NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
AgroFresh Solutions, Inc. (the “Company”) is a global leader in delivering innovative food preservation and waste prevention solutions for fresh produce. The Company is empowering the food industry with a range of integrated solutions designed to help growers, packers and retailers improve produce freshness and quality while preventing waste. The Company has an extensive portfolio of solutions to extend freshness across the produce supply chain from near-harvest up to the point-of-sale. These include HarvistaTM for near-harvest optimization and the SmartFreshTM Quality System, the Company's flagship post-harvest freshness solution. Additional post-harvest freshness solutions include fungicides that can be applied to meet various customer operational requirements in both foggable (ActiMist™) and liquid (ActiSeal™) delivery options. The Company has a controlling interest in Tecnidex Fruit Protection, S.A. (“Tecnidex”), a leading regional provider of post-harvest fungicides, waxes, disinfectants and packinghouse equipment for the citrus market. Beyond apples, SmartFresh technology can provide ready-to-eat freshness for other fruits and vegetables including avocados, bananas, melons, tomatoes, broccoli and mangos. Additionally, LandSpringTM eases transplant shock for higher potential yields. RipeLockTM is the Company's modified atmosphere packaging technology for fruits and vegetables. The Company has key products registered in over 50 countries and supports customers with over 25,000 storage rooms globally.
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 and pears, the Company’s core crops, 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 growing season has historically occurred during both quarters. A variety of factors, including weather and fruit quality, may affect the timing of the growing, harvesting and storing patterns of the Company’s customers and therefore shift 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.
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") 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 financial statements and notes included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2019.
COVID-19
In March 2020, the World Health Organization characterized the coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy. During the three months ended September 30, 2020, as the Company’s primary sales regions moved to the northern hemisphere, the COVID-19 pandemic continued to not have a significant adverse impact on the Company’s results of operations. However, there were numerous obstacles presented and some localized financial impacts of the pandemic, including fluctuations in foreign currency exchange rates and customer demand and spending pattern changes. While the Company is following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of its workforce, including implementing remote working arrangements and varying procedures for essential workforce, the Company cannot be 100% certain there will not be any incidents across its global operations that may cause service interruptions. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak, although the Company operates in an industry that thus far has not been as severely impacted as others. Nevertheless, the outbreak presents some uncertainty and risk with respect to the Company and its performance and financial results.
Adoption of Highly Inflationary Accounting in Argentina
GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation rate exceeds 100 percent. The Company closely monitors the inflation data and currency volatility in Argentina, where there are multiple data sources for measuring and reporting inflation. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the
U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of June 30, 2018. As a result, the Company adopted highly inflationary accounting as of July 1, 2018 for its subsidiary in Argentina. Under highly inflationary accounting, the functional currency of the Company's subsidiary in Argentina became the U.S. dollar, and its income statement and balance sheet are measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine peso-denominated monetary assets and liabilities are reflected in earnings. As the three-year cumulative inflation rate exceeded 100 percent as of September 30, 2020, there is no change to highly inflationary accounting. As of September 30, 2020, the Company’s subsidiary in Argentina had a net asset position of $3.0 million. Net sales attributable to Argentina were approximately 6% and 6% of the Company’s consolidated net sales for each of the nine months ended September 30, 2020 and 2019, respectively.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into geographic region, product and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenues for the three months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Region
|
North America
(1)
|
EMEA
(2)
|
Latin America
(3)
|
Asia Pacific (4)
|
Total Revenues
|
Product
|
|
|
|
|
|
1-MCP based
|
$
|
17,122
|
|
$
|
28,906
|
|
$
|
845
|
|
$
|
1,165
|
|
$
|
48,038
|
|
Fungicides, waxes, coatings and disinfectants
|
534
|
|
3,011
|
|
575
|
|
—
|
|
4,120
|
|
Other*
|
190
|
|
115
|
|
210
|
|
97
|
|
612
|
|
|
$
|
17,846
|
|
$
|
32,032
|
|
$
|
1,630
|
|
$
|
1,262
|
|
$
|
52,770
|
|
|
|
|
|
|
|
Pattern of Revenue Recognition
|
|
|
|
|
|
Products transferred at a point in time
|
$
|
17,663
|
|
$
|
31,921
|
|
$
|
1,420
|
|
$
|
1,165
|
|
$
|
52,169
|
|
Services transferred over time
|
183
|
|
111
|
|
210
|
|
97
|
|
601
|
|
|
$
|
17,846
|
|
$
|
32,032
|
|
$
|
1,630
|
|
$
|
1,262
|
|
$
|
52,770
|
|
Revenues for the three months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Region
|
North America
(1)
|
EMEA
(2)
|
Latin America
(3)
|
Asia Pacific (4)
|
Total Revenues
|
Product
|
|
|
|
|
|
1-MCP based
|
$
|
19,726
|
|
$
|
22,377
|
|
$
|
1,680
|
|
$
|
1,605
|
|
$
|
45,388
|
|
Fungicides, waxes, coatings and disinfectants
|
—
|
|
2,857
|
|
198
|
|
—
|
|
3,055
|
|
Other*
|
218
|
|
86
|
|
108
|
|
117
|
|
529
|
|
|
$
|
19,944
|
|
$
|
25,320
|
|
$
|
1,986
|
|
$
|
1,722
|
|
$
|
48,972
|
|
|
|
|
|
|
|
Pattern of Revenue Recognition
|
|
|
|
|
|
Products transferred at a point in time
|
$
|
19,802
