PRELIMINARY OFFERING MEMORANDUM — CONFIDENTIAL
June 1, 2022
PRELIMINARY — SUBJECT TO COMPLETION, DATED JUNE 1, 2022. The information in this offering memorandum is not complete and may be changed. These notes may not be sold nor may offers to buy be accepted prior to the time the offering memorandum is delivered in final form. This offering memorandum does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these notes in any jurisdiction in which such offer, solicitation or sale would be unlawful.
GREENFIELD AGRICULTURAL PARTNERS LLC
(an Iowa limited liability company)
$30,000,000
Senior Unsecured Notes due 2027
Greenfield Agricultural Partners LLC ("GAP," the "Issuer," "we," "us," or "our") is offering $30,000,000 aggregate principal amount of its Senior Unsecured Notes due 2027 (the "notes"). The notes will bear interest at a rate of \\\\% per annum (to be determined at pricing; initial price talk 8.750%–9.250%). The notes will mature on June 30, 2027. Interest on the notes will be payable semi-annually in arrears on June 30 and December 30 of each year, commencing December 30, 2022.
The notes will be senior unsecured obligations of GAP and will rank pari passu in right of payment with all of GAP's existing and future senior unsecured indebtedness. The notes will be effectively subordinated to all of GAP's existing and future secured indebtedness, including indebtedness under GAP's revolving credit facility with Meridian Commercial Bank, N.A., to the extent of the assets securing such indebtedness.
On or after the second anniversary of the issuance date, GAP may redeem some or all of the notes at specified redemption prices, plus accrued and unpaid interest. Prior to the second anniversary, GAP may redeem the notes at a make-whole price. Upon the occurrence of a change of control, GAP will be required to make an offer to purchase the notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon.
CUSIP (Reserved): 39572L AA 3 ISIN (Reserved): US39572LAA35
Investing in the notes involves a high degree of risk. See "Risk Factors" beginning on page [\_\_].
The notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws. The notes are being offered and sold only to qualified institutional buyers ("QIBs") in reliance on Rule 144A under the Securities Act. See "Notice to Investors."
Pinnacle Ratings Group, Inc. has provided an indicative (non-public) credit assessment of B+ (stable outlook) as of March 30, 2022. A formal rating has not been published and may not be assigned. See "Summary — Indicative Credit Assessment."
Ridgeline Securities LLC Sole Initial Purchaser
NOTICE TO INVESTORS / IMPORTANT NOTICES
This offering memorandum is confidential and has been prepared by Greenfield Agricultural Partners LLC solely for use by prospective qualified institutional buyers evaluating the purchase of the notes offered hereby. This offering memorandum may not be reproduced, redistributed, or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose, without the prior written consent of the Issuer and Ridgeline Securities LLC. Any recipient of this offering memorandum who purchases notes in the offering will be deemed to have agreed to the foregoing restrictions. Any unauthorized disclosure of the information contained herein is prohibited.
The notes have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdiction. The notes are being offered and sold solely to qualified institutional buyers (as defined in Rule 144A under the Securities Act) in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. The notes may be resold only pursuant to Rule 144A under the Securities Act to persons that the seller reasonably believes to be qualified institutional buyers. Prospective investors are hereby notified that the seller of the notes may be relying on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 144A.
No action has been taken to permit a public offering of the notes in any jurisdiction. The notes may not be offered or sold, directly or indirectly, except as permitted under the securities laws of each jurisdiction in which they are offered or sold. Persons into whose possession this offering memorandum comes are required by the Issuer and Ridgeline Securities LLC to inform themselves about and to observe any restrictions as to the offering of the notes and the distribution of this offering memorandum.
This offering memorandum does not constitute an offer to sell or the solicitation of an offer to buy the notes in any jurisdiction in which such offer, solicitation, or sale would be unlawful. Neither the delivery of this offering memorandum nor any sale of the notes hereunder shall, under any circumstances, create any implication that the information herein is correct as of any time subsequent to the date hereof, or that there has been no change in the affairs of the Issuer since the date hereof.
Prospective investors should rely only on the information contained in this offering memorandum. Neither the Issuer nor Ridgeline Securities LLC has authorized any other person to provide any information or to make any representation other than those contained in this offering memorandum. If given or made, such other information or representations must not be relied upon as having been authorized by the Issuer or Ridgeline Securities LLC. The information contained in this offering memorandum is as of the date set forth on the cover page hereof unless otherwise stated. The delivery of this offering memorandum at any time after the date hereof does not, under any circumstances, create any implication that the affairs of the Issuer have not changed since such date.
Forward-Looking Statements. This offering memorandum contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, but are not limited to, statements regarding the Issuer's expectations, projections, estimates, beliefs, intentions, and strategies for the future. These statements are generally identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will," "would," and similar expressions or their negatives. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties include, but are not limited to, those described under "Risk Factors" in this offering memorandum. The Issuer undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances arising after the date of this offering memorandum, whether as a result of new information, future events, or otherwise, except as required by applicable law. Prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.
Indicative Credit Assessment. Pinnacle Ratings Group, Inc. has communicated to the Issuer an indicative (non-public) credit assessment of B+ with a stable outlook as of March 30, 2022. This indicative assessment has not been published and does not constitute a formal credit rating. A formal credit rating may not be assigned. An indicative assessment is subject to change or withdrawal at any time without notice. Prospective investors should not rely upon the indicative credit assessment as a formal credit rating or as a recommendation to purchase, hold, or sell the notes.
