AgroFresh Solutions, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36316

AgroFresh Solutions, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware			46-4007249
(State or other jurisdiction of incorporation)			(IRS Employer Identification Number)

One Washington Square

510-530 Walnut Street, Suite 1350

Philadelphia, PA 19106

(Address of principal executive offices)

(267) 317-9139

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AGFS

The Nasdaq Stock Market LLC

Warrants, each warrant exercisable for one share of Common Stock at an exercise price of $11.50

AGFSW

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ¨

Smaller reporting company ☒

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). ☐ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of common stock outstanding as of October 25, 2019 was 50,957,878.

Table of Contents

TABLE OF CONTENTS


				Page
PART I - FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Comprehensive Loss	5
		Condensed Consolidated Statement of Stockholders' Equity	6
		Condensed Consolidated Statement of Cash Flows	7
		Notes to Unaudited Condensed Consolidated Financial Statements	8
	Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations			23
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
	Item 4. Controls and Procedures			33
PART II - OTHER INFORMATION					34
	Item 1. Legal Proceedings			34
	Item 1A. Risk Factors			34
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
	Item 3. Defaults Upon Senior Securities			35
	Item 4. Mine Safety and Disclosures			35
	Item 5. Other Information			35
	Item 6. Exhibits			36
SIGNATURES					37

Table of Contents

PART I - FINANCIAL INFORMATION

AgroFresh Solutions, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)


	September 30, 2019		December 31, 2018

ASSETS
Current Assets:
Cash and cash equivalents	$	18,746	$	34,852
Accounts receivable, net of allowance for doubtful accounts of $2,358 and $2,336, respectively	72,074		67,942
Inventories	24,199		24,807
Other current assets	14,648		15,608
Total Current Assets	129,667		143,209
Property and equipment, net	13,643		13,289
Goodwill	6,091		6,670
Intangible assets, net	676,938		711,967
Deferred income tax assets	10,095		7,332
Other assets	22,492		16,820
TOTAL ASSETS	$	858,926	$	899,287

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	10,257	$	7,530
Current portion of long-term debt	4,748		6,419
Income taxes payable	4,374		4,815
Accrued expenses and other current liabilities	41,397		45,340
Total Current Liabilities	60,776		64,104
Long-term debt	398,619		400,309
Other noncurrent liabilities	40,733		32,066
Deferred income tax liabilities	17,555		30,232
Total liabilities	517,683		526,711

Commitments and contingencies (see Note 19)
Stockholders’ Equity:
Common stock, par value $0.0001, 400,000,000 shares authorized, 51,592,959 and 51,071,573 shares issued and 50,931,578 and 50,410,192 outstanding at September 30, 2019 and December 31, 2018, respectively	5		5
Preferred stock; par value $0.0001, 1 share authorized and outstanding	—		—
Treasury stock; par value $0.0001, 661,381 shares at September 30, 2019 and December 31, 2018, respectively	(3,885)		(3,885)
Additional paid-in capital	538,075		535,819
Accumulated deficit	(170,388)		(138,789)
Accumulated other comprehensive loss	(30,491)		(28,837)
Total AgroFresh Stockholders’ Equity	333,316		364,313
Non-controlling interest	7,927		8,263
Total Stockholders' Equity	341,243		372,576
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	858,926	$	899,287

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AgroFresh Solutions, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)


	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Net sales	$	48,972	$	68,698	$	109,095	$	125,470
Cost of sales (excluding amortization, shown separately below)	13,892		16,662		31,516		32,910
Gross profit	35,080		52,036		77,579		92,560
Research and development expenses	2,566		3,491		9,720		10,293
Selling, general, and administrative expenses	14,998		18,212		47,044		50,133
Amortization of intangibles	11,754		12,002		35,136		34,342
Impairment of long lived assets	—		—		992		—
Change in fair value of contingent consideration	(229)		307		128		543
Operating income (loss)	5,991		18,024		(15,441)		(2,751)
Other (expense) income	(81)		(189)		(119)		419
Gain (loss) on foreign currency exchange	54		(4,731)		(2,884)		472
Interest expense, net	(8,606)		(9,132)		(26,021)		(26,250)
(Loss) income before income taxes	(2,642)		3,972		(44,465)		(28,110)
Income taxes (benefit) expense	(5,653)		1,018		(12,530)		214
Net income (loss) including non-controlling interests	$	3,011	$	2,954	(31,935)		(28,324)
Less: Net loss attributable to non-controlling interests	(278)		(516)		(336)		(442)
Net income (loss) attributable to AgroFresh Solutions, Inc	$	3,289	$	3,470	(31,599)		(27,882)

Net income (loss) per share:
Basic	$	0.06	$	0.06	$	(0.64)	$	(0.57)
Diluted	$	0.06	$	0.06	$	(0.64)	$	(0.57)
Weighted average shares outstanding:
Basic	50,227,590		49,853,181		50,138,835		49,671,648
Diluted	50,288,304		50,309,979		50,138,835		49,671,648

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AgroFresh Solutions, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)


	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Net income (loss)	$	3,011	2,954		$	(31,935)	(28,324)
Other comprehensive (loss) income:
Unrealized gain on hedging activity, net of tax of $24, $158, $24 and $989, respectively	83		558		83		3,509
Recognition of gain on hedging activity reclassified to net loss, net of tax of $78 and $235, respectively	(278)		—		(834)		—
Foreign currency translation adjustments	(3,823)		(11,088)		(903)		(24,123)

Comprehensive loss	$	(1,007)	$	(7,576)	$	(33,589)	$	(48,938)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AgroFresh Solutions, Inc.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share and per share data)


	Preferred Stock				Common Stock						Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Non-Controlling Interest	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Amount
Balances, December 31, 2018	1	$	—	51,071,573	$	5	$	(3,885)	$	535,819	$	(138,789)	$	(28,837)	$	8,263	$	372,576
Stock-based compensation	—	—		—	—		—		2,256		—		—		$	—	$	2,256
Issuance of stock, net of forfeitures	—	—		521,386	—		—		—		—		—		$	—	$	—
Comprehensive loss	—	—		—	—		—		—		(31,599)		(1,654)		$	(336)	$	(33,589)
Balances, September 30, 2019	1	$	—	51,592,959	$	5	$	(3,885)	$	538,075	$	(170,388)	$	(30,491)	$	7,927	$	341,243


	Preferred Stock				Common Stock						Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Non-Controlling Interest	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Amount
Balances, June 30, 2019	1	$	—	51,620,770	$	5	$	(3,885)	$	537,259	$	(173,677)	$	(26,473)	$	8,205	$	341,434
Stock-based compensation	—	—		—	—		—		816		—		—		$	—	$	816
Forfeiture of stock, net of issuances	—	—		(27,811)	—		—		—		—		—		$	—	$	—
Comprehensive income (loss)	—	—		—	—		—		—		3,289		(4,018)		$	(278)	$	(1,007)
Balances, September 30, 2019	1	$	—	51,592,959	$	5	$	(3,885)	$	538,075	$	(170,388)	$	(30,491)	$	7,927	$	341,243


	Preferred Stock				Common Stock						Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Non-Controlling Interest	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Amount
Balances, December 31, 2017	1	$	—	51,002,234	$	5	$	(3,885)	$	533,015	$	(108,729)	$	(12,769)	$	8,443	$	416,080
Stock-based compensation	—	—		—	—		—		2,028		—		—		$	—	$	2,028
Issuance of stock, net of forfeitures	—	—		98,357	—		—		—		—		—		$	—	$	—
Comprehensive loss	—	—		—	—		—		—		(27,882)		(20,614)		$	(442)	$	(48,938)
Balances, September 30, 2018	1	$	—	51,100,591	$	5	$	(3,885)	$	535,043	$	(136,611)	$	(33,383)	$	8,001	$	369,170


	Preferred Stock				Common Stock						Treasury Stock		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Non-Controlling Interest	Total Stockholders’ Equity
	Shares	Amount		Shares	Amount		Amount
Balances, June 30, 2018	1	$	—	51,148,343	$	5	$	(3,885)	$	534,774	$	(140,099)	$	(22,834)	$	8,516	$	376,477
Stock-based compensation	—	—		—	—		—		269		—		—		—		269
Forfeiture of stock, net of issuances	—	—		(47,752)	—		—		—		—		—		—		—
Comprehensive income (loss)	—	—		—	—		—		—		3,488		(10,549)		(515)		(7,576)
Balances, September 30, 2018	1	$	—	51,100,591	$	5	$	(3,885)	$	535,043	$	(136,611)	$	(33,383)	$	8,001	$	369,170

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AgroFresh Solutions, Inc.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)


(in thousands)	Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Cash flows from operating activities:
Net loss	$	(31,935)	$	(28,324)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	36,692		35,486
Provision for bad debts	215		599
Stock-based compensation	2,256		1,965
Pension expense	—		71
Impairment of intangible assets	992		—
Amortization of deferred financing costs	2,032		1,842
Cash received on interest rate swap	—		4,041
Interest income on interest rate swap	(1,070)		—
Accretion of contingent consideration	2,669		2,894
Change in fair value of contingent consideration	128		543
Deferred income taxes	(14,499)		(97)
Loss on sales of property	2		—

