American Vanguard Corp: Form 10-Q for the period ended Jun 30, 2024

FORWARD-LOOKING STATEMENTS/RISK FACTORS:

The Company, from time-to-time, may discuss forward-looking statements including assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. In connection with the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important factors which, among other things, could cause the actual results and events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions contained in the entire Annual Report. Such factors include, but are not limited to: product demand and market acceptance risks; the effect of economic conditions; weather conditions; changes in regulatory policy; the impact of competitive products and pricing; changes in foreign exchange rates; product development and commercialization difficulties; capacity and supply constraints or difficulties; transformation initiatives and related expenses; availability of capital resources; general business regulations, including taxes and other risks as detailed from time-to-time in the Company’s reports and filings filed with the U.S. Securities and Exchange Commission (the “SEC”). It is not possible to foresee or identify all such factors. For more detailed information, refer to Item 3, Quantitative and Qualitative Disclosures about Market Risk, and Part II, Item 1A., Risk Factors, in this Quarterly Report on Form 10-Q.

Three Months Ended June 30, 2024 and 2023:

Overview of the Company’s Performance

Persistently low commodity prices coupled with high input costs and interest rates continue to place pressure on the global agricultural economy. 2024 will mark the second year of declining profitability for farm income, with government reports estimating farmer's income to be down more than 40% from the cyclical high of 2022. The just-in-time procurement approach that arose within the Company’s distribution channel in early 2023, impacted by high interest rates, has continued throughout the first half of 2024. It will take some time to work through the accumulated channel inventories (of both the Company’s and competitors’ products), and the timing of any meaningful adjustments to interest rates remains uncertain.

Against this backdrop, overall sales for the second quarter of 2024 declined by 3% compared to the second quarter of 2023. From a regional perspective, our domestic sales decreased by 2% and our international sales decreased by 5%. Just-in-time purchasing by some of our largest customers continues to drag sales performance, with flat performance across our insecticide product line. Our herbicide sales decreased by 30% compared to the year ago period in the face of generic pressure from non-specific herbicide products in multiple regions.

Inflationary pressures led to a higher cost of goods, which increased by about 1%, as compared to the same quarter of 2023. As a result of these factors, gross margins for the business decreased to 29% of net sales, as compared to 32% in the same period of 2023.

Operating expenses increased by 20% compared to the first quarter of 2023. Substantially all of this increase can be attributed to non-recurring charges of approximately $9,310 related to the transformation of the business.

Interest expense increased, based upon increased average borrowings and elevated interest rates. The Company’s borrowed debt rose in light of higher inventory levels and reduced sales, which yielded lower cash proceeds. Seasonally, working capital levels decrease in the latter half of the year.

The Company recorded an income tax benefit of $1,553, as compared to an income tax expense of $1,541 in the same period of last year.

These factors yielded a net loss of $11,721, or $(0.42) per share, compared to a loss of $1,053, or $(0.04) per share, in the prior year quarter. Without one-time nonrecurring charges of $9,310, the adjusted net loss would be $2,411 or $(0.09) per share. Further details on our financial performance are set forth below.

RESULTS OF OPERATIONS

Quarter Ended June 30, 2024 and 2023:

Our domestic crop business recorded net sales during the second quarter of 2024 that were 7% lower than those of the second quarter of 2023 ($52,289 as compared to $56,212). Our customers continue to focus on controlling inventory levels, as carrying costs for working capital remain elevated in the current interest rate environment.

The domestic granular insecticide category was up 3% compared to the same period of the prior year, led by Thimet (with sales driven by demand from peanut and sugar cane growers) partially offset by reduced sales of Aztec (due to conservative, off-season procurement practices by the distribution channel) and soil fumigants (in light of potato pricing trends).

Our domestic non-crop business posted a 13% increase in net sales in the second quarter 2024, as compared to the same period in the prior year ($19,011 in 2024 v. $16,878 in 2023). Sales of biologicals increased by 34%, as compared to the same period in 2023, driven by BotaniGard® and Mycotrol. Pest strip sales are also an area of strength for the company with sales up 22% compared to the year ago period. These sales were partially offset by lower Dibrom® mosquito adulticide sales, primarily related to a shift in timing of procurement by vector control regions.

Net sales of our international businesses declined by about 5% during the period ($56,909 in 2024 as compared to $59,700 in 2023). Herbicides sales had the largest negative impact on the quarter and were down 27% compared to the prior year, which are still feeling the effect of low-cost, generic alternatives. Regionally, Central America improved, yet it is still too early to determine if the supply of Asian low-cost generics has peaked. Brazil also showed improvement during the quarter, benefiting from less pressure from generics. Australia sales weakened, largely based upon currency.