No Representation by the Initial Purchaser. Ridgeline Securities LLC makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this offering memorandum. Nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation by Ridgeline Securities LLC. Ridgeline Securities LLC has not independently verified the information contained herein.
Industry and Market Data. Certain industry and market data included in this offering memorandum have been obtained from third-party publications, including industry trade journals, government agency publications, and independent market research reports, as well as the Issuer's internal data and management estimates. Although the Issuer believes that the data from third-party sources are reliable, neither the Issuer nor Ridgeline Securities LLC has independently verified any such data and makes no representation as to the accuracy or completeness of such information. The Issuer's internal data and management estimates have not been verified by any independent source.
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SUMMARY
The following summary highlights selected information contained elsewhere in this offering memorandum and does not contain all information that prospective investors should consider before investing in the notes. Prospective investors should read this entire offering memorandum carefully, including "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and related notes thereto included elsewhere in this offering memorandum. Unless the context requires otherwise, references to "GAP," the "Issuer," the "Company," "we," "us," or "our" refer to Greenfield Agricultural Partners LLC.
The Issuer
Greenfield Agricultural Partners LLC is an Iowa limited liability company (Iowa Secretary of State File No. 723841; EIN: 47-3918206) headquartered at 1420 Prairie Ridge Boulevard, Suite 300, Des Moines, Iowa 50309. GAP's registered agent is Capitol Filings, Inc., located at 400 E. Grand Avenue, Des Moines, Iowa 50309.
GAP is a manufacturer and distributor of specialty crop-protection chemicals, adjuvants, and bio-stimulants for row-crop agriculture across the U.S. Midwest. The Company's products serve corn, soybean, and wheat producers in Iowa, Illinois, Indiana, Minnesota, Nebraska, and surrounding states. GAP has built a leading regional position through an established brand, a broad product portfolio, and long-standing relationships with agricultural cooperatives and independent dealers.
For the fiscal year ended December 31, 2021, GAP generated revenue of approximately $189.4 million and Adjusted EBITDA of approximately $27.6 million. The Company's revenue and earnings growth reflect favorable trends in crop prices, increased adoption of specialty crop-protection and bio-stimulant products, and continued expansion of GAP's distribution network.
GAP is majority-owned by Tallgrass Capital Holdings LP, a Des Moines-based private equity sponsor focused on middle-market investments, which holds a 68.2% membership interest. The remaining 31.8% membership interest is held by members of the management team and legacy family interests. See "Principal Members / Ownership."
The Offering
The following is a summary of the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. For a more detailed description of the terms and conditions of the notes, see "Description of the Notes."
Use of Proceeds
We estimate that the net proceeds from this offering will be approximately $30,000,000 (assuming no placement discount), which we intend to apply as follows:
• Approximately $18,000,000 to refinance outstanding borrowings under GAP's existing $40,000,000 senior secured revolving credit facility with Meridian Commercial Bank, N.A. As of March 31, 2022, $18,000,000 was drawn under the Meridian revolving credit facility at an interest rate of SOFR + 325 basis points. The Meridian revolving credit facility matures on August 15, 2024 and is secured by substantially all of GAP's assets.
• Approximately $9,250,000 to fund capital expenditures for the construction of a new adjuvant blending and formulation facility at 3800 University Boulevard, Ames, Iowa 50010. The Ames facility is expected to increase GAP's blending capacity by approximately 40% and has an estimated construction timeline of 18 to 24 months.
• Approximately $2,000,000 for general corporate purposes and working capital needs, including the funding of seasonal raw material purchases and other day-to-day operational expenditures.
• Approximately $750,000 for estimated transaction fees and expenses, including legal fees, trustee acceptance fees, rating agency fees, printing costs, and other miscellaneous costs associated with this offering.
The foregoing represents our current intentions based upon our present plans and business conditions. The amounts and timing of our actual expenditures will depend on numerous factors, including the timing of construction at the Ames facility, working capital requirements, market conditions, and other factors. See "Use of Proceeds."
Registration Rights
In connection with this offering, we will enter into a registration rights agreement with Ridgeline Securities LLC on behalf of the holders of the notes. Pursuant to the registration rights agreement, we will be obligated to file an exchange offer registration statement with the Securities and Exchange Commission (the "SEC") within 180 days of the issuance date and to consummate the exchange offer within 270 days of the issuance date. If we fail to satisfy these obligations, the interest rate on the notes will increase by 0.25% per annum for the first 90-day period following such failure and by an additional 0.25% per annum for each subsequent 90-day period during which the failure continues, up to a maximum additional interest rate of 1.00% per annum, until the exchange offer is consummated or, if applicable, a shelf registration statement is declared effective by the SEC.
Summary Ownership
GAP's membership interests are owned as follows:
Tallgrass Capital Holdings LP is a Delaware limited partnership with its principal office at 2200 Financial Center Drive, Suite 1800, Des Moines, Iowa 50312. Tallgrass Capital GP LLC, a Delaware limited liability company, serves as the general partner of Tallgrass Capital Holdings LP. Nathan Cordero is the Managing Partner of Tallgrass, and Priya Venkatesh serves as Partner, Portfolio Operations. Tallgrass is a Des Moines-based private equity sponsor focused on middle-market investments in the agricultural, industrial, and business-services sectors.
The remaining 31.8% membership interest in GAP is held by members of the Company's management team and legacy family interests associated with the founding shareholders of the business.