|
|
$
|
25,238
|
|
$
|
1,877
|
|
$
|
1,605
|
|
$
|
48,522
|
|
Services transferred over time
|
142
|
|
82
|
|
109
|
|
117
|
|
450
|
|
|
$
|
19,944
|
|
$
|
25,320
|
|
$
|
1,986
|
|
$
|
1,722
|
|
$
|
48,972
|
|
Revenues for the nine months ended September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Region
|
North America
(1)
|
EMEA
(2)
|
Latin America
(3)
|
Asia Pacific (4)
|
Total Revenues
|
Product
|
|
|
|
|
|
1-MCP based
|
$
|
19,264
|
|
$
|
37,223
|
|
$
|
23,217
|
|
$
|
11,538
|
|
$
|
91,242
|
|
Fungicides, waxes, coatings and disinfectants
|
534
|
|
9,650
|
|
1,750
|
|
—
|
|
11,934
|
|
Other*
|
722
|
|
700
|
|
938
|
|
239
|
|
2,599
|
|
|
$
|
20,520
|
|
$
|
47,573
|
|
$
|
25,905
|
|
$
|
11,777
|
|
$
|
105,775
|
|
|
|
|
|
|
|
Pattern of Revenue Recognition
|
|
|
|
|
|
Products transferred at a point in time
|
$
|
19,823
|
|
$
|
46,887
|
|
$
|
25,338
|
|
$
|
11,538
|
|
$
|
103,586
|
|
Services transferred over time
|
697
|
|
686
|
|
567
|
|
239
|
|
2,189
|
|
|
$
|
20,520
|
|
$
|
47,573
|
|
$
|
25,905
|
|
$
|
11,777
|
|
$
|
105,775
|
|
Revenues for the nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Region
|
North America
(1)
|
EMEA
(2)
|
Latin America
(3)
|
Asia Pacific (4)
|
Total Revenues
|
Product
|
|
|
|
|
|
1-MCP based
|
$
|
23,084
|
|
$
|
31,965
|
|
$
|
27,503
|
|
$
|
11,287
|
|
$
|
93,839
|
|
Fungicides, waxes, coatings and disinfectants
|
—
|
|
11,365
|
|
1,458
|
|
—
|
|
12,823
|
|
Other*
|
954
|
|
927
|
|
381
|
|
171
|
|
2,433
|
|
|
$
|
24,038
|
|
$
|
44,257
|
|
$
|
29,342
|
|
$
|
11,458
|
|
$
|
109,095
|
|
|
|
|
|
|
|
Pattern of Revenue Recognition
|
|
|
|
|
|
Products transferred at a point in time
|
$
|
23,380
|
|
$
|
43,374
|
|
$
|
29,159
|
|
$
|
11,309
|
|
$
|
107,222
|
|
Services transferred over time
|
658
|
|
883
|
|
183
|
|
149
|
|
1,873
|
|
|
$
|
24,038
|
|
$
|
44,257
|
|
$
|
29,342
|
|
$
|
11,458
|
|
$
|
109,095
|
|
*Other includes FreshCloud, technical services and sales-type leases related to Tecnidex.
———————————————————————————————————
(1) North America includes the United States and Canada.
(2) EMEA includes Europe, the Middle East and Africa.
(3) Latin America includes Argentina, Brazil, Chile, Costa Rica, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay.
(4) Asia Pacific includes Australia, China, India, Japan, New Zealand, the Philippines, South Korea, Taiwan and Thailand.
Contract Assets and Liabilities
ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g., receivable), before the entity transfers a good or service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the nine months ended September 30, 2020 and the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at
January 1, 2020
|
Additions
|
Deductions
|
Balance at
September 30, 2020
|
Contract assets:
|
|
|
|
|
Unbilled revenue
|
$
|
1,666
|
|
11,670
|
|
(9,423)
|
|
$
|
3,913
|
|
Contract liabilities:
|
|
|
|
|
Deferred revenue
|
$
|
1,175
|
|
4,437
|
|
(4,239)
|
|
$
|
1,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance at
January 1, 2019
|
Additions
|
Deductions
|
Balance at
December 31, 2019
|
Contract assets:
|
|
|
|
|
Unbilled revenue
|
$
|
1,956
|
|
10,029
|
|
(10,319)
|
|
$
|
1,666
|
|
Contract liabilities:
|
|
|
|
|
Deferred revenue
|
$
|
1,280
|
|
3,032
|
|
(3,137)
|
|
$
|
1,175
|
|
The Company recognizes contract assets in the form of unbilled revenue in instances where services are performed by the Company but not billed by period end. The Company recognizes contract liabilities in the form of deferred revenue in instances where a customer pays in advance for future services to be performed by the Company. The Company generally receives payments from its customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the nine months ended September 30, 2020. Amounts reclassified from unbilled revenue to accounts receivable for the nine months ended September 30, 2020 and for the year ended December 31, 2019 were $9.4 million and $10.3 million, respectively. Amounts reclassified from deferred revenue to revenue for the nine months ended September 30, 2020 and for the year ended December 31, 2019 were $4.2 million and $3.1 million, respectively.
Recently Issued Accounting Standards and Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-04, "Intangibles - Goodwill and Other", which simplifies the test for goodwill impairment. The guidance was effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the condensed consolidated financial statements of the Company.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, which introduces a new
current expense credit loss model to measure impairment on certain types of financial instruments. This update requires an entity to use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. In addition, the FASB issued various amendments during 2018 and 2019 to clarify the provisions of ASU 2016-13. The standard was effective for fiscal years beginning January 1, 2020, including interim periods. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the financial statements of the Company.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify and add
certain disclosure requirements related to fair value measurements covered in Topic 820. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the notes to condensed consolidated financial statements of the Company.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate
reform on financial reporting. The new standard is effective on a date selected by the Company between March 12, 2020 and December 31, 2022. The Company is currently evaluating the impact of adopting this guidance.
3. Business Combinations and Asset Acquisition
Business Combination with Dow
On July 31, 2015 (the "Closing Date"), the Company consummated a business combination (the “Business Combination”) pursuant to the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), by and between the Company and The Dow Chemical Company ("Dow") providing for the acquisition by the Company of the AgroFresh business from Dow, resulting in AgroFresh Inc. becoming a wholly-owned, indirect subsidiary of the Company. Pursuant to the Purchase Agreement, the Company paid the following consideration to Rohm and Haas Company (“R&H”), a subsidiary of Dow: (i) 17.5 million shares of common stock and (ii) $635 million in cash.
