Business Combination

On the Closing Date, the Company consummated a business combination (the “Business Combination”) pursuant to the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), by and between the Company and Dow providing for the acquisition by the Company of the AgroFresh Business from Dow, resulting in AgroFresh Inc. becoming a wholly-owned, indirect subsidiary of the Company. Pursuant to the Purchase Agreement, the Company paid the following consideration to Rohm and Haas Company (“Rohm and Haas”), a subsidiary of Dow: (i) 17.5 million shares of common stock (the “Stock Consideration”) and (ii) $635 million in cash (the “Cash Consideration”).

In addition to the Stock Consideration and the Cash Consideration, Dow is entitled to receive the following consideration:


•	A deferred payment from the Company of $50 million, subject to the Company’s achievement of a specified average Business EBITDA, as defined in the Purchase Agreement, over the two year period from January 1, 2016 to December 31, 2017;


•	6 million of the Company's warrants;


•	85% of the amount of the tax savings, if any, in U.S. Federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh Inc. assets resulting from a section 338(h)(10) election that the Company and Dow made in connection with the Business Combination; and


•	reimbursement for any value-added and transfer taxes paid by Dow in conjunction with the transaction.

In addition, pursuant to the terms of the Purchase Agreement, the amount of the Cash Consideration paid as part of the purchase price is subject to adjustment following the Closing Date based upon the working capital of the AgroFresh Business as of the Closing Date being greater or less than a target level of working capital determined in accordance with the Purchase Agreement.

The Company accounted for its acquisition of the AgroFresh Business as a business combination under the scope of Accounting Standard Codification Topic (ASC) 805, Business Combinations. Pursuant to ASC 805, the Company has been determined to be an accounting acquirer since the Company paid cash and equity consideration for all of the assets of the AgroFresh Business. The AgroFresh Business constitutes a business with inputs, processes and outputs. Accordingly, the acquisition of the AgroFresh Business constitutes the acquisition of a business in accordance with ASC 805 and is accounted for using the acquisition method.

The following summarizes the purchase consideration to Dow:



	Purchase Consideration
Cash consideration	$	635,000
Stock consideration⁽¹⁾	210,000
Warrant consideration ⁽²⁾	19,020
Deferred payment⁽³⁾	15,172
VAT and transfer tax reimbursable to Dow ⁽⁴⁾	9,263
Tax amortization benefit contingency ⁽⁵⁾	156,180
Working capital payment to Dow ⁽⁶⁾	15,057
Total purchase price	$	1,059,692

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(1)	The Company issued 17.5 million shares of common stock valued at $12.00 per share as of July 31, 2015.


(2)	In connection with the Business Combination, the Company entered into a Warrant Purchase Agreement whereby it agreed to issue to Dow a certain number of warrants. The Company calculated the fair value of the 6 million warrants expected to be issued to Dow at $3.17 per warrant as of July 31, 2015.


(3)	Pursuant to the Purchase Agreement, the Company agreed to pay Dow a deferred payment of $50 million subject to the achievement of a specified average Business EBITDA level over the two year period from January 1, 2016 to December 31, 2017. The Company estimated the fair value of the deferred payment using the Black-Scholes option pricing model.


(4)	Pursuant to the Purchase Agreement, the Company is required to reimburse Dow for any value-added or transfer taxes paid by Dow in conjunction with the Business Combination.

(5)

In connection with the Business Combination, the Company entered into a Tax Receivables Agreement with Dow. The Company estimated the fair value of future cash payments based upon its estimate that the undiscounted cash payments to be made total approximately $337.0 million and are based on an estimated intangible write-up amortized over 15 years, tax effected at 37%, with each amortized amount then discounted to present value utilizing an appropriate market discount rate to arrive at the estimated fair value of the cash payments and the associated liability.