Other	—		81
Changes in operating assets and liabilities:
Accounts receivable	(1,499)		(30,124)
Inventories	(4,424)		260
Prepaid expenses and other current assets	(1,429)		(4,137)
Accounts payable	3,855		(7,208)
Accrued expenses and other liabilities	(2,958)		7,115
Income taxes payable	(95)		(1,467)
Other assets and liabilities	384		245
Net cash used in operating activities	(8,684)		(16,215)
Cash flows from investing activities:
Cash paid for property and equipment	(3,271)		(3,179)


Asset acquisition	—		(1,587)

Other investments	(250)		—
Net cash used in investing activities	(3,521)		(4,766)
Cash flows from financing activities:





Payment of Dow liabilities settlement	—		(10,000)
Repayment of long-term debt	(5,056)		(3,517)









Net cash used in financing activities	(5,056)		(13,517)
Effect of exchange rate changes on cash and cash equivalents and restricted cash	1,682		(4,013)
Net decrease in cash and cash equivalents and restricted cash	(15,579)		(38,511)
Cash and cash equivalents and restricted cash, beginning of period	$	34,852	$	64,533
Cash and cash equivalents and restricted cash, end of period	$	19,273	$	26,022

Supplemental disclosures of cash flow information:
Cash paid for:
Cash paid for interest	$	18,007	$	23,280
Cash paid for income taxes	$	2,469	$	5,304
Supplemental schedule of non-cash investing and financing activities:
Accrued purchases of property and equipment	$	62	$	316
Right of use assets obtained in exchange for new lease liabilities	$	376	$	—
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents	$	18,746	$	26,022
Restricted cash within other current assets	527		—
Total cash and cash equivalents and restricted cash	19,273		26,022

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

AgroFresh Solutions, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

AgroFresh Solutions, Inc. (the “Company”) is a global leader in delivering innovative food preservation and waste reduction solutions for fresh produce. The Company is empowering the food industry with Smarter Freshness^TM, a range of integrated solutions designed to help growers, packers and retailers improve produce freshness and quality while reducing waste. The Company’s solutions range from near-harvest with Harvista^TM and LandSpring^TM, to its marquee SmartFresh^TM Quality System, which includes SmartFresh^TM, FreshCloud^TM and ActiMist^TM, working together to maintain the quality of stored produce. The Company has a controlling interest in Tecnidex Fruit Protection, S.A.U. (“Tecnidex”), a leading provider of post-harvest fungicides, waxes, and sanitizers for the citrus market. Additionally, the Company’s initial retail solution, RipeLock^TM, optimizes banana ripening for the benefit of retailers and consumers. The Company has key products registered in over 50 countries, supports approximately 3,900 direct customers and services over 25,000 storage rooms globally.

The end markets that the Company serves are seasonal and are generally aligned with the seasonal growing patterns of the Company’s customers. For those customers growing, harvesting or storing apples, the Company’s primary market, the peak season in the southern hemisphere is the first and second quarters of each year, while the peak season in the northern hemisphere is the third and fourth quarters of each year. Within each half-year period (i.e., January through June for the southern hemisphere, and July through December for the northern hemisphere) the apple growing season has historically occurred during both quarters. A variety of factors, including weather, may affect the timing of the growing, harvesting and storing patterns of the Company’s customers and therefore shift the consumption of the Company’s services and products between the first and second quarters primarily in the southern hemisphere or between the third and fourth quarters primarily in the northern hemisphere.

The Company was originally incorporated as Boulevard Acquisition Corp. (“Boulevard”), a blank check company, in Delaware on October 24, 2013, and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination. On July 31, 2015, the Company completed a Business Combination (refer to Note 3) and changed its name to AgroFresh Solutions, Inc. Prior to consummation of the Business Combination, the Company’s efforts were limited to organizational activities, its initial public offering and related financings, and the search for suitable business acquisition transactions.

2. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements include all adjustments that are necessary for a fair presentation of the Company's condensed consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The condensed consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year. For additional information, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2018.

Adoption of Highly Inflationary Accounting in Argentina

GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation rate exceeds 100 percent. The Company has been closely monitoring the inflation data and currency volatility in Argentina, where there are multiple data sources for measuring and reporting inflation. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of June 30, 2018. As a result, the Company has elected to adopt highly inflationary accounting as of July 1, 2018 for its subsidiary in Argentina. Under highly inflationary accounting, the functional currency of the Company's subsidiary in Argentina became the U.S. dollar, and its income statement and balance sheet will be measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on Argentine peso-denominated monetary assets and liabilities will be reflected in earnings. As of September 30, 2019, the Company’s subsidiary in Argentina had a net asset position of $6.7 million. Net sales attributable to Argentina were approximately 6% and 5% of the Company’s consolidated net sales for the nine months ended September 30, 2019 and 2018, respectively.

Table of Contents

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into geographic region, product and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Revenues for the three months ended September 30, 2019


(in thousands)
Region	North America (1)		EMEA (2)		Latin America (3)		Asia Pacific (4)		Total Revenue
Product
1-MCP based	$	19,726	$	22,377	$	1,680	$	1,605	$	45,388
Fungicides, waxes, coatings, sanitizers	—		2,857		198		—		3,055
Other*	218		86		108		117		529
	$	19,944	$	25,320	$	1,986	$	1,722	$	48,972

Pattern of Revenue Recognition
Products transferred at a point in time	$	19,802	$	25,238	$	1,877	$	1,605	$	48,522
Services transferred over time	142		82		109		117		450
	$	19,944	$	25,320	$	1,986	$	1,722	$	48,972

Revenues for the three months ended September 30, 2018


(in thousands)
Region	North America (1)		EMEA (2)		Latin America (3)		Asia Pacific (4)		Total Revenue
Product
1-MCP based	$	26,029	$	34,284	$	779	$	2,387	$	63,479
Fungicides, waxes, coatings, sanitizers	270		4,047		—		—		4,317
Other*	614		134		154		—		902
	$	26,913	$	38,465	$	933	$	2,387	$	68,698

Pattern of Revenue Recognition
Products transferred at a point in time	$	26,774	$	38,342	$	907	$	2,176	$	68,199
Services transferred over time	139		123		26		211		499
	$	26,913	$	38,465	$	933	$	2,387	$	68,698

Table of Contents

Revenues for the nine months ended September 30, 2019


(in thousands)
Region	North America (1)		EMEA (2)		Latin America (3)		Asia Pacific (4)		Total Revenue
Product
1-MCP based	$	23,084	$	31,965	$	27,503	$	11,287	$	93,839
Fungicides, waxes, coatings, sanitizers	—		11,365		1,458		—		12,823
Other*	954		927		381		171		2,433
	$	24,038	$	44,257	$	29,342	$	11,458	$	109,095

Pattern of Revenue Recognition
Products transferred at a point in time	$	23,380	$	43,374	$	29,159	$	11,309	$	107,222
Services transferred over time	658		883		183		149		1,873
	$	24,038	$	44,257	$	29,342	$	11,458	$	109,095

Revenues for the nine months ended September 30, 2018


(in thousands)
Region	North America (1)		EMEA (2)		Latin America (3)		Asia Pacific (4)		Total Revenue
Product
1-MCP based	$	28,378	$	43,508	$	26,185	$	12,228	$	110,299
Fungicides, waxes, coatings, biocides	270		12,981		—		—		13,251
Other*	1,236		349		335		—		1,920
	$	29,884	$	56,838	$	26,520	$	12,228	$	125,470

Pattern of Revenue Recognition
Products and equipment transferred at a point in time	$	29,701	$	56,658	$	26,448	$	11,784	$	124,591
Services transferred over time	183		180		72		444		879
	$	29,884	$	56,838	$	26,520	$	12,228	$	125,470

*Other includes FreshCloud, technical services and sales-type leases related to Tecnidex.

———————————————————————————————

(1) North America includes the United States and Canada.

(2) EMEA includes Europe, the Middle East, and Africa.

(3) Latin America includes Argentina, Brazil, Chile, Costa Rica, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Peru, and Uruguay.

(4) Asia Pacific includes Australia, China, India, Japan, New Zealand, the Philippines, South Korea, Taiwan, and Thailand.

