NOTES TO 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 reducing 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 solutions. 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, disinfectants, coatings and packinghouse equipment for the citrus market. Beyond apples and pears, 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, and RipeLockTM is the Company's modified atmosphere packaging technology for fruits and vegetables. The Company has key products registered in approximately 50 countries, and supports customers by protecting 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, 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.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and entities in which the Company has a controlling voting interest. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include the allocation of the purchase price to the fair value of assets acquired and liabilities assumed, impairment of goodwill and identifiable intangible assets, stock-based compensation, contingent liabilities and income tax valuation allowances.
The inputs into certain of our estimates, assumptions, and judgments considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. The actual results experienced by us may differ from our estimates. As the COVID-19 pandemic continues to develop, many of our estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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%. 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% as of June 30, 2018. As a result, the Company elected to adopt 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 will be 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 will be reflected in earnings. As of December 31, 2020, the Company’s subsidiary in Argentina had net assets of ($3.0) million. Net sales attributable to Argentina were approximately 3.9% and 4.0% of the Company’s consolidated net sales for the years ended December 31, 2020 and 2019, respectively.
Revenue Recognition
On January 1, 2018, the Company began to account for revenue in accordance with Accounting Standards Codification ("ASC") 606, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company utilized the modified retrospective method of adoption to all contracts that were not completed as of January 1, 2018. The Company has not made any significant changes to judgments in applying ASC 606 during the year ended December 31, 2020.
Performance Obligations
The Company derives revenue from the sale of products created with proprietary technology to regulate the ripening of produce and through performing post application technical services for its customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s contracts have multiple performance obligations primarily related to product application and post application services, which the Company provides. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. The method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company calculates the costs of satisfying a performance obligation and factors in an appropriate margin for that distinct good or service.
The transaction price is primarily fixed, as prices are governed by the terms and conditions of the Company's contracts with customers, and payment is typically made under standard terms. The Company has certain transactions that provide for variable consideration through rebate and customer loyalty programs. Depending on the program, the customer may elect to receive either a credit against its account or a cash payment. The Company recognizes an accrued provision for estimated rebates and customer loyalty program payouts at the time services are provided. The primary factors considered when estimating the provision for rebates and customer loyalty programs are the average historical experience of aggregate credits issued, the historical relationship of rebates as a percentage of total gross product sales, and the contract terms and conditions of the various rebate programs in effect at the time services are performed. The Company provides standard warranty provisions.
Performance obligations related to product application are typically satisfied at a point in time when the customer obtains control upon application. Performance obligations related to post-application services are satisfied over time and revenue is recognized using the output method, as control of the service transfers to the customer over time during and after storage of the produce. The Company believes that this method provides a faithful depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period. Performance obligations related to Tecnidex sales-type leases are satisfied at the point in time that equipment is installed at the customer site.
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 year ended December 31, 2020
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(in thousands)
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Region
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North America
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EMEA
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Latin America
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Asia Pacific
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Total Revenue
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Product
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1-MCP based
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$
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31,658
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$
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61,902
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$
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23,710
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$
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15,453
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$
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132,723
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Fungicides, disinfectants and coatings
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1,066
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|
16,442
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|
4,082
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—
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21,590
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Other*
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1,035
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1,069
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939
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287
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3,330
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Total
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$
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33,759
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$
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79,413
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$
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28,731
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$
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15,740
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$
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157,643
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Pattern of Revenue Recognition
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Products transferred at a point in time
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$
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32,771
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$
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78,389
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$
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28,162
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$
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15,457
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$
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154,779
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Services transferred over time
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988
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1,024
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569
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283
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2,864
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Total
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$
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33,759
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$
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79,413
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$
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28,731
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$
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15,740
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$
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157,643
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Revenues for the year ended December 31, 2019
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(in thousands)
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Region
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North America
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EMEA
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Latin America
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Asia Pacific
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Total Revenue
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Product
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1-MCP based
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$
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40,012
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$
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63,109
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$
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28,199
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$
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14,513
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$
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145,833
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Fungicides, disinfectants and coatings
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712
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16,803
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3,172
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—
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20,687
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Other*
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1,523
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1,374
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447
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201
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3,545
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Total
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$
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42,247
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$
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81,286
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$
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31,818
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$
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14,714
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$
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170,065
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Pattern of Revenue Recognition
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Products transferred at a point in time
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$
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41,122
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$
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79,811
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$
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31,618
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$
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14,535
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$
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167,086
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Services transferred over time
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1,125
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1,475
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|
200
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|
179
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2,979
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Total
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$
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42,247
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$
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81,286
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$
|
31,818
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|
$
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14,714
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|
$
|
170,065
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*Other includes FreshCloud, technical services and sales-type leases related to Tecnidex.
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 twelve months ended December 31, 2020:
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(in thousands)
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Balance at January 1, 2020
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Additions
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Deductions
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Balance at December 31, 2020
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Contract assets:
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Unbilled revenue
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$
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1,666
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13,624
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(13,806)
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$
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1,484
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Contract liabilities:
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Deferred revenue
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$
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1,175
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5,348
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(5,049)
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$
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1,474
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The following table presents changes in the Company’s contract assets and liabilities during the twelve months ended Balance at December 31, 2019:
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(in thousands)
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Balance at January 1, 2019
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Additions
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Deductions
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Balance at December 31, 2019
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Contract assets:
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|
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|
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|
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Unbilled revenue
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1,956
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|
|
10,029
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(10,319)
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$
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1,666
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Contract liabilities:
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Deferred revenue
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$
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1,280
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|
|
3,032
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(3,137)
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|
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$
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1,175
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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 year ended December 31, 2020. Amounts reclassified from unbilled revenue to accounts receivable for the year ended December 31, 2020 were $13.8 million. Amounts reclassified from deferred revenue to revenue were $5.0 million for the year ended December 31, 2020.
Practical Expedients Elected
The Company has elected the following practical expedients in applying ASC 606 across all reportable segments:
Unsatisfied Performance Obligations. Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
Contract Costs. All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
Significant Financing Component. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Sales Tax Exclusion from the Transaction Price. The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
Shipping and Handling Activities. The Company accounts for shipping and handling activities it performs after a customer obtains control of the good as activities to fulfill the promise to transfer the good, which are recognized in cost of goods sold.
Modified Retrospective Method. The Company adopted ASC 606 on January 1, 2018 utilizing the modified retrospective method, which meant the Company did not retrospectively adjust prior periods. The Company applied the modified retrospective method only to contracts that were not completed at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded upon adoption.
Cost of Sales
The Company's cost of sales consists of cost of materials, cost of equipment, application costs and certain supply chain costs. The Company's primary costs of sale are related to applications at customer sites through a direct service model primarily utilizing third-party service providers. Amounts recorded as cost of sales relate to direct costs incurred in connection with the purchase, delivery and application of the product. Such costs are recorded as the related revenue is recognized.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable, Net
Accounts receivable, net consists primarily of (i) outstanding amounts invoiced to end-users, re-sellers and third-party contractors and (ii) unbilled revenue in arrangements where the earnings process has been completed but invoices have not been issued as of the reporting date.
The allowance for doubtful accounts is based on forecasted losses and a review on a specific identification basis of the collectability of outstanding receivables.
Inventories
Inventories, consisting primarily of chemical products and packing, are valued at the lower of cost (under the first-in, first-out method) or net realizable value. Raw materials are valued using the weighted average moving cost method.
Property and Equipment
Property and equipment includes leasehold improvements, machinery and equipment and furniture. Property and equipment acquired in business combinations are initially recorded at their estimated fair value. Property and equipment acquired or constructed in the normal course of business are initially recorded at cost. The Company provides for depreciation and amortization based on the estimated useful lives of assets using the straight-line method.
Estimated useful lives are as follows:
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Leasehold improvements
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Shorter of useful life or lease term
|
Machinery & Equipment
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1—12 years
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Furniture
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1—12 years
|
Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the related lease term, which generally includes reasonably assured option periods expected to be exercised by the Company when the Company would suffer an economic penalty if not exercised.
Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received and net carrying values of the assets disposed.
Impairment of Long-Lived Assets
Company management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. As of December 31, 2020, Company management believed that no revision to the remaining useful lives or write-down of the Company’s long-lived assets was required. During 2019, the Company changed its strategy for the use of its RipeLock product. Based on this change, the Company reevaluated the useful life of RipeLock related intangible assets and recorded $34.0 million of amortization based on the change in useful life.
Leases
The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred. In the consolidated statements of income, lease expense for
operating lease payments is recognized on a straight-line basis over the lease term. See Note 12 - Leases for additional information.
Selling, General and Administrative Expenses
The Company expenses selling, general and administrative costs as incurred. Selling, general and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in the Company’s administrative, finance, legal, business development, commercial, sales, marketing and human resource functions. Other expenses include professional fees from outside service providers.
Debt Issuance Costs
Debt issuance costs are capitalized and presented as a reduction of the principal balance of the debt and costs associated with the revolving loan are capitalized in Other Assets. All issuance costs are accreted through interest expense for the duration of the respective debt facilities.
Goodwill and Indefinite-lived Intangible Assets
The Company’s goodwill and trade names are not amortized, but tested annually for impairment, and more frequently, if events and circumstances indicate that the asset might be impaired. The Company conducts annual impairment tests on goodwill and trade names on the last day of each fiscal year or whenever an indicator of impairment exists.
The Company performs a two-step impairment test of goodwill. In the first step, the Company estimates the fair value of the reporting unit and compares it to the carrying value of the reporting unit. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of the impairment loss, if any. In the second step, the amount of the impairment loss is the excess of the carrying amount of the goodwill over its estimated implied fair value.