Pursuant to a Tax Receivables Agreement among the Company, Dow, R&H and AgroFresh Inc. entered into in connection with the consummation of the Business Combination, as amended on April 4, 2017 (as so amended, the “Tax Receivables Agreement”), the Company was required to pay to Dow 50% of the annual tax savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realized 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 Business Combination. In December 2019, the Tax Receivables Agreement was terminated, and the Company paid to Dow an aggregate of $16 million in settlement of all past and estimated future liabilities that would have been owed under the Tax Receivables Agreement. Based on this termination, the Company recorded a reduction of liabilities of $27.9 million. This reduction, net of deferred income taxes of $5.9 million, has been recorded to additional paid-in capital since the Tax Receivable Agreement was with a related party and is treated as a capital transaction.
Acquisition of Tecnidex
On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling interest in Tecnidex. The transaction was closed on December 1, 2017. Tecnidex is a leading regional provider of post-harvest fungicides, waxes, coatings, and disinfectants 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 their regional clients. The acquisition was accounted for as a purchase in accordance with ASC 805, Business Combination.
At the effective date of the acquisition, the Company agreed to pay holders of Tecnidex an estimated $25.0 million in cash for 75% of the outstanding capital stock, of which $20.0 million was paid on December 1, 2017. In 2018, the purchase price was finalized as $22.3 million after giving effect to working capital, net debt and other adjustments. The remaining $2.3 million was paid during 2018.
In accordance with the acquisition method of accounting, the Company has allocated the purchase price to the estimated fair values of the identifiable assets acquired and liabilities assumed, with any excess allocated to goodwill. The preliminary assessment of fair value of the contingent consideration payments on the acquisition date was approximately $0.7 million and was estimated by applying a probability-based income approach utilizing an appropriate discount rate. This estimation was based on significant inputs that are not observable in the market, referred to as Level 3 inputs. During the year ended December 31, 2019 there was a final adjustment made to consideration payable to holders of Tecnidex which resulted in a fair value adjustment of $0.4 million.
4. Related Party Transactions
The Company is a party to an ongoing transition services agreement with Dow, a related party. The Company incurred expenses for such transition services for the nine months ended September 30, 2020 and 2019 of $0.04 million and $0.09 million, respectively. As of September 30, 2020 and December 31, 2019, the Company had outstanding amounts payable to Dow of $0.0 million and $0.1 million, respectively.
On June 13, 2020, in connection with the execution of the Investment Agreement (as defined in Note 15- Series B Convertible Preferred Stock and Stockholders’ Equity), the Company, PSP AGFS Holdings, L.P. (the “Investor”) and R&H entered into a side agreement, pursuant to which the parties agreed that if the Investor or its affiliates has the right to designate at least 50% of the total directors on the Company’s board of directors pursuant to the Investment Agreement, so long as R&H or its affiliates beneficially owns at least 20% of the Company’s outstanding common stock (on a fully diluted, “as converted” basis), the Company and the board of directors will increase the size of the board of directors by one member and the board will elect a
designee selected by R&H to fill the newly-created vacancy. Such right is in addition to any right that R&H has to appoint a member of the board pursuant to its ownership of the Company’s Series A preferred stock (see Note 15- Series B Convertible Preferred Stock and Stockholders’ Equity).
Refer to Note 3 - Business Combinations and Asset Acquisition regarding the contingent consideration owed to Dow as part of the Business Combination, as well as certain other agreements entered into in connection with the Business Combination, including the termination of the Tax Receivables Agreement in 2019.
During 2016, the Company made a minority investment in RipeLocker, LLC ("RipeLocker"), a company led by George Lobisser, a director of the Company. In February 2019, the Company made a further minority investment in RipeLocker. As of and for the nine months ended September 30, 2020, there were no material amounts paid or owed to RipeLocker or Mr. Lobisser.
5. Inventories
Inventories at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Raw material
|
$
|
3,026
|
|
$
|
3,401
|
|
Work-in-process
|
8,575
|
|
7,278
|
|
Finished goods
|
11,619
|
|
10,974
|
|
Supplies
|
1,224
|
|
968
|
|
Total inventories
|
$
|
24,444
|
|
$
|
22,621
|
|
6. Other Current Assets
The Company's other current assets at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
VAT receivable
|
$
|
7,627
|
|
$
|
4,925
|
|
Prepaid income tax asset
|
5,349
|
|
3,616
|
|
Prepaid and other current assets
|
4,289
|
|
3,261
|
|
Total other current assets
|
$
|
17,265
|
|
$
|
11,802
|
|
7. Property and Equipment
Property and equipment at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for useful life data)
|
Useful life
(years)
|
September 30, 2020
|
December 31, 2019
|
Buildings and leasehold improvements
|
7-20
|
$
|
7,032
|
|
$
|
6,508
|
|
Machinery & equipment
|
1-12
|
11,953
|
|
10,954
|
|
Furniture
|
1-12
|
2,944
|
|
2,681
|
|
Construction in progress
|
|
1,149
|
|
902
|
|
|
|
23,078
|
|
21,045
|
|
Less: accumulated depreciation
|
|
(9,803)
|
|
(7,868)
|
|
Total property and equipment, net
|
|
$
|
13,275
|
|
$
|
13,177
|
|
Depreciation expense was $0.7 million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $1.9 million and $1.6 million for the nine months ended September 30, 2020 and 2019, 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 operations.