Contract Assets and Liabilities

ASC 606 requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the nine months ended September 30, 2019 and the twelve months ended December 31, 2018:

Table of Contents


(in thousands)	Balance at January 1, 2019		Additions		Deductions		Balance at, September 30, 2019
Contract assets:
Unbilled revenue	$	1,956	$	8,958	$	(6,911)	$	4,003
Contract liabilities:
Deferred revenue	$	1,280	$	2,810	$	(2,761)	$	1,329


(in thousands)	Balance at January 1, 2018		Additions		Deductions		Balance at, December 31, 2018
Contract assets:
Unbilled revenue	$	739	$	7,117	$	(5,900)	$	1,956
Contract liabilities:
Deferred revenue	$	100	$	4,428	$	(3,248)	$	1,280

The Company recognizes contract assets in the form of unbilled revenue in instances where services are performed by the Company but not billed by period end. The Company recognizes contract liabilities in the form of deferred revenue in instances where a customer pays in advance for future services to be performed by the Company. The Company generally receives payments from its customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the three months ended September 30, 2019. Amounts reclassified from unbilled revenue to accounts receivable for the nine months ended September 30, 2019 and for the year ended December 31, 2018 were $6.9 million and $5.9 million, respectively. Amounts reclassified from deferred revenue to revenue for the nine months ended September 30, 2019 and the year ended December 31, 2018 were $2.8 million and $3.2 million, respectively.

Recently Issued Accounting Standards and Pronouncements

In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12 Targeted Improvements to Accounting for Hedging Activities. This update makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. This update will be effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted upon its issuance. The Company adopted the new ASU as of January 1, 2019 and it did not have a material impact on the Company's financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation, Scope of Modification Accounting. ASU 2017-09 addresses the changes to the terms and conditions of share-based awards. ASU 2017-09 is effective for periods beginning after December 15, 2017 and interim periods therein on a modified retrospective basis. The Company adopted the new ASU as of January 1, 2018, and it did not have a material impact on the financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations, Clarifying the Definition of a Business. The new accounting guidance clarifies the definition of a business and provides additional guidance to assist entities with evaluating whether transactions should be accounted for as asset acquisitions (or asset disposals) or business combinations (or disposals of a business). Under the new guidance, an entity first determines whether substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this criterion is met, the transaction should be accounted for as an asset acquisition as opposed to a business combination. This distinction is important because the accounting for an asset acquisition significantly differs from the accounting for a business combination. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. During the second quarter of 2018, the Company adopted this standard in connection with the acquisition of Verigo (refer to Note 3).

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. This standard will impact future financial statements when adopted if the Company has impairment to its goodwill.

In February 2016, the FASB issued ASU 2016-02, Leases. The main objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including

Table of Contents

interim periods within those fiscal years. Effective for the quarter ended March 31, 2019, the Company adopted the guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance.

The Company also elected to apply practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $7.3 million as part of other assets and a lease liability of $7.3 million as part of other current liabilities and other long-term liabilities in the consolidated balance sheet as of January 1, 2019. This represents non-cash activity as of the adoption date. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.

3. Business Combinations and Asset Acquisition

Business Combination with Dow

On July 31, 2015 (the "Closing Date"), the Company consummated a business combination (the “Business Combination”) pursuant to the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), by and between the Company and The Dow Chemical Company ("Dow") providing for the acquisition by the Company of the AgroFresh business from Dow, resulting in AgroFresh Inc. becoming a wholly-owned, indirect subsidiary of the Company. Pursuant to the Purchase Agreement, the Company paid the following consideration to Rohm and Haas Company (“R&H”), a subsidiary of Dow: (i) 17.5 million shares of common stock and (ii) $635 million in cash.

Pursuant to a Tax Receivables Agreement among the Company, Dow, R&H and AgroFresh Inc. entered into in connection with the consummation of the Business Combination, as amended on April 4, 2017 (as so amended, the “Tax Receivables Agreement”), the Company is required to pay to Dow 50% of the annual tax savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh assets resulting from a Section 338(h)(10) election that the Company and Dow made in connection with the Business Combination.

On April 4, 2017, the Company entered into an agreement (the “Amendment Agreement”) with Dow, R&H, Boulevard Acquisition Sponsor, LLC (the “Sponsor”) and certain other parties. Pursuant to the Amendment Agreement, among other things, the Company agreed to pay Dow the aggregate amount of $20.0 million, of which $10.0 million was paid on April 4, 2017 and the remaining $10.0 million was paid on January 31, 2018, in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, and (iii) the amount payable to Dow pursuant to the Tax Receivables Agreement on account of the 2015 tax year. During the three months ended March 31, 2018, these liabilities were extinguished.

Acquisition of Tecnidex

On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling interest in Tecnidex. The transaction was closed on December 1, 2017. Tecnidex is a leading provider of post-harvest fungicides, waxes, coatings, and sanitizers for the citrus market, with clients in 18 countries. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to their regional clients. The acquisition was accounted for as a purchase in accordance with ASC 805, Business Combination.

At the effective date of the acquisition, the Company agreed to pay holders of Tecnidex an estimated $25.0 million in cash for 75% of the outstanding capital stock, of which $20.0 million was paid on December 1, 2017. In 2018, the purchase price was finalized as $22.3 million after giving effect to working capital, net debt and other adjustments. The remaining $2.3 million was paid during 2018.

In accordance with the acquisition method of accounting, the Company has allocated the purchase price to the estimated fair values of the identifiable assets acquired and liabilities assumed, with any excess allocated to goodwill. The preliminary assessment of fair value of the contingent consideration payments on the acquisition date was approximately $0.7 million and was estimated by applying a probability-based income approach utilizing an appropriate discount rate. This estimation was based on significant inputs that are not observable in the market, referred to as Level 3 inputs. During 2018 there was an adjustment made to consideration payable to holders of Tecnidex which resulted in a measurement period adjustment of $2.8 million to the purchase price allocation.

Table of Contents

Acquisition of Verigo

On April 9, 2018, the Company acquired the assets of Comm-n-Sense Corp., d/b/a Verigo ("Verigo"), pursuant to the terms of an Asset Purchase Agreement, for approximately $1.8 million. Verigo, a privately-held organization, provided hardware in the form of wireless data receptors along with cloud-based software to synchronize data pulled from the hardware to support and provide tools for monitoring environmental and quality factors, such as temperature and relative humidity. The transaction was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired was concentrated in a single asset, the acquired software. Asset acquisitions are accounted for using a cost accumulation approach, whereby the total consideration paid is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis.

4. Related Party Transactions

The Company is a party to ongoing agreements with Dow, a related party, including, but not limited to, operating-related agreements for certain transition services. In connection with the Transition Services Agreement, the Company paid Dow a $5.0 million set-up fee which was amortized over the period during which the services were expected to be provided.

The Company incurred expenses for such services for the nine months ended September 30, 2019 and September 30, 2018 as follows:


(in thousands)	Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Ongoing costs of transition services agreement	$	90	$	251
Other expenses	—		1,484
Total incurred expenses	$	90	$	1,735

As of September 30, 2019 and September 30, 2018, the Company had an outstanding payable to Dow of $0.1 million and $0.5 million, respectively, related to the Transition Services Agreement.

Refer to Note 3 regarding the contingent consideration owed to Dow as part of the Business Combination, as well as certain other agreements entered into in connection with the Business Combination.

During 2016, the Company made a minority investment in RipeLocker, LLC ("RipeLocker"), a company led by George Lobisser, a director of the Company. In February 2019, the Company made a further minority investment in RipeLocker. On November 29, 2016, the Company entered into a Mutual Services Agreement (the “Services Agreement”) with George Lobisser and RipeLocker. Pursuant to the Services Agreement, (i) the Company agreed to provide RipeLocker with technical support, in the form of access to the Company’s research and development personnel for a specified number of hours for purposes of providing advice and input relating to RipeLocker’s products and services, and (ii) Mr. Lobisser agreed to provide consulting services to the Company as may be reasonably requested by the Company from time to time. The Services Agreement provided for Mr. Lobisser to receive a consulting fee of $5,000 per full day for time spent performing consulting services under the Services Agreement (pro-rated for any partial day), plus reimbursement for out-of-pocket expenses, provided that for each hour of technical support provided by the Company to RipeLocker, Mr. Lobisser agreed to provide one-half hour of consulting services for no consideration. In February 2017, the Company and Mr. Lobisser agreed to substantially curtail any mutual consulting services to be provided under the Services Agreement, and that any further services would be provided at no charge. For the nine months ended September 30, 2019 and 2018, there were no material amounts paid and as of September 30, 2019, there were no material amounts owed to RipeLocker or Mr. Lobisser for consulting services.

5. Inventories

Inventories at September 30, 2019 and December 31, 2018 consisted of the following:

Table of Contents


(in thousands)	September 30, 2019		December 31, 2018
Raw material	$	2,852	$	1,286
Work-in-process	4,996		4,749
Finished goods	15,306		17,535
Supplies	1,045		1,237
Total inventories	$	24,199	$	24,807

6. Other Current Assets

The Company's other current assets at September 30, 2019 and December 31, 2018 consisted of the following:


(in thousands)	September 30, 2019		December 31, 2018
VAT receivable	$	6,531	$	7,854
Prepaid income tax asset	4,813		5,090
Prepaid and other current assets	3,304		2,664
Total other current assets	$	14,648	$	15,608

7. Property and Equipment

Property and equipment at September 30, 2019 and December 31, 2018 consisted of the following:


(in thousands, except for useful life data)	Useful life (years)	September 30, 2019		December 31, 2018
Buildings and leasehold improvements	7-20	$	6,030	$	4,647
Machinery & equipment	1-12	10,487		8,193
Furniture	1-12	2,656		2,712
Construction in progress		1,701		1,744
		20,874		17,296
Less: accumulated depreciation		(7,231)		(4,007)
Total property and equipment, net		$	13,643	$	13,289

Depreciation expense was $0.6 million and $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and $1.6 million and $1.2 million, for the nine months ended September 30, 2019 and 2018, respectively. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the condensed consolidated statements of operations.

8. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2019 and the twelve months ended December 31, 2018 were as follows:


(in thousands)	September 30, 2019		December 31, 2018
Balance as of Beginning balance	$	6,670	$	9,402
Measurement period adjustment	—		(2,807)
Foreign currency translation	(579)		75
Balance as of Ending balance	$	6,091	$	6,670

See Note 3 for a description of the measurement period adjustment.

Table of Contents

The Company’s intangible assets at September 30, 2019 and December 31, 2018 consisted of the following:


	September 30, 2019														December 31, 2018
(in thousands)	Gross Carrying Amount		Accumulated Amortization		Impairment		Net		Gross Carrying Amount		Accumulated Amortization		Impairment		Net
Other intangible assets:
Developed technology	$	759,205	$	(165,730)	$	—	$	593,475	$	759,290	$	(134,151)	$	—	$	625,139
In-process research and development	39,000		(6,681)		—		32,319		39,000		(5,055)		—		33,945
Trade name	27,216		—		—		27,216		28,507		—		(2,600)		25,907
Service provider network	2,000		—		—		2,000		2,000		—		—		2,000
Customer relationships	17,866		(1,958)		—		15,908		19,872		(2,198)		—		17,674
Software	10,604		(3,638)		(992)		5,974		9,405		(2,161)		—		7,244

Other	100		(54)		—		46		100		(42)		—		58
Total intangible assets	$	855,991	$	(178,061)	$	(992)	$	676,938	$	858,174	$	(143,607)	$	(2,600)	$	711,967

During the Company's annual impairment testing conducted for the year ended December 31, 2018, the Company recorded an impairment charge of $2.6 million on its SmartFresh trade name. During the nine months ended September 30, 2019, the Company had an impairment charge of $1.0 million associated with the Verigo software following a partnership agreement with a new technology provider.

At September 30, 2019, the weighted-average amortization periods remaining for developed technology, in-process R&D, customer relationships, software and other was 15.6, 13.0, 15.0, 3.0, and 2.8 years, respectively. At September 30, 2019, the weighted-average amortization period remaining for these finite-lived intangible assets was 15.4 years.

Estimated annual amortization expense for finite-lived intangible assets subsequent to September 30, 2019 is as follows:


(in thousands)	Amount
2019 (remaining)	$	10,893
2020	43,545
2021	43,295
2022	43,150
2023	43,142
Thereafter	463,697
Total	$	647,722

Amortization expense for intangible assets was $11.8 million and $12.0 million for the three months ended September 30, 2019 and 2018, respectively, and $35.1 million and $34.3 million, for the nine months ended September 30, 2019 and 2018, respectively.

9. Accrued and Other Current Liabilities

The Company’s accrued and other current liabilities at September 30, 2019 and December 31, 2018 consisted of the following:

Table of Contents


(in thousands)	September 30, 2019		December 31, 2018
Tax amortization benefit contingency	$	10,844	$	11,098
Additional consideration due seller	451		379
Accrued compensation and benefits	9,136		10,192
Accrued rebates payable	4,302		3,616
Insurance premium financing payable	1,247		721
Severance	638		971
Deferred revenue	1,329		1,280
Accrued taxes	4,030		5,316
Accrued interest	5,086		—
Lease liability	1,534		—
Other	2,800		11,767
Total accrued and other current liabilities	$	41,397	$	45,340

Other current liabilities include primarily professional services, litigation and research and development accruals.

10. Debt

The Company’s debt, net of unamortized deferred issuance costs, at September 30, 2019 and December 31, 2018 consisted of the following:


(in thousands)	September 30, 2019		December 31, 2018
Total Term Loan outstanding	$	406,937	$	410,125
Unamortized deferred issuance costs	(4,474)		(6,168)
Tecnidex loan outstanding	904		2,771
Less: Amounts due within one year	4,748		6,419
Total long-term debt due after one year	$	398,619	$	400,309

At September 30, 2019, the Company evaluated the amount recorded under the Term Loan (defined below) and determined that the fair value was approximately $376.4 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.

The Term Loan is presented net of deferred issuance costs, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance costs at the inception of the Term Loan were $12.9 million and as of September 30, 2019 there were $4.5 million of unamortized deferred issuance costs.

Scheduled principal repayments of debt subsequent to September 30, 2019 are as follows:


(in thousands)	Amount
2019 (remaining)	$	1,213
2020	4,792
2021	401,836

Total	$	407,841

Credit Facility

On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and its parent, AF Solutions Holdings LLC (“AF Solutions Holdings”), a wholly-owned subsidiary of the Company, as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (as subsequently amended, the “Credit Facility”). The Credit Facility consists of a $425.0 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a revolving loan facility (the “Revolving Loan”). On January 31, 2019, the Revolving Loan was amended to reduce the total availability from $25.0 million to $12.5 million, to extend the maturity date from July 31, 2019 to December 31, 2020, and to

Table of Contents

amend certain financial covenants. The Revolving Loan includes a $10.0 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. The Term Loan has a scheduled maturity date of July 31, 2021. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75% or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries, and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.

The net proceeds of the Term Loan were used to fund a portion of the purchase price payable to Dow in connection with the Business Combination. Amounts available under the Revolving Loan may also be used for working capital, general corporate purposes, and other uses, all as more fully set forth in the Credit Agreement. At September 30, 2019, there was $406.9 million outstanding under the Term Loan and no balance outstanding under the Revolving Loan.

As of the Closing Date, the Company incurred approximately $12.9 million in debt issuance costs related to the Term Loan and $1.3 million in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The interest expense related to the amortization of the debt issuance costs during the three and nine months ended September 30, 2019 was approximately $0.6 million and $1.7 million, respectively. The interest expense related to the amortization of the debt issuance costs during the three and nine months ended September 30, 2018 was approximately $0.6 million and $1.8 million, respectively.

Certain restrictive covenants are contained in the Credit Facility, which includes the Revolving Loan, and the Company was in compliance with these covenants as of September 30, 2019. The Company had full availability to draw under the Revolving Loan as of September 30, 2019.

The Company entered into an interest rate swap contract in August 2019 to hedge interest rate risk associated with the Term Loan. During the three months ended September 30, 2019, an unrealized gain of $0.1 million was recognized in connection with this swap. The interest rate swap contract matures on December 31, 2020.

Beginning with the year ended December 31, 2016, the Company is required to prepay Term Loan Borrowings and Incremental Term Loan Borrowings in an aggregate amount equal to 50% of the "Excess Cash Flow" (as defined in the Credit Facility) for the fiscal year; provided that such amount of the Excess Cash Flow in any fiscal year shall be reduced by (i) the aggregate amount of prepayments of Term Loans and Incremental Term Loans made, (ii) to the extent accompanied by permanent reductions of Revolving Commitments, the aggregate amount of prepayments of Revolving Loans (other than prepayments financed with the proceeds of Indebtedness), and (iii) repaid borrowings of Revolving Loans made on the Effective Date to account for any additional original issue discount or upfront fees that are implemented pursuant to the Fee Letter provided further that, prepayments of Term Loan Borrowings and Incremental Term Loan Borrowings shall only be required if 50% of the Excess Cash Flow for such fiscal year exceeds $5.0 million. There are no amounts due under this provision as of September 30, 2019.

11. Leases

The Company enters into lease agreements for certain facilities and vehicles that are primarily used in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.

Most leases include an option to extend or renew the lease term. The exercise of the renewal option is at the Company's discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. The Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

Lease expense is primarily included in general and administrative expenses in the condensed consolidated statements of operations. Additional information regarding the Company's operating leases is as follows:

Table of Contents


(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating Lease Cost
Operating leases	$	591	$	1,849
Short-term leases⁽¹⁾	5		52
Total lease expense	$	596	$	1,901

(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.


Other information on operating leases
Cash payments included in operating cash flows	$	1,625
Weighted average discount rate	9.33		%
Weighted average remaining lease term in years	5.53

The following table presents the contractual maturities of the Company's lease liabilities as of September 30, 2019:


(in thousands)	Lease Liability
Remainder of 2019	$	540
2020	1,905
2021	1,641
2022	1,487
2023	1,277
2024 and thereafter	2,364
Total undiscounted lease payments	$	9,214
Less: present value adjustment	2,075
Operating lease liability	$	7,139

The following table presents the future minimum lease payments as of December 31, 2018 under noncancellable operating leases:


(in thousands)	Future lease Payments
2019	$	3,413
2020	2,058
2021	1,790
2022	1,640
2023	1,242
Thereafter	2,396
Total	$	12,539

12. Other Noncurrent Liabilities

The Company’s other noncurrent liabilities at September 30, 2019 and December 31, 2018 consisted of the following:


(in thousands)	September 30, 2019		December 31, 2018
Tax amortization benefit contingency	$	32,363	$	29,369


Lease liability	5,605		—
Other⁽¹⁾	2,765		2,697
Total other noncurrent liabilities	$	40,733	$	32,066

(1) Other noncurrent liabilities include long-term rebates and deferred rent.

Table of Contents

13. Severance

Severance expense was $0.3 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $1.0 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated statements of loss. As of September 30, 2019 and December 31, 2018, the Company had a $0.6 million and $1.0 million severance liability, respectively.

14. Stockholders’ Equity

The authorized common stock of the Company consists of 400,000,000 shares with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share of common stock. As of September 30, 2019, there were 50,931,578 shares of common stock outstanding. As of September 30, 2019, there were warrants to purchase 15,983,072 shares of the Company’s common stock outstanding at a strike price of $11.50. Of the 15,983,072 warrants, 9,823,072 were issued as part of the units sold in the Company's initial public offering in February 2014 (1,201,928 warrants were subsequently repurchased during 2015) and 6,160,000 warrants were sold in a private placement at the time of such public offering.

In connection with and as a condition to the consummation of the Business Combination, the Company issued Dow one share of Series A Preferred Stock. Dow, voting as a separate class, is entitled to appoint one director to the Company’s board of directors for so long as Dow beneficially holds 10% or more of the aggregate amount of the outstanding shares of common stock and non-voting common stock of the Company. The Series A Preferred Stock has no other rights.

15. Stock-based Compensation

In July 2015, the Company adopted the 2015 Incentive Compensation Plan (as amended, the “Plan”), pursuant to which the Compensation Committee of the Company is authorized to grant up to 7,150,000 shares to officers and employees of the Company, in the form of equity-based awards, including time or performance based options and restricted stock.

In June 2019, the Company's shareholders approved the 2019 Employee Stock Purchase Plan (the "ESPP"), which was effective July 1, 2019. 500,000 shares of common stock are reserved for issuance under the ESPP. As of September 30, 2019, no shares had been issued under the ESPP.

Stock compensation expense for equity-classified and liability-classified awards for the three and nine months ended September 30, 2019 was $1.0 million and $2.1 million, respectively. Stock compensation expense for equity-classified and liability-classified awards for the three and nine months ended September 30, 2018 was $0.2 million and $2.0 million, respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses, and research and development expenses. At September 30, 2019, there was $4.4 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 1.8 years.

16. Earnings Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The Company had a loss for the nine months ended September 30, 2019 and 2018. Therefore, the effect of stock-based awards including options, restricted stock, restricted stock units, and warrants outstanding at September 30, 2019 and September 30, 2018, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive.

The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net income (loss) per common share:


	Three Months Ended September 30, 2019	Three Months Ended September 30, 2018	Nine Months Ended September 30, 2019	Nine Months Ended September 30, 2018
Basic weighted-average common shares outstanding	50,227,590	49,853,181	50,138,835	49,671,648
Effect of dilutive options, performance stock units and restricted stock	60,714	456,798	—	—
Diluted weighted-average shares outstanding	50,288,304	50,309,979	50,138,835	49,671,648

Table of Contents

Securities that could potentially be dilutive are excluded from the computation of diluted earnings (loss) per share when a loss from continuing operations exists, when the exercise price exceeds the average closing price of the Company's common stock during the period, or for contingently issued shares, if the contingency is not met at the end of the reporting period, because their inclusion would result in an anti-dilutive effect on per share amounts.

The following represent the number of shares that could potentially dilute basic earnings per share in the future:


	Three Months Ended September 30, 2019	Three Months Ended September 30, 2018	Nine Months Ended September 30, 2019	Nine Months Ended September 30, 2018
Stock-based compensation awards⁽¹⁾:
Stock options	1,028,583	322,158	949,987	322,158
Restricted stock to non-directors	749,510	336,286	624,930	278,289
Restricted stock to directors	—	84,427	—	72,655
Warrants:
Private placement warrants	6,160,000	6,160,000	6,160,000	6,160,000
Public warrants	9,823,072	9,823,072	9,823,072	9,823,072

(1) SARs and Phantom Shares are payable in cash so will have no impact on number of shares

Warrants and options are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period.

17. Income Taxes

The provision for income taxes consists of provisions for federal, state, and foreign incomes taxes. The effective tax rates for the periods ended September 30, 2019, and September 30, 2018, reflect the Company’s expected tax rate on reported income from continuing operations before income tax and tax adjustments. The Company operates in a global environment with significant operations in the U.S. and various other jurisdictions outside the U.S. Accordingly, the consolidated income tax rate is a composite rate reflecting the Company’s earnings and the applicable tax rates in the various jurisdictions where the Company operates.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted in the U.S. The TCJA represents sweeping changes in U.S. tax law. Among other changes in tax law, the TCJA permanently reduced the U.S. corporate income tax rate to 21% beginning in 2018, imposed a one-time repatriation tax on deferred foreign earnings, established a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign subsidiaries, limited deductions for net interest expense, and expanded the U.S. taxation of foreign earned income to include “global intangible low-taxed income” (“GILTI”).

The Company's effective tax rate for the three and nine months ended September 30, 2019 was 214.0% and 28.2%, respectively, compared to the effective tax rate for the three and nine months ended September 30, 2018 of 25.6% and (0.8)%, respectively.

The effective tax rate for the nine months ended September 30, 2019 differs from the U.S. statutory tax rate of 21%, due primarily to changes in valuation allowance positions related to certain foreign jurisdictions and the elimination of intercompany profit activity. The effective tax rate is adversely impacted by certain provisions of the TCJA, limiting the deductibility of U.S. interest expense.

18. Segment Information

The authoritative guidance for disclosures about segments of an enterprise establishes standards for reporting information about segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. We currently operate and manage our business as two operating segments. Our chief operating decision-makers allocate resources and assess performance of the business for each segment. Accordingly, we consider ourselves to have two operating and reportable segments (i) AgroFresh core and (ii) Tecnidex. AgroFresh core business is providing produce preservation and waste reduction solutions for growers and packers. Its products include SmartFresh, Harvista, RipeLock and FreshCloud. Tecnidex is a provider of fungicides, sanitizers, waxes, and coatings primarily focused on the citrus market.

Table of Contents

Our chief operating decision-makers do not evaluate operating segments using asset or liability information. The following table presents a breakdown of our revenues and gross profit based on reportable segments for the three and nine months ended September 30, 2019 and 2018.


(in thousands)	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
AgroFresh Core
Revenues	$	45,917	$	64,647	$	96,272	$	112,489
Gross Profit	34,182		51,149		72,679		87,861
Tecnidex
Revenues	3,055		4,051		12,823		12,981
Gross Profit	898		887		4,900		4,699
Total Revenues	$	48,972	$	68,698	$	109,095	$	125,470
Total Gross Profit	$	35,080	$	52,036	$	77,579	$	92,560

19. Commitments and Contingencies

The Company is currently involved in various claims and legal actions that arise in the ordinary course of business. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and can be reasonably estimated. Although the results of litigation and claims can never be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, financial condition or results of operations.

On October 14, 2019, the Company was awarded a verdict of $31.1 million in damages, related to, among other things, trade secret misappropriation and willful patent infringement, in its litigation against Decco Post-Harvest, Inc. ("Decco") and Decco's parent company, UPL Limited. The award is subject to post-verdict review by the Court and any appeals that may be taken by the parties in the future.

Purchase Commitments

The Company has various purchasing contracts for contract manufacturing and research and development services which are based on the requirements of the business. Generally, the contracts are at prices not in excess of current market prices and do not commit the business to obligations outside the normal customary terms for similar contracts.

20. Fair Value Measurements

Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2019:


(in thousands)	Level 1		Level 2		Level 3		Total
Tax amortization benefit contingency⁽¹⁾	$	—	$	—	$	43,207	$	43,207
Contingent consideration⁽²⁾	—		—		451		451
Liability-classified stock compensation⁽³⁾	—		—		218		218
Interest rate swap⁽⁴⁾	$	—	$	(106)	$	—	$	(106)
Total	$	—	$	(106)	$	43,876	$	43,770

Table of Contents

The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of December 31, 2018:


(in thousands)	Level 1		Level 2		Level 3		Total
Tax amortization benefit contingency⁽¹⁾	$	—	$	—	$	40,467	$	40,467
Contingent consideration⁽²⁾	—		—		379		379
Liability-classified stock compensation⁽³⁾	—		—		550		550
Total	$	—	$	—	$	41,396	$	41,396

(1) The fair value of the tax amortization benefit contingency is measured using an income approach based on the Company’s best estimate of the undiscounted cash payments to be made, using an estimated tax rate of 21.5% and discounted to present value utilizing an appropriate market discount rate.

(2) The fair value of the contingent consideration related to the Tecnidex acquisition.

(3) The fair value of the stock appreciation rights was measured using a Black Scholes pricing model during the nine months ended September 30, 2019. The fair value of time based phantom shares is based on the fair value of the Company's common stock. The fair value of performance based phantom shares was measured using a Monte Carlo pricing model during the nine months ended September 30, 2019. The valuation technique used did not change during the nine months ended September 30, 2019.

(4) The derivative assets and liabilities relate to an interest rate derivative that is measured at fair value using observable market inputs such as interest rates, our own credit risks as well as an evaluation of the counterparts' credit risks.

There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2019.

At September 30, 2019, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately $376.4 million. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

The following table presents the changes during the period presented in our Level 3 financial instrument liabilities that are measured at fair value on a recurring basis.


(in thousands)	Tax amortization benefit contingency		Contingent consideration related to acquisition		Liability-classified stock compensation		Interest rate swap		Total
Balance, December 31, 2018	$	40,467	$	379	$	550	$	—	$	41,396
Accretion	2,669		—		—		—		2,669
Tecnidex earnout activity	—		72		—		—		72
Stock compensation activity	—		—		(332)		—		(332)
Mark-to-market adjustment	71		—		—		(106)		(35)
Balance, September 30, 2019	$	43,207	$	451	$	218	$	(106)	$	43,770

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), the terms “Company,” “AgroFresh,” “we,” “us” and “our” refer to AgroFresh Solutions, Inc. and its consolidated subsidiaries, unless the context otherwise requires or it is otherwise indicated.

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Report.

This MD&A contains the financial measures EBITDA and Adjusted EBITDA, which are not presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP financial measures are being presented because management believes that they provide readers with additional insight into the Company’s operational performance relative to earlier periods and relative to its competitors. EBITDA and Adjusted EBITDA are key measures used by the Company to evaluate its performance. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. A reconciliation of EBITDA and Adjusted EBITDA to the most comparable GAAP measure is provided in this MD&A.

Note Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Report including, without limitation, statements in this MD&A regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements. When used in this Report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results and/or the timing of events could differ materially from those contemplated by these forward-looking statements due to a number of factors, including those discussed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K") as well as the update to those Risk Factors disclosed in Part II, Item 1A of this Report. Any forward-looking statements included in this Report are based only on information currently available to the Company and speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are qualified in their entirety by this paragraph.

Business Overview

AgroFresh is a global leader in delivering innovative food preservation and waste reduction solutions for fresh produce, including apples, pears, citrus, kiwifruit, avocados and bananas, among others. Our proprietary and innovative solutions are designed to help growers, packers, and retailers improve produce freshness and quality while reducing waste.

AgroFresh’s market leadership is underpinned by our global footprint, extensive applied scientific expertise, customer intimacy, and a growing portfolio of value-added products and mission-critical advisory services. Our key products are registered in over 50 countries, support approximately 3,900 direct customers, and service over 25,000 storage rooms globally. In addition, we offer a comprehensive list of solutions spanning from near-harvest to post-harvest, from storage through retail. More importantly, we believe that our direct market approach and high touch service model best position us to address our customers’ needs. We believe this is a key differentiator compared to other companies that have narrower product offerings and limited service levels.

Freshness is the most important driver of consumer satisfaction when it comes to produce, and, at the same time, food waste is a major issue in the industry. According to the U.N.’s Food and Agricultural Organization, fruits and vegetables have the highest waste rates of any food, estimated at 40%-50% globally. AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.

AgroFresh’s core business is providing produce preservation and waste reduction solutions for growers and packers. SmartFresh^TM, our current principal solution, preserves the texture, firmness, taste and appearance of produce during storage, transportation and retail display. It allows growers and packers to deliver “just harvested” freshness on a year-round basis and enables retailers to increase customer satisfaction with fresh, high quality produce. An integral part of the SmartFresh value

Table of Contents

proposition is a direct service model providing customers with on-site applications of SmartFresh at their storage facilities together with mission-critical and value-added advisory services.

In December 2017, AgroFresh acquired a controlling interest in Tecnidex Fruit Protection, S.A.U. ("Tecnidex"). With this acquisition, AgroFresh expanded its post-harvest leadership into additional crops, and increased its penetration of the produce market in southern Europe, Latin America and Africa. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to customers, now reaching 18 countries. Tecnidex is a leading provider of fungicides, sanitizers, waxes, and coatings primarily focused on the citrus market. The Tecnidex acquisition brought a broad catalog of solutions that enhanced AgroFresh’s fungicide offering, ActiMist^TM, an innovative delivery system of foggable fungicides. AgroFresh’s fungicide offerings further diversify our revenue by expanding our ability to provide solutions and service to the citrus industry. Tecnidex is based in Valencia, Spain.

Complementing our post-harvest solutions, Harvista^TM technology is used for near harvest management of pome fruit, such as apples, pears, and cherries. Just as SmartFresh revolutionized post-harvest apple storage, we believe Harvista can have a similar impact in the orchard. Harvista slows ripening, reduces fruit drop, and holds fruit on the tree longer to promote better color and fruit size, thereby bringing new benefits to the grower. With maximum flexibility in application timing, it extends the harvest window by allowing growers to factor in ever-changing weather conditions and labor availability, providing peace of mind. Finally, we have found that the combination of Harvista in the orchard and SmartFresh in the storage room results in improved fruit quality metrics compared to use of either product individually.

AgroFresh provides freshness solutions across the supply chain, wherever waste occurs. For many crops, much of the waste occurs at retail. This includes bananas, one of the largest retail produce categories, where, according to internal analysis based on data from Journal of Consumer Affairs and United Nation’s Food and Agriculture Organization, it is estimated that 12-16% of banana loss occurs after the fruit reaches the grocery store. Our RipeLock^TMQuality System is a retail solution to improve the quality and consumer appeal of bananas. RipeLock enables retailers to offer consumers bananas that are in better condition and maintain the consumer-preferred color and firmness longer, reducing waste and increasing sales.

To continue to evolve and increase the value we provide to our customers, AgroFresh offers our FreshCloud^TM suite of produce monitoring and screening solutions. FreshCloud is the culmination of our decades-long history of innovation and scientific know-how in the physiology of fruits and vegetables. FreshCloud consists of both enhancements to our existing service offerings, as well as new innovations. FreshCloud Storage Insights^TM, the next generation of AdvanStore, combines proprietary sensor technology and data analytics in the storage room to offer customers real-time access to unique insights into the condition of their stored fruit. FreshCloud Predictive Screening^TM, which predicts the risk of disorder development during storage by analyzing gene expression at commercial harvest, allows for more informed storage management decisions. FreshCloud Transit Insights^TM combines sensor technology and algorithms to provide insights as to the condition and quality of fruit during transit.

AgroFresh’s business is highly seasonal, driven by the timing of harvests in the northern and southern hemispheres. The first half of the year is when the southern hemisphere harvest occurs, and the second half of the year is when the northern hemisphere harvest occurs. Since the northern hemisphere harvest of apples, our primary crop, is typically larger, a significant portion of our sales and profits are historically generated in the second half of the year. In addition to this seasonality, factors such as weather patterns may impact the timing of the harvest within the two halves of the year.

Factors Affecting the Company’s Results of Operations

The Company’s results of operations are affected by a number of external factors. Some of the more important factors are briefly discussed below.

Demand for the Company’s Offerings

The Company services customers in over 50 countries and derives its revenue by assisting growers, packers and retailers to optimize the value of their crops brought to market. The Company's products and services add value to customers by reducing food spoilage and extending the life of perishable fruits. The U.S. Food and Agriculture Organization has estimated that a growing global population will require a near doubling of food production in developing countries by 2050 to meet the expected demand of a worldwide population of 9 billion people.

This global trend, among others, creates demand for the Company’s solutions. The Company’s offerings are currently protected by patent filings in 55 countries.

Table of Contents

The global produce market is a function of both the size and the yield of the crop harvested; variations in either will affect total production. Given the nature of the agricultural industry, weather patterns may impact total production and the Company's resulting commercial opportunities. The Company supports a diverse customer base whose end markets vary due to the type of fruit and quality of the product demanded in their respective markets. Such variation across end markets also affects demand for the Company’s services.

Customer Pricing

The Company’s offerings are priced based on the value they provide to the Company’s customers. From time to time, the Company adjusts the pricing of its offerings depending on the volume of fruit treated, or in order to address specific market trends. The SmartFresh Quality System continues to expand its platform of services, which may have an impact on price. The Company provides a value-added service and does not typically price its products in relation to any underlying cost of materials; therefore, its margins can fluctuate with changes in the costs to provide its services to customers. The Company’s pricing may include rebate arrangements with customers in exchange for mutually beneficial long-term relationships and growth.

Whole Product Offering

The AgroFresh Whole Product offering is a direct service model for the Company’s commercially available products, including SmartFresh and Harvista. Sales and sales support personnel maintain direct face-to-face relationships with customers year round. Technical sales and support personnel work directly with customers to provide value-added advisory services regarding the application of SmartFresh. Typically, third party contractors perform the actual application of SmartFresh. The Harvista application service, through both aerial and ground application, is also administered by third-party service providers or made by our customers directly.

Most of the Company’s service providers are operating under multi-year contracts. Management believes the quality and experience of its service providers deliver clear commercial benefits.

Seasonality

The Company’s operations are subject to seasonal variation due to the timing of the growing seasons around the world. Northern hemisphere growers typically harvest from August through November, and southern hemisphere growers typically harvest from late January to early May. Since the majority of the Company’s sales are in northern hemisphere countries, a proportionately greater share of its revenue is realized during the second half of the year. There are also variations in the seasonal demands from year to year depending on weather patterns and crop size. This seasonality and variations in seasonal demand could impact the ability to compare results between periods.

Foreign Currency Exchange Rates

With a global customer base and geographic footprint, the Company generates revenue and incurs costs in a number of different currencies, with the Euro comprising the most significant non-U.S. currency. Fluctuations in the value of these currencies relative to the U.S. dollar can increase or decrease the Company’s overall revenue and profitability as stated in U.S. dollars, which is the Company’s reporting currency. In certain instances, if sales in a given geography have been adversely impacted on a long-term basis due to foreign currency depreciation, the Company has been able to adjust its pricing so as to mitigate the impact on profitability.

Domestic and Foreign Operations

The Company has both domestic and foreign operations. Fluctuations in foreign exchange rates, regional growth-related spending in research and development (“R&D”) and marketing expenses, and changes in local selling prices, among other factors, may impact the profitability of foreign operations in the future.

Critical Accounting Policies and Use of Estimates

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations and that require the use of complex and subjective estimates based upon management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. Aside from the adoption of ASC 842, there have been no material changes to our critical accounting policies and estimates previously disclosed in the 2018 Form 10-K. For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations -

Table of Contents

Critical Accounting Policies and Use of Estimates” and “Note 2 - Basis of Presentation and Summary of Significant Accounting Policies” in the 2018 Form 10-K.

Table of Contents

Results of Operations

The following table summarizes the results of operations for the three and nine months ended September 30, 2019 and September 30, 2018:


(in thousands)	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
Net sales	$	48,972	$	68,698	$	109,095	$	125,470
Cost of sales (excluding amortization, shown separately below)	13,892		16,662		31,516		32,910
Gross profit	35,080		52,036		77,579		92,560
Research and development expenses	2,566		3,491		9,720		10,293
Selling, general, and administrative expenses	14,998		18,212		47,044		50,133
Amortization of intangibles	11,754		12,002		35,136		34,342
Impairment of long lived assets	—		—		992		—
Change in fair value of contingent consideration	(229)		307		128		543
Operating income (loss)	5,991		18,024		(15,441)		(2,751)
Other (expense) income	(81)		(189)		(119)		419
Gain (loss) on foreign currency exchange	54		(4,731)		(2,884)		472
Interest expense, net	(8,606)		(9,132)		(26,021)		(26,250)
(Loss) income before income taxes	(2,642)		3,972		(44,465)		(28,110)
Income taxes (benefit) expense	(5,653)		1,018		(12,530)		214
Net income (loss) including non-controlling interests	$	3,011	$	2,954	(31,935)		(28,324)
Less: Net loss attributable to non-controlling interests	(278)		(516)		(336)		(442)
Net income (loss) attributable to AgroFresh Solutions, Inc	3,289		3,470		(31,599)		(27,882)

Comparison of Results of Operations for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

Net Sales

Net sales were $49.0 million for the three months ended September 30, 2019, as compared to net sales of $68.7 million for the three months ended September 30, 2018, a decrease of 28.7%. The impact of the change in foreign currency exchange rates compared to the third quarter of 2018 reduced revenue by $1.2 million. Excluding this impact, revenue decreased approximately 27.0%.

The overall decrease in sales is driven by a late apple harvest in North America and Europe along with a weaker pear crop in Europe. During the third quarter of 2018, Europe experienced a favorable crop size along with an early harvest primarily in apples. The Company anticipates a shift in sales from the third quarter into the fourth quarter in 2019 due to the delayed harvest in Europe and North America.

Cost of Sales

Cost of sales was $13.9 million for the three months ended September 30, 2019 as compared to $16.7 million for the three months ended September 30, 2018. Gross profit margin was 71.6% for the three months ended September 30, 2019 versus 75.7% for the three months ended September 30, 2018. The change was in line with our expectations, and mostly due to a higher percentage of Harvista and Tecnidex revenue, which generate lower margins than SmartFresh.

Research and Development Expenses

Research and development expenses were $2.6 million and $3.5 million, respectively, for the three months ended September 30, 2019 and September 30, 2018. The decrease in research and development expenses was primarily driven by timing.

Table of Contents

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $15.0 million for the three months ended September 30, 2019 compared to $18.2 million for the three months ended September 30, 2018, a decrease of 17.6%. Included in selling, general and administrative expenses were $1.6 million in the current year and $3.7 million in the prior year of costs associated with non-recurring items that include M&A and litigation along with severance. Excluding these items, selling general and administrative expenses decreased approximately 7.7% over the same period last year driven by ongoing cost optimization initiatives.

Amortization of Intangibles

Amortization of intangible assets was $11.8 million for the three months ended September 30, 2019 compared to $12.0 million for the three months ended September 30, 2018.

Impairment of Intangibles

There were no indicators of impairment during the three months ended September 30, 2019 and 2018, respectively.

Change in Fair Value of Contingent Consideration

The Company recorded a $0.2 million loss in the three months ended September 30, 2019 related to a change in the fair value of contingent consideration, as compared to a $0.3 million gain in the three months ended September 30, 2018. As discussed in Note 3 of the unaudited condensed consolidated financial statements, pursuant to the Company’s business combination with The Dow Chemical Company (“Dow”) that was consummated on July 31, 2015 (the “Business Combination"), the Company entered into various forms of contingent consideration, including the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings.

Interest Expense, Net

Interest expense was $8.6 million for the three months ended September 30, 2019, as compared to $9.1 million for the three months ended September 30, 2018.

Gain (loss) on foreign currency

Gain on foreign currency was $0.1 million for the three months ended September 30, 2019, as compared to a loss of $4.7 million for the three months ended September 30, 2018, related to the change in the Euro during 2018.

Income Taxes

Income tax benefit was $5.7 million for the three months ended September 30, 2019 compared to income tax expense of $1.0 million for the three months ended September 30, 2018. During the three months ended September 30, 2019, there were changes in valuation allowance positions related to certain foreign and domestic jurisdictions and the elimination of intercompany profit activity which did not result in income tax provision adjustments. For the three months ended September 30, 2018, the elimination of intercompany profits resulted in losses that did not receive an income tax benefit.

Comparison of Results of Operations for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Net Sales

Net sales were $109.1 million for the nine months ended September 30, 2019, as compared to net sales of $125.5 million for the nine months ended September 30, 2018, a decrease of 13.1%. The impact of the change in foreign currency exchange rates compared to the first nine months of 2018 reduced revenue by $2.3 million. Excluding this impact, revenue decreased approximately 11.2%.

The decrease in net sales was driven by lower sales of SmartFresh in the northern hemisphere and Latin America. The decrease in SmartFresh sales is primarily due to a delayed apple harvest in North America and Europe. The Company anticipates a shift in sales from the third quarter to the fourth quarter as a result of this delay. In addition, Tecnidex sales decreased 1.2% on an absolute basis and increased 4.7% on a constant currency basis versus the prior year period. Offsetting these decreases are growth in sales of Harvista and EthylBloc, which is used to preserve cut flowers, and new revenue associated with our FreshCloud

Table of Contents

product offerings. The Company anticipates that its SmartFresh business will recover in the fourth quarter as a result of the delayed harvest and that Harvista and Tecnidex will experience growth for full year fiscal 2019 relative to 2018.

Cost of Sales

Cost of sales was $31.5 million for the nine months ended September 30, 2019 as compared to $32.9 million for the nine months ended September 30, 2018. Gross profit margin was 71.1% for the nine months ended September 30, 2019 versus 73.8% for the nine months ended September 30, 2018. The change was in line with our expectations, and mostly due to a higher percentage of Harvista and Tecnidex revenue, which generate lower margins than SmartFresh.

Research and Development Expenses

Research and development expenses were $9.7 million and $10.3 million, respectively, for the nine months ended September 30, 2019 and September 30, 2018. The decrease in research and development expenses is primarily timing related, and was partially offset by $0.5 million of severance costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $47.0 million for the nine months ended September 30, 2019, compared to $50.1 million for the nine months ended September 30, 2018, a decrease of 6.2%. Included in selling, general and administrative expenses were $6.9 million in the current year and $6.7 million in the prior year of costs associated with non-recurring items that include M&A and litigation along with severance. Excluding these items, selling general and administrative expenses decreased approximately 7.5% over the same period last year, driven by ongoing cost optimization initiatives.