On a consolidated basis, gross profit for the second quarter of 2024 decreased by 12% ($37,763 in 2024 as compared to $42,909 in 2023). The overall gross margin percentage ended at 29% in the second quarter of 2024, as compared to 32% in the second quarter of the prior year.

Operating expenses increased by $7,840 to $46,995 for the three-month period ended June 30, 2024, as compared to the same period in 2023. The changes in operating expenses by department are as follows:

• Selling expenses increased by $201 for the three months ended June 30, 2024, as compared with the same period of the prior year. This included increased costs associated with employees following a small acquisition in the second half of 2023, offset by lower travel and marketing expenses.
• Other general and administrative expenses decreased by $249 for the three months ended June 30, 2024, as compared to the same period of 2023, primarily driven by reductions in costs associated with stock compensation, travel, and potential credit losses.
• During the three-months ended June 30, 2023, the Company spent $541 in fees associated with its proxy activities. There were no similar expenses during the same three-month period this year.
• Amortization declined slightly during the three months ended June 30, 2024, as compared to the same period of the prior year, as the result of completely amortized assets.
• Legal reserves are contingencies related to certain labor and employment matters.
• Transformation costs related to the Company’s digital and structural transformation project amounted to $7,345. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized systems and processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services and identifying process improvements. The Company has engaged a third-party consulting firm to assist it in navigating the project to gain the maximum benefit at the earliest possible time. Severance costs relating to the Company’s former CEO, which were incurred in connection with the staffing and execution of the Company’s transformation initiatives, are included in the transformation costs.
• Research, product development costs and regulatory expenses decreased by $815 for the three months ended June 30, 2024, as compared to the same period of 2023. The main drivers were reductions in costs associated with regulatory and product development studies, and with the commercialization of our SIMPAS delivery system.

On April 1, 2020, the Company made a strategic investment in Clean Seed Inc., in the amount of $1,190. The Company recorded negative fair value adjustments in the amount of $125 and $55 during the three months ended June 30, 2024 and 2023, respectively.

Interest costs net of capitalized interest were $3,917 and $3,211 during the three-month period ended June 30, 2024 and 2023, respectively. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the three-month period ended June 30, 2024 was $214,107, as compared to $152,750 for the same period of the prior year. Our borrowings increased primarily as a result of higher inventory levels. As can be seen from the table, the effective bank interest rate on our revolving line of credit was 7.5% and 7.1% for the three-month periods ended June 30, 2024 and 2023, respectively.

Income tax benefit was $1,553. The effective income tax rate for the three months ended June 30, 2024, was computed based on the estimated effective tax rate for the full year which is approximately 39%, excluding discrete items and entities subject to full valuation allowances against related net deferred tax assets. The Company’s subsidiaries in Brazil incurred losses during the period. These losses did not result in any tax benefits as the Brazilian subsidiaries maintain full valuation allowances against their net deferred tax assets. With the inclusion of discrete items and entities subject to full valuation allowances against related net deferred tax assets, the Company’s overall effective tax rate for the second quarter was 11.7%. During the three months ended June 30, 2024, the Company gained a tax benefit from transformation costs incurred as part of evaluating the current business structure, which resulted in a decrease in the effective tax rate.

We generated a loss before provision for income taxes of $13,274 and income $488 for the three months ended June 30, 2024 and 2023, respectively. Our net loss (after income taxes) for the three-month period ended June 30, 2024, was $11,721 or ($0.42) per basic and diluted share, as compared to $1,053 or ($.04) per basic and diluted share in the same quarter of 2023.

Six Months Ended June 30, 2024 and 2023:

Overview of the Company’s Performance

Commodity prices have steadily trended lower in the first half of 2024, including corn and soybean prices, that have shown steady weakness since the beginning of the year. Wheat prices experienced a period of exuberance during the spring, but the downturn recommenced in June, and wheat prices finished the second quarter lower than where they started the year. Already elevated inventory levels, coupled with a strong dollar and the expectation of a strong crop this season have led most agricultural commodities to finish the second quarter at the lowest price levels of the year. With this backdrop, procurement practices remain conservative. In an effort to control working capital levels and the associated carrying costs, the distribution channel for crop products remains tight. Despite this market dynamic, the Company’s net sales improved, and gross profit was in line with the first six months of 2023.