For a more detailed description of GAP's ownership structure and related governance arrangements, see "Principal Members / Ownership."
Summary Financial Data
The following table sets forth summary financial data for GAP for the fiscal years ended December 31, 2019, 2020, and 2021. The financial data have been derived from the audited consolidated financial statements of GAP included elsewhere in this offering memorandum. Prospective investors should read the following summary financial data in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto included elsewhere in this offering memorandum.
Pro Forma Total Leverage. After giving pro forma effect to the issuance of the notes and the application of the net proceeds (including the refinancing of the $18.0 million balance on the Meridian revolving credit facility), pro forma total debt would be $30.0 million (consisting solely of the notes). Pro forma total leverage is calculated as $30,000,000 / $27,600,000 of FY 2021 EBITDA, or approximately 1.09×. On a pro forma basis, the Meridian revolving credit facility would be undrawn, with the full $40.0 million of availability remaining for future borrowings.
Indicative Credit Assessment
Pinnacle Ratings Group, Inc. has communicated to us an indicative (non-public) credit assessment of B+ (stable outlook) as of March 30, 2022. The indicative assessment is non-public and has not been published by Pinnacle Ratings Group. It should not be relied upon as a formal credit rating. A formal credit rating may not be assigned. The indicative assessment is subject to revision, suspension, or withdrawal at any time without notice. An indicative assessment is not a recommendation to buy, sell, or hold any of the notes. Prospective investors should perform their own evaluation of the notes and the creditworthiness of the Issuer.
RISK FACTORS
An investment in the notes involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information contained in this offering memorandum, including our financial statements and related notes, before making an investment decision. If any of the following risks actually occur, our business, financial condition, results of operations, or ability to service our indebtedness could be materially and adversely affected. In that event, the value of the notes could decline, and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations.
Risks Related to Our Business and Industry
Dependence on agricultural commodity markets. Demand for our crop-protection chemicals, adjuvants, and bio-stimulant products is directly and significantly tied to the planting decisions and production activities of row-crop farmers throughout the U.S. Midwest. Planting decisions, in turn, are heavily influenced by prevailing and expected commodity prices for corn, soybeans, wheat, and other crops, as well as government agricultural subsidy programs, export demand, and other macroeconomic and geopolitical factors. A prolonged decline in commodity prices could cause farmers to reduce their planted acreage, defer input purchases, or shift to lower-cost alternatives, any of which could materially reduce demand for our products and adversely affect our revenue and profitability. Commodity prices are inherently volatile and subject to factors beyond our control, including global supply and demand dynamics, weather conditions, currency fluctuations, trade policies, and government intervention. We cannot assure you that commodity prices will remain at levels supportive of the demand for our products.
Seasonality. Our business is highly seasonal. Revenue is concentrated in the spring planting season, which generally occurs during the first and second quarters of each fiscal year, corresponding to the period from approximately March through June. Working capital requirements fluctuate significantly throughout the year. We typically build inventory and purchase raw materials in advance of the planting season, resulting in substantial cash outlays during the first quarter that are not recovered through customer payments until the second and third quarters. This seasonal pattern requires us to maintain adequate liquidity, including borrowing capacity under the Meridian revolving credit facility, to fund working capital needs during the pre-planting period. Delays in the onset of the planting season due to wet or cold weather, or other disruptions that compress the planting window, could adversely affect our revenue and profitability for the entire fiscal year. In addition, the concentration of revenue in a relatively short time frame means that any disruption to our manufacturing, distribution, or logistics operations during the planting season could have a disproportionate impact on our financial results.
Regulatory and environmental risks. Our crop-protection chemical products are subject to extensive regulation by the U.S. Environmental Protection Agency ("EPA") under the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), as well as by state-level regulatory authorities. We are required to maintain EPA registrations for our products, which involve a rigorous review process, ongoing compliance obligations, and periodic re-registration requirements. Changes in federal or state pesticide regulations, including the adoption of more restrictive application requirements, the cancellation or non-renewal of active ingredient registrations, or the imposition of new labeling or data submission requirements, could adversely affect our ability to manufacture and sell certain products, increase our costs of compliance, or require us to reformulate products. We are also subject to environmental regulations under the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), and their state equivalents, which govern the treatment, storage, and disposal of hazardous and non-hazardous wastes generated in our manufacturing operations. Any failure to comply with applicable environmental or regulatory requirements could result in fines, penalties, product recalls, operating restrictions, or remediation obligations, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Raw material and supply chain risks. Our manufacturing operations depend on the procurement of certain key chemical inputs, including surfactants, solvents, emulsifiers, and active ingredient concentrates, from domestic and international suppliers. The prices of these raw materials are subject to volatility driven by changes in global supply and demand, petrochemical prices, currency exchange rates, transportation costs, and other factors. We do not maintain long-term fixed-price contracts for all of our raw material needs, and there can be no assurance that we will be able to pass on increases in raw material costs to our customers in a timely manner or at all. In addition, disruptions in the global supply chain, including transportation bottlenecks, port congestion, sanctions, trade restrictions, force majeure events, and the effects of the ongoing COVID-19 pandemic, could result in shortages, delivery delays, or increased costs for critical inputs. Any significant increase in raw material costs or disruption to our supply chain could adversely affect our margins, production volumes, and ability to fulfill customer orders.
