NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
AgroFresh Solutions, Inc. (the “Company”) is an agriculture technology innovator and global leader with a mission to prevent food loss and waste and conserve the planet’s resources by providing a range of science-based solutions, data-driven digital technologies and high-touch customer services. The Company supports growers, packers and retailers with solutions across the food supply chain to enhance the quality and extend the shelf life of fresh produce. The Company has 40 years of post-harvest experience across a broad range of crops, including revolutionizing the apple industry with the SmartFresh™ Quality System more than 20 years ago. The AgroFresh platform is powered by the Company's comprehensive portfolio that includes plant-based coatings, equipment and proprietary solutions that help improve the freshness supply chain from harvest to the home.
The Company has an extensive portfolio of solutions to extend freshness across the produce supply chain from near-harvest up to the point-of sale. These include Harvista™ for near-harvest optimization, and the SmartFresh™ Quality System, the Company's flagship post-harvest freshness solutions. Additional post-harvest freshness solutions include fungicides that can be applied to meet various customer operational requirements in both foggable (ActiMist™) and liquid (ActiSeal™) delivery options. The Company has a controlling interest in AgroFresh Fruit Protection S.A. ("AgroFresh Fruit Protection") (formerly Tecnidex Fruit Protection, S.A.), a leading regional provider of post-harvest fungicides, disinfectants, coatings and packinghouse equipment for the citrus market. Beyond apples and pears, SmartFresh technology can provide ready-to-eat freshness for other fruits and vegetables including avocados, bananas, melons, tomatoes, broccoli and mangos. The Company has key products registered in approximately 50 countries, and supports customers by protecting over 25,000 storage rooms globally.
The end-markets that the Company serves are seasonal and are generally aligned with the seasonal growing patterns of the Company’s customers. For those customers growing, harvesting or storing apples and pears, the Company’s core crops, the peak season in the southern hemisphere is the first and second quarters of each year, while the peak season in the northern hemisphere is the third and fourth quarters of each year. Within each half-year period (i.e., January through June for the southern hemisphere, and July through December for the northern hemisphere) the growing season has historically occurred during both quarters. A variety of factors, including weather, may affect the timing of the growing, harvesting and storing patterns of the Company’s customers and therefore shift the consumption of the Company’s services and products between the first and second quarters primarily in the southern hemisphere or between the third and fourth quarters primarily in the northern hemisphere.
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements include all adjustments that are necessary for a fair presentation of the Company's condensed consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The condensed consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. For additional information, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2021. Certain prior period amounts have been reclassified to conform to the current year presentation.
COVID-19
The global health crisis caused by COVID-19 and the related government actions and stay at home orders have negatively impacted economic activity and increased political instability across the globe. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. There have been numerous obstacles presented and some localized financial impacts of the pandemic, including fluctuations in foreign currency exchange rates and customer demand and spending pattern changes. During the six months ended June 30, 2022, the COVID-19 pandemic did not have a significant adverse impact on the Company’s results of operations. While the Company is following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of its workforce, including remote working arrangements and varying procedures for essential workforce, the outbreak presents some uncertainty and risk with respect to the Company and its performance and financial results.
Adoption of Highly Inflationary Accounting in Argentina and Turkey
GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation rate exceeds 100 percent.The Company closely monitors the inflation data and currency volatility where there are multiple data sources for
measuring and reporting inflation in applicable countries. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of June 30, 2018. As a result, the Company elected to adopt highly inflationary accounting as of July 1, 2018 for its subsidiary in Argentina. As the three-year cumulative inflation rate exceeded 100 percent as of June 30, 2022, there is no change to highly inflationary accounting in Argentina.
In the first half of 2022, the Turkish lira rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of April 1, 2022. As a result, the Company elected to adopt highly inflationary accounting as of July 1, 2022 for its subsidiary in Turkey.
