NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
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1.
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Description of Business
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AgroFresh Solutions, Inc. (the “Company”) is a global leader in delivering innovative food preservation and waste reduction solutions for fresh produce. The Company is empowering the food industry with Smarter Freshness
TM
, a range of integrated solutions designed to help growers, packers and retailers improve produce freshness and quality while reducing waste. The Company’s solutions range from pre-harvest with Harvista
TM
and LandSpring
TM
to its marquee
SmartFresh
TM
Quality System, which includes SmartFresh
TM
, AdvanStore
TM
and ActiMistT
M
, working together to maintain the quality of stored produce. The Company has a controlling interest in Tecnidex Fruit Protection, S.A.U. (“Tecnidex”), a leading provider of post-harvest fungicides, waxes and biocides for the citrus market. Additionally, the Company’s initial retail solution, RipeLock
TM
, optimizes banana ripening for the benefit of retailers and consumers. The Company has key products registered in over
45
countries, supports approximately
3,700
direct customers and services 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, the Company’s primary target market, the peak season in the southern hemisphere is the first and second quarters of each year, while the peak season in the northern hemisphere is the third and fourth quarters of each year. Within each half-year period (i.e., January through June for the southern hemisphere, and July through December for the northern hemisphere) the apple growing season has historically occurred during both quarters. A variety of factors, including weather, may affect the timing of the growing, harvesting and storing patterns of the Company’s customers and therefore shift the consumption of the Company’s services and products between the first and second quarters primarily in the southern hemisphere or between the third and fourth quarters primarily in the northern hemisphere.
The Company was originally incorporated as Boulevard Acquisition Corp. (“Boulevard”), a blank check company, in Delaware on October 24, 2013, and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination. On July 31, 2015, the Company completed a Business Combination (refer to Note 3) and changed its name to AgroFresh Solutions, Inc. Prior to consummation of the Business Combination, the Company’s efforts were limited to organizational activities, its initial public offering and related financings, and the search for suitable business acquisition transactions.
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2.
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Basis of Presentation and Summary of Significant Accounting Policies
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As used in these notes to the consolidated and combined financial statements, the “AgroFresh Business” refers to the business conducted prior to the closing of the Business Combination by The Dow Chemical Company (“Dow”) through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States.
As a result of the Business Combination, the Company was identified as the acquirer for accounting purposes, and the AgroFresh Business is the acquiree and accounting Predecessor. The Company’s financial statement presentation reflects the AgroFresh Business as the “Predecessor” for periods through July 31, 2015 (the “Closing Date”). On the Closing Date, Boulevard was re-named AgroFresh Solutions, Inc. and is the “Successor” for periods after the Closing Date, which includes consolidation of the AgroFresh Business subsequent to the Closing Date. The acquisition was accounted for as a business combination using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of net assets acquired. See Note 3 for further discussion of the Business Combination. As a result of the application of the acquisition method of accounting as of the effective time of the Business Combination, the financial statements for the Predecessor period and for the Successor period are presented on a different basis and, therefore, are not comparable. The historical financial information of Boulevard prior to the Business Combination has not been reflected in the Predecessor period financial statements as those amounts are not considered to be material.
For the Consolidated Statements of Stockholders’ Equity, the Predecessor results reflect the equity balances and activities of the AgroFresh Business at December 31, 2014 and July 31, 2015 prior to the closing of the Business Combination; and the Successor results reflect the Company’s equity balances at July 31, 2015 following the closing of the Business Combination and the activities of the Company through
December 31, 2017
following the closing of the Business Combination. For the fiscal year 2015, the Company’s financial statements reflect the seven months ended July 31, 2015 (Predecessor) and the five months ended December 31, 2015 (Successor).
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging
growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
The Company is an emerging growth company, and can adopt the new or revised standard at the time private companies adopt the new or revised standard. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
Principles of Consolidation
The accompanying consolidated and combined financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated and combined 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 and combined 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized when there is evidence of an arrangement, the price is fixed or determinable, collection from the customer is probable and either an application service has been provided or, in certain arrangements, risk and title to product have been transferred to the customer, and usually occurs when the application occurs or at the time of shipment, respectively. The Company’s standard terms of delivery are included in its contracts of sale, order confirmation documents and invoices. Sales are recorded net of provisions for customer discounts and rebate programs.
In an effort to maintain a competitive position in the marketplace and to promote sales and customer loyalty, the Company maintains various rebate and customer loyalty programs with our customers. Depending on the program, the customer may elect to receive either a credit against their account or a cash payment. We recognize an accrued provision for estimated rebates and customer loyalty program payouts at the time services are provided. The primary factors we consider 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. We also monitor aggregate actual rebates granted and customer loyalty agreements and compare them to the estimated aggregate provision for rebates to assess the reasonableness of the aggregate rebate reserve at each balance sheet date.
Cost of Sales
The Company offers SmartFresh and Harvista 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. Our cost of sales consists primarily of cost of materials, application costs and certain supply chain costs.
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 historical experience 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. In connection with the Business Combination, the Company recognized a step-up in fair value of inventory of
$103.5 million
, which was amortized into cost of sales in the consolidated statements of income (loss) over a period approximating the Company’s estimated inventory turnover cycle and was fully amortized during fiscal year 2016 and the five months ended December 31, 2015. The amount of amortization of the inventory step-up was
$30.4 million
and
$73.1 million
for the year ended
December 31, 2016
, and the five months ended December 31, 2015, respectively.
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
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Machinery & Equipment
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1—12 years
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Furniture
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1—12 years
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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, 2017, Company management believed that no revision to the remaining useful lives or write-down of the Company’s long-lived assets was required. For the fiscal year ended December 31, 2016, the Company recorded a
$1.3 million
impairment of fixed assets related to a change in the Harvista delivery system and a
$9.5 million
impairment on the SmartFresh and AgroFresh trade names, but believed no revision to the remaining useful lives was necessary.
Leases
Leases in which the risk of ownership is retained by the lessor are classified as operating leases. Leases which substantially transfer to the lessee all of the benefits and risks inherent in ownership are classified as capital leases. Assets, if any, acquired under capital leases are depreciated on the same basis as property, plant and equipment. Rental payments and incentives are expensed on a straight-line basis. The Company conducts a portion of its operations from leased facilities and leases certain equipment through agreements that are all treated as operating leases.
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 and costs incurred in connection with services provided by Dow under a Transition Services Agreement entered into upon consummation of the Business Combination.
Debt Issuance Costs
The debt issuance costs associated with the Term Loan (defined in Note 10 below) were capitalized and are presented as a reduction of the principal balance of the debt, and the Revolving Loan costs (defined in Note 10 below) were capitalized in Other Assets. All issuance costs will be 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.
In assessing goodwill impairment, the Company has the option to first assess the qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative factors indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 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. At
December 31, 2016
, the Company completed its annual evaluation of goodwill impairment and fully impaired its goodwill balance of
$62.4 million
. In connection with the Tecnidex acquisition in 2017, the Company recorded approximately
$9 million
of goodwill which is based on the preliminary purchase price allocation as of December 2017.
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 discounted future cash flows 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, 2016, the Company recorded a
$9.5 million
impairment charge related to a decline in the estimated value of the AgroFresh and SmartFresh trade names.
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.
Stock-Based Compensation
The Company grants various stock-based compensation awards to its officers, employees and Board of Directors with service (time) and/or performance 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 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.
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 the tax positions 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.
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
The Company measures fair value using the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three tiers in the fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
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Level 1, defined as observable inputs such as quoted prices in active markets;
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Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
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Level 3, defined as unobservable inputs which reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of third-party pricing services, option pricing models, discounted cash flow models and similar techniques.
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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 and combined 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 statement 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 entitles the holder thereof to purchase
one
share of the Company’s common stock at a price of
$11.50
per share. These warrants are classified in Stockholders' Equity.
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
) resulting in a reclassification of the Private Placement Warrants into Stockholders' Equity as of December 31, 2015.