Competition. The specialty agricultural chemical market is highly competitive. We compete with a number of larger, better-capitalized national and multinational chemical companies, as well as with regional and local competitors. Our larger competitors possess significantly greater financial, technical, marketing, and distribution resources than we do, and may be able to develop, register, and market new products more rapidly, withstand sustained periods of pricing pressure, and invest more heavily in research and development. Competition is based primarily on product efficacy, price, product availability, customer relationships, and technical support. Increased competitive pressure, including the introduction of new or improved products by competitors, aggressive pricing strategies, or the entry of new competitors into our markets, could cause us to lose market share, reduce our prices, or increase our marketing and distribution costs, any of which could adversely affect our business and results of operations.
Customer concentration. A significant portion of our revenue is derived from sales to a limited number of large agricultural cooperatives and regional distributors. For the fiscal year ended December 31, 2021, our ten largest customers accounted for approximately 55% of our total revenue, and our single largest customer accounted for approximately 12% of our total revenue. The loss of one or more of these significant customers, a material reduction in the volume of purchases by any such customer, or the failure of any such customer to pay amounts owed to us, could have a material adverse effect on our revenue and results of operations. In addition, our large customers generally have significant bargaining power, and we may face pressure to offer discounts, rebates, extended payment terms, or other concessions that could adversely affect our margins.
Ames facility construction risk. We intend to use approximately $9.25 million of the net proceeds from this offering to fund the construction of a new adjuvant blending and formulation facility at 3800 University Boulevard, Ames, Iowa 50010. The construction of the Ames facility is subject to a number of risks, including potential delays in obtaining required permits and regulatory approvals, labor and material shortages, adverse weather conditions, environmental remediation requirements, cost overruns, and other factors beyond our control. There can be no assurance that the Ames facility will be completed on schedule or within budget, that it will achieve the expected increase in blending capacity of approximately 40%, or that the additional capacity will be utilized at expected levels. If the construction of the Ames facility is delayed, costs more than anticipated, or does not achieve expected operational benefits, our business, financial condition, and results of operations could be adversely affected, and we may not realize the anticipated return on our investment.
Key personnel dependence. Our success depends in significant part on the continued service and contributions of our executive management team, including Marcus J. Reinhart, our Chief Executive Officer, Linda Shao-Perkins, our Chief Financial Officer, and Douglas Evanston, our General Counsel and Corporate Secretary. These individuals possess extensive industry experience, customer relationships, and institutional knowledge that would be difficult to replace on short notice. The loss of the services of any one or more of these key personnel, or our inability to attract, retain, and motivate qualified replacement personnel, could disrupt our operations, impair our customer relationships, and adversely affect our business and results of operations. We do not currently maintain key-man insurance on any of our executive officers.
Limited operating history as a stand-alone entity. GAP has operated under the ownership of Tallgrass Capital Holdings LP since Tallgrass's acquisition of the business. We have a limited track record of independent capital markets access, and this offering represents our first issuance of publicly placed debt securities. Our historical financial results may not be indicative of our future performance, and there can be no assurance that we will successfully manage our business as a stand-alone borrower in the capital markets. Our limited history of independent access to the debt markets may also limit our ability to access additional financing on favorable terms, or at all, in the future.
Climate and weather conditions. Demand for our products is inherently affected by climate and weather conditions in the U.S. Midwest. Extreme weather events, including drought, flooding, hailstorms, and unseasonably cold temperatures, can reduce planted acreage, damage growing crops, delay or shorten the planting season, and reduce the need for crop-protection inputs. The effects of climate change, including changes in precipitation patterns, increased frequency and severity of extreme weather events, and shifts in growing seasons, may further increase the uncertainty and variability of demand for our products. We cannot predict the timing, severity, or duration of adverse weather events or the long-term effects of climate change on agricultural production in the Midwest, and any such events or effects could adversely affect our business, financial condition, and results of operations.
Risks Related to Our Indebtedness and the Notes
Leverage and debt service. After giving pro forma effect to the issuance of the notes and the application of the net proceeds, our total indebtedness will be $30.0 million (consisting solely of the notes), and we will have $40.0 million of availability under the Meridian revolving credit facility (which, while drawn to zero at issuance, remains available for future borrowings). Our pro forma total leverage will be approximately 1.09× based on FY 2021 EBITDA of $27.6 million. Our ability to make scheduled interest payments on the notes and to repay the principal amount thereof at maturity will depend on our future financial performance, which is subject to a number of factors, many of which are beyond our control, including general economic and market conditions, agricultural commodity prices, weather conditions, regulatory developments, competitive dynamics, and other risks described herein. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional equity or debt financing, or restructure or refinance our indebtedness, including the notes. There can be no assurance that any of these alternatives would be available on satisfactory terms, or at all, or that they would be permitted under the terms of our indebtedness.
Senior unsecured status of the notes. The notes are senior unsecured obligations of the Issuer and are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing such indebtedness. The Meridian revolving credit facility is secured by a first-priority lien on substantially all of our assets, including accounts receivable, inventory, equipment, intellectual property, and other personal property. Although we intend to repay the $18.0 million currently drawn under the Meridian facility with a portion of the net proceeds of this offering, the $40.0 million revolving credit facility will remain in place and available for future borrowings. If we were to re-draw amounts under the Meridian facility and subsequently become the subject of a bankruptcy, liquidation, dissolution, or similar proceeding, the holders of the notes would be subordinated to the lenders under the Meridian facility to the extent of the assets securing such facility. In such a scenario, the remaining assets available to satisfy the claims of the noteholders could be significantly less than the total principal amount of the notes then outstanding.