Under highly inflationary accounting, the functional currencies of the Company's subsidiaries in Argentina and Turkey became the U.S. dollar, and its income statement and balance sheet will be measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates in the currencies of these countries on monetary assets and liabilities are reflected in earnings. As of June 30, 2022, the Company’s subsidiary in Argentina had net assets of ($9.9) million. Net sales attributable to Argentina were approximately 8% and 8% of the Company’s consolidated net sales for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the Company’s subsidiary in Turkey had net assets of $10.9 million. Net sales attributable to Turkey were approximately 1% of the Company’s consolidated net sales for the six months ended June 30, 2022.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into geographic region, product and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenues for the three months ended June 30, 2022 | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | |
| Region | North America
(1) | EMEA
(2) | Latin America
(3) | Asia Pacific
(4) | Total Revenues |
| Product | | | | | |
| 1-MCP based | $1,604 | $5,238 | $6,501 | $5,808 | $19,151 |
| Fungicides, disinfectants and coatings | — | 4,505 | 1,704 | 93 | 6,302 |
| Other* | 2 | — | 99 | 198 | 299 |
| $1,606 | $9,743 | $8,304 | $6,099 | $25,752 |
| | | | | |
| Pattern of Revenue Recognition | | | | | |
| Products transferred at a point in time | $1,542 | $9,588 | $8,069 | $6,021 | $25,220 |
| Services transferred over time | 64 | 155 | 235 | 78 | 532 |
| $1,606 | $9,743 | $8,304 | $6,099 | $25,752 |
Revenues for the three months ended June 30, 2021 | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | |
| Region | North America
(1) | EMEA
(2) | Latin America
(3) | Asia Pacific
(4) | Total Revenues |
| Product | | | | | |
| 1-MCP based | $580 | $5,434 | $5,623 | $5,212 | $16,849 |
| Fungicides, disinfectants and coatings | — | 3,317 | 999 | — | 4,316 |
| Other* | 235 | 74 | 350 | 100 | 759 |
| $815 | $8,825 | $6,972 | $5,312 | $21,924 |
| | | | | |
| Pattern of Revenue Recognition | | | | | |
| Products transferred at a point in time | $588 | $8,755 | $6,725 | $5,218 | $21,286 |
| Services transferred over time | 227 | 70 | 247 | 94 | 638 |
| $815 | $8,825 | $6,972 | $5,312 | $21,924 |
Revenues for the six months ended June 30, 2022
| | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | |
| Region | North America
(1) | EMEA
(2) | Latin America
(3) | Asia Pacific
(4) | Total Revenues |
| Product | | | | | |
| 1-MCP based | $3,135 | $11,805 | $23,040 | $11,922 | $49,902 |
| Fungicides, disinfectants and coatings | — | 10,358 | 3,824 | 93 | 14,275 |
| Other* | 316 | 398 | 483 | 267 | 1,464 |
| $3,451 | $22,561 | $27,347 | $12,282 | $65,641 |
| | | | | |
| Pattern of Revenue Recognition | | | | | |
| Products transferred at a point in time | $3,198 | $22,021 | $27,004 | $12,161 | $64,384 |
| Services transferred over time | 253 | 540 | 343 | 121 | 1,257 |
| $3,451 | $22,561 | $27,347 | $12,282 | $65,641 |
Revenues for the six months ended June 30, 2021
| | | | | | | | | | | | | | | | | |
| (in thousands) | | | | | |
| Region | North America
(1) | EMEA
(2) | Latin America
(3) | Asia Pacific
(4) | Total Revenues |
| Product | | | | | |
| 1-MCP based | $2,344 | $10,796 | $24,364 | $11,176 | $48,680 |
| Fungicides, disinfectants and coatings | 14 | 7,863 | 2,546 | — | 10,423 |
| Other* | 391 | 473 | 801 | 148 | 1,813 |
| $2,749 | $19,132 | $27,711 | $11,324 | $60,916 |
| | | | | |
| Pattern of Revenue Recognition | | | | | |
| Products transferred at a point in time | $2,355 | $18,663 | $27,352 | $11,191 | $59,561 |
| Services transferred over time | 394 | 469 | 359 | 133 | 1,355 |
| $2,749 | $19,132 | $27,711 | $11,324 | $60,916 |
*Other includes FreshCloud, technical services and sales-type equipment leases related to AgroFresh Fruit Protection.
| | | | | |
| |
| (1) | North America includes the United States and Canada. |
| (2) | EMEA includes Europe, the Middle East and Africa. |
| (3) | Latin America includes Argentina, Brazil, Chile, Costa Rica, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay. |
|
| (4) | Asia Pacific includes Australia, China, India, Japan, New Zealand, the Philippines, South Korea, Taiwan and Thailand. |
Contract Assets and Liabilities
Accounting Standards Codification ("ASC") 606 Revenue from contracts with Customers requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g., receivable), before the entity transfers a good or service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the six months ended June 30, 2022 and the year ended December 31, 2021:
| | | | | | | | | | | | | | |
| (in thousands) | Balance at
December 31, 2021 | Additions | Deductions | Balance at
June 30, 2022 |
| Contract assets: | | | | |
| Unbilled revenue | $795 | 7,030 | (5,599) | $2,226 |
| Contract liabilities: | | | | |
| Deferred revenue | $635 | 2,078 | (2,279) | $434 |
| | | | | | | | | | | | | | |
| (in thousands) | Balance at
December 31, 2020 | Additions | Deductions | Balance at
December 31, 2021 |
| Contract assets: | | | | |
| Unbilled revenue | $1,484 | 17,617 | (18,306) | $795 |
| Contract liabilities: | | | | |
| Deferred revenue | $1,474 | 4,123 | (4,962) | $635 |
The Company recognizes contract assets in the form of unbilled revenue in instances where services are performed by the Company but not billed by period end. The Company recognizes contract liabilities in the form of deferred revenue in instances where a customer pays in advance for future services to be performed by the Company. The Company generally receives payments from its customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the six months ended June 30, 2022. Amounts reclassified from unbilled revenue to accounts receivable for the six months ended June 30, 2022 and for the year ended December 31, 2021 were $5.6 million and $18.3 million, respectively. Amounts reclassified from deferred revenue to revenue for the six months ended June 30, 2022 and for the year ended December 31, 2021 were $2.3 million and $5.0 million, respectively.
