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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2015

 

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
(State or other jurisdiction of incorporation)

 

46-4007249
(IRS Employer Identification Number)

 

100 S. Independence Mall West

Philadelphia, PA 19106

(Address of principal executive offices)

 

(215) 592-3687

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

The NASDAQ Global Market

Warrants to purchase shares of Common Stock

 

The NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o   Yes x  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act o   Yes x   No

 

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 o   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 o   No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S—K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10—K or any amendment to this Form 10—K.  x

 

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  o

 

Accelerated filer  x

 

Non-accelerated filer  o

(Do not check if a

smaller reporting company)

 

Smaller reporting company  o

 

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

 

As of June 30, 2015, the aggregate market value of the common stock held by nonaffiliates of the registrant, based on the $12.50 closing price of the registrant’s common stock as reported on the NASDAQ Stock Market on that date, was approximately $275.6 million. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

 

The number of shares of the registrant’s common stock outstanding as of March 1, 2016 was 49,900,795.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III of this annual report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2016, to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2015.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

3

 

 

 

PART I

 

4

 

 

 

 

ITEM 1. BUSINESS

4

 

ITEM 1A. RISK FACTORS

12

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

27

 

ITEM 2 PROPERTIES

28

 

ITEM 3 LEGAL PROCEEDINGS

28

 

ITEM 4 MINE SAFETY DISCLOSURES

28

 

 

 

PART II

 

29

 

 

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

29

 

ITEM 6. SELECTED FINANCIAL DATA

32

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

33

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

48

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

75

 

ITEM 9A. CONTROLS AND PROCEDURES

75

 

ITEM 9B OTHER INFORMATION

76

 

 

 

PART III

 

77

 

 

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

77

 

ITEM 11. EXECUTIVE COMPENSATION

77

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTER

77

 

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

77

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

77

 

 

 

PART IV

 

78

 

 

 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

78

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the statements contained in this annual report on Form 10-K constitute “forward-looking statements” for purposes of federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would,” “will” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements relating to:

 

·                  our future financial performance;

·                  growth plans and opportunities, including planned product and service offerings;

·                  changes in the markets in which we compete;

·                  our ability to increase brand loyalty and awareness;

·                  our ability to enter into alliances and complete acquisitions of other businesses;

·                  protection of our intellectual property rights; and

·                  the outcome of any known and unknown litigation.

 

The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” elsewhere in this report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

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PART I

 

ITEM 1. BUSINESS

 

Overview

 

AgroFresh Solutions, Inc. (the “Company”, “AgroFresh”, “we”, “us” or “our”) is a global agricultural innovator in proprietary technologies that preserve the quality and value of fresh produce, including apples, pears, kiwifruit, avocados, and bananas, as well as flowers. We have a strong, proven track record in apple storage solutions and are expanding our pre- and post-harvest applications with other varieties of produce. We expect to continue to grow through strategic expansion of our core franchise, the development of a robust pipeline of high-value solutions that preserve the quality and value of fresh produce, and the pursuit of related, accretive acquisitions.

 

The SmartFresh™ Quality System (“SmartFresh”), our current principal product, regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables, through proprietary technology. The active ingredient in this technology blocks the effects of ethylene. SmartFresh is naturally biodegradable and leaves no detectable residue, which has significant consumer appeal. We believe that SmartFresh preserves the texture, firmness, taste, and appearance of produce during storage, transportation, and retail display. SmartFresh allows growers and packers to deliver “just harvested” freshness on a year-round basis and retailers to increase customer satisfaction with fresh, high quality produce. An integral part of the SmartFresh sales process is the AgroFresh Whole Product offering, which is a direct service model providing customers with on-site applications of SmartFresh at their storage facilities combined with value-added advisory services.

 

We are also investing in and launching new solutions that are expected to drive future growth. We have developed and launched our Harvista™ technology (“Harvista”) to apply our proprietary technology to pre-harvest management of pome fruit, such as apples and pears. Just as we believe SmartFresh revolutionized post-harvest apple storage, we expect Harvista can have a similar impact in the orchard. By keeping apples on the tree longer, Harvista extends the harvest window to promote better color and fruit size development, thereby bringing new benefits to the grower and the retailer. Our near-term product pipeline also includes AdvanStore™ technology (“AdvanStore”), which provides advanced monitoring of fresh fruit while in storage, and the RipeLock™ Quality System (“RipeLock”), a proprietary technology which extends the shelf life of bananas.

 

We are subject to extensive national, state and local government regulation. We have completed more than 80 comprehensive international health and environmental tests that have approved 1-Methylcyclopropene (“1-MCP”) technology for use by workers and consumers, and in the environment. 1-MCP is degraded or metabolized by the natural processes in the apple and has been approved by domestic and global organizations such as the U.S. Environmental Protection Agency, the Food and Agriculture Organization of the United Nations (the “FAO”), the U.S. Food and Drug Administration (the “FDA”), the European Chemicals Bureau and the Global Partnership for Good Agricultural Practice.

 

History

 

We are a former blank check company that completed our initial public offering on February 19, 2014. On July 31, 2015 (the “Closing Date”), we consummated a business combination (the “Business Combination”) pursuant to a Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), with The Dow Chemical Company (“Dow”), providing for the acquisition by us of the AgroFresh business from Dow, resulting in AgroFresh Inc. becoming our wholly-owned, indirect subsidiary. On the Closing Date, we changed our name from Boulevard Acquisition Corp. to AgroFresh Solutions, Inc.  Prior to the closing of the Business Combination, the business that now comprises our business was operated through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States.

 

Competitive Strengths

 

We believe that the following strengths differentiate us from our competitors and serve as the foundation for our continued growth:

 

Global Agricultural Innovator with Proprietary Technical Know-How and Solutions. We are an agricultural innovator in proprietary technologies that preserve the quality and value of fresh produce in over 40 countries. Our scientists and contract research staff are leaders in the field of post-harvest physiology. Since the launch of SmartFresh in 2002, we have developed an extensive and exclusive database on produce physiology and preferences of our more than 3,000 customers. Using this extensive proprietary technical expertise, SmartFresh delivers a step-change in storage solutions for apples, allowing for significantly less waste and greater productivity, as well as a constant supply of high quality fruit throughout the year. We believe the recently launched Harvista technology has the potential to have the same impact in the pre-harvest stage, allowing apple and pear growers the ability to better manage their harvest, reduce waste and improve fruit quality. With AdvanStore, we expect to be able to provide packers unparalleled information about the condition of their fruit while in cold storage using novel monitoring technologies. We believe that our storage solutions and portfolio of pre- and post-harvest service offerings

 

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are well positioned to help address customer needs.

 

Compelling Benefits for Value Chain. Consumer surveys have found that freshness is the most important driver of customer satisfaction with a supermarket’s produce department. The ability to store produce longer while preserving just-harvested quality allows growers and packers to extend their marketing window and capitalize on seasonal pricing trends. We believe that SmartFresh revolutionized the apple industry by allowing growers and packers to meet year-round consumer demand for just-harvested quality. This extension of post-harvest life substantially increases the value of produce that is harvested on a seasonal basis but is sold to consumers throughout the year, particularly during the summer months when apple prices have historically peaked. The cost of SmartFresh translates into less than one cent per pound of apples, and can provide up to a 20-fold increase in value to the grower or packer over the cost of the service. Due to its high effectiveness and low cost relative to the value of the crop treated, we believe that SmartFresh provides compelling benefits across the value chain, from grower to retailer.