Restrictive covenants. The indenture governing the notes will contain covenants that restrict our ability to engage in certain activities, including incurring additional indebtedness, making restricted payments (including dividends and distributions to our members), selling or disposing of assets, creating liens, entering into transactions with affiliates, and merging, consolidating, or selling all or substantially all of our assets. In addition, our existing credit agreement with Meridian Commercial Bank, N.A. contains financial maintenance covenants (including a maximum total leverage ratio and a minimum fixed charge coverage ratio) and negative covenants that further restrict our operational and financial flexibility. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. A breach of any of these covenants could result in a default under the applicable agreements, which could permit the lenders or noteholders to accelerate the maturity of the related indebtedness and, in the case of the Meridian facility, exercise remedies against the collateral securing such facility.
Change of control provisions. The indenture governing the notes will require us to make an offer to purchase all outstanding notes at 101% of the principal amount thereof, plus accrued and unpaid interest, upon the occurrence of a change of control triggering event. A change of control will be defined to include, among other events, the acquisition by a person or group (other than Tallgrass Capital Holdings LP and its affiliates) of more than 50% of the voting interests of GAP. If a change of control triggering event were to occur, we may not have sufficient funds to repurchase all tendered notes, particularly if the change of control also triggers acceleration of other indebtedness. In addition, the change of control provisions could deter potential acquirors from acquiring GAP or could make it more difficult or costly for Tallgrass to dispose of its interest in GAP, which could adversely affect the value of the membership interests and, indirectly, the value of the notes.
Floating rate risk on existing revolving credit facility. Although the notes bear interest at a fixed rate, the Meridian revolving credit facility bears interest at a floating rate of SOFR + 325 basis points. If the revolving credit facility is re-drawn after the issuance of the notes, we will have exposure to fluctuations in short-term interest rates. Increases in interest rates would increase the cost of borrowing under the revolving credit facility, which could reduce our cash flow available for debt service on the notes. We do not currently maintain interest rate hedging arrangements, and there can be no assurance that we will enter into such arrangements in the future.
Absence of a public market for the notes. The notes are being offered and sold to qualified institutional buyers in reliance on Rule 144A under the Securities Act. There is no existing public trading market for the notes, and we do not intend to apply for listing of the notes on any securities exchange. Ridgeline Securities LLC has advised us that it currently intends to make a market in the notes after this offering is completed; however, it is under no obligation to do so and may discontinue market-making activities at any time without notice. There can be no assurance that an active trading market for the notes will develop or, if one develops, that it will be maintained. If an active trading market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected. Noteholders may not be able to sell their notes at the price they paid for them or at a price equal to or above the face value of the notes.
Risks Related to the Offering
No registration under the Securities Act. The notes have not been and will not be registered under the Securities Act or the securities laws of any state or other jurisdiction. The notes are being offered and sold solely in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and may be resold only to qualified institutional buyers pursuant to Rule 144A. The lack of registration restricts the ability of holders to transfer the notes and may adversely affect the liquidity and market value of the notes. See "Notice to Investors / Transfer Restrictions."
Indicative rating only. The B+ (stable) indicative assessment from Pinnacle Ratings Group, Inc. is non-public and has not been formally published. There can be no assurance that a formal credit rating will be assigned or, if assigned, that it will be at the level of the indicative assessment. A downgrade, withdrawal, or failure to assign a formal rating could adversely affect the market value and liquidity of the notes. In addition, a credit rating or indicative assessment is not a recommendation to purchase, hold, or sell the notes and may be revised, suspended, or withdrawn at any time.
Limited information. GAP is not currently subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended. The information available to investors will be more limited than that available with respect to public companies that file annual, quarterly, and current reports with the SEC. Although GAP has agreed in the indenture and the registration rights agreement to furnish certain periodic financial information to noteholders and the trustee, including annual audited and quarterly unaudited financial statements, the scope and timeliness of such information will not be equivalent to the disclosure obligations applicable to public reporting companies. Prospective investors should be aware that they will have less information upon which to evaluate the ongoing creditworthiness of the Issuer and the value of the notes than would be available if the Issuer were a public reporting company.
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $30,000,000 (assuming the notes are sold at par and before deducting the placement fee payable to Ridgeline Securities LLC). We intend to use the net proceeds from this offering as follows:
Refinancing of Meridian Revolving Credit Facility. We intend to use approximately $18,000,000 of the net proceeds to repay the entire outstanding balance of GAP's existing senior secured revolving credit facility with Meridian Commercial Bank, N.A. The Meridian revolving credit facility has a total commitment of $40,000,000, of which $18,000,000 was drawn as of March 31, 2022. The facility bears interest at a floating rate equal to the Secured Overnight Financing Rate ("SOFR") plus 325 basis points and matures on August 15, 2024. The facility is secured by substantially all of GAP's assets, including accounts receivable, inventory, equipment, intellectual property, and other personal property. Meridian Commercial Bank, N.A. serves as the administrative agent under the credit agreement, with its principal office at 225 West Washington Street, Suite 3000, Chicago, Illinois 60606. After the application of the net proceeds to repay the outstanding balance, the full $40,000,000 commitment under the Meridian revolving credit facility will remain in place and available for future borrowings by GAP. We believe that maintaining access to the revolving credit facility is important for managing our seasonal working capital needs and providing financial flexibility.
