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, 2017
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)
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 ¨ | Emerging growth company x |
(Do not check if a smaller reporting company) | ||||
If an emerging growth company. indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of common stock outstanding as of May 5, 2017 was 50,280,826.
TABLE OF CONTENTS
| Page | |||
2
PART I - FINANCIAL INFORMATION
AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
| March 31, 2017 | December 31, 2016 | |||||
| ASSETS | ||||||
| Current Assets: | ||||||
| Cash and cash equivalents | $ | 84,858 | $ | 77,312 | ||
| Accounts receivable, net of allowance for doubtful accounts of $1,422 and $1,242, respectively | 55,167 | 63,675 | ||||
| Inventories | 16,156 | 15,467 | ||||
| Other current assets | 13,642 | 14,047 | ||||
| Total current assets | 169,823 | 170,501 | ||||
| Property and equipment, net | 7,748 | 8,048 | ||||
| Intangible assets, net | 766,868 | 776,584 | ||||
| Deferred income tax assets | 8,227 | 8,459 | ||||
| Other assets | 2,330 | 2,252 | ||||
| TOTAL ASSETS | $ | 954,996 | $ | 965,844 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| Current Liabilities: | ||||||
| Accounts payable | $ | 9,956 | $ | 12,133 | ||
| Current portion of long-term debt | 4,250 | 15,250 | ||||
| Income taxes payable | 3,121 | 3,121 | ||||
| Accrued expenses and other current liabilities | 67,281 | 66,366 | ||||
| Total current liabilities | 84,608 | 96,870 | ||||
| Long-term debt | 403,431 | 392,996 | ||||
| Other noncurrent liabilities | 145,455 | 140,833 | ||||
| Total liabilities | 633,494 | 630,699 | ||||
| Commitments and contingencies (see Note 16) | ||||||
| Stockholders’ equity: | ||||||
| Common stock, par value $0.0001; 400,000,000 shares authorized, 50,942,207 and 50,698,587 shares issued and 50,280,826 and 50,037,206 shares outstanding at March 31, 2017 and December 31, 2016, respectively | 5 | 5 | ||||
| Preferred stock; par value $0.0001, 1 share authorized and outstanding at March 31, 2017 and December 31, 2016 | — | — | ||||
| Treasury stock; par value $0.0001, 661,381 shares at March 31, 2017 and December 31, 2016 | (3,885 | ) | (3,885 | ) | ||
| Additional paid-in capital | 475,854 | 475,598 | ||||
| Accumulated deficit | (144,229 | ) | (132,200 | ) | ||
| Accumulated other comprehensive loss | (6,243 | ) | (4,373 | ) | ||
| Total stockholders' equity | 321,502 | 335,145 | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 954,996 | $ | 965,844 | ||
See accompanying notes to condensed consolidated financial statements.
3
AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | |||||
| Net sales | $ | 32,730 | $ | 28,411 | ||
| Cost of sales (excluding amortization, shown separately below) | 5,839 | 23,820 | ||||
| Gross profit | 26,891 | 4,591 | ||||
| Research and development expenses | 3,297 | 4,429 | ||||
| Selling, general, and administrative expenses | 16,431 | 19,666 | ||||
| Amortization of intangibles | 10,445 | 9,899 | ||||
| Change in fair value of contingent consideration | 215 | (3,100 | ) | |||
| Operating loss | (3,497 | ) | (26,303 | ) | ||
| Other income | 40 | 55 | ||||
| Gain on foreign currency exchange | 3,103 | 830 | ||||
| Interest expense, net | (10,293 | ) | (15,008 | ) | ||
| Loss before income taxes | (10,647 | ) | (40,426 | ) | ||
| Income tax provision (benefit) | 1,382 | (15,289 | ) | |||
| Net loss | $ | (12,029 | ) | $ | (25,137 | ) |
| Loss per share: | ||||||
| Basic | $ | (0.24 | ) | $ | (0.51 | ) |
| Diluted | $ | (0.24 | ) | $ | (0.51 | ) |
| Weighted average shares outstanding: | ||||||
| Basic | 49,661,469 | 49,718,153 | ||||
| Diluted | 49,661,469 | 49,718,153 | ||||
See accompanying notes to 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, 2017 | Three Months Ended March 31, 2016 | |||||
| Net loss | $ | (12,029 | ) | $ | (25,137 | ) |
| Other comprehensive loss: | ||||||
| Foreign currency translation adjustments | (1,870 | ) | (544 | ) | ||
| Comprehensive loss | $ | (13,899 | ) | $ | (25,681 | ) |
See accompanying notes to 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 Income | Total Stockholders’ Equity | |||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | |||||||||||||||||||||
| Balance at December 31, 2015 | 1 | $ | — | 49,940,548 | $ | 5 | $ | (2,397 | ) | $ | 472,494 | $ | (20,640 | ) | $ | (5,559 | ) | $ | 443,903 | ||||||
| Stock-based compensation | — | — | — | — | — | 1,071 | — | — | 1,071 | ||||||||||||||||
| Issuance of restricted stock | — | — | 621,628 | — | — | — | — | — | — | ||||||||||||||||
| Repurchase of stock for treasury | — | — | — | — | (1,488 | ) | — | — | — | (1,488 | ) | ||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | (25,137 | ) | (544 | ) | (25,681 | ) | |||||||||||||
| Balance at March 31, 2016 | 1 | $ | — | 50,562,176 | $ | 5 | $ | (3,885 | ) | $ | 473,565 | $ | (45,777 | ) | $ | (6,103 | ) | $ | 417,805 | ||||||
| Preferred Stock | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | |||||||||||||||||||||
| Balance at December 31, 2016 | 1 | $ | — | 50,698,587 | $ | 5 | $ | (3,885 | ) | $ | 475,598 | $ | (132,200 | ) | $ | (4,373 | ) | $ | 335,145 | ||||||
| Stock-based compensation | — | — | — | — | — | 216 | — | — | 216 | ||||||||||||||||
| Transfer of director compensation from liability to equity | — | — | — | — | — | 40 | — | — | 40 | ||||||||||||||||
| Issuance of restricted stock | — | — | 243,620 | — | — | — | — | — | — | ||||||||||||||||
| Comprehensive loss | — | — | — | — | — | — | (12,029 | ) | (1,870 | ) | (13,899 | ) | |||||||||||||
| Balance at March 31, 2017 | 1 | $ | — | 50,942,207 | $ | 5 | $ | (3,885 | ) | $ | 475,854 | $ | (144,229 | ) | $ | (6,243 | ) | $ | 321,502 | ||||||
See accompanying notes to 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, 2017 | Three Months Ended March 31, 2016 | ||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | (12,029 | ) | $ | (25,137 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||
| Depreciation and amortization | 10,978 | 10,837 | ||||
| Provision for bad debts | 180 | — | ||||
| Stock-based compensation for equity classified awards | 216 | 1,071 | ||||
| Pension expense | 49 | — | ||||
| Amortization of inventory fair value adjustment | — | 18,505 | ||||
| Amortization of deferred financing costs | 579 | 557 | ||||
| Accretion of contingent consideration | 3,704 | 7,835 | ||||
| Increase (decrease) in fair value of contingent consideration | 215 | (3,100 | ) | |||
| Deferred income taxes | 232 | (13,845 | ) | |||
| Loss on sales of property | 81 | 6 | ||||
| Other | 43 | 981 | ||||
| Changes in operating assets and liabilities: | ||||||
| Accounts receivable | 9,148 | 8,704 | ||||
| Inventories | (637 | ) | 1,845 | |||