On a consolidated basis, with domestic sales up 5% and international sales broadly in-line with the same period of last year, overall net sales increased by 3% ($263,352 in 2024 as compared to $257,674 in 2023) despite strong generic competition in certain products across several regions. Cost of sales increased by 4% on an absolute basis, driven by raw material price inflation and sales mix, partially offset by improved factory performance during the first half of 2024, as compared to the first half of 2023. These factors, taken together, yielded a gross profit that was in line with the same period of 2023 ($80,192 as compared to $81,444) and gross margin percentage slightly declined to 31% from 32% in the first half of 2023.

In the first half of 2024, operating expenses increased by approximately 12%, as compared to those of the prior year period. Expenses were higher due to one-time expenses made up of business transformation costs, primarily related to the organizational redesign, standardized systems implementation and severance expenses for the former CEO.

Interest expense increased significantly during the period due to increased working capital primarily driven by higher inventories. This has resulted in higher average borrowings, coupled with higher interest rates, resulting in significantly higher interest expense. The Company's income tax benefit during the six months ended June 30, 2024 was $69, as compared to an expense of $1,181 during the six months ended June 30, 2023.

The Company recorded a net loss of $10,169 or ($.36) per basic and diluted share, as compared to net income of $865 or $0.03 per basic and diluted share in the first half of the prior year. Without one-time nonrecurring charges of $10,462, the adjusted net income would be $293 or $0.01 per share. Details on our financial performance are set forth below.

RESULTS OF OPERATIONS

Six months ended June 30, 2024, and 2023

Our domestic crop business recorded net sales that were 1% above those of first half of 2023 ($119,542 as compared to $118,105 in 2023). Herbicide sales were up 13% for the first half of the year, with the first quarter being particularly strong. Granular soil insecticides were up 2% in the first half of the year, led by Thimet sales, partially offset by lower Aztec sales.

Our domestic non-crop business recorded a 20% increase in net sales for the first half of the year (to $36,787 from $30,759). Biologicals continue to be an area of strength in the non-crop segment, with BotaniGard® and Mycotrol® gaining market share in the pest control area focused on aphids, thrips and whiteflies. Through the first half of the year, Naled sales were up 5%. The season’s first storm, Beryl, came at the beginning of the storm season, slightly altering buying patterns for this mosquito adulticide.

Net sales of our international businesses were broadly comparable during the first half of 2024, as compared to the same period of the 2023 ($107,023 versus $108,810 in 2023). Central American sales increased by 5% during the first half of the year, driven by strong granular soil insecticide sales. Brazilian sales were up by 24% as the company appears to be gaining market share, while Asian Pacific sales were down nearly 2% due to a strong US Dollar, and Canadian sales were also down 2%. Herbicides sales were the offset to strength in some of the regions with first half sales off 12% as compared to the same period of the prior year as generic, non-specific herbicides continue to drag profitability in that product market.

On a consolidated basis, gross profit for the six months of 2024 was flat at $80,181, as compared to $81,444 last year. Gross margin performance in 2024 decreased to 30% from 32% compared to the first half of 2023.

Operating expenses increased by $8,899 to $83,322 for the six-month period ended June 30, 2024, as compared to the same period in 2023. The changes in operating expenses by department are as follows:

• Selling expenses decreased by $290 to end at $26,281 for the six-month period ended June 30, 2024, as compared to the same period of 2023. The main drivers were increased costs associated with acquisition related additional headcount, offset by lower travel and marketing costs.
• Other general and administrative expenses increased by $3,396 to end at $25,715 for the six-month period ended June 30, 2024, as compared to the same period of 2023. The main drivers were additional audit and tax advisory services, increased other outside services and changes in transactional foreign exchange gains/losses.
• During the six-months ended June 30, 2023, the Company spent $541 in fees associated with Proxy activities. There were no similar expenses during the same six-month period this year.
• Amortization declined slightly during the six months ended June 30, 2024, as compared to the same period of the prior year, as the result of completely amortized assets.
• Legal reserves are contingencies related to certain labor and employment matters.
• Transformation costs related to the Company’s digital and structural transformation project amounted to $10,462. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized systems and processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services and identifying process improvements. The Company has engaged a third-party consulting firm to assist it in navigating the project to gain the maximum benefit at the earliest possible time. Severance costs relating to the Company’s former CEO, which were incurred in connection with the staffing and execution of the Company’s transformation initiatives, are included in the transformation costs.
• Research, product development costs and regulatory expenses decreased by $3,978 to end at $14,305 for the six-month period ended June 30, 2024, as compared to the same period of 2023. The costs were reduced by a data compensation settlement and by lower spending associated with related to the commercialization of our SIMPAS proprietary delivery systems.