8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2020 and the year ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Beginning balance
|
$
|
6,323
|
|
$
|
6,670
|
|
Foreign currency translation
|
282
|
|
(347)
|
|
Ending balance
|
$
|
6,605
|
|
$
|
6,323
|
|
The Company’s intangible assets at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
December 31, 2019
|
(in thousands)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Impairment
|
Net
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Impairment
|
Net
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
Developed technology
|
$
|
798,240
|
|
$
|
(244,918)
|
|
$
|
—
|
|
$
|
553,322
|
|
$
|
758,760
|
|
$
|
(206,998)
|
|
$
|
—
|
|
$
|
551,762
|
|
In-process research and development
|
—
|
|
—
|
|
—
|
|
—
|
|
39,000
|
|
(7,222)
|
|
—
|
|
31,778
|
|
Trade name
|
27,158
|
|
—
|
|
—
|
|
27,158
|
|
27,200
|
|
—
|
|
|
27,200
|
|
Service provider network
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
Customer relationships
|
18,551
|
|
(3,548)
|
|
—
|
|
15,003
|
|
18,058
|
|
(2,993)
|
|
—
|
|
15,065
|
|
Software
|
10,691
|
|
(8,967)
|
|
—
|
|
1,724
|
|
9,861
|
|
(5,347)
|
|
(992)
|
|
3,522
|
|
|
|
|
|
|
|
|
|
|
Other
|
100
|
|
(71)
|
|
—
|
|
29
|
|
100
|
|
(58)
|
|
—
|
|
42
|
|
Total intangible assets
|
$
|
856,740
|
|
$
|
(257,504)
|
|
$
|
—
|
|
$
|
599,236
|
|
$
|
854,979
|
|
$
|
(222,618)
|
|
$
|
(992)
|
|
$
|
631,369
|
|
During 2019, the Company recognized an impairment charge of $1.0 million associated with Verigo software following a partnership agreement with a new technology provider. During the Company's annual impairment testing conducted for the year ended December 31, 2019, the Company accelerated the amortization of Ripelock developed technology based on the Company's remaining expected useful life of the technology. This resulted in an increase to amortization expense of $34.0 million.
At September 30, 2020, the weighted-average amortization periods remaining for developed technology, in-process R&D, customer relationships, software and other was 14.8, 14.0, 12.1, 1.0, and 1.8 years, respectively, and the weighted-average amortization period remaining for these finite-lived intangible assets was 14.6 years.
Estimated annual amortization expense for finite-lived intangible assets subsequent to September 30, 2020 is as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
2020 (remaining)
|
$
|
12,045
|
|
2021
|
41,730
|
|
2022
|
40,893
|
|
2023
|
40,791
|
|
2024
|
40,791
|
|
Thereafter
|
393,828
|
|
Total
|
$
|
570,078
|
|
Amortization expense for intangible assets was $11.0 million and $11.8 million for the three months ended September 30, 2020 and 2019, respectively, and $32.9 million and $35.1 million for the nine months ended September 30, 2020 and 2019, respectively.
9. Other Assets
The Company’s other assets at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Right-of-use asset
|
$
|
5,657
|
|
$
|
6,599
|
|
Long term sales-type lease receivable
|
2,354
|
|
2,501
|
|
Other long term receivable
|
3,438
|
|
3,061
|
|
Total other assets
|
$
|
11,449
|
|
$
|
12,161
|
|
10. Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Accrued compensation and benefits
|
$
|
7,111
|
|
$
|
7,307
|
|
Accrued taxes
|
6,501
|
|
3,017
|
|
Lease liability
|
1,368
|
|
1,493
|
|
Accrued rebates payable
|
3,001
|
|
1,377
|
|
Insurance premium financing payable
|
1,151
|
|
1,000
|
|
Severance
|
218
|
|
444
|
|
Deferred revenue
|
1,373
|
|
1,175
|
|
Accrued interest
|
66
|
|
71
|
|
Interest rate swap
|
290
|
|
—
|
|
Other
|
5,586
|
|
8,466
|
|
Total accrued and other current liabilities
|
$
|
26,665
|
|
$
|
24,350
|
|
Other current liabilities include primarily professional services, litigation and research and development accruals.
11. Debt
The Company’s debt, net of unamortized deferred issuance costs, at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Total term loan outstanding
|
$
|
275,000
|
|
$
|
405,875
|
|
Unamortized deferred issuance costs
|
(9,018)
|
|
(3,886)
|
|
Tecnidex loan outstanding
|
2,184
|
|
750
|
|
Less: Amounts due within one year
|
3,316
|
|
4,675
|
|
Total long-term debt due after one year
|
$
|
264,850
|
|
$
|
398,064
|
|
Restated Credit Facility
On July 27, 2020, the Company completed a comprehensive refinancing (the “Refinancing”) by (i) entering into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with the other loan parties party thereto, Bank of Montreal, as administrative agent and the lenders party thereto, and (ii) consummating the transactions contemplated by the Investment Agreement (as defined and described in Note 15 – Series B Convertible Preferred Stock and Stockholders’ Equity). The Restated Credit Agreement amends and restates in its entirety the Prior Credit Facility (defined below).
The Restated Credit Agreement provides for a $25.0 million revolving credit facility (the “Restated Revolving Loan”) which matures on June 30, 2024, and a $275.0 million term credit facility (the “Restated Term Loan” and, together with the Restated Revolving Loan, the “Restated Credit Facility”), which matures on December 31, 2024. The Restated Credit Facility includes a $5.0 million swingline commitment and a $10.0 million letter of credit sub-limit. Loans under the Restated Term Loan bear interest at a rate equal to, at the Company’s option, either the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus an Applicable Rate of 6.25% per annum, or the Alternate Base Rate plus an Applicable Rate of 5.25% per annum. Loans under the Restated Revolving Loan bear interest at a rate equal to, at the Company’s option, the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus the Applicable Rate ranging from 6.25% to 6.0% per annum, based on
certain ratios. The interest rate was 7.25% for the three months ended September 30, 2020. The Company is also required to pay a commitment fee on the unused portion of the Restated Revolving Loan at a rate ranging from 0.5% to 0.375%, based on certain ratios. The Company is required to make mandatory prepayments of outstanding indebtedness under the Restated Credit Agreement under certain circumstances.
The obligations of AgroFresh Inc., a wholly-owned subsidiary of the Company and the borrower under the Restated Credit Facility, are initially guaranteed by the Company and the Company’s wholly-owned subsidiary, AF Solutions Holdings LLC (together with AgroFresh Inc. and the Company, the “Loan Parties”) and may in the future be guaranteed by certain other domestic subsidiaries of the Company. The obligations of the Loan Parties under the Credit Agreement and other loan documents are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets, and equity interests of certain foreign subsidiaries of the Loan Parties held by the Loan Parties (subject to certain exclusions and limitations).
The Refinancing was deemed a partial extinguishment of the Term Loan (as defined below) under ASC Topic No. 470-50, “Debt – Modifications and Extinguishments” (Topic No. 470), whereby $107.1 million of the $403.8 million outstanding at the time of the Refinancing was deemed an extinguishment and $296.7 million was deemed a modification of debt. As such, unamortized deferred issuance costs related to the extinguishment of $0.7 million were written off in debt modification and extinguishment expenses and the remaining $1.9 million was deferred and amortized over the term of the Restated Term Loan.
In connection with the Restated Term Loan, expenses incurred related to existing lenders of $4.4 million were recognized in debt modification and extinguishment expenses. Expenses to new lenders of $1.1 million were deferred and amortized over the term of the Restated Term Loan along with $6.4 million of lender fees and issue discounts.
In total, the Company deferred debt issuance costs of $7.5 million related to the Restated Term Loan, $1.9 million related to the modification of the Term Loan and $0.5 million related to the Restated Revolving Loan. The debt issuance costs associated with the Restated Term Loan were capitalized against the principal balance of the debt, and the Restated Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense using the effective interest method for the duration of each respective debt facility. The interest expense related to the amortization of the Restated Credit Facility debt issuance costs during the three months ended September 30, 2020 was $0.3 million. As of September 30, 2020 there were $9.0 million of unamortized deferred issuance costs.
At September 30, 2020, there was $275.0 million outstanding under the Restated Term Loan and no balance outstanding under the Restated Revolving Loan. At September 30, 2020, the Company evaluated the amount recorded under the Restated Term Loan and determined that the fair value was approximately $267.4 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Certain restrictive covenants are contained in the Restated Credit Agreement, and the Company was in compliance with these covenants as of September 30, 2020.
Prior Credit Facility
On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and AF Solutions Holdings LLC as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (as subsequently amended prior to the Refinancing, the “Prior Credit Facility”). The Prior Credit Facility consisted of a $425.0 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a revolving loan facility (the “Revolving Loan”). The net proceeds of the Term Loan were used to fund a portion of the purchase price payable to Dow in connection with the Business Combination.
The Revolving Loan included a $10.0 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. The Term Loan had a scheduled maturity date of July 31, 2021. As discussed above, the Prior Credit Facility was refinanced on July 27, 2020, and there were no amounts outstanding as of September 30, 2020. The interest rates on borrowings under the facilities were 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).
As of the Closing Date, 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. The interest expense related to the amortization of the Term Loan debt issuance costs during the three months ended September 30, 2020 and 2019, was approximately $0.2 million and $0.6 million, respectively. The interest expense related to the amortization of the Term Loan
debt issuance costs during the nine months ended September 30, 2020 and 2019 was approximately $1.4 million and $1.7 million, respectively.
Tecnidex Debt
On March 23, 2020, Tecnidex entered into a €1.0 million loan agreement with Banco Santander, S.A., which provides funding through March 2023 at a 1.5% interest rate. In May 2020, Tecnidex entered into a €0.3 million loan agreement with BBVA, which provides funding through May 2025 at a 2.2% interest rate. In July 2020, Tecnidex entered into a €0.6 million loan agreement with Banco Santander, S.A., which provides funding through July 2025 at a 2.5% interest rate.
Scheduled principal repayments of debt subsequent to September 30, 2020 are as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
2020 (remaining)
|
$
|
815
|
|
2021
|
3,348
|
|
2022
|
3,390
|
|
2023
|
3,181
|
|
2024 and thereafter
|
$
|
266,450
|
|
Total
|
$
|
277,184
|
|
Interest Rate Swap
The Company entered into an interest rate swap contract in August 2019 to hedge interest rate risk remaining outstanding with the Restated Credit Facility. During the three and nine months ended September 30, 2020, an unrealized gain of $0.3 million and an unrealized loss of $0.4 million was recognized, respectively, in connection with this swap, which is still outstanding. The interest rate swap contract matures on December 31, 2020.
The Company entered into an interest rate swap contract in January 2018 to hedge interest rate risk associated with the Term Loan. The hedge was settled in September 2018 for $4.0 million, which is being amortized through December 31, 2020, the remaining period of the original hedge.
PPP Loan
As part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Company received a Paycheck Protection Program ("PPP") loan to offset eligible costs incurred during the period. Under the terms of the PPP, PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the forgiveness period.
As of September 30, 2020, the Company has used the entire loan proceeds to fund its eligible payroll expenses and mortgage interest, avoiding furlough of office employees. As a result, the Company believes that it has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven. As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” the Company has recognized the entire loan amount as Grant Income at September 30, 2020.
The Company does not anticipate taking any action that would cause any portion of the loan to be ineligible for forgiveness. However, to the extent that any amount is deemed unforgivable, such amount is payable over two to five years at an interest rate of 1%, with a deferral of payments for the first six months.
12. Leases
The Company enters into lease agreements for certain facilities and vehicles that are primarily used in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.