As part of the Company’s goodwill impairment analysis, the fair value of its reporting unit is determined considering two valuation approaches: (1) the income approach and (2) the market approach. The income approach requires management to make significant estimates and assumptions related to the future cash flows of the reporting unit and the discount rate commensurate with the risks involved in the asset. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping.
The Company’s indefinite-lived intangible assets other than goodwill, which primarily relate to trade names, are not amortized, but are tested at least annually for impairment using a quantitative or qualitative impairment analysis, and more frequently if events and circumstances indicate that the asset might be impaired. The quantitative impairment analysis compares the fair value of each indefinite-lived intangible asset, based on future revenues using a relief-from-royalty methodology with the carrying value of the asset. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the difference between the estimated fair value of the indefinite-lived intangible asset and its carrying amount. During the year ended December 31, 2018, the Company recorded a $2.6 million impairment charge related to a decline in the estimated value of the SmartFresh trade name. During the year ended December 31, 2020, the Company did not have any impairment charges.
Definite-Lived Intangible Assets
Intangible assets subject to amortization primarily consist of acquired technology and customer relationships and are amortized on a straight-line basis over their estimated useful lives. During the year ended December 31, 2019, the Company recorded an impairment charge of $1.0 million associated with the Verigo software following the sale of Verigo assets and a partnership agreement with a new technology provider.
Stock-Based Compensation
The Company grants various stock-based compensation awards to its officers, employees and Board of Directors with time-based and/or performance-based vesting conditions. Awards without cash settlement conditions are equity-classified. The Company measures and recognizes compensation expense over the vesting period based on their estimated grant date fair values.
Phantom stock awards and stock appreciation rights either require or provide the holder of the award with the option to settle in cash. The Company's awards with cash settlement conditions are accounted for as liabilities, and the Company measures and recognizes compensation expense over the vesting period based on their estimated fair values as of the most recent reporting date.
Fair values for options and stock appreciation rights are estimated using an option pricing model. Fair values for restricted stock and phantom stock awards are based on the closing price of the Company’s common stock on the grant date and the measurement date.
Compensation expense for the Company’s stock-based compensation awards is generally recognized on a straight-line basis over the vesting period of the award. For awards with performance conditions, compensation expense is recognized only if satisfaction of the performance condition is considered probable of being achieved.
Compensation expense for the Employee Stock Purchase Plan is recognized based on the employee contributions and market price of the stock as of the grant date.
Research and Development
Expenditures for research and development costs, which primarily relate to internal compensation costs and professional service fees, are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that a tax position will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
Contingencies
The Company recognizes liabilities for loss contingencies when it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. The Company’s ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. The Company records legal settlement costs when those costs are probable and reasonably estimable.
Redeemable Non-Controlling Interest
Non-controlling interest that is redeemable upon the occurrence of an event that is not solely within the Company's control is reported in the temporary equity section between total liabilities and shareholders' equity in the Company's consolidated balance sheets. The Company adjusts the Redeemable non-controlling interest balance to reflect the redemption amount each reporting period.
Credit Concentration Risk
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of cash deposits. The Company maintains cash balances at financial institutions with strong credit ratings. Generally, amounts invested with financial institutions are in excess of FDIC insurance limits.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which we would transact, and the Company also considers assumptions that market participants would use when pricing the asset or liability.
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. We use inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of assets or liabilities.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The fair values are determined based on model-based techniques such as discounted cash flow models using inputs that we could not corroborate with market data.
Foreign Currency
An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Assets and liabilities are translated at period-end rates; income statement amounts are translated at average rates during the course of the period. Translation gains and losses of those operations that use local currency as the functional currency, are included in accumulated other comprehensive (loss) income in the consolidated balance sheets.
Foreign currency exchange transaction gain (loss) is the result of remeasuring transactions denominated in a currency other than our primary currency and is reported in the consolidated statements of operations as a separate line within other income (expense).
Warrants
Public Warrants
On February 19, 2014, the Company sold 21,000,000 units at a price of $10.00 per unit (the “Units”) in its initial public offering (the “Public Offering”). Each unit consisted of one share of the Company’s common stock and one-half of one warrant (“Warrant”). On March 13, 2014, the Company sold an additional 1,050,000 units pursuant to the partial exercise by the underwriters for the Public Offering of their over-allotment option. Each such additional unit consisted of one share of the Company’s common stock and one-half of one warrant. Each whole warrant entitled the holder thereof to purchase one share of the Company’s common stock at a price of $11.50 per share. These warrants were classified in Stockholders' Equity and expired on July 31, 2020.
Private Placement Warrants
Simultaneous with the Public Offering, the Company issued 5,950,000 warrants, and upon the underwriters’ partial exercise of their over-allotment option on March 13, 2014, the Company issued an additional 210,000 warrants (collectively, the “Private Placement Warrants”). On December 17, 2015, the Company amended the Warrant Purchase Agreement (see Note 3 - Business Combinations) resulting in a reclassification of the Private Placement Warrants into Stockholders' Equity as of December 31, 2015. All warrants expired on July 31, 2020.
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 is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company.
In February 2016, the FASB issued ASU 2016-02, Leases. The main objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Effective for the quarter ended March 31, 2019, the Company adopted the guidance for leases and elected to utilize a cumulative effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance.
The Company also elected to apply practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $7.3 million as part of other assets and a lease liability of $7.3 million as part of other current liabilities and other long-term liabilities in the consolidated balance sheet as of January 31, 2019. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.
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 receivables, 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 Company adopted the new guidance 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, "Fair Value Measurement." The Company adopted the new guidance on January 1, 2020. The adoption of this standard did not have a material impact on the notes to 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. The Company will adopt the new guidance on January 1, 2021. The adoption of this standard is not expected to have a material impact on the financial statements of the Company.
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 Combination
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 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 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 Fruit Protection, S.A.U. ("Tecnidex"). The transaction was closed on December 1, 2017. Tecnidex, a privately-held international company, is a leading provider of post-harvest fungicides, disinfectants and coatings 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 FASB Accounting Standard Codification 805 Business Combination.
At the effective date of the acquisition, the Company agreed to pay holders of Tecnidex $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 connection with the acquisition of Tecnidex, the Company concurrently entered into option arrangements ("Option Agreement") with the Seller related to the remaining 25% equity interest. The Option Agreement permits the residual interest to be "put" by the Seller to the Company, or to allow the Company to "call" the residual interest gradually over time as outlined in the Option Agreement. The Seller's ownership of Tecnidex represents a non-controlling interest ("NCI") to the Company, which is classified outside of stockholders' equity as the option of the Seller is redeemable (see Note 15 - Redeemable non-controlling interest).
In accordance with the acquisition method of accounting, the Company 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. In connection with the transition services agreement, the Company paid Dow a $5.0 million set-up fee which was amortized over the period during which the services were expected to be provided.
The Company incurred expenses for such services for the year ended December 31, 2020, December 31, 2019 and December 31, 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended December 31,
2018
|
Ongoing costs of transition services agreement
|
$
|
40
|
|
$
|
120
|
|
$
|
335
|
|
Other expenses
|
—
|
|
—
|
|
1,484
|
|
Total incurred expenses
|
$
|
40
|
|
$
|
120
|
|
$
|
1,819
|
|
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 AgroFresh. In February 2019, the Company made a further minority investment in RipeLocker. For the years ended December 31, 2020 and December 31, 2019, there were no amounts paid and as of December 31, 2020 and December 31, 2019, there were no material amounts owed to RipeLocker.
For the years ended December 31, 2020 and December 31, 2019, there were no amounts paid and as of December 31, 2020 and December 31, 2019, there were no material amounts owed to RipeLocker for consulting services.
On June 13, 2020, in connection with the execution of the Investment Agreement (as defined in Note 16- 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 16- Series B Convertible Preferred Stock and Stockholders’ Equity).
5. Inventories
Inventories at December 31, 2020 and December 31, 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
Raw material
|
$
|
3,100
|
|
$
|
3,401
|
|
Work-in-process
|
7,079
|
|
7,278
|
|
Finished goods
|
13,288
|
|
10,974
|
|
Supplies
|
1,112
|
|
968
|
|
Total inventories
|
$
|
24,579
|
|
$
|
22,621
|
|
6. Other Current Assets
The Company’s other current assets at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
VAT receivable
|
$
|
9,348
|
|
$
|
4,925
|
|
Prepaid income tax asset
|
4,716
|
|
3,616
|
|
Other
|
3,155
|
|
3,261
|
|
Total other current assets
|
$
|
17,219
|
|
$
|
11,802
|
|
7. Property and Equipment
Property and equipment at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for useful life data)
|
Useful life
(years)
|
December 31, 2020
|
December 31, 2019
|
Buildings and leasehold improvements
|
7
|
-
|
20
|
$
|
6,416
|
|
$
|
6,508
|
|
Machinery & equipment
|
1
|
-
|
12
|
11,981
|
|
10,954
|
|
Furniture
|
1
|
-
|
12
|
3,031
|
|
2,681
|
|
Construction in progress
|
|
|
|
1,146
|
|
902
|
|
|
|
|
|
22,574
|
|
21,045
|
|
Less: accumulated depreciation
|
|
|
|
(10,142)
|
|
(7,868)
|
|
Total property and equipment, net
|
|
|
|
$
|
12,432
|
|
$
|
13,177
|
|
Depreciation expense for the year ended December 31, 2020 and 2019 was $3.2 million and $2.2 million, respectively. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the consolidated statements of (loss) income.