During the six-month period ended June 30, 2024, the Company recorded an increase in the fair value of our equity investment in Clean Seed in the amount of $513, as compared to a decrease of $77 during the six months ended June 30, 2023. These changes in fair value of our investment directly reflect changes in the stock’s quoted market price.

Interest costs net of capitalized interest were $7,610 in the first six-month period of 2024, as compared to $4,898 in the same period of 2023. Interest costs are summarized in the following table:

Average Indebtedness and Interest expense

The Company’s average overall debt for the six-month period ended June 30, 2024, was $195,375, as compared to $123,248 for the same period of the prior year. Our borrowings increased as a result of higher inventory levels. As can be seen from the table above, our effective bank interest rate on our revolving line of credit was 7.9% for the six months ended June 30, 2024, as compared to 6.9% in 2023.

Income tax benefit was $69 for the six months ended June 30, 2024, as compared to an income tax expense of $1,181 for the six-months ended June 30, 2023. The effective income tax rate for the six months ended June 30, 2024, was computed based on the estimated effective tax rate for the full year which is approximately 39%, excluding discrete items and entities subject to full valuation allowances against related net deferred tax assets. The Company’s subsidiaries in Brazil incurred losses during the period. These losses did not result in any tax benefits as the Brazilian subsidiaries maintain full valuation allowances against their net deferred tax assets. With the inclusion of discrete items and entities subject to full valuation allowances against related net deferred tax assets, the Company’s overall effective tax rate for the six months ended June 30, 2024 was 0.7%. During the six months ended June 30, 2024, the Company gained a tax benefit from transformation costs incurred as part of evaluating the current business structure and beginning to develop options for alternative, more efficient, operating structures and the result was a decrease in the effective tax rate.

We incurred a loss before provision before income taxes of $10,238 for the six months ended June 30, 2024, as compared to income before taxes of $2,046 for the six months ended June 30, 2023. Our net loss (after income taxes) for the six-month period ended June 30, 2024 was $10,169 or ($0.36) per basic and diluted share, as compared to income of $865 or $0.03 per basic and per diluted share in the same period of 2023. Without one-time, nonrecurring charges of $10,462, the adjusted net income would be $293 or $0.01 per share.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s operating activities utilized net cash of $56,452 during the six-month period ended June 30, 2024, as compared to $96,602 during the six months ended June 30, 2023. Included in the $56,452 are net loss of $10,169, plus non-cash depreciation, amortization of intangibles and other assets and discounted future liabilities, in the amount of $11,093, and provision for bad debts in the amount of $883, change in deferred income taxes of $276 and changes in liabilities for uncertain tax positions or unrecognized tax benefits of $71. Also included are stock-based compensation of $2,752, change in fair value of an equity investment of $513, and net foreign currency adjustments of $376. These together provided net cash inflows of $3,932, as compared to $15,670 for the same period of 2023.

During the six-month period of 2024, the Company increased working capital by $49,375, as compared to an increase of $110,845 during the same period of the prior year. Included in this change: inventories increased by $25,962, as compared to $50,900 for the same period of 2023. While increases in inventories are normal for the Company’s annual cycle, this year the Company has seen distinct changes in buying patterns across its global markets as customers are pushing back purchase close to time of use as they manage working capital and interest expense. In response the Company has worked hard to hold inventory levels down including holding down manufacturing output.

Customer prepayments decreased by $53,468, as compared to $83,225 in the same period of 2023, driven by customer decisions regarding the amount of prepayments they made during the final quarter of 2023, and by purchase orders received from those customers during the first two quarters and the product mix and payment terms on those purchase orders. Our accounts payable balances increased by $29,776, as compared to $9,105 in the same period of 2023, reflecting both the timing and terms of the related purchase orders. Accounts receivables increased by $13,498, as compared to a decrease of $6,092 in the same period of 2023. This is primarily driven by the amount of customers prepayments (which reduced), and the timing of customer demand and the geographic location for the sales. Prepaid expenses increased by $3,078, as compared to $1,749 in the same period of 2023. Income tax receivable changed by $7,129 as compared to $3,510 in the prior year. Accrued programs increased by $18,209, as compared to $19,607 in the prior year, driven by changes in mix of sales (products attract different program arrangements) and lower sales in our US Crop business (which is the main driver from programs). Finally, other payables and accrued expenses decreased by $1,665, as compared to an increase of $7,824 in the prior year.

