AgroFresh Solutions, Inc. - Quarter Report: 2019 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
o 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 | x | Non-accelerated filer ¨ | Smaller reporting company x | Emerging growth company x | ||||||||||||
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 May 3, 2019 was 51,453,233.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
| March 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 39,995 | $ | 34,852 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $1,887 and $2,336, respectively | 63,923 | 67,942 | ||||||
| Inventories | 22,441 | 24,807 | ||||||
| Other current assets | 13,947 | 15,608 | ||||||
| Total current assets | 140,306 | 143,209 | ||||||
| Property and equipment, net | 14,095 | 13,289 | ||||||
| Goodwill | 6,649 | 6,670 | ||||||
| Intangible assets, net | 700,039 | 711,967 | ||||||
| Deferred income tax assets | 8,361 | 7,332 | ||||||
| Other assets | 23,968 | 16,820 | ||||||
| TOTAL ASSETS | $ | 893,418 | $ | 899,287 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 7,377 | $ | 7,530 | ||||
| Current portion of long-term debt | 6,836 | 6,419 | ||||||
| Income taxes payable | 5,418 | 4,815 | ||||||
| Accrued expenses and other current liabilities | 51,246 | 45,340 | ||||||
| Total current liabilities | 70,877 | 64,104 | ||||||
| Long-term debt | 399,656 | 400,309 | ||||||
| Other noncurrent liabilities | 38,130 | 32,066 | ||||||
| Deferred income tax liabilities | 28,757 | 30,232 | ||||||
| Total liabilities | 537,420 | 526,711 | ||||||
| Commitments and contingencies (see Note 17) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, par value $0.0001; 400,000,000 shares authorized, 51,425,734 and 51,071,573 shares issued and 50,764,353 and 50,410,192 outstanding at March 31, 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 March 31, 2019 and December 31, 2018, respectively | (3,885) | (3,885) | ||||||
| Additional paid-in capital | 536,407 | 535,819 | ||||||
| Accumulated deficit | (151,408) | (138,789) | ||||||
| Accumulated other comprehensive loss | (33,418) | (28,837) | ||||||
| Total AgroFresh stockholders’ equity | 347,701 | 364,313 | ||||||
| Non-controlling interest | 8,297 | 8,263 | ||||||
| Total stockholders' equity | 355,998 | 372,576 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 893,418 | $ | 899,287 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |||||||
| Net sales | $ | 38,940 | $ | 38,351 | ||||
| Cost of sales (excluding amortization, shown separately below) | 11,335 | 10,846 | ||||||
| Gross profit | 27,605 | 27,505 | ||||||
| Research and development expenses | 3,897 | 3,069 | ||||||
| Selling, general, and administrative expenses | 15,898 | 16,311 | ||||||
| Amortization of intangibles | 11,616 | 10,939 | ||||||
| Change in fair value of contingent consideration | 190 | 138 | ||||||
| Operating loss | (3,996) | (2,952) | ||||||
| Other (expense) income | (12) | 70 | ||||||
| (Loss) gain on foreign currency exchange | (419) | 1,931 | ||||||
| Interest expense, net | (8,745) | (8,355) | ||||||
| Loss before income taxes | (13,172) | (9,306) | ||||||
| (Benefit) provision for income taxes | (587) | 3,570 | ||||||
| Net loss including non-controlling interests | $ | (12,585) | $ | (12,876) | ||||
| Less: Net income attributable to non-controlling interests | 34 | 91 | ||||||
| Net loss attributable to AgroFresh Solutions, Inc | $ | (12,619) | $ | (12,967) | ||||
| Net loss per share: | ||||||||
| Basic | $ | (0.25) | $ | (0.26) | ||||
| Diluted | $ | (0.25) | $ | (0.26) | ||||
| Weighted average shares outstanding: | ||||||||
| Basic | 50,042,054 | 49,741,593 | ||||||
| Diluted | 50,042,054 | 49,741,593 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |||||||
| Net loss | $ | (12,585) | (12,876) | |||||
| Other comprehensive (loss) income: | ||||||||
| Unrealized gain on hedging activity, net of tax of $0 and $594, respectively | — | 2,106 | ||||||
| Recognition of gain on hedging activity reclassified to net loss, net of tax of $75 and $0, respectively | (278) | — | ||||||
| Foreign currency translation adjustments | (4,303) | 3,050 | ||||||
| Comprehensive loss | $ | (17,166) | $ | (7,720) | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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 | ||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 1 | $ | — | 51,002,234 | $ | 5 | $ | (3,885) | $ | 533,015 | $ | (108,729) | $ | (12,769) | $ | 8,443 | $ | 416,080 | ||||||||||||||