(6)	Pursuant to the terms of the Purchase Agreement, the amount of the Cash Consideration paid as part of the purchase price is subject to adjustment following the Closing based upon the working capital of the AgroFresh Business as of the Closing Date being greater or less than a target level of working capital determined in accordance with the Purchase Agreement.

The fair values of the various contingent consideration components were measured using the following valuation models. The fair value of the tax amortization benefit contingency was measured using an income approach based on the Company’s best estimate of the undiscounted cash payments to be made, tax effected and discounted to present value utilizing an appropriate market discount rate. The fair value of the deferred acquisition payment was measured using a Black-Scholes option pricing model and based on the Company’s best projection of the Company’s average adjusted EBITDA level over the two year period from January 1, 2016 to December 31, 2017. The warrant consideration was measured using directly observable quoted prices for identical assets in an inactive market. The working capital settlement was measured pursuant to the terms of the Purchase Agreement based upon the working capital of the AgroFresh Business as of the Closing Date being greater or less than a target level of working capital determined in accordance with the Purchase Agreement. During the fourth quarter of 2016, the Company's management increased the estimate of the Working Capital adjustment that will be paid to Dow to $17.0 million from the previous estimate of 15.1 million.

The Company recorded the allocation of the purchase price to the AgroFresh Business’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The purchase price allocation (in thousands) is as follows:



(in thousands)	Purchase Price Allocation
Cash and cash equivalents	$	9,459
Accounts receivable and other receivables	30,884
Inventories	120,426
Prepaid expenses and other current assets	976
Total current assets	161,745
Property and equipment	4,793
Identifiable intangible assets	841,545
Noncurrent deferred tax asset	11,125
Other assets	862
Total identifiable assets acquired	1,020,070
Accounts payable	(364		)
Accrued and other current liabilities	(9,425		)
Pension and deferred compensation	(638		)
Other long-term liabilities	(1,823		)
Deferred tax liability	(10,501		)
Net identifiable assets acquired	997,319
Goodwill	62,373
Total purchase price	$	1,059,692

The values (in thousands) allocated to identifiable intangible assets and their estimated useful lives are as follows:



(in thousands, except useful life data)	Fair Value		Useful life
Software	$	45	4 years
Developed technology	757,000		12 to 22 years
Customer relationships	8,000		24 years
In-process research and development	39,000		18 Years
Service provider network	2,000		Indefinite Life
Trade names	35,500		Indefinite Life
Total intangible assets	$	841,545
Weighted average life of finite-lived intangible assets			19.7 years

The fair values of most of the intangible assets were estimated using an income approach, either the excess earnings method (developed technology, customer relationships and in-process R&D) or the relief from royalty method (trade names). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet evolving business needs and competitively produce our existing products.

The goodwill of $62.4 million arising from the Business Combination is primarily attributable to the market position of the AgroFresh Business. This goodwill is not deductible for income tax purposes. During the third quarter of 2016, the Company began commercializing its Landspring product offering, which was previously an in-process research and development asset, and thus has begun depreciating the asset value of $39.0 million over its estimated useful life as disclosed in the table above.

For the five months ended December 31, 2015 (Successor), the Company incurred approximately $1.8 million of transaction expenses directly related to the Business Combination.

The Company incurred $1.4 million of transaction expenses, not reported in the Predecessor consolidated statements of comprehensive (loss) income, directly related to the Business Combination for the seven months ended July 31, 2015 (Predecessor). Transaction expenses, which were $1.3 million through June 30, 2015 and $0.7 million for the fiscal year 2014, were reported by the Company in prior 10-Q and 10-K filings which are also not reported in the Predecessor consolidated statements of comprehensive (loss) income. Cash outflows of $1.2 million related to transaction expenses previously expensed by the Company are reported as cash outflows for operating activities for the five months ended December 31, 2015. In addition, in connection with the Business Combination, the Company paid deferred underwriter compensation of $7.8 million in connection with the Company’s Public Offering which is included as cash outflows for financing activities for the five months ended December 31, 2015