ITEM 8 FINANCIAL INFORMATION
24. Correction of Prior Period Errors
During the current year-end financial reporting process, we identified certain prior period accounting errors that we have concluded are not material to the Company’s previously reported consolidated financial statements and unaudited interim condensed consolidated financial statements. The accompanying consolidated financial statements and related notes hereto as of and for the year ended December 31, 2019 have been revised to give effect to the correction of these errors. A description of each error is described below.
Non-Controlling Interest
During the fourth quarter of 2020, we identified an error related to the accounting for the Company's acquisition of 75% of Tecnidex in December 2017 (see Note 3 – Business Combination). As part of the Tecnidex purchase agreement ("Agreement"), the Company entered into “call” and “put” option agreements that provide for both the purchaser and seller to acquire or sell some portion of the 25% remaining (“residual”) interest at a price based on a pre-defined formula. In the Company's initial accounting for the acquisition, the residual interest was classified as “Non-controlling interest” in the Company's previously reported consolidated statements of stockholders' equity. Upon further review and as prescribed by ASC 480, Distinguishing Liabilities from Equity, the Company's management concluded the residual interest should have been classified as “Redeemable non-controlling interest”
within temporary equity in the Company’s previously reported consolidated balance sheets because the Company is contingently obligated to redeem the shares if the seller elects to exercise the put option, which is outside of our control.
Furthermore, as prescribed by the SEC’s redeemable equity measurement guidance, the redeemable non-controlling interest should have been adjusted for any necessary increase in carrying value whenever the amount payable to the seller under the pre-
defined formula exceeded the cumulative allocation of income (loss) related to the redeemable non-controlling interest as of each reporting period end. The adjustment to increase the carrying value of the redeemable non-controlling interest should have been recognized as a charge to Additional paid-in capital in the Company's previously reported consolidated statements of stockholders' equity and applied as an adjustment to Net (loss) income attributable to AgroFresh Solutions, Inc. common stockholders in the determination of basic and fully diluted net (loss) income per share.
There were no necessary adjustments to previously reported Additional paid-in capital for the quarterly periods and years ended December 31, 2017 and 2018, or for any of the three quarterly periods ended through September 30, 2019. For the quarter ended December 31, 2019, a $0.1 million adjustment should have been recognized to previously reported Additional paid-in capital. For the three quarterly periods ended September 30, 2020, $0.1 million,
$0.3 million and $0.8 million adjustments, respectively, should have been recognized to previously reported Additional paid-in capital.
Income Tax Provision
During the 2020 year-end financial reporting process, the Company identified two errors related to the amount recognized as income taxes benefit in the Company's previously reported consolidated statements of operations for the year ended December 31, 2019. The first related to an error in the calculation of pre-tax loss attributed to the Company's U.S. entity that resulted in an understatement of $9.7 million that should have been recognized as an income tax benefit during the quarter ended December 31, 2019.
The second related to an error in the classification of a $10.0 million charge related to the impairment charge on a long-term equity investment (see Note 9 - Other Assets) for U.S. income tax purposes whereby the Company initially considered the charge to be a potential deduction in the calculation of pre-tax loss attributed to the Company's U.S. entity. Upon further analysis, we concluded that the $10.0 million charge should have been classified as a capital loss and therefore only deductible against capital gains. However, since the Company has no pre-existing capital gains for U.S. income tax purposes (or the likelihood of generating any future capital gains), the $2.3 million deferred income tax benefit associated with the capital loss should have been fully reserved during the quarter ended December 31, 2019 because it was not realized, nor expected to be realized in the future.
The net impact of the two errors resulted in an understatement in income tax benefit and an overstatement in Net (loss) income including non-controlling interests of $7.4 million, respectively, in the Company's previously reported consolidated statements of net (loss) income for the year ended December 31, 2019, as well as an overstatement in Deferred income tax liabilities and Accumulated deficit, of $7.4 million, respectively, in the Company's previously reported consolidated balance sheet as of December 31, 2019.
Income Tax Valuation Allowance as of September 30, 2020
As disclosed in Note 16 – Series B Convertible Preferred Stock and Shareholders’ Equity and Note 19 – Income Taxes, the Company issued Series B Convertible Stock in July 2020. The issuance of these shares was considered a change in control as defined in the U.S. Internal Revenue Code of 1986, as amended. As a result, we concluded that the Company's ability to utilize its previously existing U.S. tax attributes would be restricted and, as such, recognized deferred income tax expense of $24.7 million increase in valuation allowance during the quarter ended September 30, 2020 to fully reserve deferred income tax assets we no longer expect the Company will realize in the future. In consideration of the two income tax errors described above, the Company concluded an additional $7.4 million increase in the valuation allowance should have been recognized as a result of the net increase in deferred income tax assets that would have been recognized as of September 30, 2020 had these errors been accounted for correctly
.
