NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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1.
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Description of Business
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AgroFresh Solutions, Inc. (the “Company”) is a global leader in the food quality preservation and waste reduction space, providing proprietary advanced technologies and innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance its freshness, quality and value to maximize the percentage of produce supplied to the market relative to the amount of produce grown, as well as increase consumer appeal of product at retail. The Company currently offers SmartFresh
TM
applications at customer sites through a direct service model and provides advisory services relying on its extensive knowledge on the use of its products over thousands of monitored applications. The Company operates in over
40
countries and currently derives the majority of its revenue working with customers to protect the value of apples, pears, and other produce during storage. Additionally the Company has a number of different solutions and application technologies that have either been launched (Harvista, RipeLock, LandSpring) or will be launched in the future that will seek to extend its footprint to other crops and steps of the global produce supply chain.
The end markets that the Company serves are seasonal and are generally aligned with the seasonal growing patterns of the Company’s customers. For those customers growing, harvesting or storing apples, the Company’s primary target market, the peak season in the southern hemisphere is the first and second quarters of each year, while the peak season in the northern hemisphere is the third and fourth quarters of each year. Within each half-year period (i.e., January through June for the southern hemisphere, and July through December for the northern hemisphere) the apple growing season has historically occurred during both quarters. A variety of factors, including weather, may affect the timing of the growing, harvesting and storing patterns of the Company’s customers and therefore shift the consumption of the Company’s services and products between the first and second quarters primarily in the southern hemisphere or between the third and fourth quarters primarily in the northern hemisphere.
The Company was originally incorporated as Boulevard Acquisition Corp. (“Boulevard”), a blank check company, in Delaware on October 24, 2013, and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination. On July 31, 2015, the Company completed a business combination (the "Business Combination") with The Dow Chemical Company ("Dow") and changed its name to AgroFresh Solutions, Inc. Prior to consummation of the Business Combination, the Company’s efforts were limited to organizational activities, its initial public offering and related financings, and the search for suitable business acquisition transactions.
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2.
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Basis of Presentation and Summary of Significant Accounting Policies
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements include all adjustments that are necessary for a fair presentation of the Company's condensed consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The condensed consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year.
For additional information, these condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and notes included in the Company's Annual Report filed on Form 10-K for the year ended
December 31, 2016
.
Recently Issued Accounting Guidance
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09,
Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting.
ASU 2017-09 addresses the changes to the terms and conditions of share-based awards. The ASU is effective for periods beginning after December 15, 2017 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which has been updated through several revisions and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will be effective January 1, 2018 with early adoption permissible beginning January 1, 2017.
The Company is continuing to evaluate the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. As the Company continues the evaluation and implementation process, it expects that there will be an impact to the Company’s financial reporting disclosures as well as any related business operations processes and internal controls over financial reporting. As part of the assessment performed through the date of this filing, the Company has created an implementation working group, which includes internal and third-party resources. As part of its implementation plan, the Company has adopted implementation controls that will allow it to properly and timely adopt the new revenue accounting standard on its effective date. In particular, the Company adopted implementation controls related to the following:
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•
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Developed a detailed project plan with key milestone dates;
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•
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Performed education of the new accounting standard;
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•
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Outlined the revenue generating activities that fall within the scope of ASU 2014-09, and is continuing to assess what impact the new accounting standard will have on those activities; and
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•
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Monitoring and assessment of the impact of changes to ASU 2014-09 and its interpretations as they become available.
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Specific considerations made to date on the impact of adopting ASU 2014-09 include:
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•
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Collectibility - The valuation of revenue and accounts receivable, including whether negotiated contractual prices constitute price concessions or acceptance of the customer’s credit risk and how this impacts the timing of the Company’s revenue recognition. Currently, the Company recognizes revenue for the entire sales price and separately records a provision for bad debt as a component of operating expenses.
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•
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Performance Obligations - The treatment of the Company’s customer contracts, including whether the various goods and services promised in these contracts are distinct performance obligations, and the timing of revenue recognition for these goods and services. Currently, revenue is recognized at the time the product is applied to the fruits or vegetables as this represents the point at which the Company’s performance obligation to the customer has been completed.