| Stock-based compensation | — | — | — | — | — | 509 | — | — | $ | — | $ | 509 | ||||||||||||||||||||
| Issuance of restricted stock | — | — | 53,513 | — | — | — | — | — | $ | — | $ | — | ||||||||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | (12,967) | 5,156 | $ | 91 | $ | (7,720) | ||||||||||||||||||||
| Balance at March 31, 2018 | 1 | $ | — | 51,055,747 | $ | 5 | $ | (3,885) | $ | 533,524 | $ | (121,696) | $ | (7,613) | $ | 8,534 | $ | 408,869 | ||||||||||||||
| 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 | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 1 | $ | — | 51,071,573 | $ | 5 | $ | (3,885) | $ | 535,819 | $ | (138,789) | $ | (28,837) | $ | 8,263 | $ | 372,576 | ||||||||||||||
| Stock-based compensation | — | — | — | — | — | 588 | — | — | — | 588 | ||||||||||||||||||||||
| Issuance of stock, net of forfeitures | — | — | 354,161 | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | (12,619) | (4,581) | 34 | (17,166) | ||||||||||||||||||||||
| Balance at March 31, 2019 | 1 | $ | — | 51,425,734 | $ | 5 | $ | (3,885) | $ | 536,407 | $ | (151,408) | $ | (33,418) | $ | 8,297 | $ | 355,998 | ||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (12,585) | $ | (12,876) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 12,061 | 11,273 | ||||||
| Provision for bad debts | (392) | 52 | ||||||
| Stock-based compensation | 588 | 609 | ||||||
| Pension expense | — | 347 | ||||||
| Amortization of deferred financing costs | 630 | 601 | ||||||
| Interest income on interest rate swap | (356) | — | ||||||
| Accretion of contingent consideration | 884 | — | ||||||
| Increase in fair value of contingent consideration | 190 | 138 | ||||||
| Deferred income taxes | (1,781) | 3,630 | ||||||
| Loss on sales of property | 49 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,159 | 5,818 | ||||||
| Inventories | 823 | 3,497 | ||||||
| Prepaid expenses and other current assets | 986 | (430) | ||||||
| Accounts payable | 654 | (7,853) | ||||||
| Accrued expenses and other liabilities | 6,291 | (9,426) | ||||||
| Income taxes payable | 650 | 1,758 | ||||||
| Other assets and liabilities | (1,873) | 6,279 | ||||||
| Net cash provided by operating activities | 8,978 | 3,417 | ||||||
| Cash flows from investing activities: | ||||||||
| Cash paid for property and equipment | (2,586) | (1,905) | ||||||
| Other investments | (250) | — | ||||||
| Net cash used in investing activities | (2,836) | (1,905) | ||||||
| Cash flows from financing activities: | ||||||||
| Payment of Dow liabilities settlement | — | (10,000) | ||||||
| Repayment of long-term debt | (722) | (1,407) | ||||||
| Net cash used in financing activities | (722) | (11,407) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (277) | 2,324 | ||||||
| Net increase (decrease) in cash and cash equivalents | 5,143 | (7,571) | ||||||
| Cash and cash equivalents, beginning of period | $ | 34,852 | $ | 64,533 | ||||
| Cash and cash equivalents, end of period | $ | 39,995 | $ | 56,962 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Cash paid for interest | $ | 27 | $ | 7,242 | ||||
| Cash paid for income taxes | $ | 599 | $ | 156 | ||||
| Supplemental schedule of non-cash investing and financing activities: | ||||||||
| Accrued purchases of property and equipment | $ | 102 | $ | — | ||||
| Right of use assets obtained in exchange for new lease liabilities | $ | 33 | $ | — | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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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 FreshnessTM, 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 HarvistaTM and LandSpringTM, to its marquee SmartFreshTM Quality System, which includes SmartFreshTM, FreshCloudTM and ActiMistTM, 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, RipeLockTM, 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 and combined 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 March 31, 2019, the Company’s subsidiary in Argentina had a net asset position of $21.3 million. Net sales attributable to Argentina were approximately 15% of the Company’s consolidated net sales for each of the three months ended March 31, 2019 and 2018.
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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 March 31, 2019 | |||||||||||||||||
| (in thousands) | |||||||||||||||||
| Region | North America (1) | EMEA (2) | Latin America (3) | Asia Pacific (4) | Total Revenue | ||||||||||||
| Product | |||||||||||||||||
| 1-MCP based | $ | 2,602 | $ | 6,781 | $ | 19,469 | $ | 4,353 | $ | 33,205 | |||||||
| Fungicides, waxes, coatings, sanitizers | — | 4,887 | $ | 565 | — | 5,452 | |||||||||||
| Other* | 123 | 12 | $ | 139 | 9 | 283 | |||||||||||
| $ | 2,725 | $ | 11,680 | $ | 20,173 | $ | 4,362 | $ | 38,940 | ||||||||
| Pattern of Revenue Recognition | |||||||||||||||||
| Products transferred at a point in time | $ | 2,290 | $ | 11,074 | $ | 20,143 | $ | 4,329 | $ | 37,836 | |||||||
| Services transferred over time | 435 | 606 | $ | 30 | 33 | 1,104 | |||||||||||
| $ | 2,725 | $ | 11,680 | $ | 20,173 | $ | 4,362 | $ | 38,940 | ||||||||
| Revenues for the three months ended March 31, 2018 | |||||||||||||||||
| (in thousands) | |||||||||||||||||
| Region | North America (1) | EMEA (2) | Latin America (3) | Asia Pacific (4) | Total Revenue | ||||||||||||
| Product | |||||||||||||||||
| 1-MCP based | $ | 1,962 | $ | 5,120 | $ | 20,949 | $ | 4,328 | $ | 32,359 | |||||||
| Fungicides, waxes, coatings, sanitizers | — | 5,589 | — | — | 5,589 | ||||||||||||
| Other* | 98 | 198 | 6 | 101 | 403 | ||||||||||||
| $ | 2,060 | $ | 10,907 | $ | 20,955 | $ | 4,429 | $ | 38,351 | ||||||||
| Pattern of Revenue Recognition | |||||||||||||||||
| Products transferred at a point in time | $ | 2,047 | $ | 10,905 | $ | 20,949 | $ | 4,328 | $ | 38,229 | |||||||
| Services transferred over time | 13 | 2 | 6 | 101 | $ | 122 | |||||||||||
| $ | 2,060 | $ | 10,907 | $ | 20,955 | $ | 4,429 | $ | 38,351 | ||||||||
*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, South Korea, Taiwan, and Thailand.
Sales of SmartFresh™ accounted for approximately 75% and 76% of the Company's total worldwide net sales for the three months ended March 31, 2019 and 2018, respectively.
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
9
service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the three months ended March 31, 2019 and the twelve months ended December 31, 2018:
| (in thousands) | Balance at January 1, 2019 | Additions | Deductions | Balance at, March 31, 2019 | ||||||||||
| Contract assets: | ||||||||||||||
| Unbilled revenue | $ | 1,956 | $ | 991 | $ | (320) | $ | 2,627 | ||||||
| Contract liabilities: | ||||||||||||||
| Deferred revenue | $ | 1,280 | $ | 1,145 | $ | (1,104) | $ | 1,321 | ||||||
| (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 March 31, 2019. Amounts reclassified from unbilled revenue to accounts receivable for the three months ended March 31, 2019 and for the year ended December 31, 2018 were $0.3 million and $5.9 million, respectively. Amounts reclassified from deferred revenue to revenue for the three months ended March 31, 2019 and the year ended December 31, 2018 were $1.1 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.
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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 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, including using hindsight to determine the lease term of existing leases, the option to not reassesswhether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. 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 March 31, 2019. This represents a non-cash investing and financing 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
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to consideration payable to holders of Tecnidex which resulted in a measurement period adjustment of $2.8 million to the purchase price allocation.
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 singular 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 three months ended March 31, 2019 and March 31, 2018 as follows:
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| Ongoing costs of transition services agreement | $ | 30 | $ | 84 | ||||
| Other expenses | — | 295 | ||||||
| Total incurred expenses | $ | 30 | $ | 379 | ||||
As of each of March 31, 2019 and March 31, 2018, the Company had no outstanding amounts payable to Dow.
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.
In addition, 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 three months ended March 31, 2019, there were no material amounts paid and as of March 31, 2019, there were no material amounts owed to RipeLocker or Mr. Lobisser for consulting services.
5. Inventories
Inventories at March 31, 2019 and December 31, 2018 consisted of the following:
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| (in thousands) | March 31, 2019 | December 31, 2018 | |||||||||
| Raw material | $ | 1,870 | $ | 1,286 | |||||||
| Work-in-process | 4,633 | 4,749 | |||||||||
| Finished goods | 14,896 | 17,535 | |||||||||
| Supplies | 1,042 | 1,237 | |||||||||
| Total inventories | $ | 22,441 | $ | 24,807 | |||||||
6. Other Current Assets
The Company's other current assets at March 31, 2019 and December 31, 2018 consisted of the following:
| (in thousands) | March 31, 2019 | December 31, 2018 | |||||||||
| VAT receivable | $ | 7,640 | $ | 7,854 | |||||||
| Prepaid income tax asset | 4,920 | 5,090 | |||||||||
| Prepaid and other current assets | 1,387 | 2,664 | |||||||||
| Total other current assets | $ | 13,947 | $ | 15,608 | |||||||
7. Property and Equipment
Property and equipment at March 31, 2019 and December 31, 2018 consisted of the following:
| (in thousands, except for useful life data) | Useful life (years) | March 31, 2019 | December 31, 2018 | ||||||||||||||
| Leasehold improvements | 7-20 | $ | 5,621 | $ | 4,647 | ||||||||||||
| Machinery & equipment | 1-12 | 8,597 | 8,193 | ||||||||||||||
| Furniture | 1-12 | 2,068 | 2,712 | ||||||||||||||
| Construction in progress | 2,186 | 1,744 | |||||||||||||||
| 18,472 | 17,296 | ||||||||||||||||
| Less: accumulated depreciation | (4,377) | (4,007) | |||||||||||||||
| Total property and equipment, net | $ | 14,095 | $ | 13,289 | |||||||||||||
Depreciation expense for the three months ended March 31, 2019 and 2018 was $0.4 million and $0.4 million, 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 three months ended March 31, 2019 and the twelve months ended December 31, 2018 were as follows:
| (in thousands) | March 31, 2019 | December 31, 2018 | ||||||
| Balance as of Beginning balance | $ | 6,670 | $ | 9,402 | ||||
| Measurement period adjustment | — | (2,807) | ||||||
| Foreign currency translation | (21) | 75 | ||||||
| Balance as of Ending balance | $ | 6,649 | $ | 6,670 | ||||
See Note 3 for a description of the measurement period adjustment.
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The Company’s intangible assets at March 31, 2019 and December 31, 2018 consisted of the following:
| March 31, 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 | $ | 759,248 | $ | (143,967) | $ | — | $ | 615,281 | $ | 759,290 | $ | (134,151) | $ | — | $ | 625,139 | ||||||||||
| In-process research and development | 39,000 | (5,597) | — | 33,403 | 39,000 | (5,055) | — | 33,945 | ||||||||||||||||||
| Trade name | 25,445 | — | — | 25,445 | 28,507 | — | (2,600) | 25,907 | ||||||||||||||||||
| Service provider network | 2,000 | — | — | 2,000 | 2,000 | — | — | 2,000 | ||||||||||||||||||
| Customer relationships | 19,657 | (1,619) | — | 18,038 | 19,872 | (2,198) | — | 17,674 | ||||||||||||||||||
| Software | 9,380 | (3,563) | — | 5,817 | 9,405 | (2,161) | — | 7,244 | ||||||||||||||||||
| Other | 100 | (45) | — | 55 | 100 | (42) | — | 58 | ||||||||||||||||||
| Total intangible assets | $ | 854,830 | $ | (154,791) | $ | — | $ | 700,039 | $ | 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.
At March 31, 2019, the weighted-average amortization period remaining for the finite-lived intangible assets was 14.7 years. At March 31, 2019, the weighted-average amortization periods remaining for developed technology, customer relationships, in-process R&D, software and other was 16.0, 12.7, 15.3, 2.1, and 3.3 years, respectively.
Estimated annual amortization expense for finite-lived intangible assets subsequent to March 31, 2019 is as follows:
| (in thousands) | Amount | ||||
| 2019 (remaining) | $ | 35,094 | |||
| 2020 | 46,842 | ||||
| 2021 | 43,969 | ||||
| 2022 | 43,325 | ||||
| 2023 | 43,325 | ||||
| Thereafter | 460,039 | ||||
| Total | $ | 672,594 | |||
Amortization expense for intangible assets for the three months ended March 31, 2019 and 2018 was $11.6 million and $10.9 million, respectively.
9. Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities at March 31, 2019 and December 31, 2018 consisted of the following:
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| (in thousands) | March 31, 2019 | December 31, 2018 | ||||||
| Tax amortization benefit contingency | $ | 11,098 | $ | 11,098 | ||||
| Additional consideration due seller | 568 | 379 | ||||||
| Accrued compensation and benefits | 6,825 | 10,192 | ||||||
| Accrued rebates payable | 5,093 | 3,616 | ||||||
| Insurance premium financing payable | 367 | 721 | ||||||
| Severance | 1,143 | 971 | ||||||
| Deferred revenue | 1,321 | 1,280 | ||||||
| Accrued taxes | 5,369 | 5,316 | ||||||
| Accrued interest | 7,808 | — | ||||||
| Lease liability | 2,086 | — | ||||||
| Other | 9,568 | 11,767 | ||||||
| Total accrued and other current liabilities | $ | 51,246 | $ | 45,340 | ||||
Other current liabilities include primarily professional services, litigation and research and development accruals.
10. Debt
The Company’s debt, net of unamortized discounts and deferred financing fees, at March 31, 2019 and December 31, 2018 consisted of the following:
| (in thousands) | March 31, 2019 | December 31, 2018 | |||||||||
| Total Term Loan outstanding | $ | 404,507 | $ | 403,957 | |||||||
| Tecnidex loan outstanding | 1,985 | 2,771 | |||||||||
| Less: Amounts due within one year | 6,836 | 6,419 | |||||||||
| Total long-term debt due after one year | $ | 399,656 | $ | 400,309 | |||||||
At March 31, 2019, the Company evaluated the amount recorded under the Term Loan (defined below) and determined that the fair value was approximately $401.0 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 March 31, 2019 there were $5.6 million of unamortized deferred issuance costs.
Scheduled principal repayments of debt subsequent to March 31, 2019 are as follows:
| (in thousands) | Amount | ||||
| 2019 (remaining) | $ | 5,774 | |||
| 2020 | 4,711 | ||||
| 2021 | 401,625 | ||||
| Total | $ | 412,110 | |||
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 amend certain financial covenants. The Revolving Loan includes a $10.0 million letter-of-credit sub-facility, issuances against
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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 R&H 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 March 31, 2019, there was $410.1 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 months ended March 31, 2019 and 2018 was approximately $0.6 million and $0.6 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 March 31, 2019. The Company had full availability to draw under the Revolving Loan as of March 31, 2019.
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 March 31, 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 included in general and administrative expenses in the condensed consolidated statements of operations. Additional information regarding the Company's operating leases is as follows:
| (in thousands) | Three Months Ended March 31, 2019 | ||||
| Operating Lease Cost | |||||
| Operating leases | $ | 601 | |||
Short-term leases (1) | 31 | ||||
| Total lease expense | $ | 632 | |||
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| Other information on operating leases | |||||
| Cash payments included in operating cash flows | $ | 585 | |||
| Weighted average discount rate | 9.21 | % | |||
| Weighted average remaining lease term in years | 5.83 | ||||
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(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
The following table presents the contractual maturities of the Company's lease liabilities as of March 31, 2019:
| (in thousands) | Lease Liability | ||||
| Remainder of 2019 | $ | 1,779 | |||
| 2020 | 1,911 | ||||
| 2021 | 1,639 | ||||
| 2022 | 1,480 | ||||
| 2023 | 1,277 | ||||
| 2024 and thereafter | 2,377 | ||||
| Total undiscounted lease payments | $ | 10,463 | |||
| Less: present value adjustment | 3,163 | ||||
| Operating lease liability | $ | 7,300 | |||
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 March 31, 2019 and December 31, 2018 consisted of the following:
| (in thousands) | March 31, 2019 | December 31, 2018 | ||||||
| Tax amortization benefit contingency | $ | 30,253 | $ | 29,369 | ||||
| Lease liability | 5,214 | — | ||||||
| Other | 2,663 | 2,697 | ||||||
| Total other noncurrent liabilities | $ | 38,130 | $ | 32,066 | ||||
Other noncurrent liabilities include long-term rebates and deferred rent.
13. Severance
The Company expensed $0.5 million and $0.3 million for severance for the three months ended March 31, 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 March 31, 2019, the Company had $1.1 million severance liability which will be paid out over the next year.
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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 March 31, 2019, there were 50,764,353 shares of common stock outstanding. As of March 31, 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 R&H one share of Series A Preferred Stock. R&H, voting as a separate class, is entitled to appoint one director to the Company’s board of directors for so long as R&H 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
Stock compensation expense for equity-classified and liability-classified awards for the three months ended March 31, 2019 and 2018 was $0.6 million and $0.6 million, respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses, and research and development expenses. At March 31, 2019, there was $6.0 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 2.3 years.
On March 29, 2019, the Company granted the following share-based awards to members of management employed in the United States. These awards will be settled in shares of the Company's common stock and are equity-classified. The grant date fair value of these awards will be recognized on a straight-line basis over the vesting period. The performance-based restricted stock units each have a performance period that ends on December 31, 2021 and the other awards vest ratably on the first, second and third anniversaries of the grant date.
| Number of shares | |||||
| Performance-based restricted stock units | 467,500 | ||||
| Time-based restricted stock | 363,650 | ||||
| Options | 324,450 | ||||
| Total | 1,155,600 | ||||
On March 29, 2019, the Company also granted the following share-based awards to members of management employed in countries outside of the United States. These awards will be settled in cash and are liability-classified. Therefore, the fair value of these liability-classified awards will be re-measured on each balance sheet date. The performance-based phantom shares each have a performance period that ends on December 31, 2021 and the other awards vest ratably on the first, second and third anniversaries of the grant date.
| Number of shares | |||||
| Performance-based phantom shares | 46,200 | ||||
| Service-based phantom shares | 75,250 | ||||
| Stock appreciation rights | 5,450 | ||||
| Total | 126,900 | ||||
The performance-based restricted stock units and phantom shares were valued with a Monte Carlo simulation model using the assumptions in the table below. Based on these assumptions, the grant date fair value of the performance-based restricted stock units and phantom shares was estimated to be $2.97 per share.
| Volatility | 65.1 | % | ||||||
| Risk-free interest rate | 2.36 | % | ||||||
| Dividend yield | — | % | ||||||
| Grant date stock price | $3.34 | |||||||
| Performance period | 2.8 years | |||||||
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The stock options and stock appreciation rights were valued with a Black-Scholes option pricing model using the assumptions in the table below. Since the Company has limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected term of the Options and the actual volatility for the Company since the Business Combination. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the expected term of the Options. The expected life was estimated using the simplified method. Based on these assumptions, the grant-date fair value of the stock options and stock appreciation rights was estimated to be $1.72.
| Volatility | 52.33 | % | ||||||
| Risk-free interest rate | 2.27 | % | ||||||
| Dividend yield | — | % | ||||||
| Grant date stock price | $3.34 | |||||||
| Expected life | 6 years | |||||||
The fair value of the time-based restricted stock and the service-based phantom shares is equal to the closing price of the Company’s common stock on the grant date of the awards.