Recently Issued Accounting Standards and Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12
Targeted Improvements to Accounting for Hedging Activities,
This update makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This update will be effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted upon its issuance. The Company is currently assessing the impact of the future adoption of this standard on its financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation
(Topic 718) Scope of Modification Accounting. ASU 2017-09 addresses the changes to the terms and conditions of share-based awards. The ASU is effective for periods beginning after December 15, 2017 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which has been updated through several revisions and clarifications since its original issuance. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in accordance with the transfer of control over those goods and services. The new standard also requires additional disclosures intended to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue, and the related cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt the new revenue standard in the first quarter of 2018 using the modified retrospective adoption method.
As part of the assessment performed through the date of this filing, the Company has created an implementation working group, which includes internal and third-party resources. The Company implemented the following controls with respect to assessing the
potential impact of adopting the standard:
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Developed a detailed project plan with key milestone dates;
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Performed education of the new accounting standard;
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Outlined the revenue generating activities that fall within the scope of ASU 2014-09 and assessed what impact the standard has on those activities, and;
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Monitoring and assessment of the impact of changes to ASU 2014-09 and its interpretations.
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The group responsible for implementing the new standard has reviewed arrangements from each revenue stream and the related business strategies. The Company has assessed the various changes in the criteria for revenue recognition required under the new standard, and concluded in summary that post application services will have the most significant impact to our current revenue recognition practices. The Company has determined the following pertaining to the impact of adopting ASU 2014-09:
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Performance Obligations and Pattern of Recognition - The Company’s contracts contain various performance obligations including: product application, product supply, and technical services. Currently, revenue is recognized at the time the product is sold or applied to the produce. The adoption of the new standard will not have a material impact on revenue recognition for product application or sales. Upon adoption of the standard, technical services will be considered distinct performance obligations and recognized over time, to align with the transfer of control and benefits related to those performance obligations.
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Discounts - Currently, revenue is recognized net of estimated payments that are expected to be paid under rebate programs. The accounting for rebate programs will remain consistent upon adoption of the new standard, which requires that variable consideration be estimated at contract inception.
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Contract Costs - The Company will apply the practical expedient of expensing contract costs when incurred if the amortization period of the asset that the Company would have recognized is one year or less. Currently the Company’s accounting policy is to expense contract costs as they are incurred.
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Internal Controls Over Financial Reporting - The Company will implement additional controls as they pertain to financial reporting disclosures as well as related business processes.
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The remaining implementation matters to be addressed include finalizing the transition specific to the recent acquisition of Tecnidex where contracts include the provision of leased equipment, product supply, technical services and contract costs that may be amortized over a period greater than one year. The Company is also finalizing updates to the Company’s business processes, systems and controls to fully comply with ASU 2014-09. Prospectively, the Company expects the new revenue standard to increase the percentage of revenue recognized over time as related to technical services, which varies by product and region and which could vary in the future depending on the mix of future orders as well as contractual terms negotiated with customers. These projected impacts and accounting models are still under review by the Company.
In March 2017, the FASB issued ASU 2017-07, “
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”
ASU No. 2017-07 requires employers to separate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not anticipate that the adoption of this ASU will have a material impact on the consolidated financial statements.
In January 2017, the 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. This standard will impact future financial statements when adopted if the Company completes additional business combinations.
In August 2016, the FASB issued ASU 2016-15, "
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments."
ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement
of cash flows. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is currently in the process of assessing the impact this guidance will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 clarifies several aspects of accounting for share-based compensation including the accounting for excess tax benefits and deficiencies, accounting for forfeitures and the classification of excess tax benefits on the cash flow statement. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and in interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU for the year ended December 31, 2017 and it did not have a material impact on the consolidated financial statements.
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. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2016-02 may have on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” The update requires an entity to measure inventory at the lower of cost or net realizable value; subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The amendments in this update are effective for annual and interim periods beginning after December 15, 2016 and should be applied retrospectively. The Company adopted this ASU for the year ended December 31, 2017 and it did not have a material impact on the consolidated financial statements.
On 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 (the “Stock Consideration”) and (ii)
$635 million
in cash (the “Cash Consideration”).
On April 4, 2017, the Company entered into an agreement (the “Amendment Agreement”) with Dow, R&H, Boulevard Acquisition Sponsor, LLC (the “Sponsor”), AgroFresh Inc., Avenue Capital Management II, L.P. (“Avenue”) and, solely as to certain sections of the Amendment Agreement, Joel Citron, Darren Thompson and Robert J. Campbell (collectively, the “Founding Holders”), Marc Lasry and Stephen Trevor. Pursuant to the Amendment Agreement and certain related agreements entered into on the same date (as described below), among other things, the Company and Dow agreed to modify certain obligations of the Company pursuant to (i) the Purchase Agreement, (ii) the Tax Receivables Agreement, dated July 31, 2015 (the “Tax Receivables Agreement”), among the Company, Dow, R&H and AgroFresh Inc., and (iii) the Warrant Purchase Agreement, dated July 31, 2015 (the “Warrant Purchase Agreement”), among the Company, Dow, R&H and the Sponsor. Mr. Campbell is a member of the Company's board of directors, each of Mr. Lasry and Mr. Trevor was a member of the Company’s board of directors at the time the Amendment Agreement was entered into, and each of Dow and the Sponsor is a significant stockholder of the Company.
Amendment Agreement
Pursuant to the Amendment Agreement, the Company agreed to pay Dow the aggregate amount of
$20.0 million
, of which
$10.0 million
was paid on April 4, 2017 and the remaining
$10.0 million
was paid on January 31, 2018, in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, and (iii) the amount payable to Dow pursuant to the Tax Receivables Agreement on account of the 2015 tax year. As of December 31, 2017, these liabilities, inclusive of accrued interest, were approximately
$17.0 million
,
$9.3 million
, and
$12.0 million
, respectively. During the year ended December 31, 2017, the liabilities were reduced by approximately
$18.2 million
.
First Amendment to Tax Receivables Agreement
The Company, Dow, R&H and AgroFresh Inc. entered into a First Amendment to the Tax Receivables Agreement (the “TRA Amendment”). The TRA Amendment reduces, from
85%
to
50%
, the percentage that the Company is required to pay to Dow
pursuant to the Tax Receivables Agreement of the annual tax savings, if any, in U.S. Federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh assets resulting from a Section 338(h)(10) election that the Company and Dow made in connection with the transactions contemplated by the Purchase Agreement. During the year ended December 31, 2017 the liability to Dow was reduced by approximately
$75.3 million
as a result of the TRA Amendment.
Stock Buyback Agreement
The Company and Dow entered into a letter agreement (the “Stock Buyback Agreement”), pursuant to which Dow agreed to use its reasonable best efforts to purchase up to
5,070,358
shares of the Company’s common stock in the open market (representing approximately
10%
of the total number of shares of the Company’s common stock then outstanding), over a period of up to
18 months
.
Termination of Warrant Purchase Agreement
The Company, Dow, R&H and the Sponsor entered into a letter agreement, pursuant to which the Warrant Purchase Agreement was terminated effective immediately.
As a result of the Amendment Agreement, the TRA Amendment and the termination of the Warrant Purchase Agreement, the Company recorded a reduction of liabilities of
$95.1 million
net of deferred income taxes of
$40.0 million
. The net impact of
$55.1 million
has been recorded to additional paid-in capital as the agreements were with related parties and the transaction has been 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, waxes, coatings, and biocides for the citrus market, with clients in
18
countries. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to 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 with the balance estimated to be paid in the second quarter of 2018.
In accordance with the acquisition method of accounting, the Company is allocating the purchase price to the estimated fair values of the identifiable assets acquired and liabilities assumed, with any excess allocated to goodwill. The allocation of the purchase price accounting is preliminary as the Company is still in the process of valuing the assets acquired and liabilities assumed; therefore the allocation of the acquisition consideration is subject to change.
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.
The results of operations for Tecnidex for the period December 1, 2017 through December 31, 2017 were not material to the Company’s results for the year ended December 31, 2017.
|
|
|
|
4.
|
Related Party Transactions
|
The Company is a party to ongoing agreements with Dow, a related party, including, but not limited to, operating-related agreements for certain transition services and seconded employees. In connection with the Transition Services Agreement, the Company paid Dow a
$5.0 million
set-up fee which is being amortized over the period during which the services are expected to be provided. In addition, the Company paid Dow
$0.6 million
on the Business Combination Closing Date to import inventory into Argentina through September 30, 2016.