 

Unique Business Model with Sustainable Competitive Strengths. The AgroFresh Whole Product offering is a direct service model which comprises not only product applications but also “mission critical” advisory services. The AgroFresh product application uses a formulation of 1-MCP, an ethylene action inhibitor with a proven ability to maintain freshness and extend the shelf life of certain fresh produce, that is released into sealed storerooms using company-owned equipment. We have established a global footprint with operations in over 40 countries, allowing us to make over 34,000 monitored applications in 2015 alone. We currently have over 40 employees in research and development working in six AgroFresh locations around the world and at numerous research institutes and customer sites. This infrastructure investment has allowed us, over the past decade, to amass a proprietary database of technical data regarding the effective use of SmartFresh with a wide range of apple varieties in variable conditions. Our advisory services that are a part of the AgroFresh Whole Product offering utilize this information to assist customers in maximizing the profitability of their operations. We believe that our direct service model, extensive technical know-how, and brand loyalty will continue to sustain our competitive strengths.

 

Multiple Drivers of Future Growth. The market penetration of apples treated with SmartFresh outside the U.S. has been growing but has not yet reached the levels achieved in the U.S. We are increasing our sales and marketing efforts in non-U.S. regions to seek to capture these penetration opportunities and are working to apply SmartFresh to other crops, including pears, kiwifruit, plums, and bananas. Harvista extends our proprietary technology into pre-harvest management of apples and pears. Harvista is undergoing an expanded commercial launch in the U.S. We also achieved the first commercial sales for Harvista in Turkey in 2015 and seek to increase Harvista penetration in 2016. In addition, we are investing in and launching new solutions that we anticipate will drive continued business growth. AdvanStore offers atmospheric monitoring that storage operators are not capable of achieving with existing controlled atmosphere (“CA”) technology. This advanced monitoring system is being developed with our extensive understanding of fruit physiology, fruit respiration, current CA technology, and new proprietary diagnostic tools for measuring 1-MCP and other fruit volatiles and is designed to provide solutions to customers to help them protect the value of their crops. RipeLock combines 1-MCP with modified atmosphere packaging designed specifically for preserving the quality of bananas during transportation and extending their yellow shelf life for retailers and consumers.

 

High Customer Touch and Retention. Our personnel interact with our customers face to face year round—from harvest to harvest, to address all aspects of post-harvest operations and a variety of customer specific issues. We offer customer specific programs designed to improve the economics of growers and packers. We believe that this, in turn, has produced a high level of customer retention and trust in the product efficacy and related support services that come with the AgroFresh Whole Product offering.

 

Proven Management Team. Over the last decade, our management team has proven its ability to bring profitable innovation to the fresh produce industry. The team has extensive agricultural industry experience, long-standing customer relationships, and a long track record of success in bringing valuable services and solutions to market. Commercial and technical experts are located in key geographies worldwide to provide on-site advisory services, which help customers optimize crop potential. We encourage an independent and entrepreneurial spirit among our management team and employees.

 

Industry Overview

 

Food Preservation and Freshness

 

According to the FAO, over 1.3 billion tons of food, or approximately one third of the total food produced worldwide, is lost to spoilage or waste each year, including food valued at an estimated $48.3 billion in the U.S. alone. According to an October 2013 TESCO Consumer Study, nearly 45% of all fresh fruits and vegetables, including 40% of apples and 20% of bananas, are lost to spoilage. Loss or waste along the food supply chain has a variety of causes, including degradation of fresh produce during storage and transportation through the supply chain.

 

Food waste is a major economic cost for retailers. A large percentage of food waste at the retail level is based on qualitative factors related to consumer perception of freshness. A consumer survey conducted by Oliver Wyman and Ipsos Interactive in the U.S. in 2007 indicated

 

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that freshness is the most important driver of customer satisfaction with a store’s produce department.

 

Pre-Harvest Treatments

 

Pre-harvest treatments commonly used to increase the value of crops and reduce pre-harvest losses include plant growth regulators (“PGRs”). PGRs influence the rate of growth or development of crops or affect their reaction to stress events such as harsh weather. PGRs interact with the biochemical make-up of the plant and work by mimicking or blocking the production of naturally occurring plant hormones, like ethylene. Blocking the production of ethylene allows a grower to slow down the maturation of fruit to achieve better control over the timing of harvest. PGRs have a range of effectiveness depending on factors such as environmental conditions and the timing of application.

 

Post-Harvest Treatments

 

Post-harvest treatments to maximize quality and reduce loss include treatments to manage the effects of ethylene and to prevent microbial contamination. Naturally occurring ethylene triggers the acceleration of ripening in certain horticultural crops which results in a reduction of post-harvest life.

 

One class of post-harvest treatments enhances quality and reduces losses by controlling the environment in which produce is stored. CA and Dynamic Controlled Atmosphere (“DCA”) systems are used to keep stored crops within their optimal ranges of temperature and levels of oxygen and carbon dioxide. Specific oxygen and carbon dioxide levels can lower respiration in fresh produce and delay ripening. CA systems have been used for many decades with fruits and vegetables to preserve freshness. DCA, a more recent innovation, seeks to adjust levels of oxygen and carbon dioxide dynamically as the produce in storage breathes and matures. CA and DCA are only effective at preserving freshness while the fruit is kept in cold storage. However, 1-MCP treatments have been found to be complementary to these technologies by helping to better maintain the quality of apples during cold storage and maintaining freshness for up to 90 days after the apples are removed from cold storage.

 

Our Business

 

We are an agricultural innovator in proprietary advanced technologies that enhance the freshness, quality, and value of fresh produce. We currently offer SmartFresh applications at customer sites through a direct service model utilizing third-party contractors. As part of the AgroFresh Whole Product offering, we also provide advisory services based on our extensive knowledge base on the use of 1-MCP collected through thousands of monitored applications done as a part of the AgroFresh Whole Product offering. We operate in over 40 countries and currently derive over 90% of our revenue working with customers to protect the value of apples, pears and other produce during storage. We also offer Harvista pre-harvest technology in the U.S., Turkey and Argentina. Line extensions and new services are planned for introduction to seek to strengthen our global position in post-harvest storage and to capitalize on adjacent growth opportunities in pre-harvest markets.

 

The story of the AgroFresh business began with the discovery of the use of 1-MCP by research scientists at North Carolina State University in 1994. The technology was licensed by Rohm and Haas Company, which established the AgroFresh business and began commercializing 1-MCP as SmartFresh. Dow acquired Rohm and Haas Company in 2009.

 

1-MCP Overview

 

1-MCP, the active ingredient in SmartFresh and Harvista, is an ethylene action inhibitor with a proven ability to maintain freshness and extend the shelf life of certain fresh produce. The 1-MCP molecule is structurally similar to ethylene, a naturally occurring plant hormone that occurs in certain fruits and vegetables. Ethylene helps produce grow and ripen, but eventually causes over-ripening and spoilage. 1-MCP works by blocking the ethylene receptors in plant cells, which temporarily delays the ripening process, enabling the produce to better maintain the qualities associated with freshness.

 

Today, two types of SmartFresh formulations are used to deliver 1-MCP into store rooms, powder and tablets. In a typical SmartFresh powder application, an AgroFresh service provider mixes a pouch of water-soluble powder with water in a SmartFresh generator and activates the generator to release the gaseous form of 1-MCP in the sealed storeroom. When using tablets, a service provider adds the tablets into a prepackaged formulated solution, the tablets dissolve in the solution and the gaseous form of 1-MCP is released in the storeroom. The gas released by either process mixes with the air circulating in the room, interacts with the fruit, and firmly binds to the fruit’s ethylene receptor sites.

 

Fruits and vegetables are classified as climacteric or non-climacteric, a term referring to the process of fruit maturation. The climacteric event is a stage of fruit ripening associated with higher ethylene production and changes in the fruit including pigment changes and sugar release. For those climacteric fruits raised as food, the climacteric event marks the peak of edible ripeness, with fruits having the best taste

 

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and texture for consumption. The role of SmartFresh is to delay the onset of the climacteric stage until the product is ready for consumption. Apples, pears, kiwifruit, plums, persimmon, bananas, melons, peaches, and tomatoes are examples of climacteric fruit. Our management continues to evaluate the commercial value of 1-MCP with a range of other climacteric fruit.

 

SmartFresh Value Proposition

 

The value of SmartFresh with any crop is determined by both the biological efficacy with that crop and the utility value the application delivers to the customer. The biological efficacy with apples is high; apples are sensitive to ethylene and SmartFresh is effective at delaying ripening. In addition, SmartFresh brings high utility value by helping to keep apples fresh year-round despite their seasonal harvest. This set of attributes has increased the adoption of SmartFresh by apple growers and packers throughout the world. The cost of SmartFresh translates into less than one cent per pound of apples, providing significant economic value to customers. The price paid for SmartFresh is small relative to both the value of the crop and the importance of maintaining the quality of that crop during storage. The use of SmartFresh gives growers and packers the ability to store apples from one season to the next without losing their just picked quality characteristics.

 

SmartFresh is particularly effective in preserving the quality of apples. Beneficial effects of SmartFresh have been proven across numerous apple varieties throughout the world. SmartFresh is also effective with other crops, including pears, kiwifruit, plums, persimmons, avocados, and flowers, the latter marketed under the EthylBloc™ brand name and various private label brands.

 

SmartFresh Service Model

 

We believe that we have developed deep, trusted relationships with our customers by combining our effective SmartFresh product with application expertise and trusted advisory services. The AgroFresh Whole Product offering comprises this value-added service model. We made over 34,000 monitored applications in 2015 alone and, over the past decade, have amassed a valuable proprietary database of technical information on the best practices for the effective use of SmartFresh on a wide range of apple varieties. The advisory services component of the AgroFresh Whole Product offering utilizes this information to help maximize the profitability of our customers’ operations.

 

Seasonality

 

Our business is highly seasonal, driven by the timing of harvests in the northern and southern hemispheres. The first half of the year encompasses the southern hemisphere harvest season and the second half of the year encompasses the northern hemisphere harvest season. Since the northern hemisphere harvest 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.

 

Our Other Products

 

Harvista

 

Harvista is a pre-harvest management product that brings ethylene management into the orchard. Harvista technology comprises several proprietary 1-MCP formulations that are specifically designed to keep fruit on the tree longer, which allows more color and size development.

 

Harvista provides flexibility for fruit harvesters when it is needed the most — within a few days before harvest or when bad weather strikes. Application in the period leading up to harvest allows the grower to better manage the optimal timing and scheduling of harvest. Application prior to, or following, a stress event such as bad weather helps to reduce the incidence of fruit drop triggered by these events, which can lower crop yields and cause significant economic loss. We believe the flexibility to apply treatment close to harvest provides growers using Harvista with valuable harvest management benefits compared to competing solutions using older technology that require applications well in advance of harvest.

 

We believe that Harvista extends the “ideal harvest window,” the period during which fruit quality is at its peak, by keeping the fruit on the tree longer. For pome fruits, the ideal harvest window is typically up to seven days. The use of Harvista can triple the length of that window by extending it up to an additional 14 days. This added flexibility creates significant benefits both in terms of harvest logistics and crop profitability. Widening the harvest window allows for better scheduling and the optimization of limited resources, such as harvest crews and equipment. The extended harvest window can result in increased average size and weight of fruit. Overall, the value of the crop is enhanced by bigger average sizes, better color, and fewer defects.

 

We offer Harvista technology for apples and pears through a pre-scheduled application service including aerial and/or ground applications. Typically, our technical staff designs the protocol in consultation with the customer, and third-party service providers (or in some cases the growers) make the applications. We are running a trial program in 2016 that will allow customers to make their own applications through

 

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AgroFresh owned sprayers. This will give orchard operators flexibility to manage the application timing to meet orchard conditions.

 

Harvista applications were launched in the U.S. in 2012 in the Northwest region and in 2014 in the Eastern regions. Harvista was also launched in Turkey in 2015 and in Argentina in 2016. Management is currently compiling data for registration in ten more countries, which are expected to be completed on a country by country basis over the next six years, with additional registrations and label expansions expected to be pursued as new formulations and/or crop concepts are validated.

 

AdvanStore

 

Our AdvanStore platform is being designed to extend the AgroFresh Whole Product offering into monitoring the condition of produce during storage. We expect that these services will protect the value of the customer’s investment by analyzing the atmosphere of a storage room to determine if, and provide advance notice when, there are conditions present that may be detrimental to the quality of the produce. The AdvanStore offering is expected to include the installation of advanced sensor equipment in a customer’s facility that will provide “real-time” monitoring, analytics and feedback to enable the customer to more optimally manage the condition of the stored commodity. Through internal innovation and external alliances, the AdvanStore platform reflects our strategy to provide proprietary complete storage solutions to customers by leveraging our extensive knowledge of fruit physiology. Beta testing for AdvanStore will continue in 2016, with an anticipated launch in 2017.

 

RipeLock

 

RipeLock is an innovative fruit quality management system specifically designed for the banana industry. The patent-pending RipeLock system combines a specially-engineered, micro-perforated form of Modified Atmosphere Packaging (“MAP”) and a proprietary 1-MCP formulation. The combination of MAP with 1-MCP provides greater control over the ripening progression of bananas during shipping, distribution, and display. We believe that bananas handled with RipeLock technology retain their bright-yellow color, fresh taste, and appealing look for four to six days longer than untreated bananas. As a result, RipeLock maximizes the marketable “yellow life” of the fruit, providing economic benefits to brand owners and retailers. Commercial launch of RipeLock began in 2015, and the technology continues to progress through customer testing with brand owners, ripeners, food service companies and retailers in the U.S. and Europe. A full launch is expected during 2016.

 

Growth Strategy

 

Our mission is to provide technology, service and support targeted at preserving the quality, freshness and value of food, through the value chain, worldwide. We have a high touch, asset light, technology driven solutions philosophy. We intend to pursue profitable growth by building on our current capabilities and competencies, expanding into adjacent markets and pursuing related, accretive acquisitions.

 

Our focus is to:

 

·                  Strengthen our brand awareness and loyalty through customer relationship programs, intellectual property protection and year round customer engagement. AgroFresh believes this focus, building on its philosophy of customer intimacy and its sustainable competitive advantages, will allow it to better secure and grow its current business.

 

·                  Penetrate further both regionally and with short term cold storage opportunities. AgroFresh currently provides its offering to over 80% of US apples stored beyond 30 days. This percentage is much lower in Latin America, Asia Pacific and Europe. Penetration is typically driven by the pace of registrations, which were earliest in the U.S., and AgroFresh sees these other geographies presenting further opportunities for growth moving forward, as well as shorter term apple storage opportunities in all regions with existing customers.

 

·                  Extend to other produce, including bananas, pears, and other crops that have the ethylene physiology which responds positively to SmartFresh. One example is RipeLock for bananas, our system to maintain “yellow life” and thus extend the bananas’ shelf life at retailers and in consumers’ homes. It is also effective at reducing split peel which is a significant problem in the industry. AgroFresh believes it will be able to provide a measurable extension of “yellow life” as well as prevent disorders like split-peel, both of which are highly desired value drivers throughout the supply chain, especially at retail and consumer levels where consistent quality is expected to increase sales.

 

·                  Expand into other segments such as pre-harvest fruit quality management, fungal and microbial control solutions, diagnostics and storage management solutions. Opportunities include Harvista, which involves treating the produce before harvest, creating value for the grower through treated trees which retain their fruit longer, producing larger size, improved sugar development and better color, while also extending the picking window, allowing better harvest management, labor optimization, and fruit storage potential. Another opportunity is AdvanStore, our next storage

 

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management solution, which is being developed to utilize our extensive knowledge of produce physiology and our extensive post-harvest quality performance database, to allow customers to have their rooms continually monitored with advanced sensing technology for various problematic volatiles and storage parameters, as well as to provide real-time dosage of SmartFresh and other offerings to optimize fruit quality and condition during storage.

 

·                  Diversify and grow via alliances and accretive acquisitions, building on our numerous core competencies. AgroFresh anticipates proactively pursuing these opportunities.

 

Operations

 

We operate in more than 40 countries around the world. Currently, we use a single third party manufacturer, under a long-term contract that includes strong confidentiality obligations, to manufacture our key active ingredient, 1-MCP, and several other third parties, primarily to manufacture formulated products and provide product packaging services. We have no owned manufacturing facilities or manufacturing personnel.

 

We operate under a service model for our commercially available products including SmartFresh and Harvista. Sales and sales support personnel maintain direct relationships with the customers in terms of sales, price and contract negotiations, and overall customer service. Technical sales and support personnel work directly with customers to provide value-added advisory services regarding the application of SmartFresh and Harvista. The actual application of SmartFresh and Harvista is performed by service providers that are typically third-party contractors. We plan to trial an orchard operator self-application of Harvista in areas where it is best fits the local practice.

 

We have a dedicated customer service organization responsible for fulfilling customer-related requirements as well as coordinating all services being delivered by service providers. During the harvest season, temporary third-party resources are added to the customer service organization to support the high volume of transactions and activities.

 

Marketing and Sales

 

Our sales structure is built on both a regional and country-by-country basis. Globally, the business is divided into three regions, each of which has a commercial leader who is a part of our leadership team: (i) North America, Australia, and New Zealand; (ii) EMEA and Asia Pacific; and (iii) Latin America. Each leader supervises commercial managers responsible for either a number of countries or an area with large key accounts. With a direct business model, the commercial team calls on end-user customers, not just dealers or distributors. They also work closely in the field with the service providers.

 

Technical sales and development, the technical support group housed within research and development, supports the sales team. Technical sales support runs customer-specific trials for local apple varieties or specialized storage conditions and conducts follow-up with customers. These individuals work closely with customers to provide advice on appropriate protocols for SmartFresh and Harvista applications depending on crop, variety, region, and climatic conditions. The technical support group draws on our extensive knowledge base of 1-MCP applications across all regions and conditions.

 

Marketing and communications functions are organized on a global and regional basis. The regional teams manage all product launches, advertising and trade shows, and are responsible for corporate brand stewardship and communications. The teams reach out to customers to keep them up to date on the latest research and news about AgroFresh products. Market research, including product penetration, collecting competitive intelligence and tracking other relevant market and industry information, is managed globally in conjunction with the regional teams.

 

No single customer accounted for more than 10% of net sales in 2015, 2014, or 2013.

 

Competition

 

The market for the use of 1-MCP is evolving and, in the near future, we expect to face growing competition as some of our patents expire over the next several years. We compete with other pre- and post-harvest crop preservation providers that have similar product claims and offer potential functional substitutes for our products. Current competitors include: dynamic controlled atmosphere storage companies, including Harvest Watch; Janssen Pharmaceutical and Pace International selling the Fysisum 1-MCP technology; and 1-MCP generic sellers such as AgroBest, Fitomag and several Chinese companies. ReTain is used pre-harvest for extending the harvest season across all regions with the exception of the European Union. We believe that the principal factors of competition in our industry include reputation, product quality, customer service and intimacy, product innovation, technical service and value creation. We believe that we compete favorably with competitors on the basis of these and other factors. See the subsection titled “Competitive Strengths” above.

 

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Research and Development

 

Research and development plays an important role at AgroFresh in supporting customers as well as developing line extensions and new products. Approximately half of our research and development resources are located in facilities in North America, with the remainder across the other regions. Approximately 30% of the research and development organization’s resources are composed of third-party contract resources. During fruit harvest times (August to November in the Northern Hemisphere and late January to early May in the Southern Hemisphere), we hire additional third-party contract scientists to assist with extensive testing of samples pulled from treated rooms. Most of the regional research and development facilities focus on customer trials and on further developing the extensive knowledge base of SmartFresh treatments. The remaining resources are prioritized against business aligned research and development initiatives to develop line extensions and create new products. Research and development makes use of core competencies in a number of technical areas including post-harvest physiology, analytical chemistry, regulatory sciences, regulatory affairs, formulation science, formulation process development, organic chemistry, and delivery systems. Initiatives focused on next generation solutions utilize expertise in molecular biology, microbiology, postharvest pathology, diagnostics and sensor technology.

 

Intellectual Property

 

We are a technology-based solutions provider and, as such, rely on a combination of important intellectual property strengths, including licenses, patents, trademarks, copyrights and trade secret protection laws to protect our proprietary technology and our intellectual property. We seek to control access to and distribution of our proprietary information. We enter into confidentiality agreements with our employees, consultants, customers, service providers and vendors that generally provide that any confidential or proprietary information developed by us or on our behalf be kept confidential including, but not limited to, information related to our proprietary manufacturing process and SmartFresh service model. In the normal course of business, we provide our intellectual property and/or our products protected by our intellectual property to third parties through licensing or restricted use agreements.

 

We obtained an exclusive license from North Carolina State University (“NCSU”) under the Sisler patent (U.S. 5,518,988) for the use of 1-MCP to delay ripening of fruit and flowers.  This patent has expired in the United States and in Europe and continues only in Japan until May of 2020. We also acquired the Daly patent (U.S. 6,017,849) for the encapsulation complex of 1-MCP and alpha-cyclodextrin (alpha-CD), used as the foundational component in SmartFresh and Harvista. Depending on the country, SmartFresh is currently protected by a patent for the encapsulation complex through 2018 or 2019. We have also generated an impressive portfolio of intellectual property with over 30 patents granted in at least one country (pending in other countries) covering 1-MCP and next generation technologies, most of which do not expire until 2025 or beyond. RipeLock and Harvista formulations are patent protected through at least 2027.

 

Regulation and Compliance

 

We are subject to extensive national, state and local government regulation, and we have a global network of highly-experienced regulatory consultants. Through this network, we have successfully obtained registrations for SmartFresh and Harvista in every country where the review process has been completed, and the registration process for Harvista continues in ten additional countries. As of December 31, 2015, we had completed more than 80 comprehensive international health and environmental tests and have obtained product registrations in 45 countries that have approved 1-MCP technology for use by workers and consumers, and in the environment. The product has been approved by domestic and global organizations such as the U.S. Environmental Protection Agency, FAO, FDA, the European Chemicals Bureau and the Global Partnership for Good Agricultural Practice. We do not anticipate any significant problems obtaining required licenses, permits or approvals that could negatively impact the ability to expand our business.

 

For a discussion of the various risks we may face from regulation and compliance matters, see “Risk Factors” in Item 1A of this report.

 

Employees

 

As of December 31, 2015, we had approximately 156 employees. None of our employees in North America are members of a union or subject to the terms of a collective bargaining agreement. In certain other countries where we operate (including Brazil, France, Germany, Italy, Netherlands and Spain), employees are members of unions or are represented by works councils. In addition, certain of our activities have been performed historically by seasonal and part-time third-party contingent staff.

 

Geographic Information

 

Please see Note 16 to the audited consolidated financial statements for geographic sales information.

 

Available Information

 

Our website is http://www.agrofresh.com. We make available free of charge, on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing or furnishing these

 

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reports with the Securities and Exchange Commission, or SEC. Information contained on our website is not a part of this report. We have adopted a code of ethics applicable to our employees including our principal executive, financial and accounting officers, and it is available free of charge, on our website’s investor relations page.

 

The SEC maintains an Internet site at http://www.sec.gov that contains our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and our proxy and information statements. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

 

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ITEM 1A. RISK FACTORS

 

Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained in this report, including our historical financial statements and related notes included herein. The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses operations. If any of the following risks or uncertainties 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.

 

Risks Related to Our Business and Industry

 

Increased competition in our industry can lead to pricing pressure, reduced margins or the inability of our products and services to achieve market acceptance.

 

We serve established and knowledgeable customers in the business of growing, storing and handling of fresh produce and flowers. Key SmartFresh patents have expired or will expire over the next four years.

 

Actions by new or existing competitors, including introduction of competing products or services, promotions, combinations with other products or services, or price-cutting may lower our sales or require actions to retain and attract customers which could adversely affect our profitability. Increased competition from existing or new competitors could result in price reductions, increased competition for materials, reduced margins or loss of market share, any of which could materially and adversely affect our business and our operating results and financial condition.

 

In addition, if the prices at which our customers sell their products increase or decrease, the demand for our products or services may change. If the demand for our products or services decreases, there could be a significant impact on our business in the applicable location or region, resulting in a material adverse effect on our revenues and results of operations.

 

Our relationship with our employees could deteriorate, and certain key employees could leave, which could adversely affect our business, financial condition and results of operations.

 

Our business involves complex operations and demands a management team and workforce that is knowledgeable and expert in many areas necessary for our operations. As a company focused on both research and development and customer service in the highly-specialized horticultural pre- and post-harvest field, we rely on our ability to attract and retain skilled employees, consultants and contractors, including our specialized research and development and sales and service personnel. As of December 31, 2015, we employed approximately 156 full-time employees, approximately 126 of whom were members of our research and development and sales and service teams. The departure of a significant number of our highly skilled employees, consultants or contractors or one or more employees who hold key regional management positions could have an adverse impact on our operations, including as a result of customers choosing to follow a regional manager to one of our competitors.

 

In addition, to execute our growth plan we must attract and retain highly qualified personnel. Competition for these employees exists; new members of management must have significant industry expertise when they join us or engage in significant training which, in many cases, requires significant time before they achieve full productivity. If we fail to attract, train, retain, and motivate our key personnel, our business and growth prospects could be severely harmed.

 

In addition, certain of our key full-time employees are employed outside the United States. In certain jurisdictions where we operate, labor and employment laws may grant significant job protection to employees, including rights on termination of employment. In addition, in certain countries where we operate (including Brazil, France, Germany, Italy, Netherlands and Spain), our employees are members of unions or are represented by works councils as required by law. We are often required to consult and seek the consent or advice of these

 

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unions and/or works councils. These laws, coupled with any requirement to consult with the relevant unions or works councils, could adversely affect our flexibility in managing costs and responding to market changes and could limit our ability to access the skilled employees on which our business depends.

 

In addition, certain activities of our business have been performed historically by seasonal and part-time third-party contingent staff. Changes in market and other conditions (including changes in applicable law) affecting employees and/or contingent staff could adversely impact the cost to our business of maintaining our employees and third-party staffing.

 

We are subject to risks relating to portfolio concentration.

 

Our business is highly dependent on a small number of products, primarily SmartFresh, based on one active ingredient, 1-MCP applied to a limited number of horticultural products. Currently, we derive over 90% of our revenue working with customers using SmartFresh to protect the value of apples, pears, and other produce during storage. We expect these applications, products and active ingredients to continue to account for a large percentage of our profits in the near term. Our ability to continue to market and sell products containing this active ingredient in existing and new crop segments is critical to our future success.

 

Our net sales and gross profit have historically been generated from one service platform but future growth in net sales and gross profit will likely depend on the development of new product and service platforms, geographic expansion and expansion into new applications. Net sales and gross profit may vary significantly depending on our product, service, customer, application and geographic mix for any given period, which will make it difficult to forecast future operating results.

 

Our net sales and gross profit vary among our products and services, customer groups and geographic markets. This variation will increase as we attempt to increase sales into new geographies and applications, and as we introduce new product and service platforms. Net sales and gross profit, therefore, may differ in future periods from historic or current periods. Overall gross profit margins in any given period are dependent in large part on the product, service, customer and geographic mix reflected in that period’s net sales. Market conditions, competitive pressures, increased material or application costs, regulatory conditions and other factors may result in reductions in revenue or create pressure on the gross profit margins of our business in a given period. Given the nature of our business and expansion plans, the impact of these factors on our business and results of operations will likely vary from period to period and across products, services, applications and geographies. As a result, we may be challenged in our ability to accurately forecast our future operating results.

 

Potential future acquisitions may not yield the returns expected, which, in turn, could adversely affect our business, financial condition and results of operations.

 

We expect to selectively pursue strategic acquisitions. Acquisitions present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s respective ongoing businesses, possible inconsistencies in standards, controls, procedures, and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations, and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business, and adversely affect our results of operations and financial condition. Acquisitions are an important source of new products and active ingredients, technologies, services, customers, geographies and channels to market. The inability to consummate and integrate new acquisitions on advantageous terms could adversely affect our ability to grow and compete effectively.

 

In addition, we might not be able to identify suitable acquisition opportunities or obtain necessary financing on acceptable terms and might also spend time and money investigating and negotiating with potential acquisition or investment targets but not complete the transaction.

 

Following any acquisitions we may complete, if the new business, product or product or service portfolio does not meet our expectations for any reason, we may not achieve our forecasted results. There can be no assurance that the pre-acquisition analyses and the diligence we conducted in connection with any acquisition will uncover all material issues that may be present in a particular target business, or that factors outside of the target business and outside of our control will not later arise. In such event, we may be required to subsequently realize restructuring, impairment or other charges that could have a significant adverse effect on our business, financial condition and results of operations.

 

Conditions in the global economy may adversely affect our net sales, gross profit and financial condition and may result in delays or reductions in our spending that could have a material adverse effect on our business, financial condition and results of operations.

 

Although demand for fresh horticultural products is somewhat inelastic in developed economies, the fresh fruit and flower industries that we sell to can be affected by important changes in supply, market prices, exchange rates and general economic conditions. Delays or reductions in our customers’ purchasing or shifts to lower-cost alternatives that result from tighter economic market conditions would reduce demand for our products and services and could, consequently, have a material adverse effect on our business, financial condition and results of

 

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operations.

 

Our expansion depends on further penetration in existing markets and growth into new geographic markets, products, services and applications.

 

Our growth depends on our ability to achieve further penetration into existing markets and expand into new geographic markets where there may be little or no existing knowledge of our brands or service offerings. There are significant differences in fresh produce handling practices from geographic region to region. If we cannot generate further penetration in existing markets or create brand awareness and successfully adapt our sales and distribution practices to new markets, this could have an impact on our ability to generate greater revenue. Expansion into new geographic markets will require us to establish our value proposition for local fresh produce industries and to comply with new regulatory and licensing regimes. Longer registration lead times and a relatively fragmented post-harvest infrastructure in certain jurisdictions could have a material adverse effect on our results of operations and prospects in those markets.

 

Our growth also depends on our ability to apply current and future technologies to an expanded range of agricultural products. If the adoption of our products and services by growers and packers of these agricultural products is slower than anticipated, or if the prices that these customers are willing to pay for our products and services are lower than anticipated, this could negatively impact our ability to increase revenue from current levels.

 

We face new risks from the expanded launch of our Harvista™ product.

 

Our Harvista product relies initially on a range of service providers, some of which will require different contractual arrangements than for our traditional product and service offerings. Because we cannot guarantee that there will be sufficient capacity in the near term to allow for significant adoption of the ground application utilizing a full service model, we are seeking to develop spray equipment that can be standardized within the industry to permit self-applications with appropriate AgroFresh product stewardship and security. Further, we must establish application procedures and protocols for Harvista that will differ from region to region, crop to crop and variety to variety. We will have to communicate such procedures and protocols to our new service provider network and work with the network to develop a level of efficiency that will support significant growth in the adoption of Harvista. It may take longer than anticipated to develop this level of efficiency with the new service provider network, which could negatively impact our business, financial condition and results of operations.

 

Failure to manage our growth effectively using our existing controls and systems could harm our business, financial condition and operating results.

 

Our existing management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing any such growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain management and employees and to engage new material suppliers and service providers. We may not respond quickly enough to the changing demands that our expansion will impose on our management and existing infrastructure, which could harm our business, financial condition and results of operations. Failure to appropriately manage safety, human health, product liability and environmental risks could adversely impact employees, communities, stakeholders, the environment, our reputation and our business, financial condition and results of operations.

 

We may be unable to respond effectively to technological changes in our industry, which could reduce the demand for our products.

 

Our future business success will depend upon our ability to maintain and enhance our technological capabilities and develop and market products, services and applications that meet changing customer needs and market conditions in a cost-effective and timely manner. Maintaining and enhancing technological capabilities and developing new products may also require significant investments in research and development. We may not be successful in developing new products, services and technology that successfully compete or be able to anticipate changing customer needs and preferences, and our customers may not accept one or more of our new products or services. If we fail to keep pace with evolving technological innovations or fail to modify our products and services in response to customers’ needs or preferences, then our business, financial condition and results of operations could be adversely affected.

 

We currently rely on a limited number of suppliers to produce certain key components of our products.

 

We rely on unaffiliated contract manufacturers to produce certain key components of our products. There is limited available manufacturing capacity that meets our quality standards and regulatory requirements, especially for the manufacturing of the active ingredient, 1-MCP. Our 1-MCP needs are currently sourced from a single qualified supplier, although we currently have sufficient safety stock to allow us to withstand a disruption in supply from that supplier. In addition, we have qualified a second supplier to provide our active ingredient in the event of a disruption from our current supplier. However, if we are unable to arrange for sufficient production capacity among our contract manufacturers or our contract manufacturers encounter production, quality, financial, or other difficulties, including labor or geopolitical disturbances, we may encounter difficulty in meeting customer demands as we seek alternative sources of supply, or we may have to make

 

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financial accommodations to such contract manufacturer or otherwise take steps to avoid or minimize supply disruption. We may be unable to locate an additional or alternate contract manufacturing arrangement that meets our quality controls and standards and regulatory requirements in a timely manner or on commercially reasonable terms. Any such difficulties could have an adverse effect on our business, financial condition and results of operations, which could be material.

 

In some jurisdictions, we rely on independent distributors to distribute our products.

 

We rely in some jurisdictions on independent distributors to distribute our products and to assist us with the marketing, sale and servicing of certain of our products. For example, we have entered into long-term distribution relationships for our products in China, Russia, Israel, South Korea, Japan and Mexico. As a result, delivery of services and products in these jurisdictions relies on the performance of a small number of contractual counterparties, and in most of these countries we are not directly involved in sales and service provider relationships. We cannot be certain that our distributors will focus adequate resources on selling our products and services to end-users or will be successful in selling them. Some of our distributors also represent or manufacture other, potentially competing, agrochemical products. If we are unable to establish or maintain successful relationships with our distributors, we will need to further develop our own sales and distribution capabilities, which would be expensive, time-consuming and possibly not as successful in achieving market penetration, which could have a material adverse effect on our results of operations, cash flows or financial condition. In addition, the distribution of our products could be disrupted by a number of factors, including labor issues, failure to meet customer standards, bankruptcy or other financial issues affecting our third-party providers, or other issues affecting any such third party’s ability to meet our distribution requirements. The failure to properly perform by, switch to the competition or loss of, one or more of our distributors could have a material adverse effect on our business, financial condition and results of operations.

 

Our intellectual property and proprietary rights are integral to our business. Our business and results of operations could be adversely affected if we fail to protect our intellectual property and proprietary rights.

 

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property rights, including our patent and trademark portfolio and trade secrets related to our proprietary processes, methods, formulations and other technology. Failure to protect our intellectual property rights may result in the loss of valuable technologies or impair our competitive advantage. We rely on confidentiality agreements and patent, trade secret and trademark, as well as judicial enforcement of all of the foregoing to protect such technologies and intellectual property rights. In addition, some of our technologies are not or will not be covered by any patent or patent application. With respect to our pending patent applications, we may not be successful in securing patents for these claims, which could limit our ability to protect inventions that these applications were intended to cover. In addition, the expiration of a patent can result in increased competition with consequent erosion of profit margins.

 

As key SmartFresh patents have expired or will expire over the next four years, if we are not able to achieve further differentiation of our products and services through patented mixtures, new formulations, new delivery systems, new application methods or other means of obtaining extended patent protection, our ability to prevent competitors from developing and registering similar products could have an adverse effect on our sales of such product. Our patents also may not provide us with any competitive advantage and may be challenged by third parties. Further, our competitors may attempt to design around our patents.

 

In some cases, we rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally will enter into confidentiality agreements with our employees and third parties to protect our intellectual property, our confidentiality agreements could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. In addition, adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets or manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.

 

In addition, we rely on both registered and unregistered trademarks to protect our name and brands. Our failure to adequately maintain the quality of our products and services associated with our trademarks or any loss to the distinctiveness of our trademarks may cause us to lose certain trademark protection, which could result in the loss of goodwill and brand recognition. In addition, successful third-party challenges to the use of any of our trademarks may require us to rebrand our business or certain products or services associated therewith.

 

We may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, or that has been designed around our patents, particularly in countries other than the United States. The unauthorized use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantages we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights; any proceedings could be burdensome and costly, and we may not prevail.

 

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We may experience claims that our products infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products or services.

 

We continually seek to improve our business processes and develop new products and applications in a crowded patent space that we must continually monitor to avoid infringement. We cannot guarantee that we will not experience claims that our processes and products infringe issued patents (whether present or future) or other intellectual property rights belonging to others.

 

From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the ability to operate freely in our various business lines without the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could experience claims for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products. Likewise, our competitors may also already hold or have applied for patents in the United States or abroad that, if enforced or issued, could prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the United States or abroad. Any actions asserted against us could include payment of damages for infringement, stopping the use, require that we obtain licenses from these parties or substantially re-engineer our products or processes in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Further, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.

 

We license patent rights from third parties. If we are not able to enter into future licenses on commercially reasonable terms, if such third parties do not properly maintain or enforce the patents underlying such existing or future licenses, or if we fail to comply with our obligations under such licenses, our competitive position and business prospects could be adversely affected.