8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the year ended December 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
Balance as of December 31, 2018
|
$
|
6,670
|
|
Foreign currency translation
|
(347)
|
|
Balance as of December 31, 2019
|
6,323
|
|
Foreign currency translation
|
602
|
|
Balance as of December 31, 2020
|
$
|
6,925
|
|
The Company’s other intangible assets at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
$
|
798,260
|
|
($254,629)
|
|
|
$
|
—
|
|
$
|
543,631
|
|
|
$
|
797,760
|
|
($214,220)
|
|
$
|
—
|
|
$
|
583,540
|
|
Trade name
|
27,343
|
|
—
|
|
|
—
|
|
27,343
|
|
|
27,200
|
|
—
|
|
—
|
|
27,200
|
|
Service provider network
|
2,000
|
|
—
|
|
|
—
|
|
2,000
|
|
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
Customer relationships
|
19,072
|
|
(4,042)
|
|
|
—
|
|
15,030
|
|
|
18,058
|
|
(2,993)
|
|
—
|
|
15,065
|
|
Software
|
10,865
|
|
(9,693)
|
|
|
—
|
|
1,172
|
|
|
9,861
|
|
(5,347)
|
|
(992)
|
|
3,522
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
100
|
|
(75)
|
|
|
—
|
|
25
|
|
|
100
|
|
(58)
|
|
—
|
|
42
|
|
Total intangible assets
|
$
|
857,640
|
|
($268,439)
|
|
|
$
|
—
|
|
$
|
589,201
|
|
|
$
|
854,979
|
|
($222,618)
|
|
($992)
|
|
$
|
631,369
|
|
During the Company's annual impairment testing conducted for the year ended December 31, 2019, the Company recorded an impairment charge of $1.0 million associated with its Verigo software following a partnership agreement with a new technology provider. During 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 December 31, 2020, the weighted-average amortization periods remaining for developed technology, customer relationships, software and other was 14.4, 11.8, 1.0 and 1.5 years, respectively. At December 31, 2020, the weighted-average amortization periods remaining for these finite-lived intangible assets was 14.3 years.
Amortization expense for intangible assets was $43.7 million, $81.1 million and $45.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Estimated annual amortization expense for finite-lived intangible assets subsequent to December 31, 2020 is as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
2021
|
$
|
41,793
|
|
2022
|
40,983
|
|
2023
|
40,870
|
|
2024
|
40,870
|
|
2025
|
40,870
|
|
Thereafter
|
354,472
|
|
Total
|
$
|
559,858
|
|
9. Other Assets
The Company’s other assets at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
|
|
|
Right-of-use asset
|
$
|
6,184
|
|
$
|
6,599
|
|
Long term sales-type lease receivable
|
2,821
|
|
2,501
|
|
|
|
|
Other long term receivable
|
3,489
|
|
3,061
|
|
Total other assets
|
$
|
12,494
|
|
$
|
12,161
|
|
During the year ended December 31, 2019, the Company recorded an impairment of $10.0 million related to a cost method investment.
10. Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
Accrued compensation and benefits
|
$
|
7,778
|
|
$
|
7,307
|
|
Accrued rebates payable
|
390
|
|
1,377
|
|
Insurance premium financing payable
|
695
|
|
1,000
|
|
Severance
|
598
|
|
444
|
|
Deferred revenue
|
1,474
|
|
1,175
|
|
Accrued taxes
|
6,649
|
|
3,017
|
|
Accrued interest
|
83
|
|
71
|
|
Lease liability
|
1,708
|
|
1,493
|
|
Other
|
6,601
|
|
8,466
|
|
Total accrued and other current liabilities
|
$
|
25,976
|
|
$
|
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 December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
Total term loan outstanding
|
$
|
274,313
|
|
$
|
405,875
|
|
Unamortized deferred issuance costs
|
(8,588)
|
|
(3,886)
|
|
Tecnidex loan outstanding
|
2,144
|
|
750
|
|
Less: Amounts due within one year
|
3,378
|
|
4,675
|
|
Total long-term debt due after one year
|
$
|
264,491
|
|
$
|
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 16 – 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 year ended December 31, 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 year ended December 31, 2020 was $0.8 million. As of December 31, 2020 there were $8.6 million of unamortized deferred issuance costs.
At December 31, 2020, there was $274.3 million outstanding under the Restated Term Loan and no balance outstanding under the Restated Revolving Loan. At December 31, 2020, the Company evaluated the amount recorded under the Restated Term Loan and determined that the fair value was approximately $271.6 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 December 31, 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 December 31, 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 of the Business Combination, 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 year ended December 31, 2020 and 2019 was approximately $1.4 million and $2.5 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 the Company's debt subsequent to December 31, 2020 are as follows:
|
|
|
|
|
|
(in thousands)
|
Amount
|
2021
|
$
|
3,378
|
2022
|
3,475
|
2023
|
3,135
|
2024 and thereafter
|
266,469
|
Total
|
$
|
276,457
|
|
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 years ended December 31, 2020 and 2019, a realized loss of $0.1 million and an unrealized gain of $0.1 million were recognized, respectively, in connection with this swap. The interest rate swap contract matured 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 was 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 December 31, 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 during the year ended December 31, 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)
|
Year ended December 31, 2020
|
Year ended December 31, 2019
|
Operating Lease Cost
|
|
|
Operating leases
|
$
|
3,090
|
|
$
|
2,409
|
|
Short-term leases (1)
|
218
|
|
90
|
|
Total lease expense
|
$
|
3,308
|
|
$
|
2,499
|
|
(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Other information on operating leases:
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
Year ended December 31, 2019
|
Cash payments included in operating cash flows
|
2,466
|
|
2,312
|
|
Right-of-use assets obtained in exchange for new lease
|
1,810
|
|
401
|
|
Weighted average discount rate
|
8.71
|
%
|
9.34
|
%
|
Weighted average remaining lease term in years
|
4.55 years
|
5.40 years
|
The following table presents the contractual maturities of the Company's lease liabilities as of December 31, 2020:
|
|
|
|
|
|
(in thousands)
|
Lease Liability
|
2021
|
$
|
2,219
|
|
2022
|
1,906
|
2023
|
1,503
|
2024
|
740
|
2025 and thereafter
|
1,745
|
Total undiscounted lease payments
|
8,113
|
|
Less: present value adjustment
|
1,755
|
|
Operating lease liability
|
$
|
6,358
|
|
13. Other Noncurrent Liabilities
The Company’s other noncurrent liabilities at December 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
Lease liability
|
$
|
4,650
|
|
$
|
5,339
|
|
Other
|
1,782
|
|
1,907
|
|
Total other noncurrent liabilities
|
$
|
6,432
|
|
$
|
7,246
|
|
14. Severance
The Company expensed $0.9 million and $1.1 million of severance expense for the years ended December 31, 2020 and 2019, respectively. These amounts, which do not include stock compensation expense, were recorded in selling, general and administrative expenses in the consolidated statements of (loss) income. As of December 31, 2020, the Company had $0.6 million of severance liability, which will be paid out over the next year.
15. Redeemable non-controlling interest
In connection with the acquisition of Tecnidex, the Company concurrently entered into the Option Agreement with the Seller related to the remaining 25% equity interest. The Option Agreement permits the residual interest to be "put" by the Seller to the Company, or to allow the Company to "call" the residual interest gradually over time as outlined in the agreement. The Seller's ownership of Tecnidex represents a NCI to the Company, which is classified outside of stockholders' equity as the option of the Seller is redeemable. As of December 31, 2020 the carrying amount of the NCI was recorded at its redemption value of
$8.4 million in the consolidated balance sheet. Changes in the redemption value of the NCI are included as an adjustment to Additional paid-in capital on the balance sheet.
The following table summarizes the changes to the Company's Redeemable non-controlling interest.
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Beginning balance
|
$
|
(7,701)
|
|
$
|
(8,263)
|
|
Net loss attributable to redeemable non-controlling interest
|
394
|
|
678
|
|
Adjustment of NCI to redemption value
|
(1,139)
|
|
(116)
|
|
|
|
|
Ending balance
|
$
|
(8,446)
|
|
$
|
(7,701)
|
|
16. 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 December 31, 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 $10.5 million of total dividends, of which $5.2 million were in additional preferred shares and $5.2 million were in cash, for the year ended December 31, 2020. For the year ended December 31, 2019, the Company paid no dividends. As of December 31, 2020 and 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 (“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 December 31, 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 31,048,800 and 0 shares, respectively.
The below table outlines the change in Series B Preferred Stock during the twelve months ended December 31, 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
|
|
—
|
|
—
|
|
—
|
|
Exchange to Series B preferred stock
|
(150,000)
|
|
(150,000)
|
|
(150,000)
|
|
—
|
|
150,000
|
|
150,000
|
|
Issuance related expenses
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(11,516)
|
|
In kind dividend
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5,244
|
|
Balance at December 31, 2020
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
150,000
|
|
$
|
143,728
|
|
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 December 31, 2020, there were 52,430,947 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.
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
|
Foreign currency translation adjustments
|
$
|
(31,368)
|
|
$
|
(32,880)
|
|
|
Unrealized gain on hedging activity
|
—
|
|
1,876
|
|
|
Pension and other postretirement benefit plans
|
(299)
|
|
(56)
|
|
|
Total
|
$
|
(31,667)
|
|
$
|
(31,060)
|
|
|
17. Stock Compensation
The Company’s stock-based compensation is in accordance with the amended 2015 Incentive Compensation Plan (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 addition, the Company may grant cash-settled awards, including stock-appreciation rights (SARs) and phantom stock awards. As of December 31, 2020, there were 2,275,197 shares available for grant under the Plan.