Recently Issued Accounting Standards and Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the new guidance on January 1, 2021. The adoption of the new guidance did not have a material impact on the condensed consolidated financial statements of the Company.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The new standard is effective on a date selected by the Company between March 12, 2020 and December 31, 2022. The Company is currently evaluating the impact of adopting this guidance.
3. Related Party Transactions
On June 13, 2020, in connection with the execution of the Investment Agreement (as defined in Note 15 - Series B Convertible Preferred Stock and Stockholders’ Equity), the Company, PSP AGFS Holdings, L.P. (“PSP”) and Rohm and Haas Company ("R&H") entered into a side agreement, pursuant to which the parties agreed that if PSP or its affiliates has the right to designate at least 50% of the total directors on the Company’s board of directors pursuant to the Investment Agreement, so long as R&H or its affiliates beneficially owns at least 20% of the Company’s outstanding common stock (on a fully diluted, “as converted” basis), the Company and the board of directors will increase the size of the board of directors by one member and the board will elect a designee selected by R&H to fill the newly-created vacancy. Such right is in addition to any right that R&H has to appoint a member of the board pursuant to its ownership of the Company’s Series A preferred stock (see Note 15 - Series B Convertible Preferred Stock and Stockholders’ Equity).
During 2016, the Company made a minority investment in RipeLocker, LLC ("RipeLocker"), a company led by George Lobisser who was formerly a director of the Company. In February 2019, the Company made a further minority investment in RipeLocker. As of and for the six months ended June 30, 2022, there were no material amounts paid or owed to RipeLocker or Mr. Lobisser. Mr. Lobisser resigned as a director of the Company on February 18, 2021.
4. Inventories
Inventories at June 30, 2022 and December 31, 2021 consisted of the following: | | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Raw material | $3,084 | | $2,726 |
| Work-in-process | 4,460 | | 3,746 |
| Finished goods | 18,355 | | 12,520 |
| Supplies | 1,045 | | 788 |
| Total inventories | $26,944 | | $19,780 |
5. Other Current Assets
The Company's other current assets at June 30, 2022 and December 31, 2021 consisted of the following: | | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| VAT receivable | $11,432 | | $10,220 |
| Prepaid income tax asset | 7,540 | | 6,256 |
| Prepaid and other current assets | 3,946 | | 3,402 |
| Total other current assets | $22,918 | | $19,878 |
6. Property and Equipment
Property and equipment at June 30, 2022 and December 31, 2021 consisted of the following: | | | | | | | | | | | | | | |
| (in thousands, except for useful life data) | Useful life
(years) | June 30, 2022 | | December 31, 2021 |
| Buildings and leasehold improvements | 7-20 | $7,053 | | $6,967 |
| Machinery & equipment | 1-12 | 13,747 | | 13,158 |
| Furniture | 1-12 | 2,886 | | 2,927 |
| Construction in progress | | 1,558 | | 1,780 |
| | 25,244 | | 24,832 |
| Less: accumulated depreciation | | (13,859) | | (12,846) |
| Total property and equipment, net | | $11,385 | | $11,986 |
Depreciation expense was $0.7 million for each of the three months ended June 30, 2022 and 2021, respectively and $1.5 million and $1.3 million for the six months ended June 30, 2022 and 2021, respectively. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the unaudited condensed consolidated statements of operations.
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the year ended December 31, 2021 were as follows: | | | | | | | | |
| (in thousands) | | December 31, 2021 |
| Beginning balance | | $6,925 |
Foreign currency translation
| | (545) | |
| Impairment of goodwill | | (6,380) |
| Ending balance | | $— |
As a result of the operating segment realignment discussed in Note 19 - Segment Information, the composition of the Company's reporting units for the evaluation of goodwill impairment has changed. Historically, the Company's reporting units were identified at the operating segment level, which consisted of AgroFresh Core and AgroFresh Fruit Protection and all of the Company's goodwill was assigned to the AgroFresh Fruit Protection reporting unit. Effective December 31, 2021, the Company concluded that it has one operating segment and one reporting unit, which resulted in the reassignment of its goodwill to its stand-alone reporting unit. Prior to the change, the Company tested goodwill for impairment at the previous reporting unit, which did not result in any impairment charge. Based upon the Company's impairment assessment at the new reporting unit (consolidated AgroFresh), the Company determined the carrying amount of the consolidated entity exceeded its fair value. As a result, the Company recorded $6.4 million in goodwill impairment charges during the year ended December 31, 2021.
