| Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation and Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and entities in which the Company has a controlling voting interest. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated 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 financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated financial statements. Actual results could differ from these estimates. The Company’s significant estimates include the allocation of the purchase price to the fair value of assets acquired and liabilities assumed, impairment of goodwill and identifiable intangible assets, stock-based compensation, contingent liabilities and income tax valuation allowances. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Adoption of Highly Inflationary Accounting in Argentina GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation rate exceeds 100%. The Company has been closely monitoring the inflation data and currency volatility in Argentina, where there are multiple data sources for measuring and reporting inflation. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100% as of June 30, 2018. As a result, the Company elected to adopt highly inflationary accounting as of July 1, 2018 for its subsidiary in Argentina. Under highly inflationary accounting, the functional currency of the Company's subsidiary in Argentina became the U.S. dollar, and its income statement and balance sheet will be measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine peso-denominated monetary assets and liabilities will be reflected in earnings. As of December 31, 2019, the Company’s subsidiary in Argentina had a net asset position of $4.4 million. Net sales attributable to Argentina were approximately 4.0% and 3.2% of the Company’s consolidated net sales for the years ended December 31, 2019 and 2018, respectively. Revenue Recognition On January 1, 2018, the Company began to account for revenue in accordance with Accounting Standards Codification ("ASC") 606, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which is expected to be received in exchange for those goods or services. The Company utilized the modified retrospective method of adoption to all contracts that were not completed as of January 1, 2018. Prior period results were not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company has not made any significant changes to judgments in applying ASC 606 during the year ended December 31, 2019. Performance Obligations The Company derives revenue from the sale of products created with proprietary technology to regulate the ripening of produce and through performing post application technical services for its customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s contracts have multiple performance obligations primarily related to product application and post application services, which the Company provides. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. The method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company calculates the costs of satisfying a performance obligation and factors in an appropriate margin for that distinct good or service. The transaction price is primarily fixed, as prices are governed by the terms and conditions of the Company's contracts with customers, and payment is typically made under standard terms. The Company has certain transactions that provide for variable consideration through rebate and customer loyalty programs. Depending on the program, the customer may elect to receive either a credit against its account or a cash payment. The Company recognizes an accrued provision for estimated rebates and customer loyalty program payouts at the time services are provided. The primary factors considered when estimating the provision for rebates and customer loyalty programs are the average historical experience of aggregate credits issued, the historical relationship of rebates as a percentage of total gross product sales, and the contract terms and conditions of the various rebate programs in effect at the time services are performed. The Company provides standard warranty provisions. Performance obligations related to product application are typically satisfied at a point in time when the customer obtains control upon application. Performance obligations related to post-application services are satisfied over time and revenue is recognized using the output method, as control of the service transfers to the customer over time during and after storage of the produce. The Company believes that this method provides a faithful depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period. Performance obligations related to Tecnidex sales-type leases are satisfied at the point in time that equipment is installed at the customer site. Disaggregation of Revenue The Company disaggregates revenue from contracts with customers into geographic region, product and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenues for the year ended December 31, 2019 (in thousands) Region North America EMEA Latin America Asia Pacific Total Revenue Product 1-MCP based $ 40,012 $ 63,109 $ 28,199 $ 14,513 $ 145,833 Fungicides, waxes, coatings, sanitizers 712 16,803 3,172 — 20,687 Other* 1,523 1,374 447 201 3,545 Total $ 42,247 $ 81,286 $ 31,818 $ 14,714 $ 170,065 Pattern of Revenue Recognition Products transferred at a point in time $ 41,122 $ 79,811 $ 31,618 $ 14,535 $ 167,086 Services transferred over time 1,125 1,475 200 179 2,979 Total $ 42,247 $ 81,286 $ 31,818 $ 14,714 $ 170,065 Revenues for the year ended December 31, 2018 (in thousands) Region North America EMEA Latin America Asia Pacific Total Revenue Product 1-MCP based $ 40,597 $ 71,960 $ 26,820 $ 15,082 $ 154,459 Fungicides, waxes, coatings, sanitizers 651 20,766 — — 21,417 Other* 2,022 530 358 — 2,910 Total $ 43,270 $ 93,256 $ 27,178 $ 15,082 $ 178,786 Pattern of Revenue Recognition Products transferred at a point in time $ 42,555 $ 92,555 $ 27,101 $ 14,602 $ 176,813 Services transferred over time 715 701 77 480 1,973 Total $ 43,270 $ 93,256 $ 27,178 $ 15,082 $ 178,786 *Other includes FreshCloud, technical services and sales-type leases related to Tecnidex. Contract Assets and Liabilities ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the twelve months ended December 31, 2019: (in thousands) Balance at January 1, 2019 Additions Deductions Balance at December 31, 2019 Contract assets: Unbilled revenue 1,956 10,029 (10,319) 1,666 Contract liabilities: Deferred revenue 1,280 3,032 (3,137) 1,175 The following table presents changes in the Company’s contract assets and liabilities during the twelve months ended Balance at December 31, 2018: (in thousands) Balance at January 1, 2018 Additions Deductions Balance at December 31, 2018 Contract assets: Unbilled revenue 739 7,117 (5,900) 1,956 Contract liabilities: Deferred revenue 100 4,428 (3,248) 1,280 The Company recognizes contract assets in the form of unbilled revenue in instances where services are performed by the Company but not billed by period end. The Company recognizes contract liabilities in the form of deferred revenue in instances where a customer pays in advance for future services to be performed by the Company. The Company generally receives payments from its customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the year ended December 31, 2019. Amounts reclassified from unbilled revenue to accounts receivable for the year ended December 31, 2019 were $10.3 million. Amounts reclassified from deferred revenue to revenue were $3.1 million for the year ended December 31, 2019. Practical Expedients Elected The Company has elected the following practical expedients in applying ASC 606 across all reportable segments: Unsatisfied Performance Obligations. Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. Contract Costs. All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration. Significant Financing Component. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Sales Tax Exclusion from the Transaction Price . The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer. Shipping and Handling Activities. The Company accounts for shipping and handling activities it performs after a customer obtains control of the good as activities to fulfill the promise to transfer the good, which are recognized in cost of goods sold. Modified Retrospective Method. The Company adopted ASC 606 on January 1, 2018 utilizing the modified retrospective method, which meant the Company did not retrospectively adjust prior periods. The Company applied the modified retrospective method only to contracts that were not completed at January 1, 2018 and accounted for the aggregate effect of any contract modifications upon adoption. No cumulative adjustment to retained earnings was recorded upon adoption. The following table summarizes the amounts by which the consolidated financial statements are affected in the current reporting period by ASC 606 as compared with the guidance that was in effect before the change. Balance at December 31, 2018 (in thousands) As reported ASC 606 Adjustments Balances without adoption of ASC 606 Consolidated Balance Sheet Liabilities: Accrued expenses and other current liabilities $ 45,340 $ (1,093) $ 44,247 Equity: Accumulated deficit $ (138,789) $ 1,093 $ (137,696) Year ended December 31, 2018 (in thousands) As reported ASC 606 Adjustments Balances without adoption of ASC 606 Consolidated Statement of Operations Revenue Net sales 178,786 1,093 179,879 Net loss attributable to AgroFresh Solutions, Inc. (30,060) 853 (29,207) 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 on Form 10-K for the year ended December 31, 2018. Cost of Sales The Company's cost of sales consists of cost of materials, cost of equipment, application costs and certain supply chain costs. The Company's primary costs of sale are related to applications at customer sites through a direct service model primarily utilizing third-party service providers. Amounts recorded as cost of sales relate to direct costs incurred in connection with the purchase, delivery and application of the product. Such costs are recorded as the related revenue is recognized. Cash and Cash Equivalents The Company considers short-term, highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Accounts Receivable, Net Accounts receivable, net consists primarily of (i) outstanding amounts invoiced to end-users, re-sellers and third-party contractors and (ii) unbilled revenue in arrangements where the earnings process has been completed but invoices have not been issued as of the reporting date. The allowance for doubtful accounts is based on 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. 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: Leasehold improvements Shorter of useful life or lease term Machinery & Equipment 1—12 years Furniture 1—12 years Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the related lease term, which generally includes reasonably assured option periods expected to be exercised by the Company when the Company would suffer an economic penalty if not exercised. Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received and net carrying values of the assets disposed. Impairment of Long-Lived Assets Company management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate. As of December 31, 2019, Company management believed that, except as noted below, no revision to the remaining useful lives or write-down of the Company’s long-lived assets was required. During 2019, the Company changed its strategy for the use of its RipeLock product. Based on this change, the Company reevaluated the useful life of RipeLock related intangible assets and recorded $34.0 million of amortization based on the change in useful life. For the fiscal year ended December 31, 2018, the Company management believed that no revision to the remaining useful lives or write-down of the Company's long-lived assets were necessary. Leases The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred. In the consolidated statements of income, lease expense for operating lease payments is recognized on a straight-line basis over the lease term. See Note 12 for additional information. Selling, General and Administrative Expenses The Company expenses selling, general and administrative costs as incurred. Selling, general and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in the Company’s administrative, finance, legal, business development, commercial, sales, marketing and human resource functions. Other expenses include professional fees from outside service providers and costs incurred in connection with services provided by Dow under a transition services agreement entered into upon consummation of the Business Combination (defined in Note 3 below). Debt Issuance Costs The debt issuance costs associated with the Term Loan (defined in Note 11 below) were capitalized and are presented as a reduction of the principal balance of the debt, and the Revolving Loan costs (defined in Note 11 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. In connection with the Tecnidex acquisition in 2017, the Company recorded approximately $9.4 million of goodwill which was based on the preliminary purchase price allocation as of December 31, 2017. During the year ended December 31, 2018, there was an adjustment made to consideration payable to holders of Tecnidex which resulted in a measurement period adjustment of $2.8 million to the purchase price allocation. 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, 2018, the Company recorded a $2.6 million impairment charge related to a decline in the estimated value of the SmartFresh trade name. During the year ended December 31, 2019, the Company recorded an impairment charge of $1.0 million associated with the Verigo software following the sale of Verigo assets and a partnership agreement with new technology provider. 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 time-based and/or performance-based vesting conditions. Awards without cash settlement conditions are equity-classified. The Company measures and recognizes compensation expense over the vesting period based on their estimated grant date fair values. Phantom stock awards and stock appreciation rights either require or provide the holder of the award with the option to settle in cash. The Company's awards with cash settlement conditions are accounted for as liabilities and the Company measures and recognizes compensation expense over the vesting period based on their estimated fair values as of the most recent reporting date. Fair values for options and stock appreciation rights are estimated using an option pricing model. Fair values for restricted stock and phantom stock awards are based on the closing price of the Company’s common stock on the grant date and the measurement date. Compensation expense for the Company’s stock-based compensation awards is generally recognized on a straight-line basis over the vesting period of the award. For awards with performance conditions, compensation expense is recognized only if satisfaction of the performance condition is considered probable of being achieved. Compensation expense for the Employee Stock Purchase Plan is based on 15% of the closing price on the date of purchase with an adjustment for the fair value of put and call options. Research and Development Expenditures for research and development costs, which primarily relate to internal compensation costs and professional service fees, are charged to expense as incurred. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that a tax position will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. Contingencies The Company recognizes liabilities for loss contingencies when it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. The Company’s ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. The Company records legal settlement costs when those costs are probable and reasonably estimable. 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: • Level 1, defined as observable inputs such as quoted prices in active markets; • Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and • 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. Foreign Currency An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Assets and liabilities are translated at period-end rates; income statement amounts are translated at average rates during the course of the period. Translation gains and losses of those operations that use local currency as the functional currency, are included in accumulated other comprehensive (loss) income in the consolidated balance sheets. Foreign currency exchange transaction gain (loss) is the result of remeasuring transactions denominated in a currency other than our primary currency and is reported in the consolidated 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 January 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-04, " Intangibles - Goodwill and Other", which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company expects to adopt the new guidance in the first quarter of 2020. The Company is currently evaluating the impact of adopting this guidance. In February 2016, the FASB issued ASU 2016-02, “ Leases ”. The main objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Effective for the quarter ended March 31, 2019, the Company adopted the guidance for leases and elected to utilize a cumulative effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company also elected to apply practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $7.3 million as part of other assets and a lease liability of $7.3 million as part of other current liabilities and other long-term liabilities in the consolidated balance sheet as of January 31, 2019. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity. In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”, which introduces a new current expense credit loss model to measure impairment on certain types of financial instruments. This update requires an entity to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. |