In June 2019, the Company's shareholders approved the 2019 Employee Stock Purchase Plan (the "ESPP"), which was effective July 1, 2019. 500,000 shares of common stock are reserved for issuance under the ESPP. The ESPP allows eligible employees to purchase shares of common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods beginning January 1 and July 1 of each year, and each offering period consists of a six-month purchase period. On each purchase date, eligible employees may purchase the Company's common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. As of December 31, 2020, 314,117 shares had been issued under the ESPP.
Total stock-based compensation recorded by the Company for the year ended December 31, 2020, 2019 and 2018 for both equity and liability-classified awards was $3.6 million, $2.7 million and $2.9 million respectively.
The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations for the year ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended Year Ended
December 31, 2020
|
Year Ended Year Ended
December 31, 2019
|
Year Ended Year Ended
December 31, 2018
|
Cost of sales
|
$
|
95
|
|
$
|
142
|
|
$
|
191
|
|
Selling, general and administrative expenses
|
3,192
|
|
2,384
|
|
2,413
|
|
Research and development expenses
|
311
|
|
188
|
|
293
|
|
Total
|
$
|
3,598
|
|
$
|
2,714
|
|
$
|
2,897
|
|
Time-Based Stock Options
During the year ended December 31, 2019, the Company’s compensation committee approved time-based stock options ("Options") to be granted to officers and employees of the Company, which vest ratably over three years. No Options were granted during the year ended December 31, 2020. A summary of the status of the Company’s Options for the years ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Share
Underlying
Awards
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual
Term (years)
|
Outstanding at January 1, 2019
|
982,324
|
|
$
|
9.38
|
|
7.18
|
Granted
|
324,450
|
|
3.34
|
|
9.25
|
Exercised
|
—
|
|
—
|
|
0
|
Forfeited or expired
|
(498,954)
|
|
10.17
|
|
6.27
|
Outstanding at December 31, 2019
|
807,820
|
|
6.44
|
|
7.69
|
Exercisable at December 31, 2019
|
403,831
|
|
8.66
|
|
6.48
|
Vested and expected to vest at December 31, 2019
|
807,820
|
|
$
|
6.44
|
|
7.69
|
|
|
|
|
Outstanding at January 1, 2020
|
807,820
|
|
$
|
6.44
|
|
7.69
|
Granted
|
—
|
|
—
|
|
0
|
Exercised
|
—
|
|
—
|
|
0
|
Forfeited or expired
|
(8,250)
|
|
3.34
|
|
9.43
|
Outstanding at December 31, 2020
|
799,570
|
|
6.47
|
|
6.67
|
Exercisable at December 31, 2020
|
572,858
|
|
7.43
|
|
6.11
|
Vested and expected to vest at December 31, 2020
|
799,570
|
|
$
|
6.47
|
|
6.67
|
The fair value of each Option was estimated on the date of grant using the Hull-White or Black-Scholes option pricing models with the assumptions described below. For the periods indicated, since the Company has limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of Options and the actual volatility for the Company since the Business Combination. The Company records forfeitures as they occur. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the expected term of the Options. The expected life for the Hull-White model was calculated as the average time to achieve the 2.0x strike exercise price in the simulation. The expected life for the Black-Scholes model was estimated using the simplified method.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2019
|
Weighted average grant date fair value
|
|
$1.72
|
Risk-free interest rate
|
|
2.27%
|
Expected life (years)
|
|
6.00
|
Estimated volatility factor
|
|
52.33%
|
Expected dividends
|
|
None
|
As of December 31, 2020, the Company had unrecognized compensation costs for Options totaling $0.3 million that is expected to be recognized over an average period of 1.1 years.
Time-Based Stock Appreciation Rights
During the year ended December 31, 2019, the Company’s compensation committee approved time-based stock appreciation rights ("SARs") to be granted to employees of the Company outside of the United States, which vest ratably over three years. No SARs were granted during the year ended December 31, 2020. A summary of the Company’s SARs as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Awards
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual
Term (years)
|
|
Outstanding at January 1, 2019
|
105,925
|
|
$
|
9.12
|
|
6.75
|
|
Granted
|
5,450
|
|
3.34
|
|
9.25
|
|
Exercised
|
—
|
|
—
|
|
0.00
|
|
Forfeited or expired
|
(27,500)
|
|
12.00
|
|
5.67
|
|
Outstanding at December 31, 2019
|
83,875
|
|
8.90
|
|
6.00
|
|
Exercisable at December 31, 2019
|
76,558
|
|
9.42
|
|
5.72
|
|
Vested and expected to vest at December 31, 2019
|
83,875
|
|
$
|
8.90
|
|
6.00
|
|
|
|
|
|
|
Outstanding at January 1, 2020
|
83,875
|
|
$
|
8.90
|
|
6.00
|
|
Granted
|
—
|
|
—
|
|
0.00
|
|
Exercised
|
—
|
|
—
|
|
0.00
|
|
Forfeited or expired
|
(35,750)
|
|
10.32
|
|
5.42
|
|
Outstanding at December 31, 2020
|
48,125
|
|
12.00
|
|
4.69
|
|
Exercisable at December 31, 2020
|
48,125
|
|
12.00
|
|
4.69
|
|
Vested and expected to vest at December 31, 2020
|
48,125
|
|
$
|
12.00
|
|
4.69
|
|
Holders of these SARs are entitled under the terms of the Plan to receive cash payments calculated based on the excess of the Company’s stock price over the target price in their award; consequently, these awards are accounted for as liability-type awards, and the Company measures compensation cost based on their estimated fair value at each reporting date and the number of options expected to vest.
Upon issuance, the fair value of each SAR award was estimated using the Hull-White option pricing model with the assumptions described below. For the periods indicated, since the Company has limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of SAR awards. The Company records forfeitures as they occur. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the expected term of the SAR awards. The expected life was calculated as the average time to achieve the 2.0x strike exercise price in the simulation. SARs are liability classified within Accrued expenses and other current liabilities and they are revalued at each reporting date. The assumptions used to value the SARs as of their issuance dates and as of December 31, 2020 and 2019 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At issuance
|
As of December 31, 2020
|
As of December 31,
2019
|
Fair value of awards
|
$1.86
|
$0.03
|
$0.17
|
Risk-free interest rate
|
1.74
|
|
-
|
2.98
|
%
|
0.14
|
%
|
1.61
|
%
|
-
|
1.71
|
%
|
Expected life (years)
|
5.83
|
-
|
6.50
|
2.33
|
2.84
|
-
|
5.22
|
Estimated volatility factor
|
47.52
|
|
-
|
48.00
|
%
|
54.50
|
%
|
52.33
|
%
|
-
|
54.50
|
%
|
Expected dividends
|
None
|
None
|
None
|
As of December 31, 2020, the Company had no unrecognized compensation costs for SARs.
Restricted Stock
During the year ended December 31, 2020 and December 31, 2019, the Company’s compensation committee approved equity-classified performance-based restricted stock units (RSUs) and time based restricted stock to be granted to officers and employees of the Company, which vest ratably over three years. A summary of the Company’s restricted stock awards as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
Non-vested Restricted Stock & RSUs at January 1, 2019
|
668,696
|
|
$
|
6.76
|
|
Granted
|
853,650
|
|
3.13
|
|
Vested
|
(267,249)
|
|
5.48
|
|
Forfeited or expired
|
(239,275)
|
|
4.47
|
|
Non-vested Restricted Stock & RSUs at December 31, 2019
|
1,015,822
|
|
$
|
4.26
|
|
|
|
|
Non-vested Restricted Stock & RSUs at January 1, 2020
|
1,015,822
|
|
$
|
4.26
|
|
Granted
|
1,906,745
|
|
1.65
|
|
Vested
|
(232,136)
|
|
5.21
|
|
Forfeited or expired
|
(236,809)
|
|
4.44
|
|
Non-vested Restricted Stock and RSUs at December 31, 2020
|
2,453,622
|
|
$
|
2.12
|
|
Unrecognized compensation expense for performance-based restricted stock and time-based restricted stock is $4.1 million, which is expected to be recognized over a weighted average period of 1.9 years.
Phantom Stock Awards
During the year ended December 31, 2019, the Company’s compensation committee approved phantom stock awards to be awarded to employees of the Company located outside of the United States, which vest ratably over three years. These awards will be settled in cash upon vesting and are therefore liability-classified within Accrued expenses and other current liabilities, requiring re-measurement at each balance sheet date. A summary of the Company’s Phantom Stock Awards as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
Weighted-Average
Grant Date Fair
Value
|
Non-vested phantom stock awards at January 1, 2019
|
112,183
|
|
$
|
6.71
|
|
Granted
|
136,450
|
|
3.09
|
|
Vested
|
(43,219)
|
|
5.41
|
|
Forfeited or expired
|
(22,532)
|
|
4.51
|
|
Non-vested phantom stock awards at December 31, 2019
|
182,882
|
|
$
|
4.30
|
|
|
|
|
Non-vested phantom stock awards at January 1, 2020
|
182,882
|
|
$
|
4.30
|
|
Granted
|
247,166
|
|
1.65
|
|
Vested
|
(57,986)
|
|
4.49
|
|
Forfeited or expired
|
(46,420)
|
|
2.42
|
|
Non-vested phantom stock awards at December 31, 2020
|
325,642
|
|
$
|
2.26
|
|
Unrecognized compensation expense for the unvested time-based phantom shares is $0.3 million, which is expected to be recognized over a weighted average period of 2.0 years.