The Company’s intangible assets at June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (in thousands) | Gross Carrying
Amount | Accumulated
Amortization | | Net | | Gross Carrying
Amount | Accumulated
Amortization | | Net |
| Intangible assets with finite lives: | | | | | | | | | |
| Developed technology | $798,490 | ($313,437) | | $485,053 | | $798,669 | ($293,920) | | $504,749 |
| Customer relationships | 18,911 | (7,306) | | 11,605 | | 19,778 | (6,948) | | 12,830 |
| Software | 11,435 | (10,328) | | 1,107 | | 10,992 | (10,235) | | 757 |
| Trade name | 3,368 | (1,347) | | 2,021 | | 3,635 | (727) | | 2,908 |
| Other | 100 | (100) | | — | | 100 | (92) | | 8 |
| Total intangible assets with finite lives | 832,304 | (332,518) | | 499,786 | | 833,174 | (311,922) | | 521,252 |
| Intangible assets with indefinite lives: | | | | | | | | | |
| Trade name | 23,400 | — | | 23,400 | | 23,400 | — | | 23,400 |
| Service provider network | 2,000 | — | | 2,000 | | 2,000 | — | | 2,000 |
| Total intangible assets with indefinite lives | 25,400 | — | | 25,400 | | 25,400 | — | | 25,400 |
| Total intangible assets | $857,704 | ($332,518) | | $525,186 | | $858,574 | ($311,922) | | $546,652 |
At June 30, 2022, the weighted-average amortization periods remaining for developed technology, customer relationships, software, trade name and other was 13.0, 10.8, 2.3, 1.5 and 0.0 years, respectively, and the weighted-average amortization periods remaining for these finite-lived intangible assets was 12.9 years.
Estimated annual amortization expense for finite-lived intangible assets subsequent to June 30, 2022 is as follows: | | | | | |
| (in thousands) | Amount |
| 2022 (remaining) | $21,243 |
| 2023 | 42,473 |
| 2024 | 40,959 |
| 2025 | 40,629 |
| 2026 | 40,372 |
| Thereafter | 314,110 |
| Total | $499,786 |
Amortization expense for intangible assets was $10.7 million and $10.5 million for the three months ended June 30, 2022 and 2021, respectively and $21.4 million and $21.3 million for the six months ended June 30, 2022 and 2021, respectively.
8. Other Assets
The Company’s other assets at June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Right-of-use asset | $7,275 | | $6,258 |
| Long-term sales-type lease receivable | 2,654 | | 2,860 |
| Other long-term receivable | 2,091 | | 2,288 |
| Total other assets | $12,020 | | $11,406 |
Other long-term receivable of $0.8 million was deemed uncollectible and was written off to other expense during the year ended December 31, 2021.
9. Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities at June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Accrued taxes | $7,663 | | $8,267 |
| Accrued compensation and benefits | 6,866 | | 8,227 |
| Bank overdraft | 1,771 | | 1,612 |
| Lease liability | 1,358 | | 1,624 |
| Severance | 854 | | 1,259 |
| Accrued rebates payable | 647 | | 756 |
| Deferred revenue | 434 | | 635 |
| Accrued interest | 79 | | 72 |
| Other | 3,382 | | 4,542 |
| Total accrued and other current liabilities | $23,054 | | $26,994 |
Other current liabilities include primarily professional services and research and development accruals.
10. Debt
The Company’s debt, net of unamortized deferred issuance costs, at June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Total term loan outstanding | $261,125 | | $262,501 |
| Unamortized deferred issuance costs | (5,463) | | (6,434) |
AgroFresh Fruit Protection loan outstanding | 1,132 | | 1,489 |
| Less: Amounts due within one year | 3,278 | | 3,362 |
| Total long-term debt due after one year | $253,516 | | $254,194 |
Amended Credit Facility
On July 27, 2020, the Company completed a comprehensive refinancing (the “Refinancing”) by (i) entering into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with the other loan parties party thereto, Bank of Montreal, as administrative agent and the lenders party thereto, and (ii) consummating the transactions contemplated by the Investment Agreement (as defined and described in Note 15 – Series B Convertible Preferred Stock and Stockholders’ Equity). The Amended
Credit Agreement amends and restates in its entirety the Credit Agreement a subsidiary of the Company had with Bank of Montreal that was entered into on July 31, 2015.