The Company incurred expenses for such services for the
twelve months ended
December 31, 2017
,
December 31, 2016
, and the five months ended December 2015 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015 Through December 31, 2015
|
|
Amortization of prepayment related to set-up of transition services
|
$
|
827
|
|
$
|
1,526
|
|
$
|
2,647
|
|
|
Ongoing costs of transition services agreement
|
2,970
|
|
4,346
|
|
4,531
|
|
|
Rent expense
|
902
|
|
1,198
|
|
740
|
|
|
Amortization of prepayment related to Dow importation services
|
—
|
|
397
|
|
220
|
|
|
Other expenses
|
439
|
|
894
|
|
593
|
|
|
Total incurred expenses
|
$
|
5,138
|
|
$
|
8,361
|
|
$
|
8,731
|
|
As of
December 31, 2017
and
December 31, 2016
, the Company had an outstanding payable to Dow of
$1.2 million
and
$0.1 million
, respectively.
Refer to
Note 3
regarding the contingent consideration owed to Dow as part of the Business Combination.
In addition, during 2016, the Company made a minority investment in RipeLocker, LLC ("RipeLocker"), a company led by George Lobisser, a director of AgroFresh. On November 29, 2016, the Company entered into a Mutual Services Agreement (the “Services Agreement”) with George Lobisser and RipeLocker, LLC. Pursuant to the Services Agreement, (i) the Company agreed to provide RipeLocker with technical support, in the form of access to the Company’s research and development personnel for a specified number of hours for purposes of providing advice and input relating to RipeLocker’s products and services, and (ii) Mr. Lobisser agreed to provide consulting services to the Company as may be reasonably requested by the Company from time to time. The Services Agreement provides for Mr. Lobisser to receive a consulting fee of
$5,000
per full day for time spent performing consulting services under the Services Agreement (pro-rated for any partial day), plus reimbursement for out-of-pocket expenses, provided that for each hour of technical support provided by the Company to RipeLocker, Mr. Lobisser agreed to provide one-half hour of consulting services for no consideration. In February 2017, the
Company and Mr. Lobisser agreed to substantially curtail any mutual consulting services to be provided under the Services
Agreement, and that any further services would be provided at no charge. As of
December 31, 2017
, there were
no
amounts paid and
no
material amounts owed to RipeLocker for consulting services.
Inventories at
December 31, 2017
and
December 31, 2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
December 31, 2016
|
|
Raw material
|
$
|
2,148
|
|
$
|
1,649
|
|
|
Work-in-process
|
6,585
|
|
7,963
|
|
|
Finished goods
|
14,647
|
|
5,132
|
|
|
Supplies
|
729
|
|
723
|
|
|
Total inventories
|
$
|
24,109
|
|
$
|
15,467
|
|
The Company’s other current assets at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
December 31, 2016
|
|
VAT receivable
|
$
|
14,088
|
|
$
|
9,306
|
|
|
Prepaid income tax asset
|
$
|
2,314
|
|
$
|
1,910
|
|
|
Other
|
$
|
2,282
|
|
$
|
2,831
|
|
|
Total other current assets
|
$
|
18,684
|
|
$
|
14,047
|
|
|
|
|
|
7.
|
Property and Equipment
|
Property and equipment at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for useful life data)
|
Useful life
(years)
|
December 31, 2017
|
December 31, 2016
|
|
Leasehold improvements
|
7-20
|
$
|
2,976
|
|
$
|
1,463
|
|
|
Machinery & equipment
|
1-12
|
7,853
|
|
6,066
|
|
|
Furniture
|
1-12
|
1,698
|
|
843
|
|
|
Construction in progress
|
|
2,075
|
|
781
|
|
|
|
|
14,602
|
|
9,153
|
|
|
Less: accumulated depreciation
|
|
(2,402
|
)
|
(1,105
|
)
|
|
Total property and equipment, net
|
|
$
|
12,200
|
|
$
|
8,048
|
|
Depreciation expense for the
twelve months ended
December 31, 2017
was
$1.3 million
. Depreciation expense was
$0.9 million
,
$0.3 million
, and
$0.5 million
for the year ended
December 31, 2016
, the five months ended
December 31, 2015
, and the seven months ended July 31, 2015, respectively. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the consolidated combined statements of income (loss).
|
|
|
|
8.
|
Goodwill and Intangible Assets
|
Changes in the carrying amount of goodwill for the
twelve months ended
December 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Goodwill
|
|
Balance as of December 31, 2015
|
$
|
56,006
|
|
|
Measurement period adjustments
|
6,367
|
|
|
Impairment
|
(62,373
|
)
|
|
Balance as of December 31, 2016
|
$
|
—
|
|
|
Goodwill as a result of the Business Combination
|
9,402
|
|
|
Balance as of December 31, 2017
|
$
|
9,402
|
|
During the Company's annual goodwill impairment testing for the year ended December 31, 2016, it utilized the quantitative methods to assess impairment and concluded that goodwill was fully impaired.
The Company’s other intangible assets at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in thousands)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Impairment
|
Net
|
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Impairment
|
Net
|
|
Other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
$
|
759,374
|
|
$
|
(94,886
|
)
|
$
|
—
|
|
$
|
664,488
|
|
|
$
|
757,000
|
|
$
|
(55,623
|
)
|
$
|
—
|
|
$
|
701,377
|
|
|
In-process research and development
|
39,000
|
|
(2,889
|
)
|
—
|
|
36,111
|
|
|
39,000
|
|
(722
|
)
|
—
|
|
38,278
|
|
|
Trade name
|
29,816
|
|
|
|
|
|
29,816
|
|
|
35,500
|
|
—
|
|
(9,500
|
)
|
26,000
|
|
|
Service provider network
|
2,000
|
|
|
|
—
|
|
2,000
|
|
|
2,000
|
|
—
|
|
—
|
|
2,000
|
|
|
Customer relationships
|
20,306
|
|
(806
|
)
|
—
|
|
19,500
|
|
|
8,000
|
|
(472
|
)
|
—
|
|
7,528
|
|
|
Software
|
1,274
|
|
(404
|
)
|
—
|
|
870
|
|
|
660
|
|
(104
|
)
|
—
|
|
556
|
|
|
Software not yet placed in service
|
5,022
|
|
|
|
—
|
|
5,022
|
|
|
753
|
|
—
|
|
—
|
|
753
|
|
|
Other
|
100
|
|
(25
|
)
|
—
|
|
75
|
|
|
100
|
|
(8
|
)
|
—
|
|
92
|
|
|
Total intangible assets
|
$
|
856,892
|
|
$
|
(99,010
|
)
|
$
|
—
|
|
$
|
757,882
|
|
|
$
|
843,013
|
|
$
|
(56,929
|
)
|
$
|
(9,500
|
)
|
$
|
776,584
|
|
During the Company's annual impairment testing conducted for the year ended December 31, 2016, the Company recorded an impairment charge of
$9.5 million
on its AgroFresh and SmartFresh trade names. The annual impairment testing for the year ended December 31, 2017 resulted in no indicators of impairment.
The weighted-average amortization period remaining for the finite-lived intangible assets is
16.9
years. The weighted-average amortization period remaining for developed technology, customer relationships, in-process R&D, software, and other is
17.2
,
21.6
,
16.8
,
3.1
, and
4.5
years, respectively.
Amortization expense was
$41.9 million
,
$40.3 million
,
$16.5 million
, and
$16.9 million
for the twelve months ended December 31, 2017 and 2016, and the five months ending December 31, 2015 and the seven months ended July 31, 2015.