Capital Expenditures — Ames Adjuvant Blending Facility. We intend to use approximately $9,250,000 of the net proceeds to fund the construction of a new adjuvant blending and formulation facility located at 3800 University Boulevard, Ames, Iowa 50010. The Ames facility is expected to significantly enhance GAP's manufacturing capabilities by increasing our adjuvant blending capacity by approximately 40%. We believe that the additional capacity is necessary to support growing customer demand for our adjuvant products and to improve manufacturing efficiency through the deployment of modern blending, storage, and formulation equipment. The estimated construction timeline for the Ames facility is 18 to 24 months from the commencement of construction, and we anticipate commencing construction activities during the third quarter of 2022, subject to the receipt of necessary permits and regulatory approvals. See "Risk Factors — Risks Related to Our Business and Industry — Ames facility construction risk."
General Corporate Purposes and Working Capital. We intend to use approximately $2,000,000 of the net proceeds for general corporate purposes and working capital. This may include the funding of seasonal raw material purchases in advance of the spring planting season, investment in research and development activities, enhancement of our distribution and logistics capabilities, and other day-to-day operational expenditures. We have not designated specific allocations for general corporate purposes, and the amounts and timing of such expenditures will be determined by management based on the Issuer's operational needs and strategic priorities.
Estimated Transaction Fees and Expenses. We estimate that the total transaction fees and expenses associated with this offering will be approximately $750,000. These expenses include legal fees payable to Calderwood & Harkness LLP (Issuer's counsel) and Pryor, Glendenning & Haas LLP (Initial Purchaser's counsel), the trustee acceptance fee payable to Heartland Trust Company, National Association, the fee payable to Pinnacle Ratings Group, Inc. for its indicative credit assessment, printing and production costs for this offering memorandum, and miscellaneous administrative and filing costs. These estimated transaction fees and expenses are separate from, and in addition to, the placement fee described below.
Placement Fee. In connection with this offering, GAP has agreed to pay Ridgeline Securities LLC a placement fee of 2.50% of the aggregate principal amount of the notes, which equals $750,000 on $30,000,000 of aggregate principal amount. The placement fee is payable by GAP to Ridgeline upon the closing of the offering and is separate from and in addition to the use of proceeds described above. Accordingly, GAP's total out-of-pocket cost in connection with the offering (including both the transaction fees and expenses and the placement fee) is estimated at approximately $1,500,000 in the aggregate.
CAPITALIZATION
The following table sets forth the capitalization of GAP as of March 31, 2022 (i) on an actual basis and (ii) on a pro forma basis, as adjusted to give effect to the issuance of the notes and the application of the net proceeds as described under "Use of Proceeds." This table should be read in conjunction with "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes thereto included elsewhere in this offering memorandum.
(1) Pro forma cash and cash equivalents reflects the receipt of $30,000,000 in net proceeds from the offering, the application of $18,000,000 to repay the Meridian revolving credit facility, the allocation of $9,250,000 for Ames facility capital expenditures (a portion of which will be funded over the 18–24 month construction timeline and is reflected as cash on hand pending deployment), the allocation of $2,000,000 for general corporate purposes and working capital, and the payment of approximately $750,000 in estimated transaction fees and expenses. Actual cash on hand at closing will depend on the timing of expenditures and other factors.
(2) The $40,000,000 Meridian revolving credit facility remains in place and available for future borrowings after the paydown. Total available capacity under the Meridian revolving credit facility after pro forma paydown: $40,000,000.
Pro Forma Leverage. After giving pro forma effect to the issuance of the notes and the application of the net proceeds as described herein, pro forma total debt would be $30,000,000 (consisting solely of the notes), and the Meridian revolving credit facility would be undrawn, with $40,000,000 of available capacity. Pro forma total leverage based on FY 2021 EBITDA of $27,600,000 would be approximately 1.09× ($30,000,000 / $27,600,000). The Company believes that this level of leverage is manageable in light of its cash flow generation and the availability of the Meridian revolving credit facility for seasonal working capital needs and other purposes.
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for GAP for the fiscal years ended December 31, 2019, 2020, and 2021. The selected financial data have been derived from the audited consolidated financial statements of GAP, which were prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and have been audited by Clarendon Harris & Co. LLP, independent auditors, 801 Grand Avenue, Suite 1200, Des Moines, Iowa 50309 (engagement partner: Martin Okafor). The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this offering memorandum.
Income Statement Data
Balance Sheet Data (as of period end)
Cash Flow Data
Other Financial Data
(1) EBITDA is a non-GAAP financial measure. We define EBITDA as net income before interest expense, income taxes (if applicable), depreciation, and amortization. EBITDA is not a measure of financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP or as an alternative to cash flows from operating activities as a measure of liquidity. We present EBITDA because we believe it is a useful supplemental measure of our operating performance and because it is frequently used by analysts, investors, and other interested parties in evaluating companies in our industry. Our computation of EBITDA may not be comparable to similarly titled measures presented by other companies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of Greenfield Agricultural Partners LLC should be read in conjunction with "Selected Financial Data" and the audited consolidated financial statements and related notes thereto included elsewhere in this offering memorandum. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" and elsewhere in this offering memorandum.
Overview
Greenfield Agricultural Partners LLC is a leading Midwest specialty agricultural chemicals company engaged in the manufacture and distribution of crop-protection chemicals, adjuvants, and bio-stimulants for row-crop agriculture. Our product portfolio serves corn, soybean, and wheat producers across the U.S. Midwest, including Iowa, Illinois, Indiana, Minnesota, Nebraska, and surrounding states. We distribute our products through a network of agricultural cooperatives, independent dealers, and direct sales relationships with large farming operations.
GAP is headquartered in Des Moines, Iowa, and operates manufacturing and blending facilities in the state. We are majority-owned (68.2%) by Tallgrass Capital Holdings LP, a Des Moines-based private equity sponsor, which acquired its interest in GAP in a leveraged buyout transaction. The remaining 31.8% membership interest is held by members of the management team and legacy family interests.
For the fiscal year ended December 31, 2021, we generated revenue of $189.4 million, representing an increase of 8.7% compared to $174.2 million in the prior year. EBITDA for FY 2021 was $27.6 million, representing an increase of 14.5% compared to $24.1 million in FY 2020. These results reflect the benefits of favorable agricultural market conditions, including strong crop commodity prices that supported robust planting activity and demand for crop-protection inputs, as well as our continued investment in product development and distribution capabilities.
Our key financial objectives include maintaining consistent revenue growth, expanding margins through operational efficiencies and product mix improvement, prudently managing our balance sheet and liquidity position, and investing in capacity expansion to support long-term growth. The planned construction of a new adjuvant blending facility in Ames, Iowa represents a significant strategic investment that we believe will enhance our manufacturing capabilities and competitive position. The issuance of the notes offered hereby will provide the capital necessary to refinance our existing revolving credit facility borrowings, fund the Ames facility, and support general corporate purposes.
Results of Operations — FY 2021 vs. FY 2020
Revenue. Revenue for the fiscal year ended December 31, 2021 was $189.4 million, an increase of $15.2 million, or 8.7%, compared to $174.2 million for the fiscal year ended December 31, 2020. The increase in revenue was driven by a combination of higher selling prices (reflecting pass-through of increased raw material costs and favorable pricing dynamics in the specialty crop-protection market), increased unit volumes (driven by strong planting activity across the Midwest due to elevated crop commodity prices), and a favorable shift in product mix toward higher-margin adjuvant and bio-stimulant products. Pricing increases contributed approximately $8.5 million of the year-over-year revenue growth, while volume growth contributed approximately $5.2 million and product mix improvements contributed approximately $1.5 million.
Cost of Goods Sold and Gross Profit. Cost of goods sold for FY 2021 was $134.6 million, an increase of $9.8 million, or 7.9%, compared to $124.8 million for FY 2020. The increase in cost of goods sold was primarily attributable to higher raw material costs, particularly for petrochemical-based surfactants and solvents, as well as increased production volumes. Gross profit for FY 2021 was $54.8 million, an increase of $5.4 million, or 10.9%, compared to $49.4 million for FY 2020. Gross margin improved to 28.9% in FY 2021 from 28.4% in FY 2020, reflecting our ability to pass through a significant portion of raw material cost increases to customers, combined with the favorable product mix shift toward higher-margin adjuvant and bio-stimulant products.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses for FY 2021 were $29.2 million, an increase of $1.9 million, or 7.0%, compared to $27.3 million for FY 2020. The increase in SG&A was driven primarily by higher compensation costs (including increased headcount in our sales and marketing organization to support distribution network expansion), increased travel and trade show expenses as in-person industry events resumed following COVID-19 restrictions, and higher professional services costs. As a percentage of revenue, SG&A expenses declined to 15.4% in FY 2021 from 15.7% in FY 2020, reflecting the leverage of our cost structure as revenues increased.
Operating Income and EBITDA. Operating income for FY 2021 was $25.6 million, an increase of $3.5 million, or 15.8%, compared to $22.1 million for FY 2020. EBITDA for FY 2021 was $27.6 million, an increase of $3.5 million, or 14.5%, compared to $24.1 million for FY 2020. EBITDA margin was 14.6% for FY 2021, compared to 13.8% for FY 2020, reflecting improved operating leverage and favorable product mix.
Interest Expense. Interest expense for FY 2021 was $1.1 million, a decrease of $0.3 million, or 21.4%, compared to $1.4 million for FY 2020. The decrease in interest expense was attributable to a lower average outstanding balance on the Meridian revolving credit facility during FY 2021 compared to FY 2020, partially offset by the impact of higher short-term interest rates on the facility's floating rate. As of December 31, 2021, the outstanding balance on the Meridian facility was approximately $18.0 million.
Net Income. Net income for FY 2021 was $24.5 million, an increase of $3.8 million, or 18.4%, compared to $20.7 million for FY 2020. The increase in net income was driven by the factors described above. As an Iowa limited liability company, GAP is generally treated as a pass-through entity for U.S. federal income tax purposes, and therefore does not pay entity-level federal income tax.
Results of Operations — FY 2020 vs. FY 2019
Revenue. Revenue for the fiscal year ended December 31, 2020 was $174.2 million, an increase of $11.4 million, or 7.0%, compared to $162.8 million for the fiscal year ended December 31, 2019. Revenue growth in FY 2020 was driven primarily by increased unit volumes, as strong corn and soybean prices supported above-average planting activity across our core Midwest markets. The growth in volumes was partially offset by modest pricing pressure on certain commodity-grade crop-protection products. The onset of the COVID-19 pandemic in the first quarter of 2020 had a limited direct impact on our operations, as agricultural input supply chains were generally categorized as essential services and continued to operate with minimal disruption. However, we experienced some delays in customer orders during the early weeks of the pandemic and incurred incremental costs to implement health and safety protocols at our manufacturing and distribution facilities.