Most leases include an option to extend or renew the lease term. The exercise of the renewal option is at the Company's discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the
Company is reasonably certain of exercising those options. The Company, in determining the present value of lease payments, uses the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
Lease expense is primarily included in general and administrative expenses in the condensed consolidated statements of operations. Additional information regarding the Company's operating leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three months ended September 30, 2020
|
Three months ended September 30, 2019
|
Nine months ended September 30, 2020
|
Nine months ended September 30, 2019
|
Operating leases
|
$
|
662
|
|
$
|
591
|
|
$
|
1,916
|
|
$
|
1,849
|
|
Short-term leases (1)
|
6
|
|
5
|
|
182
|
|
52
|
|
Total lease expense
|
$
|
668
|
|
$
|
596
|
|
$
|
2,098
|
|
$
|
1,901
|
|
(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
|
|
|
|
|
|
|
|
|
Other information on operating leases
|
Nine months ended September 30, 2020
|
Nine months ended September 30, 2019
|
Cash payments included in operating cash flows
|
$
|
1,645
|
|
$
|
1,625
|
|
Right-of-use assets obtained in exchange for new lease
|
$
|
769
|
|
$
|
376
|
|
Weighted average discount rate
|
9.11
|
%
|
9.33
|
%
|
Weighted average remaining lease term in years
|
5.09
|
5.53
|
The following table presents the contractual maturities of the Company's lease liabilities as of September 30, 2020:
|
|
|
|
|
|
(in thousands)
|
Lease Liability
|
Remainder of 2020
|
$
|
485
|
|
2021
|
1,784
|
|
2022
|
1,496
|
|
2023
|
1,228
|
|
2024 and thereafter
|
2,290
|
|
Total undiscounted lease payments
|
7,283
|
|
Less: present value adjustment
|
1,450
|
|
Operating lease liability
|
$
|
5,833
|
|
The following table presents the contractual maturities of the Company's lease liabilities as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
Future lease Payments
|
2020
|
$
|
1,939
|
|
2021
|
1,670
|
|
2022
|
1,509
|
|
2023
|
1,294
|
|
2024 and thereafter
|
2,380
|
|
Total undiscounted lease payments
|
8,792
|
|
Less: present value adjustment
|
1,960
|
|
Operating lease liability
|
$
|
6,832
|
|
13. Other Noncurrent Liabilities
The Company’s other noncurrent liabilities at September 30, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2020
|
December 31, 2019
|
Lease liability
|
$
|
4,465
|
|
$
|
5,339
|
|
Other (1)
|
1,524
|
|
1,907
|
|
Total other noncurrent liabilities
|
$
|
5,989
|
|
$
|
7,246
|
|
(1) Other noncurrent liabilities include long-term rebates and pension liabilities.
14. Severance
Severance expense was $0.4 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and $0.5 million and $1.0 million for the nine months ended September 30, 2020 and 2019, respectively. These amounts, which do not include stock compensation expense, were recorded in selling, general and administrative expense in the condensed consolidated statements of operations. As of September 30, 2020 and December 31, 2019, the Company had a $0.2 million and $0.4 million severance liability, respectively.
15. Series B Convertible Preferred Stock and Stockholders’ Equity
Series B Convertible Preferred Stock
On June 13, 2020, the Company entered into an Investment Agreement (the “Investment Agreement”) with the Investor, an affiliate of Paine Schwartz Partners, LLC (“PSP”), pursuant to which, subject to certain closing conditions, the Investor agreed to purchase in a private placement an aggregate of $150,000,000 of convertible preferred equity of the Company. The transaction closed on July 27, 2020 and a total of 150,000 shares of the Company’s newly-designated Series B-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-1 Preferred Stock”) were purchased in such transaction (the “Private Placement”). On September 22, 2020, following the approval of the transactions contemplated by the Investment Agreement by the necessary regulatory body, the Company issued to the Investor, for no additional consideration, a total of 150,000 shares of the Company’s newly-designated Series B-2 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-2 Preferred Stock”). On September 25, 2020 (the "Exchange Date"), the Investor elected to exchange the shares of the Company’s Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock held by it for a total of 150,000 shares of the Company’s newly-designated Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”). Accordingly, effective as of the Exchange Date, the Company issued 150,000 shares of Series B Convertible Preferred Stock, par value $0.0001 per share, to the Investor and all of the shares of Series B-1 Preferred Stock and Series B-2 Preferred Stock held by the Investor were cancelled. No shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock are outstanding as of September 30, 2020.
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series B Preferred Stock has a liquidation preference of $1,000 per share (the “Stated Value”). Holders of the Series B Preferred Stock are entitled to a cumulative dividend at a rate of 16% per annum, of which 50% will be payable in cash and 50% will be payable in kind until the first anniversary of the Closing Date, after which 50% will be payable in cash, 37.5% will be payable in kind, and the remaining 12.5% will be payable in cash or in kind, at the Company’s option, subject in each case to adjustment under certain circumstances. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears. All dividends that are paid in kind will accrete to, and increase, the Stated Value. The applicable dividend rate is subject to increase by 2% per annum during any period that the Company is in breach of certain provisions of the applicable Certificate of Designation of the Preferred Stock. The Series B Preferred Stock has been classified as temporary equity as it may be contingently redeemable in the event of a change of control, which is outside of the Company's control.
Associated with the Series B Preferred Stock, the Company paid $4.4 million of total dividends, of which $2.2 million were in additional preferred shares and $2.2 million were in cash for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2019, the Company paid no dividends. As of September 30, 2020 and December 31, 2019, the Company had no accrued dividends.
The Series B Preferred Stock is convertible into Common Stock at the election of the holder at any time at an initial conversion price of $5.00 (the “Conversion Price”). The Conversion Price is subject to customary adjustments, including for stock splits and other reorganizations affecting the Common Stock and pursuant to certain anti-dilution provisions for below market issuances. As of September 30, 2020 and December 31, 2019, the maximum number of shares of common stock that could be issued upon conversion of the outstanding shares of Series B Preferred Stock was 30,440,000 and 0 shares, respectively.