Estimated annual amortization expense for finite-lived intangible assets, excluding amounts in Work in Progress, subsequent to
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Amount
|
|
2018
|
$
|
43,657
|
|
|
2019
|
43,970
|
|
|
2020
|
43,951
|
|
|
2021
|
43,814
|
|
|
2022
|
43,691
|
|
|
Thereafter
|
501,960
|
|
|
Total
|
$
|
721,043
|
|
|
|
|
|
9.
|
Accrued and Other Current Liabilities
|
The Company’s accrued and other current liabilities at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
December 31, 2016
|
|
Warrant consideration
|
$
|
—
|
|
$
|
1,080
|
|
|
Tax amortization benefit contingency
|
11,820
|
|
17,535
|
|
|
Working capital settlement
|
—
|
|
17,000
|
|
|
Additional consideration due seller
|
693
|
|
9,263
|
|
|
Dow settlement liability
|
10,000
|
|
—
|
|
|
Accrued compensation and benefits
|
8,932
|
|
6,352
|
|
|
Accrued rebates payable
|
5,027
|
|
4,701
|
|
|
Insurance premium financing payable
|
639
|
|
578
|
|
|
Severance
|
113
|
|
1,564
|
|
|
Deferred revenue
|
100
|
|
—
|
|
|
Other Notes Payable
|
5,056
|
|
—
|
|
|
Accrued taxes
|
7,848
|
|
4,598
|
|
|
Accrued Interest
|
6,321
|
|
—
|
|
|
Other
|
9,260
|
|
3,695
|
|
|
Total accrued and other current liabilities
|
$
|
65,809
|
|
$
|
66,366
|
|
The Company’s debt, net of unamortized discounts and deferred financing fees, at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
December 31, 2016
|
|
Total Term Loan outstanding
|
$
|
407,109
|
|
$
|
408,246
|
|
|
Tecnidex loan outstanding
|
3,685
|
|
—
|
|
|
Less: Amounts due within one year
|
7,926
|
|
15,250
|
|
|
Total long-term debt due after one year
|
$
|
402,868
|
|
$
|
392,996
|
|
The Company evaluated the amount recorded under the Term Loan (defined below) and determined that the fair value as of December 31, 2017, and 2016, was approximately
$408.2 million
, and
$380.9 million
, respectively. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
The Term Loan is presented net of deferred issuance costs, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance costs at the inception of the Term Loan were
$12.9 million
and as of
December 31, 2017
and
December 31, 2016
there were
$8.3 million
and
$10.4 million
of unamortized deferred issuance costs, respectively.
Scheduled principal repayments subsequent to
December 31, 2017
are presented in the table below.
|
|
|
|
|
|
|
|
(in thousands)
|
Amount
|
|
2018
|
$
|
7,926
|
|
|
2019
|
5,322
|
|
|
2020
|
4,250
|
|
|
2021
|
401,625
|
|
|
2022
|
—
|
|
|
Total
|
$
|
419,123
|
|
Credit Facility (Successor)
On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and its parent, AF Solutions Holdings LLC (“AF Solutions Holdings”), a wholly-owned subsidiary of the Company, as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a
$425 million
term loan (the “Term Loan”), with an amortization equal to
1.00%
per year, and a
$25 million
revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a
$10 million
letter-of-credit sub-facility,
issuances against which reduce the available capacity for borrowing. As of
December 31, 2017
, the Company has issued
$0.56 million
of letters of credit, against which
no
funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. The interest rates on borrowings under the facilities are either the alternate base rate plus
3.75%
or LIBOR plus
4.75%
per annum, with a
1.00%
LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries, and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.
The net proceeds of the Term Loan were used to fund a portion of the purchase price payable to Rohm and Haas Company ("R&H"), a subsidiary of Dow, in connection with the Business Combination. Amounts available under the Revolving Loan may also be used for working capital, general corporate purposes, and other uses, all as more fully set forth in the Credit Agreement.
At
December 31, 2017
, there was
$414.4 million
outstanding under the Term Loan and
no
balance outstanding under the Revolving Loan.
As of the Closing Date, the Company incurred approximately
$12.9 million
in debt issuance costs related to the Term Loan and
$1.3 million
in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The interest expense related to the amortization of the debt issuance costs during the
twelve months ended
December 31, 2017
and
December 31, 2016
was approximately
$2.4 million
and
$2.3 million
, respectively.
On November 18, 2015, the Credit Facility was amended. An existing provision in the credit agreement permitted the Company, subject to an overall cap of
$12.0 million
per fiscal year and certain other conditions, to pay dividends to the Company’s public stockholders and to redeem or repurchase, through July 31, 2016, the Company’s outstanding warrants for an aggregate purchase price of up to
$10.0 million
. The amendment expanded the scope of this provision to also permit the repurchase of shares of the Company’s outstanding common stock or other equity securities (subject to the same overall cap and other conditions).
Certain restrictive covenants are contained in the Credit Facility, which the Company was in compliance with as of
December 31, 2017
, other than certain covenants that apply only to the Company’s ability to borrow under the Revolving
Loan (excluding letters of credit). The Credit Facility imposes an overall cap on the total amount of dividends the Company can pay, together with the total amount of shares and warrants the Company can repurchase, of
$12 million
per fiscal year, and imposes certain other conditions on the Company’s ability to pay dividends.
Beginning with the year ended
December 31, 2016
, the Company is required to prepay Term Loan Borrowings and Incremental Term Loan Borrowings in an aggregate amount equal to
50%
of the Excess Cash Flow for the fiscal year; provided that such amount of the Excess Cash Flow in any fiscal year shall be reduced by (i) the aggregate amount of prepayments of Term Loans and Incremental Term Loans made, (ii) to the extent accompanied by permanent reductions of Revolving Commitments, the aggregate amount of prepayments of Revolving Loans (other than prepayments financed with the proceeds of Indebtedness), (iii) repaid borrowings of Revolving Loans made on the Effective Date to account for any additional original issue discount or upfront fees that are implemented pursuant to the Fee Letter and (iv) the aggregate amount of cash dividends paid by the Company or Holdings to Holdings or Boulevard for the payment of the Seller Earnout; provided further that, prepayments of Term Loan Borrowings and Incremental Term Loan Borrowings shall only be required if
50%
of the Excess Cash Flow for such fiscal year exceeds
$5,000,000
. The are
no
amounts due under this provision for the year ended
December 31, 2017
.
|
|
|
|
11.
|
Other Noncurrent Liabilities
|
The Company’s other noncurrent liabilities at
December 31, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
December 31, 2016
|
|
Tax amortization benefit contingency
|
$
|
31,562
|
|
$
|
132,724
|
|
|
Deferred payment
|
—
|
|
2,498
|
|
|
Other
|
6,943
|
|
5,611
|
|
|
Total other noncurrent liabilities
|
$
|
38,505
|
|
$
|
140,833
|
|
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, 2017
, there were
50,340,853
shares of common stock outstanding. As of
December 31, 2017
there were warrants to purchase
15,983,072
shares of the Company’s common stock outstanding at a strike price of
$11.50
. Of the
15,983,072
warrants,
9,823,072
were issued as part of the units sold in the Company's initial public offering in February 2014 (
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.
On November 18, 2015, the Company announced that its board of directors had authorized a stock repurchase program (the “Repurchase Program”). The Repurchase Program authorized the Company to repurchase in the aggregate up to
$10 million
of the Company’s publicly-traded shares of common stock. The Repurchase Program was in effect for a period of
one
year, until November 17, 2016. Under the Repurchase Program, the Company repurchased
661,381
shares of its common stock for
$3.9 million
, which shares are classified as treasury stock on the Consolidated Balance Sheet.
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.
Simultaneously with the Closing, the Company issued
4,878,048
shares of common stock at a price of
$10.25
per share in a private placement to raise an aggregate of
$50 million
of additional equity.
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
5,150,000
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, 2017
, there were
3,339,356
shares available for grant under the Plan.
Total stock-based compensation recorded by the Company for the
twelve months ended
December 31, 2017
and 2016, for both equity and liability-classified awards was
$2.6 million
and
$3.7 million
respectively.