Director Shares
On January 31, 2014, 20,125 founder shares were transferred to each of three independent directors (“Director Shares”) of the Company, adjusted for the effect of stock dividends in February 2014 (for a total of 60,375 founder shares). On March 13, 2014, the underwriters exercised a portion of the over-allotment option from the Public Offering, resulting in a portion of the Director Shares being forfeited. As a result, the Director Shares were adjusted ratably resulting in each director holding 18,375 Director Shares (for a total of 55,125 Director Shares) at December 31, 2020.
The Director Shares were effectively subject to achievement of two performance conditions — the Company completing its initial public offering (IPO) and a business combination within 21 months of the IPO. Additionally, 25% (13,781 shares in the
aggregate) were subject to forfeiture if the Company’s stock price does not trade at or above $13 for any 20 trading days within a 30 day period commencing on the Closing Date through July 31, 2020. 13,781 shares were forfeited on July 31, 2020.
The grant date fair value of the Director Shares with performance conditions was estimated as of their deemed grant date of January 31, 2014. The aggregate fair value of the Director Shares of $0.4 million was recognized as an expense upon consummation of the Business Combination, at which point the performance conditions had been achieved.
The fair value of the Director Shares was estimated using a Monte Carlo Simulation Model that used the following assumptions:
|
|
|
|
|
|
Risk-free interest rate
|
1.96%
|
Expected life (years)
|
6.47
|
Estimated volatility factor
|
31.16%
|
Expected dividends
|
None
|
There were no unrecognized compensation costs for the Director Shares as of December 31, 2020.
Board of Director Grants
Certain directors receive shares of restricted stock subject to the terms, provisions and restrictions of the 2015 Incentive Compensation Plan. The shares granted during the year ended December 31, 2020 and 2019, vest over a one year period on the one year anniversary of each holder's grant date, provided the Director is still serving as a director of the Company. Upon termination of directorship for any reason, the Director immediately forfeits any unvested shares without payment. A summary of the Company’s time-based restricted stock awarded to the Board of Directors for the year ended December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
Non-vested time-based restricted stock at January 1, 2019
|
64,369
|
|
$
|
7.21
|
|
Granted
|
233,362
|
|
2.29
|
|
Vested
|
(90,308)
|
|
5.80
|
|
Forfeited or expired
|
—
|
|
—
|
|
Non-vested time-based restricted stock at December 31, 2019
|
207,423
|
|
$
|
2.29
|
|
|
|
|
Non-vested time-based restricted stock at January 1, 2020
|
207,423
|
|
$
|
2.29
|
|
Granted
|
214,177
|
|
2.45
|
|
Vested
|
(234,298)
|
|
2.28
|
|
Forfeited or expired
|
—
|
|
—
|
|
Non-vested time-based restricted stock at December 31, 2020
|
187,302
|
|
$
|
2.48
|
|
As of December 31, 2020, the Company had unrecognized compensation costs for the Director shares of $0.3 million that is expected to be recognized over an average period of 0.6 years.
18. Earnings Per Share
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. The Company had a loss for the year ended December 31, 2020 and December 31, 2019. Therefore, the effect of convertible preferred stock and stock-based awards including options, restricted stock, restricted stock units and warrants outstanding at December 31, 2020 and December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended December 31,
2018
|
Basic weighted-average common shares outstanding
|
50,770,429
|
|
50,123,565
|
|
49,883,739
|
|
Effect of dilutive options, performance stock units and restricted stock
|
—
|
|
—
|
|
—
|
|
Diluted weighted-average shares outstanding
|
50,770,429
|
|
50,123,565
|
|
49,883,739
|
|
Securities that could potentially be dilutive are excluded from the computation of diluted earnings (loss) 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 such 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:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
Year Ended December 31, 2019
|
Convertible preferred stock
|
13,064,286
|
—
|
Stock-based compensation awards (1):
|
|
|
Stock options
|
803,086
|
|
848,862
|
|
Restricted Stock Units
|
1,358,787
|
|
585,052
|
|
Warrants:
|
|
|
Private placement warrants
|
3,584,918
|
|
6,160,000
|
|
Public warrants
|
5,716,706
|
|
9,823,072
|
|
(1) SARs and Phantom Options are payable in cash so 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.
19. Income Taxes
Loss before income taxes consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended December 31,
2018
|
Domestic
|
$
|
(26,460)
|
|
$
|
(72,293)
|
|
$
|
(32,982)
|
|
Foreign
|
4,870
|
|
(6,360)
|
|
4,582
|
|
Total
|
$
|
(21,590)
|
|
$
|
(78,653)
|
|
$
|
(28,400)
|
|
Significant components of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended December 31,
2018
|
Currently payable:
|
|
|
|
Federal
|
$
|
377
|
|
$
|
(296)
|
|
$
|
(631)
|
|
State and local
|
4
|
|
37
|
|
36
|
|
Foreign
|
1,744
|
|
4,747
|
|
1,281
|
|
Total currently payable
|
2,125
|
|
4,488
|
|
686
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
27,705
|
|
(23,358)
|
|
(2,404)
|
|
State and local
|
305
|
|
(571)
|
|
(66)
|
|
Foreign
|
1,241
|
|
(5,059)
|
|
3,624
|
|
Total deferred
|
29,251
|
|
(28,988)
|
|
1,154
|
|
Provision (benefit) for income taxes
|
$
|
31,376
|
|
$
|
(24,500)
|
|
$
|
1,840
|
|
A reconciliation of income tax expense at the U.S. Federal statutory income tax rate to actual income tax provision (benefit) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended December 31,
2018
|
Tax at statutory rate
|
$
|
(4,534)
|
|
$
|
(16,517)
|
|
$
|
(5,962)
|
|
State income taxes, net of federal tax benefit
|
364
|
|
(531)
|
|
(54)
|
|
Effect of foreign items
|
1,502
|
|
1,004
|
|
834
|
|
Valuation allowance and unbenefited losses
|
33,478
|
|
(10,654)
|
|
6,018
|
Deferred tax rate changes
|
71
|
|
281
|
|
240
|
|
Transaction costs
|
(131)
|
|
671
|
|
531
|
|
Tax incentives
|
(311)
|
|
(56)
|
|
(91)
|
|
Disallowed foreign exchange loss
|
1,746
|
|
573
|
|
—
|
|
Warrants
|
—
|
|
—
|
|
—
|
|
Other
|
(809)
|
|
729
|
|
324
|
|
Provision (benefit) for income taxes
|
$
|
31,376
|
|
$
|
(24,500)
|
|
$
|
1,840
|
|
Income tax expense (benefit) for the year ended December 31, 2020, 2019 and 2018 include certain discrete tax items for changes in valuation allowances, foreign effective rate items and other rate modifying items.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. The TCJA represents sweeping changes in U.S. tax law. Among other changes in tax law, the TCJA permanently reduced the U.S. corporate income tax rate to 21% beginning in 2018, imposed a one-time repatriation tax on deferred foreign earnings, established a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign subsidiaries, limited deductions for net interest expense under Internal Revenue Code (“IRC”) Section 163(j) and expanded the U.S. taxation of foreign earned income to include “global intangible low-taxed income” (“GILTI”).
The TCJA subjects a U.S. corporation to tax on its GILTI. U.S. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). The Company elected to use the period cost method and estimated impacts of the GILTI inclusion to be a $1.0 million tax expense in tax year 2020. The Company provided no tax provision impact related to base erosion and anti-abuse tax (“BEAT”) provisions of the TCJA, as the Company’s average gross receipts are under $500 million. In addition, the Company has not been eligible for a benefit for foreign derived intangible income (“FDII”) due to the Company’s U.S. net operating loss positions in tax year 2018, 2019 and 2020.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted in the U.S. 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 income limitation on the use of net operating losses, an increase of the EBITDA limitation on the deduction of interest expense from 30% to 50%, excluding any grant income associated with forgiven PPP loans, and the acceleration of the refund for alternative minimum tax credits granted under the TCJA. Most significant to the Company are the modifications on the limitation on business interest deduction for tax year 2020, allowing an increase for deductible interest expense in the U.S. In addition, the grant income associated with the PPP loans is non-taxable income in the U.S. for tax year 2020.
The Company’s U.S. operations have incurred cumulative taxable losses through December 31, 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 IRC, 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 - Related Party Transactions regarding the ownership change in the year ended December 31, 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 and built-in losses related to future intangible amortization tax deductions.
For the year ended December 31, 2020, the Company recorded a tax expense of $33.5 million for the net increase in valuation allowances related to deferred tax assets that will no longer be able to be realized. The unrealizable deferred tax assets relate to the aforementioned Section 382 limitations on U.S. tax attributes for a tax expense of $36.3 million. After the annual limitation was determined in the Section 382 study, the Company did not have sufficient evidence to support future taxable income to realize the deferred tax assets associated with non-deductible net interest expense, U.S. and state net operating losses, and future intangible amortization tax deductions. The remaining $2.8 million tax benefit included in the net $33.5 million change in valuation allowance tax expense relates to a tax benefit of $0.3 million for decreases in foreign valuation allowances in Japan, Netherlands and Turkey, offset by immaterial increases in South Africa and Peru, and a tax benefit of $2.5 million for untaxed income related to the elimination of intercompany profit in inventory.
For the year ended December 31, 2019, the Company recorded a tax benefit of $10.7 million for the decrease in valuation allowances related to deferred tax assets that will no longer be able to be realized. The Company increased the valuation allowance in the U.S. tax jurisdiction by a $7.8 million tax expense as the Company does not have sufficient evidence to support future taxable income to realize the deferred tax assets related to non-deductible net interest expense limited under the TCJA, foreign tax credit carryforwards and outside basis differences in U.S. investments. The remaining $18.5 million tax benefit included in the net $10.7 million change in valuation allowance tax benefit relates to a $1.1 million tax benefit for decreases in foreign valuation allowances in Japan, Netherlands and Turkey, and a $17.4 million tax benefit for untaxed income related to the elimination of intercompany profit in inventory.
For the year ended December 31, 2018, the Company recorded a tax expense of $6.0 million for the increase in valuation allowances related to deferred tax assets that will no longer be able to be realized and other unbenefited losses. The unbenefited losses relate to the elimination of intercompany profit in inventory, resulting in tax expense of $1.0 million. The Company increased the valuation allowance in the U.S. tax jurisdiction by $2.8 million as the Company does not have sufficient evidence to support the future taxable income to realize the deferred tax asset related to non-deductible net interest expense limited under the TCJA. In addition to the U.S. valuation allowance increase, there was tax expense of $2.2 million recorded due to an increase in foreign valuation allowance in Japan, Netherlands, and Turkey as a result of insufficient sources of future taxable income to support certain deferred tax assets. There was also a reduction of $1.7 million in the valuation allowance recorded due to changes in certain temporary differences and foreign currency translation rates which did not have an impact on tax expense.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31,
2020
|
December 31,
2019
|
Deferred tax assets:
|
|
|
Pension and other retiree obligations
|
$
|
323
|
|
$
|
91
|
|
Inventory
|
482
|
|
438
|
|
Other accruals and reserves
|
5,020
|
|
4,580
|
|
Loss and credit carryforwards
|
39,172
|
|
32,020
|
|
Interest expense deduction limitation carryforward
|
8,147
|
|
7,767
|
|
Investments
|
2,137
|
|
2,170
|
|
Right-of-use asset
|
1,410
|
|
1,505
|
|
Other
|
2,326
|
|
—
|
|
Valuation allowance
|
(55,996)
|
|
(19,587)
|
|
Deferred tax assets
|
$
|
3,021
|
|
$
|
28,984
|
|
|
|
|
Deferred tax liabilities:
|
|
|
Intangible assets other than goodwill
|
(24,404)
|
|
(23,953)
|
|
Property, plant and equipment
|
(1,315)
|
|
(1,964)
|
|
Unrealized foreign currency gains
|
(3,862)
|
|
—
|
|
Lease liability
|
(1,575)
|
|
(1,571)
|
|
Other
|
—
|
|
(396)
|
|
Deferred tax liabilities
|
(31,156)
|
|
(27,884)
|
|
Net deferred tax (liabilities) assets
|
$
|
(28,135)
|
|
$
|
1,100
|
|
The Company makes significant judgments regarding the realizability of its deferred tax assets (principally net operating losses). The carrying value of deferred tax assets is based on the Company’s assessment that it is more likely than not that the Company will realize these assets after consideration of all available positive and negative evidence.
Gross operating loss carryforwards amounted to $10.2 million for foreign jurisdictions, $162.8 million for U.S. federal and $20.4 million for U.S. states at December 31, 2020. These operating loss carryforwards relate to years 2015 through current 2020 tax periods. At December 31, 2020, none of the operating loss carryforwards were subject to expiration in 2021 through 2023. The operating loss carryforwards expiring in years 2024 through 2031 make up $1.9 million of the recorded deferred tax asset. The operating loss carryforwards expiring in years 2032 through 2040 make up $9.6 million of the recorded deferred tax asset. The remaining deferred tax asset relating to operating loss carryforwards of $26.7 million have an indefinite expiration. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
As of December 31, 2020, management determined that sufficient negative evidence exists to conclude that it is more-likely-than-not that the certain income tax assets in the U.S., Netherlands, South Africa and Peru are not realizable, and therefore, retained the valuation allowance accordingly.
The Company has recorded tax credits in the U.S. for research and development expenditures and foreign taxes that were generated in tax years 2015, through 2020 for a total amount of $1.5 million. The foreign tax credits will begin to expire beginning in 2025 and the research and development credits will begin to expire in 2035.
U.S. income and foreign withholding taxes have not been recognized for the difference between the financial reporting and tax basis of the investments in foreign subsidiaries that are indefinitely reinvested outside the U.S. This amount may be recognized upon a sale or liquidation of the subsidiary. There is not a gross temporary difference as of December 31, 2020, since the tax basis of investments in foreign subsidiaries is in excess of the financial reporting basis.
Uncertain Tax Positions
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year Ended December 31,
2020
|
Year Ended December 31,
2019
|
Year Ended
December 31, 2018
|
Beginning Balance
|
$
|
2,670
|
|
$
|
1,879
|
|
$
|
2,884
|
|
Additions of tax positions of the current year
|
—
|
|
1,725
|
|
393
|
|
Additions to tax positions of the prior years
|
209
|
|
88
|
|
—
|
|
Reductions of tax positions of the prior years
|
(1,236)
|
|
—
|
|
(872)
|
|
Reductions related to prior tax positions due to foreign currency
|
(633)
|
|
(862)
|
|
(525)
|
|
Expiration of statutes of limitations
|
(151)
|
|
(160)
|
|
(1)
|
|
Ending Balance
|
$
|
859
|
|
$
|
2,670
|
|
$
|
1,879
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. As of December 31, 2020, and 2019, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company's financial statements, of $0.9 million and $2.7 million, respectively. If recognized in the fiscal years ended December 31, 2020 and 2019, $0.9 million and $2.7 million, respectively, of these benefits would have reduced income tax expense and the effective tax rate. Of these amounts, approximately $0.1 million and $0.2 million of the Company's unrecognized tax benefits at December 31, 2020 and 2019, respectively, are indemnified and the release of the indemnification asset will have an offsetting impact to the effective tax rate of the Company. Of the $0.9 million and $2.7 million benefits at December 31, 2020 and 2019, respectively, approximately $0.2 million and $0.5 million have been recorded as a reduction to the related deferred tax asset for the net operating loss in accordance with Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists for all periods. The total amount of unrecognized tax benefits is not expected to change within 12 months of the reporting date. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefit within the provision for income taxes in the Consolidated statements of operations. The Company recorded an increase of $0.2 million of interest and penalties as part of "Provision for income taxes" in the Company's Consolidated statements of operations during the period ending December 31, 2020. Cumulative interest and penalties of $0.8 million and $0.7 million are recorded as part of Income taxes payable for December 31, 2020 and 2019, respectively.
20. Segment and Geographical Information
Segments
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 reduction solutions for growers and packers. Its products include SmartFreshTM, HarvistaTM and FreshCloud. Tecnidex is a provider of fungicides, disinfectants and coatings primarily focused on the citrus market.
Our chief operating decision-makers do 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 years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2020
|
2019
|
AgroFresh Core
|
|
|
Revenues
|
$
|
138,162
|
|
$
|
150,268
|
|
Gross Profit
|
108,576
|
|
117,058
|
|
Tecnidex
|
|
|
Revenues
|
19,481
|
|
19,797
|
|
Gross Profit
|
6,850
|
|
7,958
|
|
Total Revenues
|
157,643
|
|
170,065
|
|
Total Gross Profit
|
$
|
115,426
|
|
$
|
125,016
|
|
Geographic Regions
Net sales by geographic region, based on the location of the customer, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended Year Ended December 31,
|
(in thousands)
|
2020
|
2019
|
2018
|
Net sales:
|
|
|
|
North America (1)
|
$
|
33,759
|
|
$
|
42,247
|
|
$
|
43,270
|
|
Latin America (2)
|
28,731
|
|
31,818
|
|
27,178
|
|
EMEA (3)
|
79,413
|
|
81,286
|
|
93,256
|
|
Asia Pacific (4)
|
15,740
|
|
14,714
|
|
15,082
|
|
Total Net sales
|
$
|
157,643
|
|
$
|
170,065
|
|
$
|
178,786
|
|
(1) North America includes the United States and Canada.
(2) Latin America includes Argentina, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay.
(3) EMEA includes Europe, the Middle East and Africa.
(4) Asia Pacific includes Australia, China, India, Japan, New Zealand, South Korea and Philippines.
Sales of SmartFresh™ accounted for approximately 75%, 76% and 80% of our total worldwide net sales for the years December 31, 2020, 2019 and 2018, respectively.
21. 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 was subsequently reduced by $18 million in connection with post-verdict review by the Court. The Court's post-trial opinion and judgment is subject to any appeals that may be taken by the parties in the future. The Company did not recognize any income associated with the award in the years ended December 31, 2020 and 2019.
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 price and do not commit the business to obligations outside the normal customary terms for similar contracts.
22. 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 December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Liability-classified stock compensation (1)
|
$
|
—
|
|
$
|
—
|
|
$
|
282
|
|
$
|
282
|
|
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
|
Interest rate swap (2)
|
$
|
—
|
|
$
|
(95)
|
|
$
|
—
|
|
$
|
(95)
|
|
Liability-classified stock compensation (1)
|
—
|
|
—
|
|
218
|
|
218
|
|
Total
|
$
|
—
|
|
$
|
(95)
|
|
$
|
218
|
|
$
|
123
|
|
(1) The fair value of the stock appreciation right was measured using a Black-Scholes pricing model during the year ended December 31, 2020 and December 31, 2019. The fair value of phantom shares is based on the fair value of the Company's common stock. The fair value of performance based phantom shares was measured using a Monte Carlo pricing model. The valuation technique used did not change during the year ended December 31, 2020 and December 31, 2019.
(2) The derivative assets and liabilities relate to an interest rate derivative that is measured at fair value using observable market inputs such as interest rates, our own credit risks as well as an evaluation of the counterpart's' credit risks.
There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the year ended December 31, 2020 and December 31, 2019.
At December 31, 2020, the Company evaluated the amount recorded under the Restated Term Loan and determined that the fair value was approximately $271.6 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 tables present the changes during the periods presented in our Level 3 financial instruments that are measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Interest rate
contract
|
Liability-classified stock compensation
|
Total
|
Balance, December 31, 2019
|
$
|
(95)
|
|
$
|
218
|
|
$
|
123
|
|
Interest rate contract
|
95
|
|
—
|
|
95
|
|
Stock compensation activity
|
—
|
|
64
|
|
64
|
|
Balance, December 31, 2020
|
$
|
—
|
|
$
|
282
|
|
$
|
282
|
|
23. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
2020
|
|
|
|
|
Net sales
|
$
|
33,023
|
|
$
|
19,982
|
|
$
|
52,770
|
|
$
|
51,868
|
|
Cost of sales
|
8,528
|
|
6,453
|
|
13,511
|
|
13,725
|
|
Gross profit
|
24,495
|
|
13,529
|
|
39,259
|
|
38,143
|
|
(Loss) income before taxes
|
(7,645)
|
|
(16,121)
|
|
3,476
|
|
(1,300)
|
|
Net (loss) income including NCI
|
(3,814)
|
|
(16,751)
|
|
(29,738)
|
|
(2,663)
|
|
Net loss attributable to AgroFresh Solutions, Inc.
|
(3,717)
|
|
(16,881)
|
|
(30,053)
|
|
(3,060)
|
|
Net loss attributable to AgroFresh Solutions, Inc. Common Stockholders
|
(3,717)
|
|
(16,881)
|
|
(34,453)
|
|
(9,148)
|
|
Net loss per share:
|
|
|
|
|
Basic
|
($0.07)
|
($0.33)
|
($0.68)
|
($0.18)
|
Diluted
|
($0.07)
|
($0.33)
|
($0.68)
|
($0.18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
2019
|
|
|
|
|
Net sales
|
$
|
38,940
|
|
$
|
21,183
|
|
$
|
48,972
|
|
$
|
60,970
|
|
Cost of sales
|
11,335
|
|
6,289
|
|
13,892
|
|
13,533
|
|
Gross profit
|
27,605
|
|
14,894
|
|
35,080
|
|
47,437
|
|
(Loss) income before taxes
|
(13,172)
|
|
(28,651)
|
|
(2,642)
|
|
(34,188)
|
|
Net (loss) income including NCI
|
(12,585)
|
|
(22,361)
|
|
3,011
|
|
(22,218)
|
|
Net (loss) income attributable to AgroFresh Solutions, Inc.
|
(12,619)
|
|
(22,269)
|
|
3,289
|
|
(21,992)
|
|
Net (loss) income per share:
|
|
|
|
|
Basic
|
($0.25)
|
($0.45)
|
$0.06
|
($0.44)
|
Diluted
|
($0.25)
|
($0.45)
|
$0.06
|
($0.44)
|
24. Correction of Prior Period Errors
During the current year-end financial reporting process, we identified certain prior period accounting errors that we have concluded are not material to the Company’s previously reported consolidated financial statements and unaudited interim condensed consolidated financial statements. The accompanying consolidated financial statements and related notes hereto as of and for the year ended December 31, 2019 have been revised to give effect to the correction of these errors. A description of each error is described below.
Non-Controlling Interest
During the fourth quarter of 2020, we identified an error related to the accounting for the Company's acquisition of 75% of Tecnidex in December 2017 (see Note 3 – Business Combination). As part of the Tecnidex purchase agreement ("Agreement"), the Company entered into “call” and “put” option agreements that provide for both the purchaser and seller to acquire or sell some portion of the 25% remaining (“residual”) interest at a price based on a pre-defined formula. In the Company's initial accounting for the acquisition, the residual interest was classified as “Non-controlling interest” in the Company's previously reported consolidated statements of stockholders' equity. Upon further review and as prescribed by ASC 480, Distinguishing Liabilities from Equity, the Company's management concluded the residual interest should have been classified as “Redeemable non-controlling interest” within temporary equity in the Company’s previously reported consolidated balance sheets because the Company is contingently obligated to redeem the shares if the seller elects to exercise the put option, which is outside of our control.
Furthermore, as prescribed by the SEC’s redeemable equity measurement guidance, the redeemable non-controlling interest should have been adjusted for any necessary increase in carrying value whenever the amount payable to the seller under the pre-
defined formula exceeded the cumulative allocation of income (loss) related to the redeemable non-controlling interest as of each reporting period end. The adjustment to increase the carrying value of the redeemable non-controlling interest should have been recognized as a charge to Additional paid-in capital in the Company's previously reported consolidated statements of stockholders' equity and applied as an adjustment to Net (loss) income attributable to AgroFresh Solutions, Inc. common stockholders in the determination of basic and fully diluted net (loss) income per share.
There were no necessary adjustments to previously reported Additional paid-in capital for the quarterly periods and years ended December 31, 2017 and 2018, or for any of the three quarterly periods ended through September 30, 2019. For the quarter ended December 31, 2019, a $0.1 million adjustment should have been recognized to previously reported Additional paid-in capital. For the three quarterly periods ended September 30, 2020, $0.1 million, $0.3 million and $0.8 million adjustments, respectively, should have been recognized to previously reported Additional paid-in capital.
Income Tax Provision
During the 2020 year-end financial reporting process, the Company identified two errors related to the amount recognized as income taxes benefit in the Company's previously reported consolidated statements of operations for the year ended December 31, 2019. The first related to an error in the calculation of pre-tax loss attributed to the Company's U.S. entity that resulted in an understatement of $9.7 million that should have been recognized as an income tax benefit during the quarter ended December 31, 2019.
The second related to an error in the classification of a $10.0 million charge related to the impairment charge on a long-term equity investment (see Note 9 - Other Assets) for U.S. income tax purposes whereby the Company initially considered the charge to be a potential deduction in the calculation of pre-tax loss attributed to the Company's U.S. entity. Upon further analysis, we concluded that the $10.0 million charge should have been classified as a capital loss and therefore only deductible against capital gains. However, since the Company has no pre-existing capital gains for U.S. income tax purposes (or the likelihood of generating any future capital gains), the $2.3 million deferred income tax benefit associated with the capital loss should have been fully reserved during the quarter ended December 31, 2019 because it was not realized, nor expected to be realized in the future.
The net impact of the two errors resulted in an understatement in income tax benefit and an overstatement in Net (loss) income including non-controlling interests of $7.4 million, respectively, in the Company's previously reported consolidated statements of net (loss) income for the year ended December 31, 2019, as well as an overstatement in Deferred income tax liabilities and Accumulated deficit, of $7.4 million, respectively, in the Company's previously reported consolidated balance sheet as of December 31, 2019.
Income Tax Valuation Allowance as of September 30, 2020
As disclosed in Note 16 – Series B Convertible Preferred Stock and Shareholders’ Equity and Note 19 – Income Taxes, the Company issued Series B Convertible Stock in July 2020. The issuance of these shares was considered a change in control as defined in the U.S. Internal Revenue Code of 1986, as amended. As a result, we concluded that the Company's ability to utilize its previously existing U.S. tax attributes would be restricted and, as such, recognized deferred income tax expense of $24.7 million increase in valuation allowance during the quarter ended September 30, 2020 to fully reserve deferred income tax assets we no longer expect the Company will realize in the future. In consideration of the two income tax errors described above, the Company concluded an additional $7.4 million increase in the valuation allowance should have been recognized as a result of the net increase in deferred income tax assets that would have been recognized as of September 30, 2020 had these errors been accounted for correctly.
As summarized in the unaudited selected financial statement tables below, the net impact of all the foregoing income tax errors resulted in an understatement in Income tax expense and an understatement in Net loss including non-controlling interest, of $7.4 million, respectively, in the previously reported unaudited condensed consolidated statements of operations for the three and nine month periods ended September 2020, as well as an overstatement in Deferred income tax liabilities and Accumulated deficit of $7.4 million in the previously reported unaudited condensed consolidated balance sheet as of March 31, 2020 and June 30, 2020.
The Company assessed the quantitative and qualitative factors associated with all the foregoing errors in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99 and 108, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded that they were not material, on an individual or aggregate basis, to any of the Company's previously reported annual or interim consolidated financial statements. Notwithstanding this conclusion, the Company further concluded it is preferable to correct the errors by revising the consolidated 2019 accompanying consolidated financial statements and related notes hereto of the Company as of and for the year ended December 31, 2019 to give effect to the correction of these errors.
The following financial statement tables present the net effect of the correction of the errors described above on the Company’s previously reported consolidated financial statements as of and for the year ended December 31, 2019:
The effect of the correction of the errors noted above on the Company's consolidated balance sheet as of December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
Deferred income tax liabilities
|
16,574
|
|
(7,357)
|
|
9,217
|
|
Total Liabilities
|
471,662
|
|
(7,357)
|
|
464,305
|
|
|
|
|
|
Redeemable non-controlling interest
|
—
|
|
7,701
|
|
7,701
|
|
|
|
|
|
Additional paid-in capital
|
561,006
|
|
(116)
|
|
560,890
|
|
Accumulated deficit
|
(199,621)
|
|
7,357
|
|
(192,264)
|
|
Total AgroFresh Stockholders' Equity
|
326,445
|
|
7,241
|
|
333,686
|
|
Non-controlling interest
|
7,585
|
|
(7,585)
|
|
—
|
|
TOTAL STOCKHOLDERS' EQUITY
|
334,030
|
|
(344)
|
|
333,686
|
|
The effect of the correction of the errors noted above on the Company's consolidated statements of (loss) income for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(in thousands except per share data)
|
As Reported
|
Adjustment
|
Revised
|
Benefit for income taxes
|
(17,143)
|
|
(7,357)
|
|
(24,500)
|
|
Net (loss) income including non-controlling interests
|
(61,510)
|
|
7,357
|
|
(54,153)
|
|
Net loss (income) attributable to non-controlling interests
|
678
|
|
(116)
|
|
562
|
|
Net (loss) income attributable to AgroFresh Solutions, Inc.
|
(60,832)
|
|
7,241
|
|
(53,591)
|
|
|
|
|
|
Net loss (income) per share:
|
|
|
|
Basic
|
($1.21)
|
$0.14
|
($1.07)
|
Diluted
|
($1.21)
|
$0.14
|
($1.07)
|
The effect of the correction of the errors noted above on the Company's consolidated statements of comprehensive loss for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
Net loss (income)
|
(61,510)
|
|
7,357
|
|
(54,153)
|
|
Comprehensive loss, net of tax
|
(63,733)
|
|
7,357
|
|
(56,376)
|
|
The effect of the correction of the errors noted above on the Company's consolidated statements of cash flows for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
Net loss (income)
|
(61,510)
|
|
7,357
|
|
(54,153)
|
|
Deferred income taxes
|
(21,631)
|
|
(7,357)
|
|
(28,988)
|
|
The following unaudited selected financial statement tables summarize the net effect of the correction of the errors noted above on the Company’s previously reported unaudited interim condensed consolidated financial statements as of and for the quarterly reporting interim and year-to-date periods ending March 31, 2019 and 2020, June 30, 2019 and 2020, and September 30, 2019 and 2020.
The effect of the correction of the errors noted above to the Company's previously issued unaudited condensed consolidated balance sheets as of March 31, 2019, June 30, 2019 and September 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
June 30, 2019
|
|
September 30, 2019
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
Redeemable non-controlling interest
|
—
|
|
8,297
|
|
8,297
|
|
|
—
|
|
8,205
|
|
8,205
|
|
|
—
|
|
7,927
|
|
7,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling Interest
|
8,297
|
|
(8,297)
|
|
—
|
|
|
8,205
|
|
(8,205)
|
|
—
|
|
|
7,927
|
|
(7,927)
|
|
—
|
|
Total Stockholders' Equity
|
355,998
|
|
(8,297)
|
|
347,701
|
|
|
341,434
|
|
(8,205)
|
|
333,229
|
|
|
341,243
|
|
(7,927)
|
|
333,316
|
|
The effect of the correction of the errors noted above had no impact on the Company's previously reported unaudited condensed consolidated statements of operations, comprehensive income or cash flows for the three months and year-to-date periods ended March 31, 2019, June 30, 2019 and September 30, 2019.
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated balance sheets as of March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
June 30, 2020
|
|
September 30, 2020
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
Deferred income tax liabilities
|
15,156
|
|
(7,357)
|
|
7,799
|
|
|
11,677
|
|
(7,357)
|
|
4,320
|
|
|
35,577
|
|
—
|
|
35,577
|
|
Total Liabilities
|
466,605
|
|
(7,357)
|
|
459,248
|
|
|
462,165
|
|
(7,357)
|
|
454,808
|
|
|
357,810
|
|
—
|
|
357,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest
|
—
|
|
7,604
|
|
7,604
|
|
|
—
|
|
7,734
|
|
7,734
|
|
|
—
|
|
8,049
|
|
8,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
561,483
|
|
(185)
|
|
561,298
|
|
|
562,584
|
|
(512)
|
|
562,072
|
|
|
559,037
|
|
(1,321)
|
|
557,716
|
|
Accumulated deficit
|
(203,269)
|
|
7,357
|
|
(195,912)
|
|
|
(219,823)
|
|
7,357
|
|
(212,466)
|
|
|
(241,710)
|
|
—
|
|
(241,710)
|
|
Total AgroFresh Stockholders' Equity
|
313,152
|
|
7,172
|
|
320,324
|
|
|
298,050
|
|
6,845
|
|
304,895
|
|
|
272,283
|
|
(1,321)
|
|
270,962
|
|
Non-controlling interest
|
7,419
|
|
(7,419)
|
|
—
|
|
|
7,222
|
|
(7,222)
|
|
—
|
|
|
6,728
|
|
(6,728)
|
|
—
|
|
Total Stockholders' Equity
|
320,571
|
|
(247)
|
|
320,324
|
|
|
305,272
|
|
(377)
|
|
304,895
|
|
|
279,011
|
|
(8,049)
|
|
270,962
|
|
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of operations for the three month periods ended March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended June 30, 2020
|
|
Three Months Ended September 30, 2020
|
(in thousands except per share data)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
(Benefit) provision for income taxes
|
(3,831)
|
|
—
|
|
(3,831)
|
|
|
630
|
|
—
|
|
630
|
|
|
25,857
|
|
7,357
|
|
33,214
|
|
Net loss including non-controlling interest
|
(3,814)
|
|
—
|
|
(3,814)
|
|
|
(16,751)
|
|
—
|
|
(16,751)
|
|
|
(22,381)
|
|
(7,357)
|
|
(29,738)
|
|
Net loss (income) attributable to non-controlling interests
|
166
|
|
(69)
|
|
97
|
|
|
197
|
|
(327)
|
|
(130)
|
|
|
494
|
|
(809)
|
|
(315)
|
|
Net loss attributable to AgroFresh Solutions, Inc.
|
(3,648)
|
|
(69)
|
|
(3,717)
|
|
|
(16,554)
|
|
(327)
|
|
(16,881)
|
|
|
(21,887)
|
|
(8,166)
|
|
(30,053)
|
|
Net loss attributable to AgroFresh Solutions, Inc. Common Stockholders
|
(3,648)
|
|
(69)
|
|
(3,717)
|
|
|
(16,554)
|
|
(327)
|
|
(16,881)
|
|
|
(26,287)
|
|
(8,166)
|
|
(34,453)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
($0.08)
|
$0.01
|
($0.07)
|
|
($0.33)
|
—
|
($0.33)
|
|
($0.52)
|
($0.16)
|
($0.68)
|
Diluted
|
($0.08)
|
$0.01
|
($0.07)
|
|
($0.33)
|
—
|
($0.33)
|
|
($0.52)
|
($0.16)
|
($0.68)
|
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of operations for the year-to-date periods ending March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Six Months Ended June 30, 2020
|
|
Nine Months Ended September 30, 2020
|
(in thousands except per share data)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
(Benefit) provision for income taxes
|
(3,831)
|
|
—
|
|
(3,831)
|
|
|
(3,201)
|
|
—
|
|
(3,201)
|
|
|
22,656
|
|
7,357
|
|
30,013
|
|
Net loss including non-controlling interest
|
(3,814)
|
|
—
|
|
(3,814)
|
|
|
(20,565)
|
|
—
|
|
(20,565)
|
|
|
(42,946)
|
|
(7,357)
|
|
(50,303)
|
|
Net loss (income) attributable to non-controlling interests
|
166
|
|
(69)
|
|
97
|
|
|
363
|
|
(396)
|
|
(33)
|
|
|
857
|
|
(1,205)
|
|
(348)
|
|
Net loss attributable to AgroFresh Solutions, Inc.
|
(3,648)
|
|
(69)
|
|
(3,717)
|
|
|
(20,202)
|
|
(396)
|
|
(20,598)
|
|
|
(42,089)
|
|
(8,562)
|
|
(50,651)
|
|
Net loss attributable to AgroFresh Solutions, Inc. Common Stockholders
|
(3,648)
|
|
(69)
|
|
(3,717)
|
|
|
(20,202)
|
|
(396)
|
|
(20,598)
|
|
|
(46,489)
|
|
(8,562)
|
|
(55,051)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
($0.08)
|
|
$0.01
|
|
($0.07)
|
|
|
($0.41)
|
|
—
|
|
($0.41)
|
|
|
($0.92)
|
|
($0.16)
|
|
($1.08)
|
|
Diluted
|
($0.08)
|
|
$0.01
|
|
($0.07)
|
|
|
($0.41)
|
|
—
|
|
($0.41)
|
|
|
($0.92)
|
|
($0.16)
|
|
($1.08)
|
|
The effect of the correction of the errors noted above had no impact on the Company's previously reported unaudited condensed consolidated statements of comprehensive loss for the three month and year-to-date periods ended March 31, 2020 and June 30, 2020. The effect of the correction of the errors noted above for the three and nine months ended September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2020
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
Net loss including non-controlling interest
|
(22,381)
|
|
(7,357)
|
|
(29,738)
|
|
|
(42,946)
|
|
(7,357)
|
|
(50,303)
|
|
Comprehensive loss, net of tax
|
(22,714)
|
|
(7,357)
|
|
(30,071)
|
|
|
(53,050)
|
|
(7,357)
|
|
(60,407)
|
|
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of cash flows for the year-to-date periods ended March 31, 2019, June 30, 2019 and September 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Six Months Ended June 30, 2020
|
|
Nine Months Ended September 30, 2020
|
(in thousands)
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
|
As Reported
|
Adjustment
|
Revised
|
Net loss including non-controlling interest
|
(3,814)
|
|
—
|
|
(3,814)
|
|
|
(20,565)
|
|
—
|
|
(20,565)
|
|
|
(42,946)
|
|
(7,357)
|
|
(50,303)
|
|
Deferred income tax liability
|
(5,231)
|
|
—
|
|
(5,231)
|
|
|
(5,668)
|
|
—
|
|
(5,668)
|
|
|
18,086
|
|
7,357
|
|
25,443
|
|