 

We are a party to license agreements that give us rights to third-party intellectual property that may be necessary or useful for our business, and we may enter into additional licenses in the future. If we are unable to enter into licensing arrangements on favorable terms in the future, our business may be adversely affected. In addition, if the owners of the patents we license do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects could be harmed. Without protection for the intellectual property we license, other companies might be able to offer substantially similar or identical products and/or services for sale, which could adversely affect our competitive business position and harm our business prospects.

 

If we fail to comply with our obligations under license agreements, our counterparties may have the right to terminate these agreements, in which event we may not be able to develop, manufacture, register, or market, or may be forced to cease developing, manufacturing, registering, or marketing, any product or service that is covered by these agreements or may face other penalties under such agreements. Such an occurrence could materially adversely affect the value of the applicable ingredient or formulated products and/or services provided by us and have an adverse effect on our business, financial condition and results of operations.

 

Seasonality, as well as adverse weather conditions and other natural phenomena, may cause fluctuations in our revenue and operating results.

 

Historically, our operations have been seasonal, with a greater portion of total net revenue and operating income occurring in the third and fourth calendar quarters. Our customers’ crops are vulnerable to adverse weather conditions and natural disasters such as storms, tsunamis, hail, tornadoes, freezing conditions, extreme heat, drought, and floods, which can reduce acreage planted, lead to modified crop selection by growers and affect the timing and overall yield of harvest, each of which may reduce or otherwise alter demand for our products and services and adversely affect our business and results of operations. Weather conditions and natural disasters also affect decisions of our distributors, direct customers and end-users about the types and amounts of products and services to purchase and the timing of use of such products and services. Delays by growers in harvesting can result in deferral of orders to a future quarter or decisions to forego orders altogether in a particular growing season, either of which would negatively affect our sales in the affected period. As a result of seasonality, any factors that would negatively affect our third and fourth quarter results in any year could have an adverse impact on our business, financial condition and results of operations for the entire year.

 

Our products are highly regulated by governmental agencies in the countries where we conduct business. Our failure to obtain regulatory approvals, to comply with registration and regulatory requirements or to maintain regulatory approvals would have an adverse impact on our ability to market and sell our products.

 

Our pre- and post-harvest products are subject to technical review and approval by government authorities in each country where we wish to sell our products. While there is a general international consensus on the data needed in order to evaluate the safety of agrochemicals products before they can be placed on the market (as evidenced, for example, by the standards and guidelines issued by the Organization for Economic Co-operation and Development), each country has its own legislative process and specific requirements in order to determine if identified risks are acceptable and can be managed in the local context and may be subject to frequent changes as new data requirements

 

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arise in response to scientific developments.

 

The regulatory requirements that we are subject to are complex and vary from country to country. To obtain new registrations, it is necessary to have a local registrant, and to understand the country’s regulatory requirements, both at the time an application for registration is submitted and when the registration decision is made, which may be several years later. A significant investment in registration data is required (covering all aspects from manufacturing specifications through storage and transport, use, and, finally, disposal of unwanted product and used containers) to ensure that product performance (bio efficacy), intrinsic hazards and use patterns are fully characterized. Risk assessments are conducted by government regulatory authorities, who make the final decision on whether the documented risk associated with a product and active ingredient (“AI”) is acceptable prior to granting approval for sale. This process may be prolonged due to requirements for additional data or internal administrative processes. There is a risk that registration of a new product may not be obtained or that a product label may be severely reduced, restricting the use of the product. If these circumstances arise, there is a risk that the substantial investments made in product development will not lead to the projected sales that justified the investment, and our business, financial condition and results of operations may be adversely affected by failure to obtain new registrations.

 

Products that are already approved are subject to periodic review by regulatory authorities in many countries; such reviews frequently require the provision of new data and more complex risk assessments. The outcome of reviews of existing registrations cannot be guaranteed; registrations may be modified or canceled. Since all government regulatory authorities have the right to review existing registrations at any time, the sustainability of the existing portfolio cannot be guaranteed. Existing registrations may be lost at any time, resulting in an immediate impact on sales. Furthermore, prior to expiration, it is necessary to renew registrations. The renewal period and processes vary by country and may require additional studies to support the renewal process. Failure to comply could result in cancellation of the registration, resulting in an impact on sales.

 

In addition, new laws and regulations may be introduced, or existing laws and regulations may be changed or may become subject to new interpretations, which could result in additional compliance costs, seizures, confiscations, recalls, monetary fines or delays that could affect us or our customers. For example, In accordance with a regulation of the European Parliament and of the Council of the European Union, in May 2014 the EU Commission proposed a List of Candidates for Substitution (“Cfs”), which included 1-MCP. In a subsequent press release published on January 27, 2015, the Commission clarified that the list is neither a list of banned substances nor as a ranking of Cfs, and that all active substances on the list will still be available on the market and are deemed acceptable, but could be substituted in time if a viable alternative becomes available. We have conducted studies, which have been submitted to the authorities, to support our position that 1-MCP should be removed from the Cfs list.

 

Compliance with the prevailing regulations in countries in which we conduct business is essential. If we fail to comply with government requirements, we could have registrations withdrawn immediately (loss of sales), suffer financial penalties (fines) and suffer reputational damage that could materially and adversely affect our business and our regulatory success in the future.

 

If the data we supply to registration authorities is used by other companies to obtain their own product registrations, “generic” copies of products in our portfolio could enter the market, and our business position could be adversely affected.

 

In many countries, toxicity studies, data and other information relied upon by registration authorities in support of a product registration are granted “data protection” for a period of up to 15 years after the date upon which the data was originally submitted. In addition to the period of data compensability, there is in many geographies an exclusive use period of ten years during which other companies may not legally cite our data in support of registration submissions without our written permission. In some countries, there is also a period of time during which companies may cite another company’s data upon payment of data compensation. In other countries, there is no legislation at all that effectively prevents third parties from citing our proprietary regulatory data. Furthermore, after the exclusive use period and data compensation period have expired, as will be the case with respect to our data in Europe in 2016, any third party would be free to cite our data in support of its registration submissions. The possibility that third parties can use our registration data to obtain their own product registrations can adversely affect our business, financial condition and results of operations by facilitating the entry of “generic” copies of products in our portfolio into the market.

 

Negative publicity relating to our products could reduce sales.

 

Our success depends both on our customers’ perception of our products’ effectiveness and on end-consumers’ perception of the safety of our products. We may, from time to time, be faced with negative publicity relating to public health concerns, customer complaints or litigation alleging illness or injury, negative employee, staffing and supplier relationships or other matters, regardless of whether the allegations are valid or whether we are found to be responsible. Given the global nature of the business, the negative impact of adverse publicity relating to one product or in one geographic region may extend far beyond the product or the country involved to affect other parts of our business. The risk of negative publicity is particularly great with respect to the performance of service providers because we are limited in the manner in which we can control them, especially on a real-time basis. The considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents.

 

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Customer demand for our products and our brand’s value could diminish significantly if we receive negative publicity or if customer confidence in us or our products is otherwise eroded, which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results of operations.

 

New information or a change in consumer attitudes and preferences regarding diet and health could result in changes in regulations and consumer consumption habits, which could have an adverse effect on our business, financial condition and results of operations.

 

Public awareness of, and concern about, the use of chemicals in food production has been increasing. Concerns about issues such as chemical residues in foods, agricultural worker safety and environmental impacts of agrochemicals (such as impacts on groundwater or non-target species, such as fish, birds and bees) could result in additional scrutiny of, or adversely affect the market for, our products, even when these products have been approved by governmental authorities. For example, such concerns could result in continued pressure for more stringent regulatory intervention and potential liability relating to health concerns arising from the use of our products in food preparation or the impact our products may have on the environment. These concerns could also influence public and customer perceptions, including purchasing preferences, the viability of our products, our reputation and the cost to comply with regulations, all of which could have a material adverse impact on our business. Some types of products that we manufacture have been subject to such scrutiny in the past, and some categories of products that we produce are currently under scrutiny and others may be in the future. We may not be able to effectively respond to changes in consumer health perceptions or to modify our product offerings to reflect trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.