The following table summarizes the components of stock-based compensation expense in the consolidated statements of income (loss) for the
twelve months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
(in thousands)
|
Amount
|
|
Cost of sales
|
$
|
191
|
|
|
Selling, general, and administrative expenses
|
$
|
2,127
|
|
|
Research and development expenses
|
299
|
|
|
Total
|
$
|
2,617
|
|
The following table summarizes the components of stock-based compensation expense in the consolidated statements of income (loss) for the twelve months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
(in thousands)
|
Amount
|
|
Cost of sales
|
$
|
—
|
|
|
Selling, general, and administrative expenses
|
$
|
3,423
|
|
|
Research and development expenses
|
261
|
|
|
Total
|
$
|
3,684
|
|
Time-Based Stock Options
During the
twelve months ended
December 31, 2017
and
December 31, 2016
, the Company’s compensation committee approved time-based stock options to be granted to officers and employees of the Company, which vest ratably over
three
years. A summary of the status of the Company’s time-based stock options (“Options”) for the years ended
December 31, 2017
and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares Underlying Awards
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic Value
(In thousands)
|
|
Outstanding at January 1, 2016
|
1,106,875
|
|
$
|
12.00
|
|
9.58
|
$
|
—
|
|
|
Granted
|
167,598
|
|
5.37
|
|
9.76
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
0
|
—
|
|
|
Forfeited or expired
|
(522,500
|
)
|
12.00
|
|
0
|
—
|
|
|
Outstanding at December 31, 2016
|
751,973
|
|
10.52
|
|
8.91
|
—
|
|
|
Exercisable at December 31, 2016
|
—
|
|
—
|
|
0
|
—
|
|
|
Vested and expected to vest at December 31, 2016
|
751,973
|
|
$
|
10.52
|
|
8.91
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
751,973
|
|
$
|
10.52
|
|
8.91
|
$
|
—
|
|
|
Granted
|
181,800
|
|
4.37
|
|
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
0
|
—
|
|
|
Forfeited or expired
|
(6,875
|
)
|
9.78
|
|
0
|
—
|
|
|
Outstanding at December 31, 2017
|
926,898
|
|
$
|
8.72
|
|
8.18
|
$
|
—
|
|
|
Exercisable at December 31, 2017
|
445,449
|
|
3.69
|
|
7.91
|
—
|
|
|
Vested and expected to vest at December 31, 2017
|
926,898
|
|
$
|
8.72
|
|
8.18
|
$
|
—
|
|
The Options granted during the
twelve months ended
December 31, 2017
vest over a
three
year period,
one-third
on each anniversary of each holder's grant date.
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 did not apply a forfeiture rate to the Options as there is not enough historical information available to estimate. 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,
2017
|
Year Ended December 31,
2016
|
|
Weighted average grant date fair value
|
$2.39
|
$2.51
|
|
Risk-free interest rate
|
2.08%
|
1.32%
|
|
Expected life (years)
|
6.00
|
6.00
|
|
Estimated volatility factor
|
57.14%
|
48.3%
|
|
Expected dividends
|
None
|
None
|
As of
December 31, 2017
, the Company had unrecognized compensation costs for stock options, totaling
$1.055 million
that is expected to be recognized over an average period of
2.0 years
.
Time-Based Stock Appreciation Rights (SARS)
During the year ended December 31, 2017, the Company’s compensation committee approved time-based stock appreciation rights ("SARs") to be granted to officers and employees of the Company outside of the United States, which vest ratably over
three
years. A summary of the Company’s time-based SARs as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Awards
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic Value
(In thousands)
|
|
Outstanding at January 1, 2016
|
165,000
|
|
$
|
12.00
|
|
9.71
|
$
|
—
|
|
|
Granted
|
—
|
|
—
|
|
0
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
0
|
—
|
|
|
Forfeited or expired
|
(6,875
|
)
|
12.00
|
|
0
|
—
|
|
|
Outstanding at December 31, 2016
|
158,125
|
|
12.00
|
|
8.71
|
—
|
|
|
Exercisable at December 31, 2016
|
—
|
|
—
|
|
0
|
—
|
|
|
Vested and expected to vest at December 31, 2016
|
158,125
|
|
$
|
12.00
|
|
8.71
|
$
|
—
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
158,125
|
|
$
|
12.00
|
|
8.71
|
$
|
—
|
|
|
Granted
|
9,350
|
|
2.39
|
|
0
|
—
|
|
|
Exercised
|
—
|
|
—
|
|
0
|
—
|
|
|
Forfeited or expired
|
(91,850
|
)
|
10.88
|
|
0
|
—
|
|
|
Outstanding at December 31, 2017
|
75,625
|
|
$
|
9.83
|
|
7.75
|
$
|
—
|
|
|
Exercisable at December 31, 2017
|
—
|
|
—
|
|
0
|
—
|
|
|
Vested and expected to vest at December 31, 2017
|
75,625
|
|
$
|
9.83
|
|
7.75
|
$
|
—
|
|
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, net of estimated forfeitures, if any.
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 did not apply a forfeiture rate to the SAR awards as there is not enough historical information available to estimate. 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. Because the SARs are liability classified, they are revalued at each reporting date. The assumptions used to value the SARs as of their issuance dates and as of
December 31, 2017
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2017
|
As of
December 31,
2016
|
|
Fair value of awards
|
$
|
2.21
|
|
$
|
0.32
|
|
|
Risk-free interest rate
|
2.22
|
%
|
1.87
|
%
|
|
Expected life (years)
|
3.95
|
|
4.73
|
|
|
Estimated volatility factor
|
54.5
|
%
|
54.5
|
%
|
|
Expected dividends
|
None
|
|
None
|
|
As of
December 31, 2017
, the Company had unrecognized compensation costs for SARs, totaling
$29 thousand
that is expected to be recognized over an average period of
1.7 years
.
Restricted Stock
During the
twelve months ended
December 31, 2017
and
December 31, 2016
, the Company’s compensation committee approved equity-classified performance-based and time based restricted stock awards to be granted to officers, employees of the Company, which vest ratably over
three
years. A summary of the Company’s restricted stock awards as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
|
Non-vested RSUs at January 1, 2016
|
596,491
|
|
$
|
6.34
|
|
|
Granted
|
194,570
|
|
5.32
|
|
|
Vested
|
(354,637
|
)
|
6.34
|
|
|
Forfeited or expired
|
(139,441
|
)
|
6.35
|
|
|
Non-vested RSUs at December 31, 2016
|
296,983
|
|
$
|
5.66
|
|
|
|
|
|
|
Non-vested RSUs at January 1, 2017
|
296,983
|
|
$
|
5.66
|
|
|
Granted
|
513,851
|
|
4.32
|
|
|
Vested
|
(63,744
|
)
|
5.46
|
|
|
Forfeited or expired
|
(302,283
|
)
|
6.26
|
|
|
Non-vested RSUs at December 31, 2017
|
444,807
|
|
$
|
5.35
|
|
As of
December 31, 2017
, Management has concluded that it is not probable that the performance condition for the RSUs issued in 2015 and 2016 will be met and therefore
no
compensation is expected to be recognized for those RSUs; however, if it becomes probable that those performance conditions will be met, the Company could recognize up to
$1.0 million
. Unrecognized compensation expense for the unvested time-based restricted shares is
$3.13 million
, which is expected to be recognized over a weighted average period of
2.2
years.
Phantom Stock Awards
During the
twelve months ended
December 31, 2017
and
December 31, 2016
, the Company’s compensation committee approved phantom stock awards to be awarded to officers and 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, requiring remeasurement at each balance sheet date. A summary of the Company’s Phantom Stock Awards as of
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
Weighted-Average
Grant Date Fair
Value
|
|
Non-vested phantom stock awards at January 1, 2016
|
154,502
|
|
$
|
6.34
|
|
|
Granted
|
10,500
|
|
6.11
|
|
|
Vested
|
(49,655
|
)
|
6.34
|
|
|
Forfeited or expired
|
(5,538
|
)
|
6.34
|
|
|
Non-vested phantom stock awards at December 31, 2016
|
109,809
|
|
$
|
6.32
|
|
|
|
|
|
|
Non-vested phantom stock awards at January 1, 2017
|
109,809
|
|
$
|
6.32
|
|
|
Granted
|
90,000
|
|
4.35
|
|
|
Vested
|
—
|
|
—
|
|
|
Forfeited or expired
|
(121,009
|
)
|
6.34
|
|
|
Non-vested phantom stock awards at December 31, 2017
|
78,800
|
|
$
|
5.91
|
|
As of
December 31, 2017
, Management concluded that it is not probable that the performance condition for the phantom shares issued in 2015 and 2016 will be met and therefore
no
compensation is expected to be recognized for those phantom shares;
however, if it becomes probable that those performance conditions will be met, the Company could recognize up to
$0.3 million
of additional compensation expense. Unrecognized compensation expense for the unvested time-based phantom shares is
$0.4 million
, which is expected to be recognized over a weighted average period of
2.2
years.
Director Shares
On January 31, 2014,
20,125
founder shares were transferred to each of Boulevard’s
three
independent directors (“Director Shares”), 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, 2017
.
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) are subject to forfeiture if the Company’s stock price does not trade at or above
$13
for any
20
days of a
30
day period commencing on the Closing date through July 31, 2020 (
5
years).