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•
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Variable Consideration - The estimation and constraining of variable consideration, including rebates and how the Company will allocate these items to the performance obligations to its customer contracts. Currently, revenue is recognized net of estimated payments that are expected to be paid under rebate programs.
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•
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Significant Financing Component - Assessing whether certain contracts with customers provide a service of financing in addition to the delivery of the goods or services. In addition, the Company is assessing whether it can apply the practical expedient alleviating the application of the significant financing component requirements if the period between when the transfers of promised goods or services to a customer and when the customer pays for that good or service is one year or less. Currently, the Company does not recognize imputed interest on its accounts receivables due to its customary trade terms that do not exceed one year.
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•
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Contract Costs - The Company is continuing to assess the impact of ASU 2014-09 on the costs to acquire and fulfill its customer contracts, including whether the Company can apply the practical expedient of expensing contract costs when incurred if the amortization period of the asset that the Company would have recognized is one year or less. Currently, the Company’s accounting policy is to expense contract costs as they are incurred.
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•
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Transition Method - The Company is expecting to use a modified retrospective method of adoption, which would require a cumulative adjustment to opening retained earnings at the date of adoption (January 1, 2018), as opposed to a full retrospective application which would require a restatement of each comparable period presented within the financial statements. The Company is continuing to assess whether a material cumulative adjustment is necessary.
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The significant assessment and implementation matters to be addressed prior to adopting ASU 2014-09 are as follows:
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•
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Completing the Company’s review of customer contracts in scope of ASU 2014-09;
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•
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Calculating the transition method adjustment;
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•
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Determining the impact that the new accounting standard will have on the Company’s consolidated financial statements and related disclosures; and
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•
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Updating, as needed, the Company’s business processes, systems and controls required to comply with ASU 2014-09 upon its effective date of January 1, 2018.
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The Company anticipates completing its evaluation of the impact of ASU 2014-09 during the next three months and will adopt ASU 2014-09 when it becomes effective on January 1, 2018.
In March 2017, the FASB issued ASU 2017-07, “
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”
ASU No. 2017-07 requires employers to separate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently in the process of assessing the impact this guidance will have on its financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its financial statements.
In February 2015, the FASB issued ASU 2016-2,
“Leases.”
This update requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its financial statements.
On April 4, 2017, the Company entered into an agreement (the “Amendment Agreement”) with Dow, Rohm and Haas Company (“R&H”), Boulevard Acquisition Sponsor, LLC (the “Sponsor”), AgroFresh Inc., a wholly-owned subsidiary of the Company, Avenue Capital Management II, L.P. (“Avenue”) and, solely as to certain sections of the Amendment Agreement, Joel Citron, Darren Thompson and Robert J. Campbell (collectively, the “Founding Holders”), Marc Lasry and Stephen Trevor. Pursuant to the Amendment Agreement and certain related agreements entered into on the same date (as described below), among other things, the Company and Dow agreed to modify certain obligations of the Company pursuant to (i) the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), between the Company and Dow, (ii) the Tax Receivables Agreement, dated July 31, 2015 (the “Tax Receivables Agreement”), among the Company, Dow, R&H and AgroFresh Inc., and (iii) the Warrant Purchase Agreement, dated July 31, 2015 (the “Warrant Purchase Agreement”), among the Company, Dow, R&H and the Sponsor. Each of Mr. Campbell and Mr. Lasry is a member of the Company's board of directors, Mr. Trevor was a member of the Company’s board of directors at the time the Amendment Agreement was entered into, and each of Dow and the Sponsor is a significant stockholder of the Company.
Amendment Agreement
Pursuant to the Amendment Agreement, the Company agreed to pay Dow the aggregate amount of
$20.0 million
, of which
$10.0 million
was paid on April 4, 2017 and the remaining
$10.0 million
is payable on or before
January 31, 2018
, in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, and (iii) the amount payable to Dow pursuant to the Tax Receivables Agreement on account of the 2015 tax year. As of March 31, 2017, these liabilities, inclusive of accrued interest, were approximately
$17.0 million
,
$9.3 million
, and
$12.0 million
, respectively. During the
nine months ended September 30, 2017
, the liabilities were reduced by approximately
$18.2 million
.