The Amended Credit Agreement provides for a $25.0 million revolving credit facility (the “Amended Revolving Loan”), which matures on June 30, 2024, and a $275.0 million term credit facility (the “Amended Term Loan” and, together with the Amended Revolving Loan, the “Amended Credit Facility”), which matures on December 31, 2024. The Amended Credit Facility includes a $5.0 million swingline commitment and a $10.0 million letter of credit sub-limit. Loans under the Amended Term Loan bear interest at a rate equal to, at the Company’s option, either the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus an Applicable Rate of 6.25% per annum, or the Alternate Base Rate plus an Applicable Rate of 5.25% per annum. Loans under the Amended Revolving Loan bear interest at a rate equal to, at the Company’s option, the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus the Applicable Rate ranging from 6.25% to 6.0% per annum, based on certain ratios. The interest rate was 7.25% for each of the three and six months ended June 30, 2022. The Company is also required to pay a commitment fee on the unused portion of the Amended Revolving Loan at a rate ranging from 0.5% to 0.375%, based on certain ratios. The Company is required to make mandatory prepayments of outstanding indebtedness under the Amended Credit Agreement under certain circumstances. During the three months ended March 31, 2021, a prepayment of principal of $9.1 million was made.
The obligations of AgroFresh Inc., a wholly-owned subsidiary of the Company and the borrower under the Amended Credit Facility, are initially guaranteed by the Company and the Company’s wholly-owned subsidiary, AF Solutions Holdings LLC (together with AgroFresh Inc. and the Company, the “Loan Parties”) and may in the future be guaranteed by certain other domestic subsidiaries of the Company. The obligations of the Loan Parties under the Amended Credit Agreement and other loan documents are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets, and equity interests of certain foreign subsidiaries of the Loan Parties held by the Loan Parties (subject to certain exclusions and limitations).
The interest expense related to the amortization of the Amended Credit Facility debt issuance costs was $0.5 million during each of the three months ended June 30, 2022 and 2021 and $1.0 million and $0.9 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there were $5.5 million of unamortized deferred issuance costs.
At June 30, 2022, there was $261.1 million outstanding under the Amended Term Loan and no balance outstanding under the Amended Revolving Loan. At June 30, 2022, the Company evaluated the amount recorded under the Amended Term Loan and determined that the fair value was approximately $244.2 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Certain restrictive covenants are contained in the Amended Credit Agreement, and the Company was in compliance with these covenants as of June 30, 2022.
AgroFresh Fruit Protection Debt
On March 23, 2020, AgroFresh Fruit Protection entered into a €1.0 million loan agreement with Banco Santander, S.A., which provides funding through March 2023 at a 1.5% interest rate. In May 2020, AgroFresh Fruit Protection entered into a €0.3 million loan agreement with BBVA, which provides funding through May 2025 at a 2.2% interest rate. In July 2020, AgroFresh Fruit Protection entered into a €0.6 million loan agreement with Banco Santander, S.A., which provides funding through July 2025 at a 2.5% interest rate.
Scheduled principal repayments of the Company's debt subsequent to June 30, 2022 are as follows:
| | | | | |
| (in thousands) | Amount |
| 2022 (remaining) | $1,686 |
| 2023 | 3,075 |
| 2024 | 257,231 |
| 2025 | 265 |
| Total | $262,257 |
11. Leases
The Company enters into lease agreements for certain facilities and vehicles that are primarily used in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.
Most leases include an option to extend or renew the lease term. The exercise of the renewal option is at the Company's discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. The Company, in determining the present value of lease payments, uses the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
Lease expense is primarily included in general and administrative expenses in the unaudited condensed consolidated statements of operations. Additional information regarding the Company's operating leases is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2022 | 2021 | | 2022 | 2021 |
| Operating Lease Cost | | | | | |
| Operating leases | $495 | $548 | | $997 | $1,103 |
Short-term leases (1) | 540 | 224 | | 627 | 414 |
| Total lease expense | $1,035 | $772 | | $1,624 | $1,517 |
(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Other information on operating leases: | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Cash payments included in operating cash flows | $982 | | $1,145 |
| Right-of-use assets obtained in exchange for new lease | $2,888 | | $242 |
| Weighted average discount rate | 7.71 | % | | 8.79 | % |
| Weighted average remaining lease term in years | 6.1 years | | 4.4 years |
The following table presents the contractual maturities of the Company's lease liabilities as of June 30, 2022.
| | | | | |
| (in thousands) | Lease Liability |
| Remainder of 2022 | $981 |
| 2023 | 1,736 |
| 2024 | 1,498 |
| 2025 | 1,301 |
| 2026 | 1,195 |
| Thereafter | 2,730 |
| Total undiscounted lease payments | 9,441 |
| Less: present value adjustment | 1,881 |
| Operating lease liability | $7,560 |
12. Other Noncurrent Liabilities
The Company’s other noncurrent liabilities at June 30, 2022 and December 31, 2021 consisted of the following: | | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Lease liability | $6,202 | | $4,790 |
Other (1) | 1,351 | | 1,466 |
| Total other noncurrent liabilities | $7,553 | | $6,256 |
(1) Other noncurrent liabilities include long-term rebates and pension liabilities.