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
|
As of
December 31, 2017
, the Company had unrecognized compensation costs for the Director Shares of
$2 thousand
that is expected to be recognized over an average period of
1.0 year
.
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 five months ended December 31, 2015 vest over a
three
year period, one-third on each anniversary of each holder’s grant date, provided the Director is still serving as a director of the Company. The shares granted during the
twelve months ended
December 31, 2017
and 2016, 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
twelve months ended
December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
Weighted-Average
Grant Date Fair
Value
|
|
Non-vested time-based restricted stocks at January 1, 2016
|
26,387
|
|
$
|
6.34
|
|
|
Granted
|
69,539
|
|
5.08
|
|
|
Vested
|
(76,802
|
)
|
5.22
|
|
|
Forfeited or expired
|
(4,600
|
)
|
6.34
|
|
|
Non-vested time-based restricted stock at December 31, 2016
|
14,524
|
|
$
|
6.22
|
|
|
|
|
|
|
Non-vested time-based restricted stock at January 1, 2017
|
14,524
|
|
$
|
6.22
|
|
|
Granted
|
96,853
|
|
5.42
|
|
|
Vested
|
(104,115
|
)
|
5.40
|
|
|
Forfeited or expired
|
|
|
|
|
|
Non-vested time-based restricted stock at December 31, 2017
|
7,262
|
|
$
|
5.48
|
|
As of
December 31, 2017
, the Company had unrecognized compensation costs for the Director shares of
$0.2 million
that is expected to be recognized over an average period of
1.5 years
.
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss) per share, basic income (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock and warrants.
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
|
Basic weighted-average common shares outstanding
|
49,808,600
|
|
49,462,205
|
|
|
Effect of dilutive options, performance stock units and restricted stock
|
382,703
|
|
—
|
|
|
Dilute weighted-average shares outstanding
|
50,191,303
|
|
49,462,205
|
|
Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company's common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.
The following represents amounts that could potentially dilute basic EPS in the future:
|
|
|
|
|
|
|
Stock-based compensation awards
(1)
:
|
|
|
|
Stock options
|
577,500
|
|
|
Warrants:
|
|
|
|
Private placement warrants
|
6,160,000
|
|
|
Public warrants
|
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. Performance share units are considered anti-dilutive if the performance targets upon which the issuance of the shares is contingent have not been achieved and the respective performance period has not been completed as of the end of the current period.
(Loss) income before income taxes consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
(amounts in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015
Through
December 31, 2015
|
|
|
January 1, 2015
Through
July 31, 2015
|
|
Domestic
|
$
|
(1,118
|
)
|
$
|
(111,056
|
)
|
$
|
(34,139
|
)
|
|
|
$
|
29,053
|
|
|
Foreign
|
20,101
|
|
12,516
|
|
470
|
|
|
|
(32,261
|
)
|
|
Total
|
$
|
18,983
|
|
$
|
(98,540
|
)
|
$
|
(33,669
|
)
|
|
|
$
|
(3,208
|
)
|
Significant components of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
(amounts in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015
Through
December 31, 2015
|
|
|
January 1, 2015
Through
July 31, 2015
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
1,323
|
|
$
|
—
|
|
$
|
—
|
|
|
|
$
|
14,370
|
|
|
State and Local
|
32
|
|
(1
|
)
|
8
|
|
|
|
305
|
|
|
Foreign
|
6,581
|
|
(771
|
)
|
646
|
|
|
|
392
|
|
|
Total currently payable
|
7,936
|
|
(772
|
)
|
654
|
|
|
|
15,067
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
(14,801
|
)
|
10,073
|
|
(18,308
|
)
|
|
|
(4,115
|
)
|
|
State and Local
|
256
|
|
(482
|
)
|
(789
|
)
|
|
|
(57
|
)
|
|
Foreign
|
2,030
|
|
4,201
|
|
(789
|
)
|
|
|
(46
|
)
|
|
Total deferred
|
(12,515
|
)
|
13,792
|
|
(19,886
|
)
|
|
|
(4,218
|
)
|
|
Provision (benefit) for income taxes
|
$
|
(4,579
|
)
|
$
|
13,020
|
|
$
|
(19,232
|
)
|
|
|
$
|
10,849
|
|
A reconciliation of income tax expense at the U.S. Federal statutory income tax rate to actual income tax provision is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
(amounts in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015
Through
December 31, 2015
|
|
|
January 1, 2015
Through
July 31, 2015
|
|
Tax at Statutory Rate
|
$
|
6,654
|
|
$
|
(34,490
|
)
|
$
|
(11,785
|
)
|
|
|
$
|
(1,123
|
)
|
|
State income taxes, net of federal tax benefit
|
166
|
|
(313
|
)
|
(508
|
)
|
|
|
141
|
|
|
Effect of Foreign Items
|
2,101
|
|
(788
|
)
|
(411
|
)
|
|
|
2,315
|
|
|
Goodwill impairment
|
—
|
|
21,831
|
|
—
|
|
|
|
—
|
|
|
Valuation Allowance and unbenefited losses
|
18,452
|
|
28,466
|
|
(2,004
|
)
|
|
|
9,321
|
|
|
U.S. valuation allowance release
|
(15,388
|
)
|
—
|
|
—
|
|
|
|
—
|
|
|
Deferred Tax Rate Changes
|
(17,312
|
)
|
—
|
|
—
|
|
|
|
—
|
|
|
Transaction Costs
|
470
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Tax Incentives
|
(68
|
)
|
(82
|
)
|
(34
|
)
|
|
|
—
|
|
|
Warrants
|
168
|
|
(1,722
|
)
|
(4,557
|
)
|
|
|
—
|
|
|
Other
|
178
|
|
118
|
|
67
|
|
|
|
195
|
|
|
Provision (benefit) for income taxes
|
$
|
(4,579
|
)
|
$
|
13,020
|
|
$
|
(19,232
|
)
|
|
|
$
|
10,849
|
|
Income tax expense for the
twelve months ended
December 31, 2017
,
twelve months ended
December 31, 2016
, five months ended
December 31, 2015
, and seven months ended July 31, 2015 include certain discrete tax items for changes in valuation allowances, non-deductible U.S. goodwill impairment, 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 significantly revised the U.S. federal corporate income tax by, among other things, lowering the corporate income tax rate to 21%, implementing a territorial tax system, and imposing a repatriation tax on earnings of foreign subsidiaries that are deemed to be repatriated to the U.S.
U.S. GAAP accounting for income taxes requires that the Company records the impacts of any tax law change on deferred income taxes in the quarter that the tax law change is enacted. Due to the complexities involved in accounting for the enactment of TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 allows the Company to provide a provisional estimate of the impacts of the TCJA in its earnings for the fourth quarter and year ending December 31, 2017. Accordingly, based on currently available information, the Company recorded a net benefit of
$17.0 million
in the Consolidated and Combined Statements of Income (Loss) as a component of “Provision (benefit) for income taxes”. The
$17.0 million
net benefit consisted of a
$17.5 million
benefit resulting from the remeasurement of the Company’s net deferred tax liabilities in the U.S. based on the new lower corporate income tax rate and, is in part, offset by a
$0.5 million
expense relating to the one-time, repatriation tax on previously deferred earnings of certain non-U.S. subsidiaries that are owned either wholly or partially by a U.S. subsidiary of the Company.
Although the
$17.0 million
net benefit represents what the Company believes is a reasonable estimate of the impact of the income tax effects of the TCJA on the Company’s consolidated financial statements as of December 31, 2017, it should be considered provisional. It will require adjustments as additional guidance from the U.S. Department of Treasury is provided and once the Company finalizes certain tax positions when the Company files its 2017 U.S. tax return, the Company will be able to conclude whether any further adjustments are required to its net deferred tax liability balance in the U.S. of
$25.4 million
as of December 31, 2017, as well as to the liability associated with the one-time, repatriation tax. Any adjustments to these provisional amounts will be reported as a component of tax expense in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018. The Company is still evaluating the potential future impacts of the global intangible low-taxed income (“GILTI”) and base erosion and anti-abuse tax (“BEAT”) provisions of the TCJA, and no provisional deferred tax liability has been provided as the Company currently believes that these minimum tax regimes will not have a material impact on future tax liabilities.