| Prepaid expenses and other current assets | 407 | (2,803 | ) | |||
| Accounts payable | (5,013 | ) | 5,724 | |||
| Accrued expenses and other liabilities | (716 | ) | (2,124 | ) | ||
| Income taxes payable | (9 | ) | 894 | |||
| Other assets and liabilities | 1,408 | — | ||||
| Net cash provided by operating activities | 8,836 | 9,950 | ||||
| Cash flows from investing activities: | ||||||
| Cash paid for property and equipment | (1,014 | ) | (850 | ) | ||
| Proceeds from sale of property | — | 8 | ||||
| Other investments | (350 | ) | — | |||
| Net cash used in investing activities | (1,364 | ) | (842 | ) | ||
| Cash flows from financing activities: | ||||||
| Repayment of long term debt | (1,063 | ) | (1,062 | ) | ||
| Repurchase of stock for treasury | — | (1,488 | ) | |||
| Net cash used in financing activities | (1,063 | ) | (2,550 | ) | ||
| Effect of exchange rate changes on cash and cash equivalents | 1,137 | 632 | ||||
| Net increase in cash and cash equivalents | 7,546 | 7,190 | ||||
| Cash and cash equivalents, beginning of period | 77,312 | 57,765 | ||||
| Cash and cash equivalents, end of period | $ | 84,858 | $ | 64,955 | ||
| Supplemental disclosures of cash flow information: | ||||||
| Cash paid for interest | $ | 6,085 | $ | 6,204 | ||
| Cash paid for income taxes | $ | 679 | $ | 1,691 | ||
| Supplemental schedule of non-cash investing and financing activities: | ||||||
| Accrued purchases of property and equipment | $ | 578 | $ | — | ||
See accompanying notes to condensed consolidated financial statements.
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AgroFresh Solutions, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Description of Business |
AgroFresh Solutions, Inc. (the “Company”) is a global leader in the food quality preservation and waste reduction space, providing proprietary advanced technologies and innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance its freshness, quality and value to maximize the percentage of produce supplied to the market relative to the amount of produce grown, as well as increase consumer appeal of product at retail. The Company currently offers SmartFreshTM applications at customer sites through a direct service model and provides advisory services relying on its extensive knowledge on the use of its products over thousands of monitored applications. The Company operates in over 40 countries and currently derives the majority of its revenue working with customers to protect the value of apples, pears, and other produce during storage. Additionally the Company has a number of different solutions and application technologies that have either been launched (Harvista, RipeLock, LandSpring) or will be launched in the future that will seek to extend its footprint to other crops and steps of the global produce supply chain.
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 target 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 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 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, 2016. As used in these notes to the consolidated financial statements, the “AgroFresh Business” refers to the business conducted prior to the closing of the Business Combination by The Dow Chemical Company (“Dow”) through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States.
Recently Issued Accounting Guidance
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU No. 2017-07 requires employers to separate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.
8
In January 2017, the FASB issued ASU No. 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 completes additional business combinations. The Company's goodwill balance at December 31, 2016 was zero.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.
Effective January 1, 2017, the Company adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718). ASU No. 2016-09 clarifies several aspects of accounting for share-based compensation including the accounting for excess tax benefits and deficiencies, accounting for forfeitures and the classification of excess tax benefits on the cash flow statement. Excess tax benefits, if any, were formerly recognized in additional paid-in capital and tax deficiencies, if any, were recognized as an offset to accumulated excess tax benefits. If the entity has no previous tax benefit, any deficiencies would have been recognized in the income statement as income tax expense. The changes require all excess tax benefits and tax deficiencies related to share-based payments be identified as income tax expense or benefit in the income statement. The Company did not have any excess tax benefits, resulting in $0 impact to the condensed consolidated financial statements. The other changes required by the ASU are not expected to have any impact on the Company's financial statements.
In February 2015, the FASB issued ASU No. 2016-2, Leases. This update requires management to recognize lease assets and lease liabilities by lessees for all operating leases. ASU No. 2016-2 is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. We are currently evaluating the impact this guidance will have on our financial statements.
Effective January 1, 2017, the Company adopted ASU No. 2015-11, Simplifying the Measurement of Inventory. The update requires an entity to measure inventory at the lower of cost or net realizable value; subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. The Company has adopted this ASU in the first quarter of 2017, which did not have a material impact to the condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance. The core principle of ASU No. 2014-09 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of the standard by one year which results in the new standard being effective for the Company at the beginning of its first quarter of fiscal year 2018. In addition, during March, April, May and December 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract costs and disclosure of performance obligations. The Company plans to adopt the new standard on January 1, 2018 and is still assessing the impact it will have on the financial statements. The new standard will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows from customer contracts, including judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company expects to use the modified retrospective method of adoption, reflecting the cumulative effect of initially applying the new standard to revenue recognition in the first quarter of 2018.
9
| 3. | 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, seconded employees and occupancy. In connection with the Transition Services Agreement, the Company paid Dow a $5.0 million set-up fee which is being amortized over the period during which the services are expected to be provided.