Cost of Goods Sold and Gross Profit. Cost of goods sold for FY 2020 was $124.8 million, an increase of $7.6 million, or 6.5%, compared to $117.2 million for FY 2019. Gross profit for FY 2020 was $49.4 million, an increase of $3.8 million, or 8.3%, compared to $45.6 million for FY 2019. Gross margin improved slightly to 28.4% in FY 2020 from 28.0% in FY 2019, reflecting favorable raw material cost trends in the early part of the year and improved manufacturing efficiencies.
Selling, General and Administrative Expenses. SG&A expenses for FY 2020 were $27.3 million, an increase of $1.2 million, or 4.6%, compared to $26.1 million for FY 2019. The more modest increase in SG&A relative to revenue growth reflected reduced travel and entertainment costs and the deferral of certain discretionary spending in response to COVID-19 uncertainties, partially offset by increased compensation costs. As a percentage of revenue, SG&A expenses declined to 15.7% in FY 2020 from 16.0% in FY 2019.
Operating Income and EBITDA. Operating income for FY 2020 was $22.1 million, an increase of $2.6 million, or 13.3%, compared to $19.5 million for FY 2019. EBITDA for FY 2020 was $24.1 million, an increase of $2.6 million, or 12.1%, compared to $21.5 million for FY 2019.
Interest Expense. Interest expense for FY 2020 was $1.4 million, a decrease of $0.4 million compared to $1.8 million for FY 2019, reflecting a lower average outstanding balance on the Meridian revolving credit facility and the impact of declining short-term interest rates during 2020.
Net Income. Net income for FY 2020 was $20.7 million, an increase of $3.0 million, or 16.9%, compared to $17.7 million for FY 2019.
Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from operations and availability under our $40.0 million senior secured revolving credit facility with Meridian Commercial Bank, N.A. We believe that these sources, together with the proceeds of this offering, will be sufficient to fund our operations, capital expenditures, debt service obligations, and other liquidity needs for at least the next twelve months.
Cash Flows from Operations. For the fiscal year ended December 31, 2021, net cash provided by operating activities was $25.1 million, compared to $21.8 million for FY 2020 and $19.2 million for FY 2019. The year-over-year increase in FY 2021 was driven primarily by higher net income, partially offset by an increase in working capital requirements (reflecting higher accounts receivable and inventory levels driven by revenue growth and raw material cost increases).
Cash Flows from Investing Activities. For the fiscal year ended December 31, 2021, net cash used in investing activities was $4.5 million, compared to $3.8 million for FY 2020 and $3.2 million for FY 2019. Investing activities consisted primarily of capital expenditures for maintenance and improvement of manufacturing equipment, blending systems, and warehouse and distribution facilities. We expect investing activities to increase significantly in FY 2022 and FY 2023 as a result of the planned construction of the Ames adjuvant blending facility, which has an estimated cost of approximately $9.25 million.
Cash Flows from Financing Activities. For the fiscal year ended December 31, 2021, net cash used in financing activities was $18.5 million, compared to $16.2 million for FY 2020 and $14.5 million for FY 2019. Financing activities consisted primarily of net repayments on the Meridian revolving credit facility and distributions to members.
Meridian Revolving Credit Facility. As of March 31, 2022, we had $18.0 million outstanding under the Meridian revolving credit facility, bearing interest at SOFR + 325 basis points, and $22.0 million of undrawn availability. The facility matures on August 15, 2024 and is secured by substantially all of our assets. After giving pro forma effect to the refinancing of the outstanding balance with proceeds from this offering, the full $40.0 million commitment under the Meridian revolving credit facility will be available for future borrowings. We intend to continue to use the revolving credit facility as our primary tool for managing seasonal working capital fluctuations.
Working Capital Seasonality. Our business is characterized by significant seasonal working capital fluctuations. We typically experience substantial cash outlays during the first quarter of each fiscal year as we purchase raw materials and build inventory in advance of the spring planting season. Customer orders and shipments are concentrated in the second quarter, with collections occurring primarily in the second and third quarters. As a result, our net working capital requirements peak during the first quarter and decline during the latter part of the year. We manage these seasonal fluctuations through a combination of cash on hand and borrowings under the Meridian revolving credit facility.
Pro Forma Impact of the Offering. After giving pro forma effect to the offering, our total indebtedness will be $30.0 million (consisting solely of the notes), and the Meridian revolving credit facility will be undrawn, with the full $40.0 million of availability. We believe that the combination of fixed-rate senior unsecured notes and a revolving credit facility provides an appropriate capital structure for our business, with the notes providing stable long-term financing and the revolving credit facility providing flexible short-term liquidity.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition. We recognize revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. Revenue from the sale of crop-protection chemicals, adjuvants, and bio-stimulants is recognized when control of the products is transferred to the customer, which generally occurs upon shipment or delivery, depending on the terms of the applicable customer agreement. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods, net of discounts, rebates, and returns. We estimate variable consideration, including volume-based rebates and early-payment discounts, at the time of sale based on historical experience and current market conditions, and adjust revenue accordingly.
Inventory Valuation. Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out ("FIFO") basis. We regularly review our inventory levels relative to projected demand and market conditions, and record write-downs for slow-moving, obsolete, or