For the year ended December 31, 2017, the Company recorded a tax benefit of
$17.3 million
for the remeasurement of deferred income tax assets and liabilities related to tax legislation enactments like the TCJA in the U.S. and other foreign tax legislation enactments. In addition, the Company recorded an income tax expense of
$18.5 million
for the increase in net valuation allowances for certain tax attributes and other unbenefited losses. The unbenefitted losses related to the elimination of intercompany profit in inventory. In addition the company released the valuation allowance in the U.S. tax jurisdiction of
$15.4 million
as sufficient deferred income tax liabilities exist such that the deferred tax assets are more likely than not to be realized.
For the year ended
December 31, 2016
, the Company recorded a tax benefit of
$1.7 million
for the non-taxable marked to market gains from Private Placement Warrants. In addition, the Company recorded an income tax expense of
$28.5 million
for the increase in valuation allowances for certain tax attributes, including net operating losses. The increase in valuation allowance occurred in the quarter ended
December 31, 2016
, following the Company's assessment that it will not be able to realize its deferred tax assets in the U.S. in the time horizon required by U.S. GAAP to carry them as assets. During the quarter ended
December 31, 2016
, the Company impaired its goodwill asset resulting in a permanent item of
$21.8 million
, as the impairment is not deductible for tax purposes.
The tax rate for the five months ended
December 31, 2015
, was unfavorably impacted by the non-taxable marked to market gains from Private Placement Warrants of
$4.6 million
in the U.S. and by the release of the valuation allowance in the U.S. of
$2.0 million
.
The tax rate for the seven months ended July 31, 2015 was unfavorably impacted by the increase of valuation allowances of
$9.3 million
primarily in Canada and South Africa and by losses in multiple foreign jurisdictions with tax rates less than
35%
of
$2.3 million
.
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, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
December 31,
2017
|
December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
Intangible assets other than goodwill
|
$
|
—
|
|
$
|
5,208
|
|
|
Pension and other retiree obligations
|
209
|
|
547
|
|
|
Inventory
|
89
|
|
46
|
|
|
Other accruals and reserves
|
2,370
|
|
2,546
|
|
|
Loss and credit carryforwards
|
10,932
|
|
27,682
|
|
|
Other
|
886
|
|
952
|
|
|
Valuation allowance
|
(13,061
|
)
|
(27,732
|
)
|
|
Deferred tax assets
|
1,425
|
|
9,249
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Intangible assets other than goodwill
|
(21,753
|
)
|
—
|
|
|
Property, plant and equipment
|
(2,604
|
)
|
(790
|
)
|
|
Deferred tax liabilities
|
(24,357
|
)
|
(790
|
)
|
|
Net deferred tax assets / (liabilities)
|
$
|
(22,932
|
)
|
$
|
8,459
|
|
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
$7.0 million
for foreign jurisdictions,
$42.4 million
for U.S. federal, and
$6.5 million
for U.S. States at
December 31, 2017
. These operating loss carryforwards related to the
2015
,
2016
and current
2017
tax periods. At
December 31, 2017
,
none
of the operating loss carryforwards were subject to expiration in
2017
through 2019. The operating loss carryforwards expiring in years 2021 through 2027 make up
$0.9 million
of the recorded deferred tax asset. The operating loss carryforwards expiring in years 2030 through 2038 make up
$9.2 million
of the recorded deferred tax asset. The remaining deferred tax asset relating to operating loss carryforwards of
$1.3 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, 2017
, 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. and Korea are not realizable, and therefore, increased the valuation allowance accordingly.
The Company has recorded tax credits in the U.S. for research and development expenditures that were generated in in 2015, 2016, and 2017 for a total amount of
$0.2 million
. These credits will expire beginning 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.
Uncertain Tax Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
(amounts in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015
Through
December 31, 2015
|
|
|
January 1, 2015
Through
July 31, 2015
|
|
Beginning Balance
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Additions of tax positions of the current year
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Additions to tax positions of the prior years
|
2,884
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Reductions of tax positions of the prior years
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Settlements with taxing authorities
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Expiration of statutes of limitations
|
—
|
|
—
|
|
—
|
|
|
|
—
|
|
|
Provision (benefit) for income taxes
|
2,884
|
|
—
|
|
—
|
|
|
|
—
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company started its operations on July 31, 2015, and has no history of U.S. federal, state and local, and foreign income tax examinations by tax authorities for any open statutes. As of December 31, 2017 and 2016, 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
$2.9 million
and
$0.0 million
, respectively. If recognized in the fiscal years ended December 31, 2017 and 2016,
$2.9 million
and
$0.0 million
, respectively, of these benefits would have reduced income tax expense and the effective tax rate. Of these amounts, approximately
$0.2 million
and
$0.0 million
of the Company's unrecognized tax benefits at December 31, 2017 and 2016, 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
$2.9 million
and
$0.0 million
benefits at December 31, 2017 and 2016, respectively, approximately
$1.1 million
and
$0.0 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 and Combined Statements of Income (Loss). The Company recorded an increase of
$0.5 million
of interest and penalties as part of "Provision for income taxes" in the Company's Consolidated and Combined Statements of Income (Loss) during the period ending December 31, 2017. Cumulative interest and penalties of
$0.5 million
and
$0.0 million
are recorded as part of "Income taxes payable" for December 31, 2017 and 2016, respectively.
|
|
|
|
16.
|
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 a single reportable segment. Our chief operating decision-makers allocate resources and assess performance of the business at the consolidated level. Accordingly, we consider ourselves to be in a single operating and reportable segment structure.
Geographic Regions
Net sales by geographic region, based on the location of the customer, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
(in thousands)
|
Year Ended December 31,
2017
|
Year Ended December 31,
2016
|
August 1, 2015
Through
December 31, 2015
|
|
|
January 1, 2015 Through July 31, 2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
North America
(1)
|
$
|
53,556
|
|
$
|
56,201
|
|
$
|
55,870
|
|
|
|
$
|
2,938
|
|
|
Latin America
(2)
|
26,657
|
|
24,315
|
|
729
|
|
|
|
24,314
|
|
|
EMEA
(3)
|
70,193
|
|
64,671
|
|
52,534
|
|
|
|
12,369
|
|
|
Asia Pacific
(4)
|
13,620
|
|
14,482
|
|
1,948
|
|
|
|
13,061
|
|
|
Total Net sales
|
$
|
164,026
|
|
$
|
159,669
|
|
$
|
111,081
|
|
|
|
$
|
52,682
|
|
Sales of SmartFresh™ accounted for approximately
87%
,
90%
, and
95%
of our total worldwide net sales for the years December 31,
2017
,
2016
, and
2015
, respectively.
———————————————————————————————
|
|
|
|
(1)
|
North America includes the United States and Canada.
|
|
|
|
|
(2)
|
Latin America includes Argentina, Brazil, Chile, Guatemala, and Mexico.
|
|
|
|
|
(3)
|
EMEA includes Europe, the Middle East, and Africa.
|
|
|
|
|
(4)
|
Asia Pacific includes China, South Korea, Japan, Australia, and New Zealand.
|
Net property, plant and equipment by geographic region at the end of each period was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
(in thousands)
|
December 31,
2017
|
December 31,
2016
|
|
Net property, plant and equipment:
|
|
|
|
|
North America
|
$
|
7,306
|
|
$
|
6,572
|
|
|
All other
|
4,894
|
|
1,476
|
|
|
Total property, plant and equipment
|
$
|
12,200
|
|
$
|
8,048
|
|
|
|
|
|
17.
|
Commitments and Contingencies
|
The Company is currently involved in various claims and legal actions that arise in the ordinary course of business. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and can be reasonably estimated. Although the results of litigation and claims can never be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have any material adverse effect on the Company’s business, financial condition or results of operations.
Purchase Commitments
The Company has various purchasing contracts for contract manufacturing and research and development services which are based on the requirements of the business. Generally, the contracts are at prices not in excess of current market price and do not commit the business to obligations outside the normal customary terms for similar contracts.