The Company incurred expenses for such services for the three months ended March 31, 2017 and March 31, 2016 as follows:
| (amounts in thousands) | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | ||||
| Amortization of prepayment related to set-up of transition services | $ | 207 | $ | 778 | ||
| Ongoing costs of transition services agreement | 743 | 1,799 | ||||
| Rent expense | 248 | 378 | ||||
| Amortization of prepayment related to Dow importation services | — | 132 | ||||
| Other expenses | 95 | 237 | ||||
| Total incurred expenses | $ | 1,293 | $ | 3,324 | ||
As of March 31, 2017 and March 31, 2016, the Company had an outstanding payable to Dow of $0.3 million and $1.5 million, respectively.
In addition, during 2016, the Company made a minority investment in RipeLocker, LCC ("RipeLocker"), a company led by George Lobisser, a director of AgroFresh. On November 29, 2016, the Company entered into a Mutual Services Agreement (the “Services Agreement”) with George Lobisser and RipeLocker, LLC. Pursuant to the Services Agreement, (i) the Company may 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 may provide consulting services to the Company as may be reasonably requested by the Company from time to time. Pursuant to the Services Agreement, Mr. Lobisser is entitled to receive a consulting fee of $5,000 per full day for time spent performing consulting services under this 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 will 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, 2017, there were no material amounts paid and as of March 31, 2017, there were no material amounts owed to RipeLocker or Mr. Lobisser for consulting services.
| 4. | Inventories |
Inventories at March 31, 2017 and December 31, 2016 consisted of the following:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||
| Raw material | $ | 1,515 | $ | 1,649 | ||
| Work-in-process | 8,757 | 7,963 | ||||
| Finished goods | 5,198 | 5,132 | ||||
| Supplies | 686 | 723 | ||||
| Total inventories | $ | 16,156 | $ | 15,467 | ||
| 5. | Other Current Assets |
The Company's other current assets at March 31, 2017 and December 31, 2016 consisted of the following:
10
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||
| VAT receivable | $ | 10,035 | $ | 9,306 | ||
| Other | 3,607 | 4,741 | ||||
| Total other current assets | $ | 13,642 | $ | 14,047 | ||
| 6. | Property and Equipment |
Property and equipment at March 31, 2017 and December 31, 2016 consisted of the following:
| (in thousands, except for useful life data) | Useful life (years) | March 31, 2017 | December 31, 2016 | ||||
| Leasehold improvements | 7-20 | $ | 1,465 | $ | 1,463 | ||
| Machinery & equipment | 1-12 | 6,509 | 6,066 | ||||
| Furniture | 1-12 | 797 | 843 | ||||
| Construction in progress | 354 | 781 | |||||
| 9,125 | 9,153 | ||||||
| Less: accumulated depreciation | (1,377 | ) | (1,105 | ) | |||
| Total property and equipment, net | $ | 7,748 | $ | 8,048 | |||
Depreciation expense for the three months ended March 31, 2017 and March 31, 2016 was $0.3 million and $0.2 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.
| 7. | Intangible Assets |
The Company’s intangible assets at March 31, 2017 and December 31, 2016 consisted of the following:
| March 31, 2017 | December 31, 2016 | |||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Impairment | Net | |||||||||||||||
| Other intangible assets: | ||||||||||||||||||||||
| Developed technology | $ | 757,000 | $ | (65,439 | ) | $ | 691,561 | $ | 757,000 | $ | (55,623 | ) | $ | — | $ | 701,377 | ||||||
| In-process research and development | 39,000 | (1,264 | ) | 37,736 | 39,000 | (722 | ) | — | 38,278 | |||||||||||||
| Trade name | 26,000 | — | 26,000 | 35,500 | — | (9,500 | ) | 26,000 | ||||||||||||||
| Service provider network | 2,000 | — | 2,000 | 2,000 | — | — | 2,000 | |||||||||||||||
| Customer relationships | 8,000 | (556 | ) | 7,444 | 8,000 | (472 | ) | — | 7,528 | |||||||||||||
| Software | 885 | (154 | ) | 731 | 660 | (104 | ) | — | 556 | |||||||||||||
| Software not yet placed in service | 1,309 | — | 1,309 | 753 | — | — | 753 | |||||||||||||||
| Other | 100 | (13 | ) | 87 | 100 | (8 | ) | — | 92 | |||||||||||||
| Total intangible assets | $ | 834,294 | $ | (67,426 | ) | $ | 766,868 | $ | 843,013 | $ | (56,929 | ) | $ | (9,500 | ) | $ | 776,584 | |||||
At March 31, 2017, the weighted-average amortization period remaining for the finite-lived intangible assets was 18.0 years. At March 31, 2017, the weighted-average amortization periods remaining for developed technology, customer relationships, in-process R&D, software and other was 18.0, 22.3, 17.5, 4.0, and 5.3 years, respectively.
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Estimated annual amortization expense for finite-lived intangible assets, excluding amounts not placed in service, subsequent to March 31, 2017 is as follows:
| (in thousands) | Amount | ||
| 2017 (remaining) | $ | 31,488 | |
| 2018 | 41,984 | ||
| 2019 | 41,979 | ||
| 2020 | 41,901 | ||
| 2021 | 41,814 | ||
| Thereafter | 538,393 | ||
| Total | $ | 737,559 | |
| 8. | Accrued and Other Current Liabilities |
The Company’s accrued and other current liabilities at March 31, 2017 and December 31, 2016 consisted of the following:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||
| Warrant consideration | $ | 1,560 | $ | 1,080 | ||
| Tax amortization benefit contingency | 17,535 | 17,535 | ||||
| Working capital settlement | 17,000 | 17,000 | ||||
| Additional consideration due seller | 9,263 | 9,263 | ||||
| Accrued compensation and benefits | 6,588 | 6,352 | ||||
| Accrued rebates payable | 3,964 | 4,701 | ||||
| Insurance premium financing payable | 290 | 578 | ||||
| Severance | 831 | 1,564 | ||||
| Accrued taxes | 6,639 | 4,598 | ||||
| Other | 3,611 | 3,695 | ||||
| Total accrued and other current liabilities | $ | 67,281 | $ | 66,366 | ||
Refer to Notes 17 and 18 regarding the contingent consideration owed to Dow as part of the Business Combination.
| 9. | Debt |
The Company’s debt, net of unamortized discounts and deferred financing fees, at March 31, 2017 and December 31, 2016 consisted of the following:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||
| Total Term Loan outstanding | $ | 407,681 | $ | 408,246 | ||
| Less: Amounts due within one year | 4,250 | 15,250 | ||||
| Total long-term debt due after one year | $ | 403,431 | $ | 392,996 | ||
At March 31, 2017, the Company evaluated the amount recorded under the Term Loan (defined below) and determined that the fair value was approximately $415.0 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the fair value 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, 2017 there were $9.9 million of unamortized deferred issuance costs.
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Scheduled principal repayments under the Term Loan subsequent to March 31, 2017 are as follows:
| (in thousands) | Amount | ||
| 2017 (remaining) | $ | 3,188 | |
| 2018 | 4,250 | ||
| 2019 | 4,250 | ||
| 2020 | 4,250 | ||
| 2021 | 401,625 | ||
| Thereafter | — | ||
| Total | $ | 417,563 | |
Credit Facility (Successor)
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 (the “Credit Facility”). The Credit Facility consists of a $425 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of March 31, 2017, the Company has issued $0.9 million of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. 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). At March 31, 2017, the effective interest rate was 6.38%. 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.
Certain restrictive covenants are contained in the Credit Facility, which the Company was in compliance with as of March 31, 2017. The Credit Facility imposes an overall cap on the total amount of dividends the Company can pay, together with the total amount of shares and warrants the Company can repurchase, of $12 million per fiscal year, and imposes certain other conditions on the Company’s ability to pay dividends.
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 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), (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 and (iv) the aggregate amount of cash dividends paid by the Company or Holdings to Holdings or Boulevard for the payment of the Seller Earnout; 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 million. The amount due under this provision for the year ended December 31, 2016 was originally estimated to be $11.0 million, but it was subsequently determined that no amount was payable for such year. There are no amounts due under this provision as of March 31, 2017.
At March 31, 2017, there was $417.6 million outstanding under the Term Loan and no balance outstanding under the Revolving Loan.
In July 2015, 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, 2017 was approximately $0.6 million.
| 10. | Other Noncurrent Liabilities |
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The Company’s other noncurrent liabilities at March 31, 2017 and December 31, 2016 consisted of the following:
| (in thousands) | March 31, 2017 | December 31, 2016 | ||||
| Tax amortization benefit contingency | $ | 136,788 | $ | 132,724 | ||
| Deferred payment | 1,874 | 2,498 | ||||
| Other | 6,793 | 5,611 | ||||
| Total other noncurrent liabilities | $ | 145,455 | $ | 140,833 | ||
| 11. | Severance |
The Company expensed $0.0 million and $1.8 million for severance in the three months ended March 31, 2017 and March 31, 2016, respectively. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated statement of operations. As of March 31, 2017, the Company had $1.1 million of severance liability, of which $0.8 million will be paid out over the next year.
| 12. | 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, 2017, there were 50,280,826 shares of common stock outstanding. As of March 31, 2017, 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 Rohm and Haas one share of Series A Preferred Stock. Rohm and Haas, voting as a separate class, is entitled to appoint one director to the Company’s board of directors for so long as Rohm and Haas 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.
| 13. | Stock-based Compensation |
Stock compensation expense for both equity-classified and liability-classified awards for the three months ended March 31, 2017 and March 31, 2016 was $0.3 million and $1.2 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, 2017, there was $5.4 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 1.8 years.
On March 31, 2017, 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, 2019 and the other awards vest ratably on the first, second, and third anniversaries of the grant date.
| Performance-based restricted stock units | 265,950 | |
| Time-based restricted stock | 207,000 | |
| Options | 181,800 | |
| Total | 654,750 | |
On March 31, 2017, 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 remeasured on each balance sheet date. The performance-based phantom shares each have a performance period that ends on December 31, 2019 and the other awards vest ratably on the first, second, and third anniversaries of the grant date.
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| Performance-based phantom shares | 39,150 | |
| Service-based phantom shares | 50,850 | |
| Stock appreciation rights | 9,350 | |
| Total | 99,350 | |
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 $4.33 per share.
| Volatility | 81.6% |
| Risk-free interest rate | 1.49% |
| Dividend yield | 0.00% |
| Grant date stock price | $4.37 |
| Performance period | 3 years |
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 $2.39.
| Volatility | 57.10% |
| Risk-free interest rate | 2.08% |
| Dividend yield | 0.00% |
| Grant date stock price | $4.37 |
| Expected term | 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.
| 14. | Earnings Per Share |
Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss) per share, basic income (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock and warrants.
The following table represents amounts that could potentially dilute basic EPS in the future:
| March 31, 2017 | March 31, 2016 | |||
Stock-based compensation awards(1): | ||||
| Stock options | 926,898 | 584,375 | ||
| Restricted stock to non-directors | 797,401 | 343,753 | ||
| Restricted stock to directors | 78,754 | 21,784 | ||
| 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 and will, therefore, 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. Given that the Company recorded a net loss for the three months ended March 31, 2017, there is no difference between basic and diluted net loss per share since the effect of the items identified above would be anti-dilutive and are, therefore, excluded from the diluted net loss per share calculation.
| 15. | Income Taxes |
The effective tax rate for the three months ended March 31, 2017 was (13.0)%, compared to the effective tax rate of 37.8% for the three months ended March 31, 2016.
The effective tax rate for the three months ended March 31, 2017 and March 31, 2016 differs from the US statutory tax rate of 35% due to the valuation allowance related to deferred tax assets in the U.S. Beginning in December 2016, the Company is not recording any tax benefits on its U.S. pre-tax losses.
| 16. | Commitments and Contingencies |
The Company is currently involved in various claims and legal actions that arise in the ordinary course of business. The Company has recorded reserves for loss contingencies based on the specific circumstances of each case. Such reserves are recorded when it is probable that a loss has been incurred as of the balance sheet date and can be reasonably estimated. Although the results of litigation and claims can never be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the Company’s business, financial condition or results of operations.
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.
| 17. | Fair Value Measurements |
Liabilities Measured at Fair Value on a Recurring Basis
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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 March 31, 2017:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||
Warrant consideration(1) | $ | — | $ | 1,560 | $ | — | $ | 1,560 | ||||
Tax amortization benefit contingency(2) | — | — | 154,323 | 154,323 | ||||||||
Deferred acquisition payment(3) | — | — | 1,874 | 1,874 | ||||||||
Stock appreciation rights(4) | — | — | 71 | 71 | ||||||||
Phantom shares(5) | — | — | 10 | 10 | ||||||||
| Total | $ | — | $ | 1,560 | $ | 156,278 | $ | 157,838 | ||||
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, 2016:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||
Warrant consideration(1) | $ | — | $ | 1,080 | $ | — | $ | 1,080 | ||||
Tax amortization benefit contingency(2) | — | — | 150,260 | 150,260 | ||||||||
Deferred acquisition payment(3) | — | — | 2,498 | 2,498 | ||||||||
Stock appreciation rights(4) | — | — | 22 | 22 | ||||||||
Phantom shares(5) | — | — | 4 | 4 | ||||||||
| Total | $ | — | $ | 1,080 | $ | 152,784 | $ | 153,864 | ||||
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| (1) | This liability relates to warrants to purchase the Company's common stock and future obligations to deliver additional such warrants in relation to the Business Combination. The inputs used in the fair value measurement were directly observable quoted prices for identical assets in an inactive market. |
| (2) | 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, tax effected at 37% and discounted to present value utilizing an appropriate market discount rate. The valuation technique used did not change during the three months ended March 31, 2017. |
| (3) | The fair value of the deferred acquisition payment is measured using a Black-Scholes option pricing model and based on the Company's best estimate of the Company's average Business EBITDA, as defined in the Purchase Agreement (as defined in Note 18), over the two year period from January 1, 2016 to December 31, 2017. The valuation technique used did not change during the three months ended March 31, 2017. |
| (4) | The fair value of the stock appreciation rights were measured using a Black Scholes pricing model during the three months ended March 31, 2017. The valuation technique used did not change during the three months ended March 31, 2017. |
| (5) | The fair value of phantom shares are 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, 2017. |
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, 2017.
At March 31, 2017, the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately $415.0 million. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.
Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis
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The following table presents the changes during the period presented in our Level 3 financial instruments that are measured at fair value on a recurring basis. These instruments relate to contingent consideration payable to Dow in connection to the Business Combination.
| (in thousands) | Tax amortization benefit contingency | Deferred acquisition payment | Stock appreciation rights | Phantom shares | Total | ||||||||||
| Balance, December 31, 2016 | $ | 150,260 | $ | 2,498 | $ | 22 | $ | 4 | $ | 152,784 | |||||
| Accretion | 3,704 | — | — | — | 3,704 | ||||||||||
| Mark to market adjustment | 359 | (624 | ) | 49 | 6 | (210 | ) | ||||||||
| Balance, March 31, 2017 | $ | 154,323 | $ | 1,874 | $ | 71 | $ | 10 | $ | 156,278 | |||||
| 18. | Subsequent Events |
On April 4, 2017, the Company entered into an agreement (the “Amendment Agreement”) with Dow, Rohm and Haas Company (“R&H”), Boulevard Acquisition Sponsor, LLC (the “Sponsor”), AgroFresh Inc., a wholly-owned subsidiary of the Company, Avenue Capital Management II, L.P. (“Avenue”) and, solely as to certain sections of the Amendment Agreement, Joel Citron, Darren Thompson and Robert J. Campbell (collectively, the “Founding Holders”), Marc Lasry and Stephen Trevor. Pursuant to the Amendment Agreement and certain related agreements entered into on the same date (as described below), among other things, the Company and Dow agreed to modify certain obligations of the Company pursuant to (i) the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), between the Company and Dow, and (ii) the Tax Receivables Agreement, dated July 31, 2015 (the “Tax Receivables Agreement”), among the Company, Dow, R&H and AgroFresh Inc., and (iii) the Warrant Purchase Agreement, dated July 31, 2015 (the “Warrant Purchase Agreement”), among the Company, Dow, R&H and the Sponsor. Each of Mr. Campbell, Mr. Lasry and Mr. Trevor is a member of the Company’s board of directors, and each of Dow and the Sponsor is a significant stockholder of the Company.
Amendment Agreement
Pursuant to the Amendment Agreement, 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 is payable on or before January 31, 2018, in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement which as of March 31, 2017 was approximately $17.0 million, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, which as of March 31, 2017 was approximately $9.3 million, and (iii) the amount payable to Dow pursuant to the Tax Receivables Agreement on account of the 2015 tax year, which as of March 31, 2017 was approximately $12.0 million, which includes accrued interest.
Also pursuant to the Amendment Agreement, each of Avenue and Dow agreed to make available to the Company a credit facility, providing for loans of up to $50.0 million each, for use to complete one or more potential acquisitions prior to December 31, 2019, in each case subject to approval by both Avenue and Dow.
First Amendment to Tax Receivables Agreement
The Company, Dow, R&H and AgroFresh Inc. entered into a First Amendment to the Tax Receivables Agreement (the “TRA Amendment”). The TRA Amendment reduces, from 85% to 50%, the percentage that the Company is required to pay annually to Dow pursuant to the Tax Receivables Agreement of the amount of the 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 transactions contemplated by the Purchase Agreement.
Stock Buyback Agreement
The Company and Dow entered into a letter agreement (the “Stock Buyback Agreement”), pursuant to which Dow agreed to use its reasonable best efforts to purchase up to 5,070,358 shares of the Company’s common stock in the open market (representing approximately 10% of the total number of shares of the Company’s common stock then outstanding). Such purchases would be effected by means of one or more plans or programs over a period of up to 18 months.
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Termination of Warrant Purchase Agreement
The Company, Dow, R&H and the Sponsor entered into a letter agreement, pursuant to which the Warrant Purchase Agreement was terminated effective immediately.
As a result of the Amendment Agreement, the TRA Amendment and the termination of the Warrant Purchase Agreement, the Company will reduce the related liabilities during the second quarter of 2017.
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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 “Predecessor” and the “AgroFresh Business” refer to the business conducted by Dow through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States, prior to the closing of the Business Combination, the term “Successor” refers to AgroFresh Solutions, Inc. (which was named Boulevard Acquisition Corp. prior to the closing of the Business Combination), and the terms “Company”, “AgroFresh”, “we”, “us” and “our” refer to the combined Predecessor and Successor companies, unless the context otherwise requires or it is otherwise indicated. The application of acquisition accounting for the Business Combination significantly affected certain assets, liabilities, and expenses.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the 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, 2016 (the "2016 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 industry leader in providing innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance the freshness, quality and value of fresh produce and to maximize the percentage of produce supplied to the market relative to the amount of produce grown. Its flagship product is the SmartFresh™ Quality System, a freshness protection technology proven to maintain firmness, texture and appearance of fruits during storage and transport. SmartFresh is currently commercialized in over 40 countries worldwide. Additionally, the Company has a number of different solutions and application technologies that have either been launched (Harvista, RipeLock, Landspring) or that it intends to launch in the future to seek to extend its footprint to other crops and steps of the global produce supply chain.
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. About one third of the total food produced worldwide is lost or wasted each year. Nearly 45 percent of all fresh fruits and vegetables, 40 percent of apples and 20 percent of bananas, are lost to spoilage. AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.
AgroFresh’s current principal product, SmartFresh, regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables. SmartFresh is naturally biodegradable, leaves no detectable residue, and has been approved for use by many domestic and global regulatory organizations. Harvista extends the Company’s proprietary technology into pre-harvest management of pome fruit such as apples and pears. AdvanStoreTM is an atmospheric monitoring system under development that leverages the Company’s extensive understanding of fruit physiology,
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fruit respiration, current controlled atmosphere technology, and new proprietary diagnostic tools to provide improved and real time guidance to producers and packers of fresh produce regarding storage conditions so corrective measures can be made on a more timely basis. RipeLockTM combines the technology behind SmartFresh with modified atmosphere packaging designed specifically to preserve quality during transportation and to extend the yellow shelf life of bananas and other potential fruits. LandSpringTM is an innovative new 1-MCP technology targeted to transplanted vegetable seedlings. It is currently registered for use on tomato and pepper crops in the US. It reduces transplant shock, resulting in less seedling mortality and faster crop establishment, which leads to a healthier crop and improved yields.
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.
AgroFresh is a former blank check company that completed its initial public offering on February 19, 2014. Upon the closing of the Business Combination with Dow on July 31, 2015, the Company changed its name to AgroFresh Solutions, Inc. The Company paid Dow cash consideration of $635 million and issued Dow 17.5 million shares of common stock at a deemed value of $12 per share. The transaction included a liability to Dow to deliver a variable number of warrants between the closing and April 2016, which obligation was terminated pursuant to a letter agreement entered into on April 4, 2017. The cash consideration was funded through our initial public offering, a term loan, and a private placement of 4.9 million shares of common stock that yielded $50 million of proceeds. The transaction also has an earn-out feature whereby Dow is entitled to receive a deferred payment of $50 million in March 2018 if AgroFresh achieves a specified average level of Business EBITDA (as defined in the Stock Purchase Agreement related to the Business Combination) over 2016 and 2017. In addition, pursuant to a tax receivables agreement entered into in connection with the Business Combination, Dow was originally entitled to receive 85% of the tax savings, if any, that the Company realizes as a result of the increase in the tax basis of assets acquired pursuant to the Business Combination. Pursuant to an amendment to the tax receivables agreement entered into on April 4, 2017, the percentage was reduced from 85% to 50% for all tax years ending after December 31, 2015.
In connection with the closing of the Business Combination, AgroFresh entered into a transition services agreement with Dow. Under the agreement, Dow provides AgroFresh a suite of services for a period of time ranging from six months to five years depending on the service. However, the Company expects to terminate these services by December 31, 2017. The agreement also provided for a $5 million execution fee that was paid to Dow at the closing of the Business Combination.
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 40 countries and derives its revenue by assisting growers and packers to optimize the value of their crops primarily through the post-harvest period. Its 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 patents on, among other things, the encapsulation of the active ingredient, 1-MCP.
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 offering to address market trends. The Company does not typically price its products in
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relation to any underlying cost of materials or services; therefore, its margins can fluctuate with changes in these costs. 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. The actual application of SmartFresh is performed by service providers that are typically third-party contractors. The Harvista application service, through both aerial and ground application, is also administered by third-party service providers or made by our customers directly.
The Company is shifting the terms of its contracts with service providers from annual renewal periods to two or three year durations in order to have greater certainty that experienced applicators will be available for upcoming harvest seasons. 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. There have been no material changes to our critical accounting policies and estimates previously disclosed in our 2016 Form 10-K for the year ended December 31, 2016. 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 - Critical Accounting Policies and Use of Estimates” and “Note 2 - Basis of Presentation and Summary of Significant Accounting Policies” in our 2016 Form 10-K.
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Results of Operations
The following table summarizes the results of operations for both the three months ended March 31, 2017 and March 31, 2016:
| (in thousands, except share and per share data) | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | ||||
| Net sales | $ | 32,730 | $ | 28,411 | ||
| Cost of sales (excluding amortization, shown separately below) | 5,839 | 23,820 | ||||
| Gross profit | 26,891 | 4,591 | ||||
| Research and development expenses | 3,297 | 4,429 | ||||
| Selling, general, and administrative expenses | 16,431 | 19,666 | ||||
| Amortization of intangibles | 10,445 | 9,899 | ||||
| Change in fair value of contingent consideration | 215 | (3,100 | ) | |||
| Operating loss | (3,497 | ) | (26,303 | ) | ||
| Other income | 40 | 55 | ||||
| Gain on foreign currency exchange | 3,103 | 830 | ||||
| Interest expense, net | (10,293 | ) | (15,008 | ) | ||
| Loss before income taxes | (10,647 | ) | (40,426 | ) | ||
| Income tax provision (benefit) | 1,382 | (15,289 | ) | |||
| Net loss | $ | (12,029 | ) | $ | (25,137 | ) |
Comparison of Results of Operations for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.
Net Sales
Net sales were $32.7 million for the three months ended March 31, 2017 as compared to net sales of $28.4 million for the three months ended March 31, 2016. The increase in net sales was primarily driven by SmartFresh growth in Brazil and Chile and significant Harvista growth in Argentina. We also saw slight revenue increases on sales of EthylBloc, RipeLock and LandSpring. Offsetting these gains were declines on sales of SmartFresh in South Africa due to drought and in Australia due to a delayed harvest season versus 2016.
Cost of Sales
Cost of sales was $5.8 million for the three months ended March 31, 2017 as compared to $23.8 million for the three months ended March 31, 2016. The amount in the prior year period includes $18.5 million of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 81.3 percent in the first quarter of 2016 versus 82.2 percent in the first quarter of 2017. This slight increase in gross margin percentage is due to timing, the impact of our higher revenue on our relatively consistent fixed cost base, and one-time costs in the first quarter of 2016.
Research and Development Expenses
Research and development expenses were $3.3 million for the three months ended March 31, 2017 as compared to $4.4 million for the three months ended March 31, 2016. The decrease in research and development expenses reflects more targeted research activities in 2017.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $16.4 million for the three months ended March 31, 2017 compared to $19.7 million for the three months ended March 31, 2016. This decrease in selling, general, and administrative expenses was primarily driven by lower non-recurring costs to establish the Company as a separate public company of $5.5 million, lower severance costs of $1.8 million, and lower stock-based compensation charges of $0.7 million, partially offset by incremental recurring costs of $3.5 million related to the addition of permanent employees and legal fees for pending litigation of $1.2 million.
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Amortization of Intangibles
Amortization of intangible assets was $10.4 million for the three months ended March 31, 2017 compared to $9.9 million for the three months ended March 31, 2016. The increase in amortization of intangibles is primarily due to the amortization of in-process research and development for our Landspring product line, which started in September 2016.
Change in Fair Value of Contingent Consideration
The Company recorded a $0.2 million loss in the three months ended March 31, 2017 related to a change in the fair value of contingent consideration, as compared to a $3.1 million gain in the three months ended March 31, 2016. As discussed in Note 3 to the 2016 audited consolidated financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the warrant consideration, the deferred payment, and 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. For the three months ended March 31, 2017, the warrant consideration, the deferred payment, and the tax amortization benefit contingency losses (gains) were $0.5 million, $(0.6) million, $0.4 million, respectively.
Interest Expense, Net
Interest expense was $10.3 million for the three months ended March 31, 2017, as compared to $15.0 million for the three months ended March 31, 2016. Accretion on the potential deferred payment to Dow was $3.5 million for the three months ended March 31, 2016, without a comparable expense in 2017. Interest on the working capital settlement with Dow was $0.3 million for the three months ended March 31, 2016, without a comparable expense in 2017. Lower interest on the Term Loan of $0.2 million and lower accretion of the Tax Receivables Agreement of $0.6 million also contributed to the decrease in interest expense.
Income taxes
Income tax expense was $1.4 million for the three months ended March 31, 2017 compared to income tax benefit of $15.3 million for the three months March 31, 2016. As of March 31, 2017, in accordance with ASC 740, Income Taxes, we maintained a full valuation allowance against net deferred tax assets in the U.S. tax jurisdiction. We will continue to maintain a full valuation allowance until such time as we can reasonably estimate the probability of realizing benefits from U.S. deferred tax assets. Our U.S. operations did not have a valuation allowance as of March��31, 2016, and, therefore, recorded a tax benefit at that time.
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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 a 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, 2017 | Three Months Ended March 31, 2016 | ||||
| GAAP Net loss | $ | (12,029 | ) | $ | (25,137 | ) |
| Provision (benefit) for income taxes | 1,382 | (15,289 | ) | |||
Amortization of inventory step-up(1) | — | 18,505 | ||||
Interest expense(2) | 10,293 | 15,008 | ||||
| Depreciation and amortization | 10,978 | 10,837 | ||||
| Non-GAAP EBITDA | $ | 10,624 | $ | 3,924 | ||
———————————————————————————————
| (1) | The amortization of inventory step-up related to the acquisition of AgroFresh was charged to income based on the pace of inventory usage. |
| (2) | Interest on the term loan and accretion for debt discounts, debt issuance costs and contingent consideration. |
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Liquidity and Capital Resources
Cash Flow
| (in thousands) | Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | ||
| Net cash provided by operating activities | 8,836 | 9,950 | ||
| Net cash (used in) investing activities | (1,364 | ) | (842 | ) |
| Net cash (used in) financing activities | (1,063 | ) | (2,550 | ) |
Cash provided by operating activities was $8.8 million for the three months ended March 31, 2017, as compared to $10.0 million for the three months ended March 31, 2016. In 2017, net income before non-cash depreciation and amortization and changes in fair value of contingent consideration (including accretion) was $2.9 million. Other non-cash charges included stock-based compensation on equity-classified awards of $0.2 million, $0.6 million of deferred financing costs, and other non-cash items of $0.6 million. Additionally, the change in net operating assets was $4.6 million in 2017. For the three months ended March 31, 2016, net income before non-cash depreciation and amortization, amortization of inventory step-up, and changes in the fair value of contingent consideration (including accretion) was $8.9 million. Other non-cash charges included stock-based compensation on equity-classified awards of $1.1 million, a $(13.8) million increase in the net deferred tax asset, and other non-cash items of $1.5 million. Additionally, the change in net operating assets was $12.2 million for the three months ended March 31, 2016.
Cash (used in) investing activities was $(1.4) million for the three months ended March 31, 2017, as compared to $(0.8) million for the three months ended March 31, 2016. Cash used in investing activities in 2017 was for the purchase of fixed assets and leasehold improvements, of $(1.0) million, and an investment of $(0.4) million. Cash used in 2016 was for the purchase of fixed assets and leasehold improvements, of $(0.8) million.
Cash (used in) financing activities was $(1.1) million for the three months ended March 31, 2017, as compared to $(2.6) million for the three months ended March 31, 2016. Cash used in financing activities in 2017 was for the repayment of debt in the amount of $(1.1) million. Cash used in 2016 was for the repayment of debt in the amount of $(1.1) million and the purchase of treasury stock in the amount of $(1.5) million.
Liquidity
On July 31, 2015, the Company consummated the Business Combination, pursuant to which the Company issued 17,500,000 shares of common stock at a deemed value of $12.00 per share and paid cash consideration of $635.0 million at the closing. The cash consideration was funded through the Company's initial public offering, the Term Loan (defined below) and the sale of our PIPE shares (defined below).
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 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10.0 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of March 31, 2017, the Company had issued $0.9 million of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. 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 LLC, 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 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.
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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, 2017 was approximately $0.6 million.
PIPE Shares
In connection with the closing of the Business Combination, the Company issued an aggregate of 4,878,000 shares of common stock, for an aggregate purchase price of $50.0 million, in a private placement (“PIPE”).
Stock Repurchase Program
In November 2015, the Company’s board of directors approved a Stock Repurchase Program totaling $10 million of the Company’s publicly-traded shares of common stock. The Repurchase Program was to remain in effect for a period of one year, until November 17, 2016. During the three months ended March 31, 2016, the Company repurchased 249,047 shares of common stock at an average market price of $5.95.