The below table outlines the change in Series B Preferred Stock during the nine months ended September 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1 Convertible Preferred Stock
|
Series B-2 Convertible Preferred Stock
|
Series B Convertible Preferred Stock
|
(in thousands, except share)
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Balance at December 31, 2019
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
Issuance of preferred stock
|
150,000
|
|
150,000
|
|
150,000
|
|
—
|
|
150,000
|
|
150,000
|
|
Exchange to Series B preferred stock
|
(150,000)
|
|
(150,000)
|
|
(150,000)
|
|
—
|
|
—
|
|
—
|
|
Issuance-related expenses
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(11,516)
|
|
Additional preferred shares
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,200
|
|
Balance at September 30, 2020
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
150,000
|
|
$
|
140,684
|
|
In connection with the consummation of the Investment Agreement, the Company and the Investor entered into a Registration Rights Agreement (the “Registration Rights Agreement”), dated as of July 27, 2020. The Registration Rights Agreement provides that the Company will use its commercially reasonable efforts to prepare and file a shelf registration statement with the SEC no later than the first business day following January 27, 2022, and to use its commercially reasonable efforts to cause such shelf registration statement to be declared effective as promptly as is reasonably practicable after its filing to permit the public resale of registrable securities covered by the Registration Rights Agreement. The registrable securities generally include any shares of the Company’s common stock into which the Series B Preferred Stock is convertible, and any other securities issued or issuable with respect to any such shares of common stock by way of share split, share dividend, distribution, recapitalization, merger, exchange, replacement or similar event or otherwise.
Common Stock
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, 2020, there were 52,393,579 shares of common stock outstanding.
Warrants
On July 31, 2020, all outstanding warrants, consisting of warrants to purchase 15,983,072 shares of the Company’s common stock outstanding at a strike price of $11.50, expired. 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 (1,201,928 warrants were subsequently repurchased during 2015) and 6,160,000 warrants were sold in a private placement at the time of such public offering.
Series A Preferred Stock
In connection with and as a condition to the consummation of the Business Combination, the Company issued R&H one share of Series A Preferred Stock. R&H, voting as a separate class, is entitled to appoint one director to the Company’s board of directors for so long as R&H 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.
ATM Facility
In December 2018, the Company filed a shelf registration statement (File No. 333-229002) (the “Form S-3 Shelf”) with the Securities and Exchange Commission, that became effective in February 2019. On June 25, 2020, the Company established an at-the-market offering facility (the “ATM Facility”) under the Form S-3 Shelf, with Virtu Americas LLC, acting as sales agent with support from H.C. Wainwright & Co and Roth Capital Partners. The Company’s board of directors approved sales of up to $30,000,000 maximum aggregate offering of the Company’s common stock under the ATM Facility. Effective as of August 7, 2020, the Company suspended sales under its ATM Facility, in light of the Company’s recent completion of the Refinancing and current market conditions. No sales have been effected pursuant to the ATM Facility to date.
16. Stock-based Compensation
In July 2015, the Company adopted the 2015 Incentive Compensation Plan (as amended, the “Plan”), pursuant to which the Compensation Committee of the Company is authorized to grant up to 7,150,000 shares to officers and employees of the Company, in the form of equity-based awards, including time or performance based options and restricted stock.
In June 2019, the Company's shareholders approved the 2019 Employee Stock Purchase Plan (the "ESPP"), which became effective July 1, 2019. 500,000 shares of common stock are reserved for issuance under the ESPP. As of September 30, 2020, 253,042 shares had been issued under the ESPP.
Stock compensation expense for equity-classified and liability-classified awards was $0.9 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively. Stock compensation expense for equity-classified and liability-classified awards was $2.7 million and $2.1 million for the nine months ended September 30, 2020 and 2019, respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses and research and development expenses. At September 30, 2020, there was $5.3 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 1.9 years.
17. Earnings Per Share
Basic (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding for the period. The Company had a loss for the nine months ended September 30, 2020 and 2019. Therefore, the effect of stock-based awards including options, restricted stock, restricted stock units and warrants outstanding at September 30, 2020 and 2019, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive.
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2020
|
Three Months Ended
September 30, 2019
|
Nine Months Ended
September 30, 2020
|
Nine Months Ended
September 30, 2019
|
Basic weighted-average common shares outstanding
|
51,001,852
|
|
50,227,590
|
|
50,765,829
|
|
50,138,835
|
|
Effect of dilutive options, performance stock units and restricted stock
|
—
|
|
60,714
|
|
—
|
|
—
|
|
Diluted weighted-average shares outstanding
|
51,001,852
|
|
50,288,304
|
|
50,765,829
|
|
50,138,835
|
|
Securities that could potentially be dilutive are excluded from the computation of diluted (loss) income per share when a loss from continuing operations exists, when the exercise price exceeds the average closing price of the Company's common stock during the period, or for contingently issued shares, if the contingency is not met at the end of the reporting period, because their inclusion would result in an anti-dilutive effect on per share amounts.
The following represents the weighted-average number of shares that could potentially dilute basic earnings per share in the future:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2020
|
Three Months Ended
September 30, 2019
|
Nine Months Ended
September 30, 2020
|
Nine Months Ended
September 30, 2019
|
Convertible preferred stock
|
21,526,522
|
|
—
|
|
7,227,883
|
|
—
|
|
Stock-based compensation awards(1):
|
|
|
|
|
Stock options
|
799,570
|
|
1,028,583
|
|
804,267
|
|
949,987
|
|
Restricted stock to non-directors
|
1,811,016
|
|
749,510
|
|
1,079,151
|
|
624,930
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
Private placement warrants
|
2,075,652
|
|
6,160,000
|
|
4,788,613
|
|
6,160,000
|
|
Public warrants
|
3,309,948
|
|
9,823,072
|
|
7,636,184
|
|
9,823,072
|
|
(1) SARs and Phantom Shares are payable in cash so will 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.
18. Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign incomes taxes. The effective tax rates for the periods ended September 30, 2020 and September 30, 2019, reflect the Company’s expected tax rate on reported income (loss)
from continuing operations before income tax and tax adjustments. The Company operates in a global environment with significant operations in the U.S. and various other jurisdictions outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the Company’s earnings and the applicable tax rates in the various jurisdictions where the Company operates.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act includes tax changes and financial aid designed to protect the American people from the public health and economic impacts of COVID-19. The tax changes include allowing net operating losses to be carried back five years, suspending the 80% of taxable limitation on the use of net operating losses, an increase of the 30% of EBITDA limitation on the deduction of interest expense to 50%, and acceleration of the refund for alternative minimum tax credits granted under the 2017 Tax Cuts and Jobs Act (“TCJA”). Most significant to the Company are the modifications on the limitation of business interest deductions for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% to 50% of adjusted taxable income.