Also pursuant to the Amendment Agreement, each of Avenue and Dow agreed to make available to the Company a credit facility, providing for loans of up to
$50.0 million
each, for use to complete one or more potential acquisitions prior to December 31, 2019, in each case subject to approval by both Avenue and Dow.
First Amendment to Tax Receivables Agreement
The Company, Dow, R&H and AgroFresh Inc. entered into a First Amendment to the Tax Receivables Agreement (the “TRA Amendment”). The TRA Amendment reduces, from
85%
to
50%
, the percentage that the Company is required to pay to Dow pursuant to the Tax Receivables Agreement of the annual tax savings, if any, in U.S. Federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh assets resulting from a Section 338(h)(10) election that the Company and Dow made in connection with the transactions contemplated by the Purchase Agreement. During the
nine months ended September 30, 2017
the liability to Dow was reduced by approximately
$75.3 million
as a result of the TRA Amendment.
Stock Buyback Agreement
The Company and Dow entered into a letter agreement (the “Stock Buyback Agreement”), pursuant to which Dow agreed to use its reasonable best efforts to purchase up to
5,070,358
shares of the Company’s common stock in the open market (representing approximately
10%
of the total number of shares of the Company’s common stock then outstanding), over a period of up to
18 months
.
Termination of Warrant Purchase Agreement
The Company, Dow, R&H and the Sponsor entered into a letter agreement, pursuant to which the Warrant Purchase Agreement was terminated effective immediately.
As a result of the Amendment Agreement, the TRA Amendment and the termination of the Warrant Purchase Agreement, the Company reduced the related liabilities during the first
nine
months of 2017 as follows:
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(amounts in millions)
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Nine Months Ended
September 30, 2017
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Amendment Agreement
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$
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18.2
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Warrant Purchase Agreement
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1.6
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TRA Amendment
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75.3
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Deferred tax adjustment related to Dow settlement
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(40.0
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)
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Total reduction in related liabilities
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$
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55.1
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The Company recorded an increase to additional paid in capital, net of deferred income taxes of
$40.0 million
, as an offset to the reduction in related liabilities, as the Company entered into the April 4, 2017 agreements with related parties and the transaction has been treated as a capital transaction.
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4.
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Related Party Transactions
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Pursuant to the Business Combination the Company consummated on April 30, 2015 with Dow, a related party, the Company agreed to certain obligations with Dow pursuant to the Purchase Agreement, the Tax Receivables Agreement, and the Warrant Purchase Agreement, dated July 31, 2015. On April 4, 2017 the Company and Dow amended the Purchase Agreement and the Tax Receivables Agreement pursuant to the Amendment Agreement and TRA Amendment, and entered into the Stock Buyback Agreement, each as described under Note 3 above.
The Company is also a party to ongoing agreements with Dow, including, but not limited to, operating-related agreements for certain transition services, seconded employees and occupancy. In connection with a transition services agreement entered into in connection with the Business Combination, the Company paid Dow a
$5.0 million
set-up fee which is being amortized from September 2015 through December 2017, which is the period during which the services are expected to be provided.
The Company incurred expenses for such services for the
nine
months ended
September 30, 2017
and
September 30, 2016
as follows:
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(amounts in thousands)
|
Nine Months Ended
September 30, 2017
|
Nine Months Ended
September 30, 2016
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Amortization of prepayment related to set-up of transition services
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$
|
620
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$
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1,319
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Ongoing costs of transition services agreement
|
2,228
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|
3,604
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|
Rent expense
|
693
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|
951
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|
Amortization of prepayment related to Dow importation services
|
—
|
|
397
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|
Other expenses
|
379
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|
835
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Total incurred expenses
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$
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3,920
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$
|
7,106
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As of
September 30, 2017
and
September 30, 2016
, the Company had an outstanding payable to Dow of
$0.7 million
and
$2.5 million
, respectively. See Notes 9 and 11 for other related party disclosures.
The Company has a minority investment in RipeLocker, LCC ("RipeLocker"), a company led by George Lobisser, a director of AgroFresh. On November 29, 2016, the Company entered into a Mutual Services Agreement (the “Services Agreement”) with George Lobisser and RipeLocker, LLC. Pursuant to the Services Agreement, Mr. Lobisser is entitled to receive a consulting fee of
$5,000
per full day for time spent performing consulting services under this Agreement (pro-rated for any partial day), plus reimbursement for out-of-pocket expenses. In February 2017, the Company and Mr. Lobisser agreed to substantially curtail any mutual consulting services to be provided under the Services Agreement, and that any further services would be provided at no charge. For the
nine months ended September 30, 2017
, there were
no
material amounts paid and as of
September 30, 2017
, there were
no
material amounts owed to RipeLocker or Mr. Lobisser for consulting services.
Inventories at
September 30, 2017
and
December 31, 2016
consisted of the following:
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|
(in thousands)
|
September 30,
2017
|
December 31, 2016
|
Raw material
|
$
|
1,143
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|
$
|
1,649
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|
Work-in-process
|
6,323
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|
7,963
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|
Finished goods
|
8,694
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|
5,132
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Supplies
|
792
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|
723
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|
Total inventories
|
$
|
16,952
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|
$
|
15,467
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The Company's other current assets at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
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|
|
|
|
|
|
(in thousands)
|
September 30,
2017
|
December 31, 2016
|
VAT receivable
|
$
|
9,783
|
|
$
|
9,306
|
|
Prepaid income tax asset
|
2,066
|
|
1,910
|
|
Other
|
2,470
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|
2,831
|
|
Total other current assets
|
$
|
14,319
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|
$
|
14,047
|
|
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7.
|
Property and Equipment
|
Property and equipment at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
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|
|
|
|
|
|
|
(in thousands, except for useful life data)
|
Useful life
(years)
|
September 30,
2017
|
December 31,
2016
|
Leasehold improvements
|
7-20
|
$
|
1,775
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|
$
|
1,463
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|
Machinery & equipment
|
1-12
|
7,105
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|
6,066
|
|
Furniture
|
1-12
|
967
|
|
843
|
|
Construction in progress
|
|
1,463
|
|
781
|
|
|
|
11,310
|
|
9,153
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|
Less: accumulated depreciation
|
|
(2,011
|
)
|
(1,105
|
)
|
Total property and equipment, net
|
|
$
|
9,299
|
|
$
|
8,048
|
|
Depreciation expense for the
three and nine
months ended
September 30, 2017
was
$0.3 million
and
$0.9 million
, respectively.
Depreciation expense for the
three and nine
months ended
September 30, 2016
was
$0.2 million
and
$0.6 million
, respectively.
Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the condensed consolidated statements of income (loss).
The Company’s intangible assets at
September 30, 2017
and
December 31, 2016
consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
(in thousands)
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Impairment
|
Net
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Developed technology
|
$
|
757,000
|
|
$
|
(85,071
|
)
|
$
|
671,929
|
|
|
$
|
757,000
|
|
$
|
(55,623
|
)
|
$
|
—
|
|
$
|
701,377
|
|
In-process research and development
|
39,000
|
|
(2,347
|
)
|
36,653
|
|
|
39,000
|
|
(722
|
)
|
—
|
|
38,278
|
|
Trade name
|
26,000
|
|
—
|
|
26,000
|
|
|
35,500
|
|
—
|
|
(9,500
|
)
|
26,000
|
|
Service provider network
|
2,000
|
|
—
|
|
2,000
|
|
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
Customer relationships
|
8,000
|
|
(722
|
)
|
7,278
|
|
|
8,000
|
|
(472
|
)
|
—
|
|
7,528
|
|
Software
|
1,200
|
|
(320
|
)
|
880
|
|
|
660
|
|
(104
|
)
|
—
|
|
556
|
|
Software not yet placed in service
|
3,974
|
|
—
|
|
3,974
|
|
|
753
|
|
—
|
|
—
|
|
753
|
|
Other
|
100
|
|
(21
|
)
|
79
|
|
|
100
|
|
(8
|
)
|
—
|
|
92
|
|
Total intangible assets
|
$
|
837,274
|
|
$
|
(88,481
|
)
|
$
|
748,793
|
|
|
$
|
843,013
|
|
$
|
(56,929
|
)
|
$
|
(9,500
|
)
|
$
|
776,584
|
|
At
September 30, 2017
, the weighted-average amortization period remaining for the finite-lived intangible assets was
17.6
years. At
September 30, 2017
, the weighted-average amortization periods remaining for developed technology, customer relationships, in-process R&D, software and other was
17.6
,
21.9
,
17.0
,
3.3
, and
4.8
years, respectively.
Estimated annual amortization expense for finite-lived intangible assets, excluding amounts not placed in service, subsequent to
September 30, 2017
is as follows:
|
|
|
|
|
(in thousands)
|
Amount
|
2017 (remaining)
|
$
|
10,518
|
|
2018
|
42,071
|
|
2019
|
42,052
|
|
2020
|
41,919
|
|
2021
|
41,814
|
|
Thereafter
|
538,445
|
|
Total
|
$
|
716,819
|
|
|
|
9.
|
Accrued and Other Current Liabilities
|
The Company’s accrued and other current liabilities at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2017
|
December 31, 2016
|
Warrant consideration
|
$
|
—
|
|
$
|
1,080
|
|
Tax amortization benefit contingency
|
3,744
|
|
17,535
|
|
Working capital settlement
|
—
|
|
17,000
|
|
Additional consideration due seller
|
—
|
|
9,263
|
|
Dow settlement liability
|
10,000
|
|
—
|
|
Accrued compensation and benefits
|
7,628
|
|
6,352
|
|
Accrued rebates payable
|
5,931
|
|
4,701
|
|
Insurance premium financing payable
|
953
|
|
578
|
|
Severance
|
412
|
|
1,564
|
|
Accrued taxes
|
8,561
|
|
4,598
|
|
Other
|
10,865
|
|
3,695
|
|
Total accrued and other current liabilities
|
$
|
48,094
|
|
$
|
66,366
|
|
Refer to Note 3 regarding the contingent consideration owed to Dow as part of the Business Combination.
Credit Facility
On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and its parent, AF Solutions Holdings LLC (“AF Solutions Holdings”), a wholly-owned subsidiary of the Company, as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a
$425 million
term loan (the “Term Loan”), with an amortization equal to
1.00%
per year, and a
$25 million
revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a
$10 million
letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of
September 30, 2017
, the Company has issued
$0.5 million
of letters of credit, against which
no
funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. The interest rates on borrowings under the facilities are either the alternate base rate plus
3.75%
or LIBOR plus
4.75%
per annum, with a
1.00%
LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). At
September 30, 2017
, the effective interest rate was
6.68%
. The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.
Certain restrictive covenants are contained in the Credit Facility, which the Company was in compliance with as of
September 30, 2017
. The Credit Facility imposes an overall cap on the total amount of dividends the Company can pay, together with the total amount of shares and warrants the Company can repurchase, of
$12 million
per fiscal year, and imposes certain other conditions on the Company’s ability to pay dividends.
The Company’s debt, net of unamortized discounts and deferred financing fees, at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2017
|
December 31,
2016
|
Total Term Loan outstanding
|
$
|
407,646
|
|
$
|
408,246
|
|
Less: Amounts due within one year
|
5,313
|
|
15,250
|
|
Total long-term debt due after one year
|
$
|
402,333
|
|
$
|
392,996
|
|
At
September 30, 2017
, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately
$416.5 million
. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the fair value hierarchy.
The Term Loan is presented net of deferred issuance costs, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance costs at the inception of the Term Loan were
$12.9 million
and as of
September 30, 2017
there were
$8.9 million
of unamortized deferred issuance costs.