Operating Leases
The Company uses various leased facilities and equipment in its operations. The lease terms for these leased assets vary depending on the terms of the applicable lease agreement. Rental expense for all operating leases totaled
$3.2 million
,
$3.3 million
,
$0.9 million
, and
$0.8 million
for the
twelve months ended
December 31, 2017
, the
twelve months ended
December 31, 2016
, the five months ended
December 31, 2015
, and the seven months ended July 31, 2015, respectively. At
December 31, 2017
, the Company had
no
residual value guarantees related to its operating leases. Future minimum lease payments as of
December 31, 2017
under noncancelable operating leases are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Future Lease
Payments
|
|
2018
|
$
|
1,149
|
|
|
2019
|
1,151
|
|
|
2020
|
1,107
|
|
|
2021
|
1,056
|
|
|
2022
|
992
|
|
|
Thereafter
|
1,027
|
|
|
Total
|
$
|
6,482
|
|
|
|
|
|
18.
|
Fair Value Measurements
|
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Tax amortization benefit contingency
(1)
|
—
|
|
—
|
|
43,382
|
|
43,382
|
|
|
Contingent consideration
(2)
|
—
|
|
—
|
|
691
|
|
691
|
|
|
Interest rate contract
(3)
|
—
|
|
456
|
|
—
|
|
456
|
|
|
Stock appreciation rights
(4)
|
—
|
|
—
|
|
268
|
|
268
|
|
|
Phantom shares
(5)
|
—
|
|
—
|
|
186
|
|
186
|
|
|
Total
|
$
|
—
|
|
$
|
456
|
|
$
|
44,527
|
|
$
|
44,983
|
|
The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Warrant consideration
(6)
|
$
|
—
|
|
$
|
1,080
|
|
$
|
—
|
|
$
|
1,080
|
|
|
Tax amortization benefit contingency
(1)
|
—
|
|
—
|
|
150,260
|
|
150,260
|
|
|
Deferred acquisition payment
(7)
|
—
|
|
—
|
|
2,498
|
|
2,498
|
|
|
Stock appreciation rights
(4)
|
—
|
|
—
|
|
22
|
|
22
|
|
|
Phantom shares
(5)
|
—
|
|
—
|
|
4
|
|
4
|
|
|
Total
|
$
|
—
|
|
$
|
1,080
|
|
$
|
152,784
|
|
$
|
153,864
|
|
———————————————————————————————
|
|
|
|
(1)
|
The fair value of the tax amortization benefit contingency is measured using an income approach based on the Company’s best estimate of the undiscounted cash payments to be made, with the current portion tax effected at
35.3%
and the non-current portion tax effected at
21.5%
due to the TCJA and discounted to present value utilizing an appropriate market discount rate. Per the April 4, 2017 Amendment Agreement, payments due to Dow under the Tax Receivable Agreement was reduced from
85%
to
50%
of the applicable tax savings realized by the Company. The valuation technique used did not change during the
twelve months ended
December 31, 2016
and
December 31, 2017
.
|
|
|
|
|
(2)
|
The fair value of the contingent consideration related to the Tecnidex acquisition.
|
|
|
|
|
(3)
|
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.
|
|
|
|
|
(4)
|
The fair value of the stock appreciation right was measured using a Black Scholes pricing model during the
twelve months ended
December 31, 2016
and
December 31, 2017
.
|
|
|
|
|
(5)
|
The fair value of phantom shares are based on the fair value of the Company's common stock. The valuation technique used did not change during the
twelve months ended
December 31, 2016
and
December 31, 2017
.
|
|
|
|
|
(6)
|
This liability relates to warrants to purchase the Company's common stock and future obligations to deliver additional warrants in relation to the Business Combination. The inputs used in the fair value measurement were directly observable quoted prices for identical assets in an inactive market.
|
|
|
|
|
(7)
|
The fair value of the deferred acquisition payment is measured using a Black-Scholes option pricing model and based on the Company’s best estimate of the Company’s average Business EBITDA, as defined in the Purchase Agreement, over the
two
year period from January 1, 2016 to December 31, 2017. The valuation technique used did not change during the
twelve months ended
December 31, 2016
and
December 31, 2017
.
|
There were
no
transfers between Level 1 and Level 2 and
no
transfers out of Level 3 of the fair value hierarchy during the
twelve months ended
December 31, 2017
and
December 31, 2016
.
At
December 31, 2017
, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately
$408.2 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. These instruments relate to contingent consideration payable to Dow in relation to the Business Combination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Tax amortization
benefit contingency
|
Contingent consideration related to acquisition
|
Deferred
acquisition payment
|
Interest rate contract (3)
|
Stock appreciation rights
|
Phantom shares
|
Total
|
|
Balance, December 31, 2016
|
$
|
150,260
|
|
|
$
|
2,498
|
|
|
$
|
22
|
|
$
|
4
|
|
$
|
152,784
|
|
|
Dow settlement
|
(86,931
|
)
|
|
—
|
|
|
—
|
|
—
|
|
(86,931
|
)
|
|
Accretion
|
8,432
|
|
|
—
|
|
|
—
|
|
—
|
|
8,432
|
|
|
TRA payment to Dow
|
(3,744
|
)
|
|
|
|
|
|
(3,744
|
)
|
|
Tecnidex acquisition
|
|
691
|
|
|
|
|
|
691
|
|
|
Interest rate contract
|
|
|
|
456
|
|
|
|
456
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
246
|
|
182
|
|
428
|
|
|
Mark-to-market adjustment
|
(24,924
|
)
|
|
(2,498
|
)
|
|
—
|
|
—
|
|
(27,422
|
)
|
|
Balance, December 31, 2017
|
$
|
43,093
|
|
$
|
691
|
|
$
|
—
|
|
$
|
456
|
|
$
|
268
|
|
$
|
186
|
|
$
|
44,694
|
|
There was
$0.3 million
of severance expense for the
twelve months ended
December 31, 2017
. For the twelve months ended December 31, 2016, there was
$3.2 million
of severance expense. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated statements of income (loss). As of December 31, 2017, the Company had
$0.2 million
of severance liability, of which
$0.1 million
will be paid out over the next year.
|
|
|
|
20.
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|
2017:
|
|
|
|
|
|
Net sales
|
$
|
32,730
|
|
$
|
16,389
|
|
$
|
60,772
|
|
$
|
54,135
|
|
|
Cost of sales
|
$
|
5,839
|
|
$
|
3,906
|
|
$
|
11,620
|
|
$
|
11,290
|
|
|
Gross profit
|
$
|
26,891
|
|
$
|
12,483
|
|
$
|
49,152
|
|
$
|
42,845
|
|
|
(Loss) income before taxes
|
$
|
(10,647
|
)
|
$
|
(14,302
|
)
|
$
|
13,178
|
|
$
|
30,754
|
|
|
Net (loss) income
|
$
|
(12,029
|
)
|
$
|
2,607
|
|
$
|
9,546
|
|
$
|
23,438
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
Basic
|
$
|
(0.24
|
)
|
$
|
0.05
|
|
$
|
0.19
|
|
$
|
0.47
|
|
|
Diluted
|
$
|
(0.24
|
)
|
$
|
0.05
|
|
$
|
0.19
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
First Quarter
|
Second Quarter
|
Third Quarter
|
Fourth Quarter
|
|
2016:
|
|
|
|
|
|
Net sales
|
$
|
28,411
|
|
$
|
18,385
|
|
$
|
61,200
|
|
$
|
51,673
|
|
|
Cost of sales
|
$
|
23,820
|
|
$
|
15,833
|
|
$
|
8,905
|
|
$
|
11,791
|
|
|
Gross profit
|
$
|
4,591
|
|
$
|
2,552
|
|
$
|
52,295
|
|
$
|
39,882
|
|
|
(Loss) income before taxes
|
$
|
(40,426
|
)
|
$
|
(40,790
|
)
|
$
|
11,988
|
|
$
|
(29,595
|
)
|
|
Net (loss) income
|
$
|
(25,137
|
)
|
$
|
(25,164
|
)
|
$
|
7,312
|
|
$
|
(68,854
|
)
|
|
Net (loss) income per common share:
|
|
|
|
|
|
Basic
|
$
|
(0.51
|
)
|
$
|
(0.51
|
)
|
$
|
0.15
|
|
$
|
(1.40
|
)
|
|
Diluted
|
$
|
(0.51
|
)
|
$
|
(0.51
|
)
|
$
|
0.15
|
|
$
|
(1.40
|
)
|
———————————————————————————————