13. Severance
Severance expense was $0.8 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $0.8 million and $1.6 million for the six months ended June 30, 2022 and 2021, respectively. These amounts, which do not include stock compensation expense, were recorded in selling, general and administrative expense in the unaudited condensed consolidated statements of operations. As of June 30, 2022 and December 31, 2021, the Company had $0.9 million and $1.3 million of severance liability, respectively.
14. Redeemable Non-Controlling Interest ("NCI")
On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling-interest in AgroFresh Fruit Protection. The transaction was closed on December 1, 2017. At the effective date of the acquisition, the Company acquired 75% of the outstanding capital stock of AgroFresh Fruit Protection. In connection with the acquisition of AgroFresh Fruit Protection, the Company concurrently entered into option agreements ("Option Agreement") with the Seller related to the remaining 25% equity interest. The Option Agreement permits the residual interest to be "put" by the Seller to the Company, or to allow the Company to "call" the residual interest gradually over time as outlined in the agreement. The Seller's ownership of AgroFresh Fruit Protection represents a NCI to the Company, which is classified outside of stockholders' equity as the option of the Seller is redeemable. As of June 30, 2022 the carrying amount of the NCI was $7.4 million in the unaudited condensed consolidated balance sheet. Any changes in the redemption value of the NCI are included as an adjustment to Additional paid-in capital on the balance sheet.
The following table summarizes the changes to the Company's redeemable NCI.
| | | | | | | | | | | |
| (in thousands) | June 30, 2022 | | December 31, 2021 |
| Beginning balance | ($7,787) | | ($8,446) |
| Net loss attributable to redeemable non-controlling interest | 434 | | 2,258 |
| Adjustment of NCI to redemption value | — | | (1,599) |
| Ending balance | ($7,353) | | ($7,787) |
15. Series B Convertible Preferred Stock and Stockholders’ Equity
Series B Convertible Preferred Stock
On June 13, 2020, the Company entered into an Investment Agreement (the “Investment Agreement”) with PSP, an affiliate of Paine Schwartz Partners, LLC, pursuant to which, subject to certain closing conditions, PSP agreed to purchase in a private placement an aggregate of $150,000,000 of convertible preferred equity of the Company. The transaction closed on July 27, 2020 (the "Closing Date"), and a total of 150,000 shares of the Company’s newly-designated Series B-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-1 Preferred Stock”), were purchased in such transaction (the “Private Placement”). On September 22, 2020, following the approval of the transactions contemplated by the Investment Agreement by the necessary regulatory body, the Company issued to PSP, for no additional consideration, a total of 150,000 shares of the Company’s newly-designated Series B-2 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-2 Preferred Stock”). On September 25, 2020 (the "Exchange Date"), PSP elected to exchange the shares of the Company’s Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock held by it for a total of 150,000 shares of the Company’s newly-designated Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”). Accordingly, effective as of the Exchange Date, the Company issued 150,000 shares of Series B Convertible Preferred Stock, par value $0.0001 per share, to PSP and all of the shares of Series B-1 Preferred Stock and Series B-2 Preferred Stock held by PSP were cancelled. No shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock were outstanding as of June 30, 2022.
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series B Preferred Stock has a liquidation preference of $1,000 per share (the “Stated Value”). Holders of the Series B Preferred Stock are entitled to a cumulative dividend at a rate of 16% per annum, of which 50% was payable in cash and 50% was payable in kind until the first anniversary of the Closing Date, after which 50% is payable in cash, 37.5% is payable in kind, and the remaining 12.5% is payable in cash or in kind, at the Company’s option, subject in each case to adjustment under certain circumstances. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears. All dividends that are paid in kind will accrete to, and increase, the Stated Value. The applicable dividend rate is subject to increase by 2% per annum during any period that the Company is in breach of certain provisions of the Certificate of Designation of the Series B Preferred
Stock. The Series B Preferred Stock has been classified as temporary equity as it may be contingently redeemable in the event of a change of control, which is outside of the Company's control.
Associated with the Series B Preferred Stock, the Company paid dividends of $3.3 million in kind and $3.3 million in cash during the three months ended June 30, 2022, and $5.7 million in kind and $7.3 million in cash during the six months ended June 30, 2022. The Company paid dividends of $3.3 million in kind and $3.1 million in cash three months ended June 30, 2021, and $6.3 million in kind and $6.1 million in cash during the six months ended June 30, 2021 associated with the Series B Preferred Stock. As of June 30, 2022 and December 31, 2021, the Company had no accrued dividends.
The Series B Preferred Stock is convertible into Common Stock at the election of the holder at any time at an initial conversion price of $5.00 (“Conversion Price”). The Conversion Price is subject to customary adjustments, including for stock splits and other reorganizations affecting the Common Stock and pursuant to certain anti-dilution provisions for below market issuances. As of June 30, 2022 and December 31, 2021, the maximum number of shares of common stock that could be issued upon conversion of the outstanding shares of Series B Preferred Stock was 33.3 million and 32.2 million shares, respectively.