Amortization of Intangibles

Amortization of intangible assets was $35.1 million for the nine months ended September 30, 2019 compared to $34.3 million for the nine months ended September 30, 2018.

Impairment of Intangibles

During the nine months ended September 30, 2019, the Company recorded an impairment charge of $1.0 million associated with the Verigo software following a partnership agreement with a new technology provider. There were no indicators of impairment during the nine months ended September 30, 2018.

Change in Fair Value of Contingent Consideration

The Company recorded a $0.1 million gain in the nine months ended September 30, 2019 related to a change in the fair value of contingent consideration, as compared to a $0.5 million gain in the nine months ended September 30, 2018. As discussed in Note 3 of the accompanying unaudited condensed consolidated financial statements, pursuant to the Company’s Business Combination with Dow that was consummated on July 31, 2015, the Company entered into various forms of contingent consideration, including the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings.

Interest Expense, Net

Interest expense was $26.0 million for the nine months ended September 30, 2019, as compared to $26.3 million for the nine months ended September 30, 2018.

(Loss) gain on foreign currency

Loss on foreign currency was $2.9 million for the nine months ended September 30, 2019, as compared to a $0.5 million gain for the nine months ended September 30, 2018, due primarily to inflation in Argentina during 2019.

Income Taxes

Income tax benefit was $12.5 million for the nine months ended September 30, 2019 compared to income tax expense of $0.2 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, there were changes in valuation allowance positions related to certain foreign and domestic jurisdictions and the elimination of intercompany

Table of Contents

profit activity which did not result in income tax provision adjustments For the nine months ended September 30, 2018, the elimination of intercompany profits resulted in losses that did not receive an income tax benefit.

Table of Contents

Non-GAAP Measure

The following table sets forth the non-GAAP financial measures of EBITDA and Adjusted EBITDA. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company’s management to evaluate the Company’s performance (including incentive bonuses and for bank covenant reporting), are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.

The following is a reconciliation between the non-GAAP financial measures of EBITDA and Adjusted EBITDA to their most directly comparable GAAP financial measure, net income (loss):


(in thousands)	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2018
GAAP net income (loss) including non-controlling interests	$	3,011	$	2,954	$	(31,935)	$	(28,324)
(Benefit) expense for income taxes	(5,653)		1,018		(12,530)		214
Interest expense ⁽¹⁾	8,606		9,132		26,021		26,250
Depreciation and amortization	12,356		12,533		36,692		35,486
Non-GAAP EBITDA	$	18,320	$	25,637	$	18,248	$	33,626
Share-based compensation	959		188		2,111		2,088
Severance related costs ⁽²⁾	344		1,711		1,040		2,046
Other non-recurring costs ⁽³⁾	1,297		2,035		6,305		4,655
(Gain) loss on foreign currency exchange ⁽⁴⁾	(54)		4,731		2,884		(472)
Mark-to-market adjustments, net ⁽⁵⁾	(229)		307		128		543
Impairment of intangible assets ⁽⁶⁾	—		—		992		—
Non-GAAP Adjusted EBITDA	20,637		34,609		$	31,708	$	42,486

(1) Interest on the term loan and accretion for debt discounts, debt issuance costs and contingent consideration

(2) Severance costs related to ongoing cost optimization initiatives

(3) Costs related to certain professional and other infrequent or non-recurring fees, including those associated with transition service agreement, litigation and M&A related fees

(4) (Gain) loss on foreign currency exchange relates to net losses and gains resulting from transactions denominated in a currency other than the entity's functional currency

(5) Non-cash adjustment to the fair value of contingent consideration

(6) Impairment of intangible assets related to software

Liquidity and Capital Resources

Cash Flow


(in thousands)	Nine Months Ended September 30, 2019	Nine Months Ended September 30, 2018
Net cash used in operating activities	(8,684)	(16,215)
Net cash used in investing activities	(3,521)	(4,766)
Net cash used in financing activities	(5,056)	(13,517)

Cash used in operating activities was $(8.7) million for the nine months ended September 30, 2019, as compared to cash used in operating activities of $(16.2) million for the nine months ended September 30, 2018. In 2019, net loss before non-cash depreciation and amortization, impairment of intangibles and changes in fair value of contingent consideration (including accretion) was $8.5 million. Other non-cash charges included stock-based compensation of $2.3 million, $2.0 million of deferred financing costs, a $(14.5) million increase in the net deferred taxes, interest income recognized on the interest rate swap of $(1.1) million, and other non-cash items of $0.2 million. Additionally, the change in net operating assets was $(6.2) million in 2019. For the nine months ended September 30, 2018, net loss before non-cash depreciation and amortization and changes in fair value of contingent consideration (including accretion) was $10.6 million. Other non-cash charges included cash received on the Company's interest rate swap of $4.0 million, stock-based compensation of $2.0 million, $1.8 million of deferred financing costs, a $(0.1) million increase in net deferred tax asset, and other non-cash items of $0.8 million. Additionally, the change in net operating assets was $(35.3) million for the nine months ended September 30, 2018.

Table of Contents

Cash used in investing activities was $(3.5) million for the nine months ended September 30, 2019, as compared to $(4.8) million for the nine months ended September 30, 2018. Cash used in investing activities in 2019 was for the purchase of fixed assets and leasehold improvements of $(3.3) million and for other investments of $(0.3) million. Cash used in 2018 was for the purchase of fixed assets and leasehold improvements of $(3.2) million and as asset acquisition of $(1.6) million.

Cash used in financing activities was $(5.1) million for the nine months ended September 30, 2019, as compared to $(13.5) million for the nine months ended September 30, 2018. Cash used in financing activities in 2019 was for the repayment of debt in the amount of $(5.1) million. Cash used in 2018 was for the repayment of debt in the amount of $(3.5) million and the $(10.0) million payment related to the Dow liabilities settlement.

Liquidity

At September 30, 2019, we had $18.7 million of cash and cash equivalents, compared to $34.9 million at December 31, 2018.

Term Loan

On July 31, 2015, certain of our subsidiaries entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a $425.0 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a revolving loan facility (the “Revolving Loan”). On January 31, 2019, the Revolving Loan was amended to reduce the total availability from $25.0 to $12.5, extend the maturity date from July 31, 2019 to December 31, 2020 and to amend certain financial covenants. The Revolving Loan includes a $10.0 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of December 31, 2020. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75%, or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries, and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.

The net proceeds of the Term Loan were used to fund a portion of the purchase price payable to Rohm and Haas Company, a subsidiary of Dow, in connection with the Business Combination. Amounts available under the Revolving Loan may also be used for working capital, general corporate purposes, and other uses, all as more fully set forth in the Credit Facility.

As of September 30, 2019, the Company was in compliance with the senior secured net leverage covenant and the other covenants in the facility.

As of the Closing Date the Company incurred approximately $12.9 million in debt issuance costs related to the Term Loan and $1.3 million in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The interest expense related to the amortization of the debt issuance costs during the three and nine months ended September 30, 2019 was approximately $0.6 million and $1.7 million, respectively. The interest expense related to the amortization of the debt issuance costs during the three and nine months ended September 30, 2018 was approximately $0.6 million and $1.8 million, respectively.

Off-Balance Sheet Arrangements

As of September 30, 2019, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations other than as detailed below. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

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

Table of Contents

PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are named as a defendant in legal actions arising from our normal business activities. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.

ITEM 1A. RISK FACTORS

Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider, in addition to the historical financial statements and related notes and other information set forth in this Report, the risk factors discussed in Part I - Item 1A - Risk Factors included in our 2018 Form 10-K, all of which could materially affect our business or future results. There have been no material changes to the risk factors disclosed in our 2018 Form 10-K. If any of the risks or uncertainties described in any of such risk factors actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.

Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS


Exhibit No.		Description
3.1	(1)	Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015.
3.2	(4)	Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation.
3.3	(1)	Series A Certificate of Designation.
3.4	(2)	Amended and Restated Bylaws.
3.5	(3)	Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015.
3.6	(5)	Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of November 2, 2017.
4.1	(1)	Specimen Common Stock Certificate.
4.2	(1)	Specimen Warrant Certificate.
10.1	(6)	Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Jordi Ferre.
10.2	(6)	Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Graham Miao.
10.3	(6)	Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Thomas Ermi.
10.4	(6)	Amended and Restated Employment Agreement, dated August 30, 2019, between the Company and Thomas Ermi.
31.1	*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2	*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	*	XBRL Instance Document
101.SCH	*	XBRL Taxonomy Extension Schema Document
101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document

———————————————————————————————

* Filed herewith.

(1) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015.

(2) Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.

(3) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015.

(4) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 7, 2017.

(5) Incorporated by reference to an exhibit to the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission on November 9, 2017.

(6) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 6, 2019.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			AgroFresh Solutions, Inc.
			Date:			November 7, 2019

			/s/ Jordi Ferre
			By:			Jordi Ferre
			Title:			Chief Executive Officer

			/s/ Graham Miao
			By:			Graham Miao
			Title:			Chief Financial Officer