As summarized in the unaudited selected financial statement tables below, the net impact of all the foregoing income tax errors resulted in an understatement in Income tax expense and an understatement in Net loss including non-controlling interest, of $7.4 million, respectively, in the previously reported unaudited condensed consolidated statements of operations for the three and nine month periods ended September 2020, as well as an overstatement in Deferred income tax liabilities and Accumulated deficit of $7.4 million in the previously reported unaudited condensed consolidated balance sheet as of March 31, 2020 and June 30, 2020.
The Company assessed the quantitative and qualitative factors associated with all the foregoing errors in accordance with SEC Staff Accounting Bulletin ("SAB") No. 99 and 108, Materiality, codified in ASC 250, Presentation of Financial Statements, and concluded that they were not material, on an individual or aggregate basis, to any of the Company's previously reported annual or interim consolidated financial statements. Notwithstanding this conclusion, the Company further concluded it is preferable to correct the errors by revising the consolidated 2019 accompanying consolidated financial statements and related notes hereto of the Company as of and for the year ended December 31, 2019 to give effect to the correction of these errors.
The following financial statement tables present the net effect of the correction of the errors described above on the Company’s previously reported consolidated financial statements as of and for the year ended December 31, 2019:
The effect of the correction of the errors noted above on the Company's consolidated balance sheet as of December 31, 2019 is as follows:
December 31, 2019
(in thousands) As Reported Adjustment Revised
Deferred income tax liabilities 16,574 (7,357) 9,217
Total Liabilities 471,662 (7,357) 464,305
Redeemable non-controlling interest — 7,701 7,701
Additional paid-in capital 561,006 (116) 560,890
Accumulated deficit (199,621) 7,357 (192,264)
Total AgroFresh Stockholders' Equity 326,445 7,241 333,686
Non-controlling interest 7,585 (7,585) —
TOTAL STOCKHOLDERS' EQUITY 334,030 (344) 333,686
The effect of the correction of the errors noted above on the Company's consolidated statements of (loss) income for the year ended December 31, 2019 is as follows:
Year Ended December 31, 2019
(in thousands except per share data) As Reported Adjustment Revised
Benefit for income taxes (17,143) (7,357) (24,500)
Net (loss) income including non-controlling interests (61,510) 7,357 (54,153)
Net loss (income) attributable to non-controlling interests 678 (116) 562
Net (loss) income attributable to AgroFresh Solutions, Inc. (60,832) 7,241 (53,591)
Net loss (income) per share:
Basic ($1.21) $0.14 ($1.07)
Diluted ($1.21) $0.14 ($1.07)
The effect of the correction of the errors noted above on the Company's consolidated statements of comprehensive loss for the year ended December 31, 2019 is as follows:
Year Ended December 31, 2019
(in thousands) As Reported Adjustment Revised
Net loss (income) (61,510) 7,357 (54,153)
Comprehensive loss, net of tax (63,733) 7,357 (56,376)
The effect of the correction of the errors noted above on the Company's consolidated statements of cash flows for the year ended December 31, 2019 is as follows:
Year Ended December 31, 2019
(in thousands) As Reported Adjustment Revised
Net loss (income) (61,510) 7,357 (54,153)
Deferred income taxes (21,631) (7,357) (28,988)
The following unaudited selected financial statement tables summarize the net effect of the correction of the errors noted above on the Company’s previously reported unaudited interim condensed consolidated financial statements as of and for the quarterly reporting interim and year-to-date periods ending March 31, 2019 and 2020, June 30, 2019 and 2020, and September 30, 2019 and 2020.
The effect of the correction of the errors noted above to the Company's previously issued unaudited condensed consolidated balance sheets as of March 31, 2019, June 30, 2019 and September 30, 2019 are as follows:
March 31, 2019 June 30, 2019 September 30, 2019
(in thousands) As Reported Adjustment Revised As Reported Adjustment Revised As Reported Adjustment Revised
Redeemable non-controlling
interest — 8,297 8,297 — 8,205 8,205 — 7,927 7,927
Non-controlling Interest 8,297 (8,297) — 8,205 (8,205) — 7,927 (7,927) —
Total Stockholders' Equity 355,998 (8,297) 347,701 341,434 (8,205) 333,229 341,243 (7,927) 333,316
The effect of the correction of the errors noted above had no impact on the Company's previously reported unaudited condensed consolidated statements of operations, comprehensive income or cash flows for the three months and year-to-date periods ended March 31, 2019, June 30, 2019 and September 30, 2019.