During the three months ended March 31, 2021, the Company redeemed 4,954 shares of Series B Preferred Stock for $5.3 million. The below table outlines the change in Series B Preferred Stock during the six months ended June 30, 2022 and the year ended December 31, 2021.
| | | | | | | | | | | | |
| | | Series B Convertible Preferred Stock |
| (in thousands) | | | | | Shares | Amount |
| Balance at December 31, 2020 | | | | | 150 | | $143,728 |
| Redemption of shares | | | | | (5) | (5,330) |
| In kind dividend | | | | | — | | 10,988 |
| Balance at December 31, 2021 | | | | | 145 | | 149,386 |
| In kind dividend | | | | | — | | 5,680 |
| Balance at June 30, 2022 | | | | | 145 | | $155,066 |
In connection with the consummation of the Investment Agreement, the Company and PSP entered into a Registration Rights Agreement (as amended, the “Registration Rights Agreement”), dated as of July 27, 2020. The Registration Rights Agreement provides that the Company will use its commercially reasonable efforts to prepare and file a shelf registration statement with the SEC within 30 days following a written request by PSP, and will use its commercially reasonable efforts to cause such shelf registration statement to be declared effective as promptly as is reasonably practicable after its filing to permit the public resale of registrable securities covered by the Registration Rights Agreement. The registrable securities generally include any shares of the Company’s common stock into which the Series B Preferred Stock is convertible, and any other securities issued or issuable with respect to any such shares of common stock by way of share split, share dividend, distribution, recapitalization, merger, exchange, replacement or similar event or otherwise.
Common Stock
The authorized common stock of the Company consists of 400 million 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 June 30, 2022, there were approximately 52.7 million shares of common stock outstanding.
Series A Preferred Stock
The Company has one share of Series A Preferred Stock outstanding, which is owned by R&H. 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.
16. Stock-based Compensation
The Company's stock-based compensation is in accordance with the Company's amended 2015 Incentive Compensation Plan (the “Plan”), pursuant to which the Compensation Committee of the Company is authorized to grant up to 13.7 million 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.
In June 2019, the Company's shareholders approved the 2019 Employee Stock Purchase Plan (the "ESPP"), which was effective July 1, 2019. In August 2021, the number of shares reserved for issuance under the ESPP was increased to 1.25 million. The ESPP allows eligible employees to purchase shares of common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods beginning January 1 and July 1 of each year, and each offering period consists of a six-month purchase period. On each purchase date, eligible employees may purchase the Company's common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. As of June 30, 2022, 564,233 shares had been issued under the ESPP.
Stock compensation expense for equity-classified and liability-classified awards was $1.3 million and $0.3 million for the three months ended June 30, 2022 and 2021, respectively. Stock compensation expense for equity-classified and liability-classified awards was $2.3 million and $1.2 million for the six months ended June 30, 2022 and 2021, respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses and research and development expenses. At June 30, 2022, there was $8.7 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 2.1 years.
During the three months ended June 30, 2022, the Company granted the following share-based awards to members of management and employees. These awards will be settled in shares of the Company's common stock and are equity-classified. The grant date fair value of the time-based awards will be recognized on a straight-line basis over the vesting period. The grant date fair value of the performance-based awards will be recognized on a straight-line basis over the vesting period based on the probability of achieving the performance condition. The performance-based restricted stock units each have a performance period that ends on December 31, 2024.
| | | | | | | | |
| (in thousands) | Number of shares | |
| Time-based restricted stock units | 1,246 | | |
| Performance-based restricted stock units | 1,081 | | |
| Total | 2,327 | |
During the three months ended June 30, 2022, the Company also granted the following share-based awards to members of management employed in certain countries outside of the United States. These awards will be settled in cash and are liability-classified. Therefore, the fair value of these liability-classified awards will be re-measured on each balance sheet date. The performance-based phantom shares each have a performance period that ends on December 31, 2024.
| | | | | |
| (in thousands) | Number of shares |
| Time-based phantom shares | 32 | |
| Performance-based phantom shares | 18 | |
| Total | 50 |
17. Earnings Per Share
Basic loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. The Company had a net loss for the three months ended June 30, 2022 and 2021. Therefore, the effect of stock-based awards including options, restricted stock and restricted stock units outstanding at June 30, 2022 and 2021 were excluded in the computation of diluted loss per share because their inclusion would have been anti-dilutive.
The following table is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net loss per share:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2022 | 2021 | | 2022 | 2021 |
| Basic weighted-average number of shares of common stock outstanding | 52,089 | | 51,348 | | | 51,913 | | 51,191 | |
Effect of dilutive options, restricted stock and restricted stock units | — | | — | | | — | | — | |
| Diluted weighted-average number of shares of common stock outstanding | 52,089 | | 51,348 | | | 51,913 | | 51,191 | |
| | | | | |
The following represents the weighted average number of shares that could potentially dilute basic earnings per share in the future:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2022 | 2021 | | 2022 | 2021 |
| Convertible preferred stock | 32,670 | | 30,591 | | | 32,430 | | 30,810 | |
Stock-based compensation awards(1): | | | | | |
| Stock options | 1,508 | | 899 | | | 1,507 | | 849 | |
| Restricted stock awards and restricted stock units | 5,417 | | 2,655 | | | 4,726 | | 2,161 | |
| | | | | |
(1) SARs and phantom stock awards are payable in cash and will therefore have no impact on number of shares.
18. Income Taxes
The provision for income taxes consists of provisions for federal, state and foreign income taxes. The effective tax rates for the periods ended June 30, 2022 and June 30, 2021, reflect the Company’s expected tax rate on reported income (loss) from continuing operations before income tax and tax adjustments. The Company operates in a global environment with significant operations in the U.S. and various other jurisdictions outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the Company’s earnings and the applicable tax rates in the various jurisdictions where the Company operates.
The Company's U.S. operations have incurred cumulative taxable losses through June 30, 2022. The Company’s U.S. net operating loss carry forwards and carry forwards of other tax attributes are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. The utilization of the tax attributes have become restricted because of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended, as well as similar state tax provisions. This limits the amount of the tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, was determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. Please refer to Note 3 - Related Party Transactions regarding the ownership change in the quarter ended September 30, 2020. The Company completed a Section 382 study and determined the ownership change gave rise to the restrictions that will limit the realizability of certain U.S. tax attributes and built-in losses related to future intangible amortization tax deductions. These limitations apply to the corresponding tax attributes and built-in losses incurred before the ownership change.
The effective tax rate for the six months ended June 30, 2022 differs from the U.S. statutory tax rate of 21%, primarily because of changes in valuation allowance positions related to certain foreign jurisdictions, taxable foreign inclusions within the U.S., and certain non-deductible items. The Company's effective tax rate for the three and six months ended June 30, 2022 was 14.3% and 13.0%, compared to the effective tax rate for the three and six months ended June 30, 2021 of (0.8)% and (27.6)%.
19. Segment Information
ASC 280 requires use of the management approach for segment reporting. The management approach is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Through the nine months ended September 31, 2021, the Company had operated and managed our business as two reportable segments, AgroFresh Core and AgroFresh Fruit Protection (formerly Tecnidex). Due to changes in senior management, as well as the integration of AgroFresh Fruit Protection with the Company's Core business operational and reporting structure, during the fourth quarter of 2021, the Company determined that it has one reportable segment as of December 31, 2021. Since the Company
operates in one operating segment, all required financial segment information can be found in the unaudited condensed consolidated financial statements.
20. Commitments and Contingencies
The Company is currently involved in various claims and legal actions that arise in the ordinary course of business. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and can be reasonably estimated. Although the results of litigation and claims can never be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, financial condition or results of operations.
On October 14, 2019, the Company was awarded a verdict of $31.1 million in damages, related to, among other things, trade secret misappropriation and willful patent infringement, in its litigation against Decco Post-Harvest, Inc. ("Decco") and Decco's parent company, UPL Limited. The award was subsequently reduced by $18 million in connection with post-verdict review by the Court. During the three months ended March 31, 2021, the lawsuit was settled, paid and is considered closed.
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, and these payment obligations are considered insignificant.
21. Fair Value Measurements
Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value of the Company's financial instruments that are measured at fair value on a recurring basis as of June 30, 2022.
| | | | | | |
| (in thousands) | Level 3 | |
Liability-classified stock compensation (1) | $164 | |
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, 2021.
| | | | | |
| (in thousands) | Level 3 |
Liability-classified stock compensation (1) | $241 |
(1) The fair values of market-based phantom shares granted in 2020 were estimated using a Monte Carlo simulation pricing model with the assumptions described below:
| | | | | | | |
| |
| Grant date fair value | $1.70 | | |
| Risk-free interest rate | 0.27% | | |
| Expected life (years) | 2.71 | | |
| Estimated volatility factor | 65.8% | | |
| Expected dividends | None |
There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the six months ended June 30, 2022.
At June 30, 2022, the Company evaluated the amount recorded under the Amended Term Loan and determined that the fair value was approximately $244.2 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 table presents the changes during the periods presented in our Level 3 financial instruments that are measured at fair value on a recurring basis.
| | | | | |
| (in thousands) | Liability-classified stock compensation |
| Balance, December 31, 2021 | $241 |
| Stock compensation activity | (77) | |
| |
| Balance, June 30, 2022 | $164 |
22. Other Income
The Company had no material other income for the three months ended June 30, 2022 or June 30, 2021. During the six months ended June 30, 2022, the Company had other income of $0.5 million related to the receipt of data sharing income. During the six months ended June 30, 2021 the Company had other income of $14.4 million due to the receipt of proceeds from the settlement of a litigation matter.