Scheduled principal repayments under the Term Loan subsequent to
September 30, 2017
are as follows:
|
|
|
|
|
(in thousands)
|
Amount
|
2017 (remaining)
|
$
|
2,125
|
|
2018
|
4,250
|
|
2019
|
4,250
|
|
2020
|
4,250
|
|
2021
|
401,625
|
|
Total
|
$
|
416,500
|
|
Beginning with the year ended December 31, 2016, the Company is required to prepay Term Loan Borrowings and Incremental Term Loan Borrowings in an aggregate amount equal to
50%
of the Excess Cash Flow for the fiscal year; provided that such amount of the Excess Cash Flow in any fiscal year shall be reduced by (i) the aggregate amount of prepayments of Term Loans and Incremental Term Loans made, (ii) to the extent accompanied by permanent reductions of Revolving Commitments, the aggregate amount of prepayments of Revolving Loans (other than prepayments financed with the proceeds of Indebtedness), (iii) repaid borrowings of Revolving Loans made on the Effective Date to account for any additional original issue discount or upfront fees that are implemented pursuant to the Fee Letter and (iv) the aggregate amount of cash dividends paid by the Company or Holdings to Holdings or Boulevard for the payment of the Seller Earnout; provided further that, prepayments of Term Loan Borrowings and Incremental Term Loan Borrowings shall only be required if
50%
of the Excess Cash Flow for such fiscal year exceeds
$5 million
. The amount due under this provision for the year ended
December 31, 2016
was originally estimated to be
$11.0 million
, but it was subsequently determined that
no
amount was payable for such year. There are
no
amounts due under this provision as of
September 30, 2017
.
At
September 30, 2017
, there was
$416.5 million
outstanding under the Term Loan and
no
balance outstanding under the Revolving Loan.
In July 2015, the Company incurred approximately
$12.9 million
in debt issuance costs related to the Term Loan and
$1.3 million
in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The interest expense related to the amortization of the debt issuance costs during the
three and nine
months ended
September 30, 2017
was approximately
$0.6 million
and
$1.8 million
, respectively.
|
|
11.
|
Other Noncurrent Liabilities
|
The Company’s other noncurrent liabilities at
September 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2017
|
December 31, 2016
|
Tax amortization benefit contingency
|
$
|
65,855
|
|
$
|
132,724
|
|
Deferred payment
|
—
|
|
2,498
|
|
Other
|
4,542
|
|
5,611
|
|
Total other noncurrent liabilities
|
$
|
70,397
|
|
$
|
140,833
|
|
There was
$0.2 million
and
$0.3 million
severance expense for the
three and nine
months ended
September 30, 2017
, respectively. For the
three and nine
months ended
September 30, 2016
, there was
$1.2 million
and
$2.6 million
of severance expense, respectively. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated statements of income (loss). As of
September 30, 2017
, the Company had
$0.6 million
of severance liability, of which
$0.4 million
will be paid out over the next year.
The authorized common stock of the Company consists of
400,000,000
shares with a par value of
$0.0001
per share. Holders of the Company’s common stock are entitled to
one
vote for each share of common stock. As of
September 30, 2017
, there were
50,340,014
shares of common stock outstanding. As of
September 30, 2017
, there were warrants to purchase
15,983,072
shares of the Company’s common stock outstanding at a strike price of
$11.50
. Of the
15,983,072
warrants,
9,823,072
were issued as part of the units sold in the Company's initial public offering in February 2014 and
6,160,000
warrants were sold in a private placement at the time of such public offering.
In connection with and as a condition to the consummation of the Business Combination, the Company issued Rohm and Haas
one
share of Series A Preferred Stock. Rohm and Haas, voting as a separate class, is entitled to appoint
one
director to the Company’s board of directors for so long as Rohm and Haas beneficially holds
10%
or more of the aggregate amount of the outstanding shares of common stock and non-voting common stock of the Company. The Series A Preferred Stock has no other rights.
|
|
14.
|
Stock-based Compensation
|
Stock compensation expense for both equity-classified and liability-classified awards for the
three and nine
months ended
September 30, 2017
was
$0.5 million
and
$1.7 million
, respectively. Stock compensation expense for both equity-classified and liability-classified awards for the
three and nine
months ended
September 30, 2016
was
$1.3 million
and
$3.2 million
, respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses, and research and development expenses. At
September 30, 2017
, there was
$5.0 million
of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of
2.03
years.