The Company's U.S. operations have incurred cumulative taxable losses through September 30, 2020. The Company’s U.S. net operating loss carry forwards and carry forwards of other tax attributes are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. The utilization of the tax attributes may become restricted in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This could limit the amount of the tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will generally be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. Please refer to Note 4 regarding the ownership change in the quarter ended September 30, 2020. The Company completed a Section 382 study and determined the ownership change gave rise to the restrictions that will limit the realizability of certain U.S. tax attributes.
Typically, the Company has calculated its provision for income taxes during its interim reporting periods by applying an estimate of the annual effective tax rate for the full year "ordinary" income or loss for the respective reporting period. For the nine months ended September 30, 2020, the Company has computed its provision for income taxes under the discrete method which allows the Company to calculate its tax provision based upon the actual effective tax rate for the year-to-date. The discrete method was determined to be an appropriate method for estimating its tax provision for the nine months ended September 30, 2020 as it provides a reliable estimate as opposed to changes in estimated "ordinary" income or loss which would have resulted in significant fluctuations when estimating the annual effective tax rate.
The effective tax rate for the nine months ended September 30, 2020 differs from the U.S. statutory tax rate of 21%, primarily because of changes in valuation allowance positions related to the United States and certain foreign jurisdictions and by foreign exchange currency gains, offset by foreign provision to return tax benefits, primarily in France. The Company recorded an increase of $24.7 million in the valuation allowance for the three months ended September 30, 2020, primarily as a result of the ownership change that will limit the realizability of certain U.S. tax attributes.
The Company's effective tax rate for the three and nine months ended September 30, 2020 was 743.9% and (111.7)%, respectively, compared to the effective tax rate for the three and nine months ended September 30, 2019 of 214.0% and 28.2%, respectively.
19. Segment Information
The authoritative guidance for disclosures about segments of an enterprise establishes standards for reporting information about segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. We currently operate and manage our business as two operating segments. Our chief operating decision-makers allocate resources and assess performance of the business for each segment. Accordingly, we consider ourselves to have two operating and reportable segments (i) AgroFresh core and (ii) Tecnidex. AgroFresh core business is providing produce preservation and waste prevention solutions for growers and packers. Its products include SmartFresh, Harvista, RipeLock and FreshCloud. Tecnidex is a provider of fungicides, disinfectants, waxes and coatings primarily focused on the citrus market.
Our chief operating decision-maker does not evaluate operating segments using asset or liability information. The following table presents a breakdown of our revenues and gross profit based on reportable segments for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Three Months Ended
September 30, 2020
|
Three Months Ended
September 30, 2019
|
Nine Months Ended
September 30, 2020
|
Nine Months Ended
September 30, 2019
|
AgroFresh Core
|
|
|
|
|
Revenues
|
$
|
49,343
|
|
$
|
45,917
|
|
$
|
94,723
|
|
$
|
96,272
|
|
Gross Profit
|
38,283
|
|
34,182
|
|
73,080
|
|
72,679
|
|
Tecnidex
|
|
|
|
|
Revenues
|
3,427
|
|
3,055
|
|
11,052
|
|
12,823
|
|
Gross Profit
|
976
|
|
898
|
|
4,203
|
|
4,900
|
|
Total Revenues
|
$
|
52,770
|
|
$
|
48,972
|
|
$
|
105,775
|
|
$
|
109,095
|
|
Total Gross Profit
|
$
|
39,259
|
|
$
|
35,080
|
|
$
|
77,283
|
|
$
|
77,579
|
|
20. 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.
On October 14, 2019, the Company was awarded a verdict of $31.1 million in damages, related to, among other things, trade secret misappropriation and willful patent infringement, in its litigation against Decco Post-Harvest, Inc. ("Decco") and Decco's parent company, UPL Limited. The award is subject to post-verdict review by the Court and any appeals that may be taken by the parties in the future.
In July 2020, three separate putative class action lawsuits were filed against the Company, each alleging that the Company’s disclosures regarding the transactions contemplated by the Investment Agreement contained in its proxy statement for the 2020 annual meeting of the Company’s stockholders were inadequate.
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.
21. 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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Liability-classified stock compensation (1)
|
$
|
—
|
|
$
|
—
|
|
$
|
294
|
|
$
|
294
|
|
Interest rate swap
|
—
|
|
—
|
|
290
|
|
290
|
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
584
|
|
$
|
584
|
|
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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Liability-classified stock compensation (1)
|
$
|
—
|
|
$
|
—
|
|
$
|
218
|
|
$
|
218
|
|
Interest rate swap
|
—
|
|
—
|
|
(95)
|
|
(95)
|
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
123
|
|
$
|
123
|
|
(1) The fair values of phantom stock units were estimated using a Monte Carlo simulation pricing model with the assumptions described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Grant date fair value
|
$
|
1.70
|
|
—
|
$7.28
|
Risk-free interest rate
|
0.27
|
%
|
—
|
2.39%
|
Expected life (years)
|
2.71
|
—
|
2.75
|
Estimated volatility factor
|
65.1
|
%
|
—
|
69.9%
|
Expected dividends
|
None
|
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, 2020.
At September 30, 2020, the Company evaluated the amount recorded under the Restated Term Loan and determined that the fair value was approximately $267.4 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 the Company's Level 3 financial instrument liabilities that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Liability-classified stock compensation
|
Interest rate swap
|
Total
|
Balance, December 31, 2019
|
$
|
218
|
|
$
|
(95)
|
|
$
|
123
|
|
Stock compensation activity
|
76
|
|
—
|
|
76
|
|
Mark-to-market adjustment
|
—
|
|
385
|
|
385
|
|
Balance, September 30, 2020
|
$
|
294
|
|
$
|
290
|
|
$
|
584
|
|