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated balance sheets as of March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
March 31, 2020 June 30, 2020 September 30, 2020
(in thousands) As Reported Adjustment Revised As Reported Adjustment Revised As Reported Adjustment Revised
Deferred income tax liabilities 15,156 (7,357) 7,799 11,677 (7,357) 4,320 35,577 — 35,577
Total Liabilities 466,605 (7,357) 459,248 462,165 (7,357) 454,808 357,810 — 357,810
Redeemable non-controlling
interest — 7,604 7,604 — 7,734 7,734 — 8,049 8,049
Additional paid-in capital 561,483 (185) 561,298 562,584 (512) 562,072 559,037 (1,321) 557,716
Accumulated deficit (203,269) 7,357 (195,912) (219,823) 7,357 (212,466) (241,710) — (241,710)
Total AgroFresh Stockholders'
Equity 313,152 7,172 320,324 298,050 6,845 304,895 272,283 (1,321) 270,962
Non-controlling interest 7,419 (7,419) — 7,222 (7,222) — 6,728 (6,728) —
Total Stockholders' Equity 320,571 (247) 320,324 305,272 (377) 304,895 279,011 (8,049) 270,962
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of operations for the three month periods ended March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
83
Three Months Ended March 31, 2020 Three Months Ended June 30, 2020 Three Months Ended September 30, 2020 (in thousands except per share data) As Reported Adjustment Revised As Reported Adjustment Revised As Reported Adjustment Revised (Benefit) provision for income
taxes (3,831) — (3,831) 630 — 630 25,857 7,357 33,214
Net loss including non-
controlling interest (3,814) — (3,814) (16,751) — (16,751) (22,381) (7,357) (29,738)
Net loss (income) attributable
to non-controlling interests 166 (69) 97 197 (327) (130) 494 (809) (315)
Net loss attributable to
AgroFresh Solutions, Inc. (3,648) (69) (3,717) (16,554) (327) (16,881) (21,887) (8,166) (30,053)
Net loss attributable to AgroFresh Solutions, Inc.
Common Stockholders (3,648) (69) (3,717) (16,554) (327) (16,881) (26,287) (8,166) (34,453)
Net loss per share:
Basic ($0.08) $0.01 ($0.07) ($0.33) — ($0.33) ($0.52) ($0.16) ($0.68)
Diluted ($0.08) $0.01 ($0.07) ($0.33) — ($0.33) ($0.52) ($0.16) ($0.68)
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of operations for the year-to-date periods ending March 31, 2020, June 30, 2020 and September 30, 2020 are as follows:
Three Months Ended March 31, 2020 Six Months Ended June 30, 2020 Nine Months Ended September 30, 2020 (in thousands except per share data) As Reported Adjustment Revised As Reported Adjustment Revised As Reported Adjustment Revised (Benefit) provision for income
taxes (3,831) — (3,831) (3,201) — (3,201) 22,656 7,357 30,013
Net loss including non-
controlling interest (3,814) — (3,814) (20,565) — (20,565) (42,946) (7,357) (50,303)
Net loss (income) attributable to non-
controlling interests 166 (69) 97 363 (396) (33) 857 (1,205) (348)
Net loss attributable to
AgroFresh Solutions, Inc. (3,648) (69) (3,717) (20,202) (396) (20,598) (42,089) (8,562) (50,651)
Net loss attributable to AgroFresh Solutions, Inc.
Common Stockholders (3,648) (69) (3,717) (20,202) (396) (20,598) (46,489) (8,562) (55,051)
Net loss per share:
Basic ($0.08) $0.01 ($0.07) ($0.41) — ($0.41) ($0.92) ($0.16) ($1.08)
Diluted ($0.08) $0.01 ($0.07) ($0.41) — ($0.41) ($0.92) ($0.16) ($1.08)
The effect of the correction of the errors noted above had no impact on the Company's previously reported unaudited condensed consolidated statements of comprehensive loss for the three month and year-to-date periods ended March 31, 2020 and June 30, 2020. The effect of the correction of the errors noted above for the three and nine months ended September 30, 2020 are as follows:
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
(in thousands) As Reported Adjustment Revised As Reported Adjustment Revised
Net loss including non-controlling interest (22,381) (7,357) (29,738) (42,946) (7,357) (50,303)
Comprehensive loss, net of tax (22,714) (7,357) (30,071) (53,050) (7,357) (60,407)
84
The effect of the correction of the errors noted above to the Company's previously reported unaudited condensed consolidated statements of cash flows for the year-to-date periods ended March 31, 2019, June 30, 2019 and September 30, 2019 are as follows:
Three Months Ended March 31, 2020 Six Months Ended June 30, 2020 Nine Months Ended September 30, 2020
(in thousands) As Reported Adjustment Revised As Reported Adjustment Revised As Reported Adjustment Revised
Net loss including non-
controlling interest (3,814) — (3,814) (20,565) — (20,565) (42,946) (7,357) (50,303)
Deferred income tax liability (5,231) — (5,231) (5,668) — (5,668) 18,086 7,357 25,443
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE