Item 1.01 Entry into a Material Definitive Agreement.
Equity Purchase Agreement
On December 16, 2021, DMC Global Inc., a Delaware corporation (the “Company”), entered into an equity purchase agreement (the “Equity Purchase Agreement”) with Arcadia, Inc., a California corporation, the current shareholders of Arcadia, Inc. and certain other parties (the “Equity Purchase Agreement”). Pursuant to the Equity Purchase Agreement, and subject to the terms and conditions thereof, the Company, directly and through its wholly-owned subsidiary, DMC Korea, Inc., a Colorado corporation (“DMC Korea”), has agreed to acquire (the “Acquisition”) 60% of the membership interests (the “Purchased Interests”) of Arcadia Products, LLC, a Colorado limited liability company resulting from the conversion of Arcadia, Inc. following a tax reorganization (collectively, “Arcadia”). The consideration for the Purchased Interests is $282.5 million and consists of (a) cash of approximately $262.0 million and (b) approximately $20.5 million in shares (the “Stock Consideration”) of the Company’s common stock, par value $0.05 per share (the “Common Stock”), subject to certain adjustments for working capital, cash and indebtedness, among other items (the “Closing Cash Consideration”).
The Equity Purchase Agreement contains various representations, warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Equity Purchase Agreement and the closing of the Acquisition, Arcadia has agreed, among other things, to cause Arcadia and each of its subsidiaries to operate their businesses in the ordinary course of business and not to engage in specified types of transactions. The shareholders of Arcadia have agreed, following the closing of the Acquisition, to indemnify the Company for certain specified matters and for certain breaches of representations, warranties and covenants, subject to limitations set forth in the Equity Purchase Agreement. The closing of the Acquisition is subject to certain customary conditions, including conditions that relate to the accuracy of the parties’ representations and warranties and their compliance with covenants. The Company’s obligation to close is not subject to its ability to obtain sufficient financing to pay the Closing Cash Consideration. The Company expects to pay such consideration using cash on hand and the proceeds of a secured credit agreement that it is currently in the process of negotiating (the “Credit Facility”). The Equity Purchase Agreement also contemplates that the Company will, following the closing of the Acquisition, grant approximately $2.6 million in restricted stock to key employees of Arcadia under the Company’s 2016 Omnibus Incentive Plan.
The Equity Purchase Agreement may be terminated in certain circumstances, including but not limited to: (a) by mutual written consent of the Company and the representative of Arcadia’s shareholders (the “Shareholders’ Representative”), (b) by the Shareholders’ Representative or the Company if any governmental authority issues a final, non-appealable order permanently enjoining or prohibiting the closing of the Acquisition, (c) by written notice to the Shareholders’ Representative from the Company, or to the Company from the Shareholders’ Representative, in the event of certain breaches of representations and warranties or (d) if the closing of the Acquisition does not occur on or before December 31, 2021.
Operating Agreement
Following the closing of the Acquisition, the Company (through its direct ownership and indirect ownership through DMC Korea) will own 60% of Arcadia and the remaining 40% will be owned by New Arcadia Holdings, Inc., which is wholly-owned by Synergex Group LLC, Trustee of the Munera Family ESBT, currently the majority owner of Arcadia, Inc. (“Munera”). Arcadia will be governed by an Operating Agreement to be entered into at the closing of the Acquisition by the Company, Arcadia and Munera (the “Operating Agreement”). Pursuant to the Operating Agreement, the Company will have the right to appoint four directors to Arcadia’s board of directors (the “Board”), one of whom will serve as Chairman of the Board, and Munera will have the right to appoint three directors. If Munera’s ownership in Arcadia declines, the number of directors it has the right to appoint will be reduced in the manner set forth in the Operating Agreement. James Schladen, currently the CEO of Arcadia, Inc., will serve as President of Arcadia and will be a Company-appointee to the Board. The Board will generally act by majority vote of the directors, but certain matters specified in the Operating Agreement will require the affirmative vote of 80% of the directors.
At any time at or after the third anniversary of the effective date of the Operating Agreement, Munera shall have the right (but not the obligation) to require the Company to purchase (the “Put Right”) its interests in Arcadia for a price based on the higher of (a) a value based on the Acquisition purchase price and (b) a multiple of Arcadia’s average EBITDA for the preceding two fiscal years and its projected EBITDA for the then-current fiscal year (the “Option Purchase Price”), and the Company shall have the right (but not the obligation) to purchase all of Munera’s interests for the same price (the “Call Right”). If the Put Right is exercised, the Option Purchase Price will be paid, at DMC’s option, (i) in cash or (ii) 20% in cash and 80% in shares of preferred stock. If the Company, exercises the Call Right, the Option Purchase Price will be paid in cash.
Schladen Employment Agreement
In connection with the Acquisition, Arcadia will enter into an employment agreement (the “Employment Agreement”) with Mr. Schladen, pursuant to which he will serve as President of Arcadia for an initial term of three years, subject to earlier termination. Mr. Schladen will receive an annual base salary of $550,000 and will be eligible to earn a performance-based annual cash bonus under the Company’s annual incentive plan, with a target award equal to 100% of base salary. He will also be eligible to receive long-term equity incentive grants under the Company’s 2016 Omnibus Incentive Plan, with the value of such grants targeted at two times his base salary. Additionally, Mr. Schladen will enter into a restrictive covenant agreement (the “Restrictive Covenant Agreement”) pursuant to which, among other things, he will agree not to compete with Arcadia for a specified period.
Promissory Note
In order to equalize after-tax consideration to Munera relative to an alternative transaction structure, immediately following the closing of the Acquisition, the Company will loan approximately $24.9 million to Munera. The loan will be evidenced by an unsecured promissory note from Munera (the “Promissory Note”). The loan evidenced by the Promissory Note will be repaid out of proceeds from the sale of Munera’s interests in Arcadia, whether received upon exercise of the Put Right, the Call Right or upon sales to third parties permitted under the terms of the Operating Agreement and must be repaid in full by December 16, 2051.
General
The representations, warranties and covenants contained in the Equity Purchase Agreement were made solely for purposes of the agreement and as of specific dates, were solely for the benefit of the parties to the agreement, may be subject to limitations agreed upon by the contracting parties, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to security holders. Security holders are not third-party beneficiaries under the agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or Arcadia. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.
The Acquisition is expected to close in late December 2021, subject to customary conditions precedent to the completion of the Acquisition being met.
The foregoing description of the Equity Purchase Agreement and the exhibits thereto, including the form of Operating Agreement, Employment Agreement and Restrictive Covenant Agreement is not complete and is qualified in its entirety by the full text of the Equity Purchase Agreement, including such exhibits, which is filed as Exhibit 10.1 to this Current Report on Form 8-K and incorporated herein by reference.