16. Earnings Per Share
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Due to the loss for the three months ended March 31, 2019, dilutive loss per share is the same as basic loss per share as the adjustment for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock and warrants would be anti-dilutive.
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net loss per common share:
| Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | |||||||
| Basic weighted-average common shares outstanding | 50,042,054 | 49,741,593 | ||||||
| Effect of dilutive options, performance stock units and restricted stock | — | — | ||||||
| Diluted weighted-average shares outstanding | 50,042,054 | 49,741,593 | ||||||
Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company's common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.
The following represents amounts that could potentially dilute basic earnings per share in the future:
| (in thousands, except share data) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
Stock-based compensation awards(1): | ||||||||
| Stock options | 962,795 | 63,019 | ||||||
| Restricted stock to non-directors | 692,947 | 610,642 | ||||||
| Restricted stock to directors | 64,369 | 122,929 | ||||||
| Warrants: | ||||||||
| Private placement warrants | 6,160,000 | 6,160,000 | ||||||
| Public warrants | 9,823,072 | 9,823,072 | ||||||
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(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. Performance share units are considered anti-dilutive if the performance targets upon which the issuance of the shares is contingent have not been achieved and the respective performance period has not been completed as of the end of the current period.
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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 March 31, 2019, and March 31, 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 months ended March 31, 2019 was 4.5% compared to the effective tax rate for the three months ended March 31, 2018 of (38.4)%.
The effective tax rate for the three months ended March 31, 2019 differs from the U.S. statutory tax rate of 21%, due to a change in the valuation allowance related to deferred tax assets that are not able to be realized and other unbenefited losses. The cumulative unbenefited losses related to the elimination of intercompany profit in inventory, and the changes in the valuation allowance related to the Japan, Netherlands, and Turkey jurisdictions where there is not sufficient evidence to support future taxable income. In addition to the changes in valuation allowances, the effective tax rate is impacted by certain provisions of the TCJA. The limitation and deductibility of U.S. interest expense, and the inclusion of GILTI reduced the overall tax benefit for the Company. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore did not provide any deferred taxes in the consolidated financial statements at March 31, 2019.
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 SmartFreshTM, HarvistaTM, RipelockTM and FreshCloud. Tecnidex is a provider of fungicides, sanitizers, waxes, and coatings primarily focused on the citrus market.
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 three months ended March 31, 2019 and 2018.
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| AgroFresh Core | ||||||||
| Revenues | $ | 33,488 | $ | 32,762 | ||||
| Gross Profit | 25,133 | 24,862 | ||||||
| Tecnidex | ||||||||
| Revenues | 5,452 | 5,589 | ||||||
| Gross Profit | 2,472 | 2,643 | ||||||
| Total Revenues | $ | 38,940 | $ | 38,351 | ||||
| Total Gross Profit | $ | 27,605 | $ | 27,505 | ||||
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
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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.
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 instrument liability/(asset) that are measured at fair value on a recurring basis as of March 31, 2019:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Tax amortization benefit contingency(1) | $ | — | $ | — | $ | 41,351 | $ | 41,351 | ||||||
| Contingent consideration(2) | — | — | 569 | 569 | ||||||||||
| Stock appreciation rights(3) | — | — | 72 | 72 | ||||||||||
| Phantom shares(4) | — | — | 447 | 447 | ||||||||||
| Total | $ | — | $ | — | $ | 42,439 | $ | 42,439 | ||||||
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 related to acquisition(2) | — | — | 379 | 379 | ||||||||||
| Stock appreciation rights(3) | — | — | 146 | 146 | ||||||||||
| Phantoms shares(4) | — | — | 404 | 404 | ||||||||||
| Total | $ | — | $ | — | $ | 41,396 | $ | 41,396 | ||||||
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(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, with the current portion tax effected at 21.5% and the non-current portion tax effected at 21.5% due to the TCJA enacted in the U.S. 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 three months ended March 31, 2019. The valuation technique used did not change during the three months ended March 31, 2019.
(4) The fair value of phantom shares is based on the fair value of the Company's common stock. The valuation technique used did not change during the three months ended March 31, 2019.
There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the three months ended March 31, 2019.
At March 31, 2019, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately $401.0 million. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.