Accrued program costs are recorded in line with the growing season upon which specific products are targeted. Typically crop products have a growing season that ends on September 30th of each year. During the first six months of 2024, the Company made accruals for programs in the amount of $44,633 and payments in the amount of $26,615, resulting in a net increase in accrued program costs of $18,018. During the first six months of the prior year, the Company made accruals in the amount of $44,714 and made payments in the amount of $25,124, resulting in a net increase of accrued program costs of $19,607. The accruals for programs in the first six months of 2024 remains flat, as compared to prior year.

Cash used for investing activities for the six-month period ended June 30, 2024, and 2023 was $6,398 and $7,172, respectively. In 2024, the Company spent $4,944 on purchases of fixed assets primarily focused on continuing to invest in manufacturing infrastructure, as compared to $6,498 for the same period of prior year. The Company made a payment of $1,529 for a product acquisition. In addition, the Company received proceeds from disposal of property, plant and equipment in the amount of $755, as compared to $44 in the prior year.

During the six months ended June 30, 2024, financing activities provided $70,285, as compared to $98,086 during the same period of the prior year. Net borrowings under the Credit Agreement amounted to $72,354 during the six-month period ended June 30, 2023, as compared to $108,450 in the same period of the prior year. The Company paid dividends to stockholders amounting to $1,670 during the six months ended June 30, 2024, as compared to $1,702 in the same period of 2023. During the six-month period ended June 30, 2023, the Company paid $7,226 for the repurchase of 408,201 shares of its common stock. The Company did not repurchase shares during the six-month period ending June 30, 2024. The Company received $430 for the issuance of ESPP shares and exercise of stock options for the six months ended June 30, 2024, as compared to $512 for the same period in prior year. Lastly, in exchange for shares of common stock returned by employees, the Company paid $829 and $1,948 for tax withholding on stock-based compensation awards during the six months ended June 30, 2024 and 2023, respectively.

The Company has a revolving line of credit that is shown as long-term debt in the condensed consolidated balance sheets at June 30, 2024 and December 31, 2023. These are summarized in the following table:

As of June 30, 2024, by virtue of Amendment Number Seven to the Third Amended Loan and Security Agreement, the Company is deemed to be in compliance with its financial covenants.

At June 30, 2024, according to the terms of the Credit Agreement, as amended, and based on our performance against the most restrictive covenant listed above, the Company had the capacity to increase its borrowings by up to $21,245, compared to $115,002 as of December 31, 2023.

We believe that anticipated cash flow from operations, existing cash balances and available borrowings under our amended senior credit facility will be sufficient to provide us with liquidity necessary to fund our working capital and cash requirements for the next twelve months.

RECENTLY ISSUED ACCOUNTING GUIDANCE

Please refer to Note 13 in the accompanying notes to the condensed consolidated financial statements for recently issued accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company continually re-assesses the critical accounting policies used in preparing its financial statements. In the Company’s Form 10-K filed with the SEC for the year ended December 31, 2023, the Company provided a comprehensive statement of critical accounting policies. These policies have been reviewed in detail as part of the preparation work for this Form 10-Q. After our review of these matters, we have determined that, during the subject reporting period, except to the extent stated below, there has been no material change to the critical accounting policies that are listed in the Company’s Form 10-K for the year ended December 31, 2023.

Certain of the Company’s policies require the application of judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on historical experience, terms of existing contracts, commonly accepted industry practices and other assumptions that the Company believes are reasonable under the circumstances. These estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the condensed consolidated financial statements in the period that revisions are determined to be necessary. Actual results may differ from these estimates under different outcomes or conditions.

***Goodwill—***The Company reviews goodwill for impairment utilizing either a qualitative or quantitative assessment. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs a quantitative assessment, the Company compares the fair value of a reporting unit with its carrying value and recognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. The Company annually tests goodwill for impairment at the beginning of the fourth quarter, or earlier if triggering events occur. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in estimates and assumptions regarding revenue growth rates, gross margins, expenses, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, and synergies available to market participants. As of October 1, 2023, the Company conducted its annual impairment test by quantitatively testing goodwill assigned to its domestic and international reporting units. Based on the results of the quantitative test, the Company concluded that the fair value of both the domestic and international reporting units exceed their respective carrying value by 18% and 9%, respectively.