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss) per share, basic income (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock and warrants.
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017
|
Three Months Ended
September 30, 2016
|
|
Nine Months Ended
September 30, 2017
|
Nine Months Ended
September 30, 2016
|
Basic weighted-average common shares outstanding
|
49,676,923
|
|
49,567,735
|
|
|
49,852,337
|
|
49,385,733
|
|
Effect of dilutive options, performance stock units and restricted stock
|
492,511
|
|
60,065
|
|
|
282,254
|
|
—
|
|
Dilute weighted-average shares outstanding
|
50,169,434
|
|
49,627,800
|
|
|
50,134,591
|
|
49,385,733
|
|
Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company's common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.
The following amounts were not included in the calculation of net income (loss) per diluted share because their effects were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
Three Months Ended
September 30, 2017
|
Three Months Ended
September 30, 2016
|
|
Nine Months Ended
September 30, 2017
|
Nine Months Ended
September 30, 2016
|
Stock-based compensation awards
(1)
:
|
|
|
|
|
|
Stock options
|
577,500
|
|
584,375
|
|
|
577,500
|
|
584,375
|
|
Warrants:
|
|
|
|
|
|
Private placement warrants
|
6,160,000
|
|
6,160,000
|
|
|
6,160,000
|
|
6,160,000
|
|
Public warrants
|
9,823,072
|
|
9,823,072
|
|
|
9,823,072
|
|
9,823,072
|
|
———————————————————————————————
|
|
(1)
|
SARs and Phantom Shares are payable in cash and will, therefore, have no impact on number of shares.
|
Warrants and options are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period. Performance share units are considered anti-dilutive if the performance targets upon which the issuance of the shares is contingent have not been achieved and the respective performance period has not been completed as of the end of the current period.
The effective tax rate for the
three and nine
months ended
September 30, 2017
was
27.6%
and
101.1%
, respectively, compared to the effective tax rate for the
three and nine
months ended
September 30, 2016
of
39.0%
and
37.9%
, respectively.
The effective tax rate for the three months ended
September 30, 2017
differs from the US statutory tax rate of
35%
, primarily due to certain intercompany transactions that did not have a tax effect.
The effective tax rate for the nine months ended
September 30, 2017
differs from the US statutory tax rate of
35%
due to the release of the valuation allowance related to net deferred tax assets in the U.S. tax jurisdiction. There were a series of tax adjustments as a result of the April 2017 settlement with Dow that resulted in
$40.0 million
additional U.S. deferred tax liabilities. The reduction of the Company's obligations to Dow on the balance sheet impacted purchase price consideration, ultimately decreasing the Company’s intangible’s tax basis determined for ASC 740 purposes. The Company considered these future sources of taxable income as additional positive evidence when concluding the deferred tax assets within the U.S. were more likely than not to be realized and reversed a valuation allowance of
$15.4 million
.
|
|
17.
|
Commitments and Contingencies
|
The Company is currently involved in various claims and legal actions that arise in the ordinary course of business. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and can be reasonably estimated. Although the results of litigation and claims can never be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, financial condition or results of operations.
Purchase Commitments
The Company has various purchasing contracts for contract manufacturing and research and development services which are based on the requirements of the business. Generally, the contracts are at prices not in excess of current market prices and do not commit the business to obligations outside the normal customary terms for similar contracts.
|
|
18.