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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 liability/(asset) that are measured at fair value on a recurring basis.
| (in thousands) | Tax amortization benefit contingency | Contingent consideration related to acquisition | Stock appreciation rights | Phantom shares | Total | ||||||||||||
| Balance, December 31, 2018 | $ | 40,467 | $ | 379 | $ | 146 | $ | 404 | $ | 41,396 | |||||||
| Accretion | 884 | — | — | — | 884 | ||||||||||||
| Tecnidex acquisition | — | 190 | — | — | 190 | ||||||||||||
| Stock compensation expense | — | — | (74) | 43 | (31) | ||||||||||||
| Balance, March 31, 2019 | $ | 41,351 | $ | 569 | $ | 72 | $ | 447 | $ | 42,439 | |||||||
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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 measure EBITDA, which is not presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). This non-GAAP financial measure is being presented because management believes that it provides readers with additional insight into the Company’s operational performance relative to earlier periods and relative to its competitors. EBITDA is a key measure used by the Company to evaluate its performance. The Company does not intend for this non-GAAP financial measure to be a substitute for any GAAP financial information. Readers of this MD&A should use this non-GAAP financial measure only in conjunction with the comparable GAAP financial measure. A reconciliation of 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. SmartFreshTM, 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
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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 catalogue of solutions that enhanced AgroFresh’s fungicide offering, ActiMistTM, 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, HarvistaTM 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 RipeLockTM Quality 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 recently launched our FreshCloudTM 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 InsightsTM, 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 ScreeningTM, 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 InsightsTM combines sensor technology and proprietary 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 our two core crops of apples and pears 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.
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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 -
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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.
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Results of Operations
The following table summarizes the results of operations for the three months ended March 31, 2019 and March 31, 2018:
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| Net sales | $ | 38,940 | $ | 38,351 | ||||
| Cost of sales (excluding amortization, shown separately below) | 11,335 | 10,846 | ||||||
| Gross profit | 27,605 | 27,505 | ||||||
| Research and development expenses | 3,897 | 3,069 | ||||||
| Selling, general, and administrative expenses | 15,898 | 16,311 | ||||||
| Amortization of intangibles | 11,616 | 10,939 | ||||||
| Change in fair value of contingent consideration | 190 | 138 | ||||||
| Operating loss | (3,996) | (2,952) | ||||||
| Other (expense) income | (12) | 70 | ||||||
| (Loss) gain on foreign currency exchange | (419) | 1,931 | ||||||
| Interest expense, net | (8,745) | (8,355) | ||||||
| Loss before income taxes | (13,172) | (9,306) | ||||||
| (Benefit) provision for income taxes | (587) | 3,570 | ||||||
| Net loss including non-controlling interests | $ | (12,585) | $ | (12,876) | ||||
| Less: Net income attributable to non-controlling interests | 34 | 91 | ||||||
| Net loss attributable to AgroFresh Solutions, Inc | (12,619) | (12,967) | ||||||
Comparison of Results of Operations for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Net Sales
Net sales were $38.9 million for the three months ended March 31, 2019, as compared to net sales of $38.4 million for the three months ended March 31, 2018, an increase of 1.5%. The impact of the change in foreign currency exchange rates compared to the first quarter of 2018 reduced revenue by $0.6 million. Excluding this impact, revenue increased approximately 3%.
The increase in net sales was driven by growth in our core business, which includes SmartFresh and Harvista, in our Middle East and Africa region, with particular strength in South Africa. We also experienced growth in sales of EthylBloc product, which is used to preserve cut flowers, and in FreshCloud, the Company's newest product offering. Additionally, Tecnidex performed well, growing 5% overall on a constant currency basis, driven by 18% constant currency growth in our fungicide, waxes and coatings business, partially offset by a decline in our equipment business due to timing of order delivery. In the Latin America region, the Company's core business was impacted by a delayed season. We also realized our first commercial sales of Harvista in Australia.
Cost of Sales
Cost of sales was $11.3 million for the three months ended March 31, 2019 as compared to $10.8 million for the three months ended March 31, 2018. Gross profit margin was 70.9% for the three months ended March 31, 2019 versus 71.7% for the three months ended March 31, 2018. The change was in line with our expectations, and mostly due to foreign exchange and product mix.
Research and Development Expenses
Research and development expenses were $3.9 million and $3.1 million, respectively, for the three months ended March 31, 2019 and March 31, 2018. The increase in research and development expenses was primarily driven by $0.5 million of severance costs associated with ongoing cost optimization initiatives along with timing of project expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $15.9 million for the three months ended March 31, 2019 compared to $16.3 million for the three months ended March 31, 2018, a decrease of 2.5%. Included in selling, general and administrative expenses
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were $3.2 million in the current year and $2.0 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 12% over the same period last year.
Amortization of Intangibles
Amortization of intangible assets was $11.6 million for the three months ended March 31, 2019 compared to $10.9 million for the three months ended March 31, 2018.
Change in Fair Value of Contingent Consideration
The Company recorded a $0.2 million gain in the three months ended March 31, 2019 related to a change in the fair value of contingent consideration, as compared to a $0.1 million gain in the three months ended March 31, 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 $8.7 million for the three months ended March 31, 2019, as compared to $8.4 million for the three months ended March 31, 2018.
(Loss) gain on foreign currency
Loss on foreign currency was $0.4 million for the three months ended March 31, 2019, as compared to a $1.9 million gain for the three months ended March 31, 2018.