On April 9, 2024, out of an abundance of caution, the Company voluntarily suspended sales of Dacthal pending review and potential approval of a significantly narrower label submitted to the USEPA (refer to Note 12 to the condensed consolidated financial statements for further details). The Company performed an interim test for goodwill impairment in April 2024, conservatively excluding all Dacthal sales from its projected net sales. Based on the results of this quantitative test, the Company concluded that the fair value of both the domestic and international reporting units still exceed their respective carrying value by 11% and 6%, respectively.

The carrying value of both reporting units is mainly sensitive to discount rates, the projected net sales growth rates, gross margin improvements, and terminal growth rates. Negative deviations from the Company’s projections and assumptions used in its quantitative impairment test may result in an impairment. As of June 30, 2024, goodwill related to the domestic and international reporting units amounted to $9,132 and $39,746, respectively.

The Company is exposed to market risk related to changes in interest rates, primarily from its borrowing activities. The Company’s indebtedness to its primary lender is evidenced by a line of credit with a variable rate of interest, which fluctuates with changes in the lender’s reference rate. For more information, please refer to the applicable disclosures in the Company’s Form 10-K filed with the SEC for the year ended December 31, 2023.

The Company faces market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency as to foreign subsidiaries’ revenues, expenses, assets and liabilities. The Company currently does not engage in hedging activities with respect to such exchange rate risks.

Assets and liabilities outside the U.S. are located in regions where the Company has subsidiaries or joint ventures: Central America, South America, North America, Europe, Asia, and Australia. The Company’s investments in foreign subsidiaries and joint ventures with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments.

As of June 30, 2024, the Company has a comprehensive set of disclosure controls and procedures designed to ensure that all information required to be disclosed in our filings under the Securities Exchange Act (1934) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of June 30, 2024, the Company’s management, including the Company’s Acting Chief Executive Officer and Chief Financial Officer, has concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective to provide reasonable assurance of the achievement of the objectives described above.

There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

The Company was not required to report any matters or changes for any items of Part II except as disclosed below.

The Company continually re-assesses the business risks, and as part of that process detailed a range of risk factors in the disclosures in American Vanguard’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 27, 2024. The following disclosure amends and supplements those risk factors and, except to the extent stated below, there are no material changes to the risk factors as so stated.

Public statements made by USEPA regarding their preliminary findings in connection with the registration review of the Company’s products could adversely affect product sales and/or commercial viability. Registrations for the Company’s products are subject to registration review by the USEPA from time to time. In the course of the review, the Company submits, and the USEPA reviews, data studies. At any stage in the course of the review, USEPA may reach preliminary findings that could impair the commercial viability of a product. For example, in connection with USEPA’s review of the DCPA registration, based upon a comparative thyroid assay study (which is comparatively rare and quite complex), based upon limited data points, the USEPA found an adverse effect upon neonate rodents. Consequently, in June 2024, the agency published preliminary findings, noting its concern that based upon current, permitted use patterns, the product could have an adverse effect upon human health and, in particular, pregnant women. At the same time, the agency invited the Company to examine mitigation measures to allay their concerns, which the Company is doing. On August 6, 2024, the agency issued an emergency suspension of DCPA products, which prohibits their distribution, sale and use. There is no guarantee that the DCPA registrations will not be cancelled. Regulatory activities of this nature, whether in connection with DCPA or other products of significance, could have a material adverse effect upon the Company’s financial performance.

The Company’s transformation initiatives may not generate the full benefit of targeted efficiencies. During the final quarter of 2023 and the first two quarters of 2024, the Company has invested in activities intended to transform both its digital platform (including business processes) and its business structures (ranging from organizational change to procurement) in the interest of achieving greater efficiencies and improving operating leverage. While the Company continues to pursue these initiatives and is taking all available measures to ensure success, there is no guarantee that these measures will yield the targeted results that the Company, working with its business consultants, has identified, or that the return on these initiatives will exceed the investment.

The carrying value of certain assets on the Company’s consolidated balance sheets may be subject to impairment depending upon market trends and other factors. The Company regularly reviews the carrying value of certain assets, including long-lived assets, inventory, fixed assets and intangibles. Depending upon the class of assets in question, the Company takes into account various factors including, among others, sales trends, market conditions, cash flows, profit margins and the like. Based upon this analysis, where circumstances warrant the Company may leave such carrying values unchanged or adjust them as appropriate. There is no guarantee that these carrying values can be maintained indefinitely, and it is possible that one or more such assets could be subject to impairment, particularly when, as now, the Company is engaged in transformational activity that may engender decisions to shift its emphasis with respect to products, markets or other business considerations. Such impairment could have a material adverse effect upon the Company’s financial reporting in future periods