|
Fair Value Measurements
|
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Tax amortization benefit contingency
(2)
|
—
|
|
—
|
|
69,599
|
|
69,599
|
|
Deferred acquisition payment
(3)
|
—
|
|
—
|
|
624
|
|
624
|
|
Stock appreciation rights
(4)
|
—
|
|
—
|
|
57
|
|
57
|
|
Phantom shares
(5)
|
—
|
|
—
|
|
32
|
|
32
|
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
70,312
|
|
$
|
70,312
|
|
The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Warrant consideration
(1)
|
$
|
—
|
|
$
|
1,080
|
|
$
|
—
|
|
$
|
1,080
|
|
Tax amortization benefit contingency
(2)
|
—
|
|
—
|
|
150,260
|
|
150,260
|
|
Deferred acquisition payment
(3)
|
—
|
|
—
|
|
2,498
|
|
2,498
|
|
Stock appreciation rights
(4)
|
—
|
|
—
|
|
22
|
|
22
|
|
Phantom shares
(5)
|
—
|
|
—
|
|
4
|
|
4
|
|
Total
|
$
|
—
|
|
$
|
1,080
|
|
$
|
152,784
|
|
$
|
153,864
|
|
———————————————————————————————
|
|
(1)
|
This liability relates to warrants to purchase the Company's common stock and future obligations to deliver additional such warrants in relation to the Business Combination. The inputs used in the fair value measurement were directly observable quoted prices for identical assets in an inactive market. Refer to Note 3 for additional details.
|
|
|
(2)
|
The fair value of the tax amortization benefit contingency is measured using an income approach based on the Company's best estimate of the undiscounted cash payments to be made, tax effected at
37%
and discounted to present value utilizing an appropriate market discount rate. The valuation technique used did not change during the
nine
months ended
September 30, 2017
. Refer to Note 3 for additional details.
|
|
|
(3)
|
The fair value of the deferred acquisition payment is measured using a Black-Scholes option pricing model and based on the Company's best estimate of the Company's average Business EBITDA, as defined in the Purchase Agreement (as defined in Note 3), over the
two
year period from January 1, 2016 to December 31, 2017. The valuation technique used did not change during the
nine
months ended
September 30, 2017
.
|
|
|
(4)
|
The fair value of the stock appreciation rights were measured using a Black Scholes pricing model during the
nine
months ended
September 30, 2017
. The valuation technique used did not change during the
nine
months ended
September 30, 2017
.
|
|
|
(5)
|
The fair value of phantom shares are based on the fair value of the Company's common stock. The valuation technique used did not change during the
nine
months ended
September 30, 2017
.
|
There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the
nine
months ended
September 30, 2017
.
At
September 30, 2017
, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately
$416.5 million
. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.
Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis
The following table presents the changes during the period presented in our Level 3 financial instruments that are measured at fair value on a recurring basis. These instruments relate to contingent consideration payable to Dow in connection to the Business Combination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Tax amortization benefit contingency
|
Deferred acquisition payment
|
Stock appreciation rights
|
Phantom shares
|
Total
|
Balance, December 31, 2016
|
$
|
150,260
|
|
$
|
2,498
|
|
$
|
22
|
|
$
|
4
|
|
$
|
152,784
|
|
Awards granted
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Settlement of Dow liabilities
|
(86,931
|
)
|
—
|
|
—
|
|
—
|
|
(86,931
|
)
|
Accretion
|
7,297
|
|
—
|
|
—
|
|
—
|
|
7,297
|
|
Mark to market adjustment
|
(1,027
|
)
|
(1,874
|
)
|
35
|
|
28
|
|
(2,838
|
)
|
Balance, September 30, 2017
|
$
|
69,599
|
|
$
|
624
|
|
$
|
57
|
|
$
|
32
|
|
$
|
70,312
|
|
On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling-interest in Tecnidex Fruit Protection, S.A.U. ("Tecnidex"). Tecnidex, a privately-held international company, is a leading provider of post-harvest fungicides, waxes, and biocides for the citrus market, with clients in
18
countries. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to its regional clients.
The purchase price is approximately
€22.5 million
(or approximately
$26.1 million
based on the exchange rate as of November 7, 2017), subject to customary purchase price adjustments, payable in cash. The Company expects to fund the acquisition with cash on hand, and following the acquisition the Company will own
75
percent of the outstanding Tecnidex shares. The Company has an option to purchase the remaining shares over time. The acquisition will be treated as a business combination.
Due to the timing of the acquisition, the Company has not yet completed its initial accounting analysis. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction including any intangible assets or goodwill. The transaction is expected to close as soon as the fourth quarter of 2017.