Income Taxes
Income tax benefit was $0.6 million for the three months ended March 31, 2019 compared to income tax expense of $3.6 million for the three months ended March 31, 2018. During the three months ended March 31, 2019, certain losses occurred that did not receive a tax benefit. The cumulative unbenefited losses relate to the elimination of intercompany profit in inventory. There were also changes in valuation allowances within the Japan, Netherlands, and Turkey tax jurisdictions. In addition to the unbenefited losses, certain provisions of the TCJA impacted the Company. The limitation and deductibility of U.S. interest expense, and the inclusion of GILTI reduced the overall tax benefit for the Company.
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Non-GAAP Measure
The following table sets forth the non-GAAP financial measure of EBITDA. The Company believes this non-GAAP financial measure provides meaningful supplemental information as it is used by the Company’s management to evaluate the Company’s performance, is more indicative of future operating performance of the Company, and facilitates a better comparison among fiscal periods, as the non-GAAP measure excludes items that are not considered core to the Company’s operations. 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 reconciliation between the non-GAAP financial measure of EBITDA to its most directly comparable GAAP financial measure, net loss:
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| GAAP net loss including non-controlling interests | $ | (12,585) | $ | (12,876) | ||||
| (Benefit) provision for income taxes | (587) | 3,570 | ||||||
Interest expense(1) | 8,745 | 8,355 | ||||||
| Depreciation and amortization | 12,061 | 11,273 | ||||||
| Non-GAAP EBITDA | $ | 7,634 | $ | 10,322 | ||||
———————————————————————————————
(1) Interest on the term loan and accretion for debt discounts, debt issuance costs and contingent consideration.
Liquidity and Capital Resources
Cash Flow
| (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | ||||||
| Net cash provided by operating activities | 8,978 | 3,417 | ||||||
| Net cash used in investing activities | (2,836) | (1,905) | ||||||
| Net cash used in financing activities | (722) | (11,407) | ||||||
Cash provided by operating activities was $9.0 million for the three months ended March 31, 2019, as compared to cash provided by operating activities of $3.4 million for the three months ended March 31, 2018. In 2019, net loss before non-cash depreciation and amortization and changes in fair value of contingent consideration (including accretion) was $0.6 million. Other non-cash charges included stock-based compensation of $0.6 million, $0.6 million of deferred financing costs, a $1.8 million decrease in the net deferred taxes, interest income recognized on the interest rate swap of $(0.4) million, and other non-cash items of $(0.3) million. Additionally, the change in net operating assets was $9.7 million in 2019. For the three months ended March 31, 2018, net income before non-cash depreciation and amortization and changes in fair value of contingent consideration (including accretion) was $(1.5) million. Other non-cash charges included stock-based compensation of $0.6 million, $0.6 million of deferred financing costs, a $3.6 million increase in net deferred tax asset, and other non-cash items of $0.4 million. Additionally, the change in net operating assets was $(0.4) million for the three months ended March 31, 2018.
Cash used in investing activities was $(2.8) million for the three months ended March 31, 2019, as compared to $(1.9) million for the three months ended March 31, 2018. Cash used in investing activities in 2019 was for the purchase of fixed assets and leasehold improvements of $(2.6) million and for other investments of $(0.3) million. Cash used in 2018 was for the purchase of fixed assets and leasehold improvements of $(1.9) million.
Cash used in financing activities was $(0.7) million for the three months ended March 31, 2019, as compared to $(11.4) million for the three months ended March 31, 2018. Cash used in financing activities in 2019 was for the repayment of debt in the amount of $(0.7) million. Cash used in 2018 was for the repayment of debt in the amount of $(1.4) million and the $(10.0) million payment related to the Dow liabilities settlement.
Liquidity
At March 31, 2019, we had $40.0 million of cash and cash equivalents, compared to $34.9 million at December 31, 2018.
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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 March 31, 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 accretion in interest expense during the three months ended March 31, 2019 and 2018 was approximately $0.6 million and $0.6 million, respectively.
Off-Balance Sheet Arrangements
As of March 31, 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.
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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 has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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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.
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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.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | |||||||
| (1) | Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015. | |||||||
| (4) | Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation. | |||||||
| (1) | Series A Certificate of Designation. | |||||||
| (2) | Amended and Restated Bylaws. | |||||||
| (3) | Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015. | |||||||
| (5) | Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of November 2, 2017. | |||||||
| (1) | Specimen Common Stock Certificate. | |||||||
| (1) | Specimen Warrant Certificate. | |||||||
| (6) | Amendment No. 2 to the Credit Agreement dated July 31, 2015. | |||||||
| * | 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. | |||||||
| * | 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. | |||||||
| * | 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 February 1, 2019.
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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: | May 7, 2019 | |||||||
| /s/ Jordi Ferre | ||||||||
| By: | Jordi Ferre | |||||||
| Title: | Chief Executive Officer | |||||||
| /s/ Graham Miao | ||||||||
| By: | Graham Miao | |||||||
| Title: | Chief Financial Officer | |||||||
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