Off-Balance Sheet Arrangements
As of March 31, 2017, we 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 detailed below. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Contingent Consideration
As part of the Business Combination, Dow is entitled to receive future contingent consideration and other payments from the Company in relation to (i) in 2018, a deferred payment from the Company of $50 million, subject to the Company’s achievement of a specified average Business EBITDA level over the two year period from January 1, 2016 to December 31, 2017; (ii) warrants to purchase the Company’s common stock pursuant to a Warrant Purchase Agreement, which was terminated pursuant to a letter agreement entered into on April 4, 2017; (iii) a Tax Receivables Agreement under which the Company was originally required to pay annually to Dow 85% of the amount of the 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 Inc. assets resulting from a section 338(h)(10) election that the Company and Dow made in connection with the Business Combination; and (iv) the final working capital settlement. Pursuant to an amendment to the tax receivables agreement entered into on April 4, 2017, the percentage of tax savings payable to Dow was reduced from 85% to 50% for all tax years ending after December 31, 2015. Also pursuant to an agreement entered into on April 4, 2017, the Company agreed to pay Dow an aggregate amount of $20.0 million 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) amounts owed under the Tax Receivables Agreement for the 2015 tax year.
See Note 18 to the unaudited condensed consolidated financial statements contained in this Report for further discussion of contingent consideration in connection with the Business Combination.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk for changes in interest rates relates primarily to our Term Loan and Revolving Loan. We have not used derivative financial instruments in our investment portfolio. The Term Loan and Revolving Loan bear interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. Holding debt levels constant, a 100 basis point increase in the effective interest rates would have increased the Company’s interest expense by $1.0 million for the three months ended March 31, 2017.
Foreign Currency Risk
A portion of the Company’s operations consists of manufacturing and sales activities in foreign jurisdictions. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or
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weak economic conditions in the foreign markets in which the Company distributes its products or services. The Company’s operating results are exposed to changes in exchange rates between the US dollar and various foreign currencies. As we expand internationally, our results of operations and cash flows will become increasingly subject to changes in foreign currency exchange rates.
We have not used forward contracts or currency borrowings to hedge our exposure to foreign currency risk. Foreign currency risk can be quantified by estimating the change in results of operations or financial position resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would generally not have a material impact on our financial position, but could have a material impact on our results of operations. Holding other variables constant (such as interest rates and debt levels), if the U.S. dollar appreciated by 10% against the foreign currencies used by our operations in the first three months of 2017, revenues would have decreased by approximately $3.1 million and EBITDA would have decreased by approximately $2.0 million for the three months ended March 31, 2017.
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 have been no changes to our internal control over financial reporting during the quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our 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.
As previously reported, in August 2016, we filed a lawsuit against MirTech, Inc. (“MirTech”), Decco U.S. Post-Harvest, Inc. (“Decco”) and certain related parties in the United States District Court for the District of Delaware. Our complaint alleges, among other things, that MirTech, a former consultant to us, appropriated our confidential information and technology, in violation of agreements between MirTech and us, and that MirTech and Decco are collaborating to infringe on several of our patents. Our complaint seeks, among other relief, declarations that we are the owner of a number of patents filed by MirTech, injunctive relief to stop the infringement of our patents, and monetary damages. A bench trial was held on March 20-22, 2017 on certain of our contract claims and we are awaiting the Court's ruling.
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 2016 Form 10-K and the factors set forth below, all of which could materially affect our business or future results. Except with respect to the amended and restated risk factors set forth below, there have been no material changes to the risk factors disclosed in our 2016 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.
We are required to pay Dow for certain tax benefits we may claim, and these amounts are expected to be material.
Pursuant to the Tax Receivables Agreement we entered into with Dow upon the consummation of the Business Combination, as amended in April 2017 (the “Tax Receivables Agreement”), we are required to pay annually to Dow 50% of the amount of any tax savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of the increase in tax basis of our assets resulting from a section 338(h)(10) election that we and Dow made in connection with the Business Combination.
We expect that the payments that we may make under the Tax Receivables Agreement could be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivables Agreement payments. There may be a material negative effect on our liquidity if we do not have sufficient funds to make payments under the Tax Receivables Agreement after we have paid taxes.
Dow and Boulevard Acquisition Sponsor, LLC (the “Sponsor”) have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
As of April 7, 2017, Dow and the Sponsor (and its affiliates) owned approximately 35% and 9%, respectively, of our outstanding common stock. In addition, each of Dow and the Sponsor currently beneficially owns a significant percentage of our outstanding warrants. Because of the degree of concentration of voting power (and the potential for such power to increase upon the purchase of additional stock or the exercise of warrants), your ability to elect members of our board of directors and influence our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends, may be diminished.
Warrants are exercisable for our common stock, which, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
As of December 31, 2016, outstanding warrants to purchase an aggregate of 15,983,072 shares of our common stock were exercisable in accordance with the terms of the warrant agreement governing those securities. All of these warrants will expire at 5:00 p.m., New York time, on July 31, 2020, or earlier upon redemption or liquidation. The exercise price of these warrants is $11.50 per share. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market.
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Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.
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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
Not applicable.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | |
| 3.1 | (1) | Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015. |
| 3.2 | (1) | Series A Certificate of Designation. |
| 3.3 | (2) | Amended and Restated Bylaws. |
| 3.4 | (3) | Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015. |
| 4.1 | (1) | Specimen Common Stock Certificate. |
| 4.2 | (1) | Specimen Warrant Certificate. |
| 31.1 | * | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. |
| 31.2 | * | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. |
| 32.1 | * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | * | XBRL Instance Document |
| 101.SCH | * | XBRL Taxonomy Extension Schema Document |
| 101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
———————————————————————————————
| * | Filed herewith. |
| (1) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015. |
| (2) | Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015. |
| (3) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015. |
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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 9, 2017 | |
| /s/ Jordi Ferre | ||
| By: | Jordi Ferre | |
| Title: | Chief Executive Officer | |
| /s/ Katherine Harper | ||
| By: | Katherine Harper | |
| Title: | Chief Financial Officer | |
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EXHIBIT INDEX
| Exhibit No. | Description | |
| 3.1 | (1) | Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015. |
| 3.2 | (1) | Series A Certificate of Designation. |
| 3.3 | (2) | Amended and Restated Bylaws. |
| 3.4 | (3) | Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015. |
| 4.1 | (1) | Specimen Common Stock Certificate. |
| 4.2 | (1) | Specimen Warrant Certificate. |
| 31.1 | * | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. |
| 31.2 | * | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended. |
| 32.1 | * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | * | XBRL Instance Document |
| 101.SCH | * | XBRL Taxonomy Extension Schema Document |
| 101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
———————————————————————————————
| * | Filed herewith. |
| (1) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015. |
| (2) | Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015. |
| (3) | Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015. |
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