 

Use of our current products is not compatible with “organic” labeling standards in all jurisdictions. As such, an increase in consumer preference for organic produce could negatively affect the demand for our products or services. Similarly, a shift in consumer preferences away from fresh produce in favor of frozen or otherwise processed food products, or towards “seasonal” or locally grown produce, could negatively affect the demand for our products or services.

 

We may be required to pay substantial damages for product liability claims or other legal proceedings.

 

We may become involved in lawsuits concerning crop damage and product inefficacy claims, in addition to intellectual property infringement disputes, claims by employees, or former employees or contingent staff, and general commercial disputes. Our insurance may not apply to or fully cover any liabilities we incur as a result of these lawsuits.

 

We may face potential product liability claims for or relating to products we have sold and products that we may sell in the future. Since our products are used in the food chain on a global basis, any such product liability claim could subject us to litigation in multiple jurisdictions. Product liability claims, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention, and may adversely affect our reputation and demand for our products and may result in significant damages. We cannot predict with certainty the eventual outcome of pending or future product liability claims. Any of these negative effects resulting from product liability claims could adversely affect our results of operations, cash flows, or financial condition. These risks exist even with respect to products that have received, or may in the future receive, regulatory approval, registration, and clearance for commercial use. Unexpected quality or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, personal injury and/or other claims.

 

Our results of operations are subject to exchange rate and other currency risks. A significant movement in exchange rates could adversely impact our results of operations and cash flows.

 

We conduct our business in many different currencies, primarily the U.S. dollar and the Euro. Accordingly, currency exchange rates affect our operating results. The effects of exchange rate fluctuations on our future operating results are unpredictable because of the number of currencies in which we conduct business and the potential volatility of exchange rates. We are also subject to the risks of currency controls and devaluations. Currency controls may limit our ability to convert currencies into U.S. dollars or other currencies, as needed, or to pay dividends or make other payments from funds held by subsidiaries in the countries imposing such controls, which could adversely affect our liquidity. Currency devaluations could also negatively affect our operating margins and cash flows. For example, if the U.S. dollar were to strengthen against a local currency, our operating margin would be adversely impacted in the country to the extent significant costs are denominated in U.S. dollars while our revenues are denominated in such local currency. We operate in countries that have experienced hyperinflation in recent years, which amplifies currency risk.

 

Our substantial international operations subject us to risks, including unfavorable political, regulatory, labor, tax and economic conditions in other countries that could adversely affect our business, financial condition and results of operations.

 

Currently, we operate, or others operate on our behalf, in more than 40 countries, in addition to our operations in the United States. We expect sales from international markets to represent an increasing portion of our net sales. Accordingly, our business is subject to risks related to the different legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in

 

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our international operations include, in addition to other risks discussed in this section, the following:

 

·                  agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system;

 

·                  foreign customers may have increased credit risk and different financial conditions, which may necessitate longer payment cycles or result in increased bad debt write-offs or additions to reserves related to our foreign receivables;

 

·                  foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;

 

·                  U.S. export licenses may be difficult to obtain;

 

·                  there may be delays and interruptions in transportation and importation of our products;

 

·                  general economic conditions in the countries in which we operate, including fluctuations in gross domestic product, interest rates, market demand, labor costs and other factors beyond our control, could have an adverse effect on our net sales in those countries;

 

·                  our results of operations in a particular country could be affected by political or economic instability on a country-specific or global level from various causes, including the possibility of hyperinflationary conditions, natural disasters and terrorist activities and the response to such conditions and events;

 

·                  we may experience difficulties in staffing and managing multi-national operations, including the possibility of labor disputes abroad;

 

·                  unexpected adverse changes in foreign laws or regulatory requirements may occur, including environmental, health and safety laws and laws and regulations affecting export and import duties and quotas;

 

·                  governmental policies, including farm subsidies, tariffs, tenders, and commodity support programs, as well as other factors beyond our control, such as the prices of fertilizers, seeds, water, energy and other inputs, and the prices at which crops may ultimately be sold, could negatively influence the number of acres planted, the mix of crops planted and the demand for agrochemicals;

 

·                  compliance with a variety of foreign laws and regulations may be difficult; and

 

·                  we may be subject to the risks of divergent business expectations resulting from cultural incompatibility.

 

We generally do not have long-term contracts with our customers or service providers.

 

Many of our relationships with our customers are based primarily upon one-year agreements or individual sales orders. As such, our customers could cease buying products or services from us at any time, for any reason, with little or no recourse. If multiple customers or a material customer elected not to purchase products or services from us, our business prospects, financial condition and results of operations could be adversely affected.

 

Our traditional service model relies on short-term and long-term contracts with a large number of service providers who apply our products in most jurisdictions for our customers. Service providers’ investment in the equipment necessary to provide services to customers is also minimal. As a result, service providers with short-term contracts could cease providing services or provide services for a competitor upon relatively short notice. If multiple service providers or a material service provider elected not to provide services on our behalf, our business, financial condition and results of operations could be adversely affected.

 

Increases in costs or reductions in the supplies of raw materials we use in our manufacturing process could materially and adversely affect our results of operations.

 

Our operations depend upon our or our contract manufacturers obtaining adequate supplies of raw materials on a timely basis. We typically purchase our major raw materials on a contract or as-needed basis from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the financial stability of our suppliers, suppliers’ allocations to other purchasers, interruptions in production by suppliers, new laws or regulations, changes in exchange rates and worldwide price levels. Additionally, we cannot guarantee that, as our supply contracts expire, we will be able to renew them, or if they are terminated, that we will be able to obtain

 

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replacement supply agreements on terms favorable to us. Our results of operations could be adversely affected if the costs of raw materials used in our manufacturing process increase significantly.

 

Joint development, distribution, manufacturing or venture investments that we enter into could be adversely affected by our lack of sole decision-making authority, our reliance on partners’ operational capabilities, strategic decisions and financial condition, and disputes between us and our collaborating partners.

 

We have a limited number of joint development and distribution agreements, and may enter into new ones in the future. Investments through joint research, development, registration, manufacturing, distribution, or other joint entities (collectively “collaborations”) may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that collaboration partners might be sold, become bankrupt, fail to fund their share of required investments, fail to meet collaboration milestones, elect to change strategy, make poor business decisions or block or delay necessary decisions. Collaboration partners may develop economic or other business interests or goals which could conflict and become incompatible with our business interests, and may be in a position to take actions opposed to our strategy and objectives. Disputes between us and our collaboration partners may result in arbitration or litigation that would increase our expenses and distract our management team from focusing their time and effort on the business, or subject the projects, investments or facilities owned by the partnership or collaboration to additional risk. In addition, we may in certain circumstances be liable for the actions of our collaboration partners, which could materially and adversely affect our business, financial condition and results of operations.

 

We might require additional capital to support business growth, and this capital might not be available.

 

We intend to continue to make investments to support our business growth and might require additional funds to finance our planned growth, including strategic acquisitions. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through issuance of equity securities, our existing stockholders could suffer significant dilution, and any new equity securities that we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

 

Our substantial level of indebtedness could materially and adversely affect our business, financial condition and results of operations.

 

Upon consummation of the Business Combination on July 31, 2015, we incurred debt obligations in the form of a $425 million term loan and a $25 million revolving loan. The incurrence of this debt could have a variety of negative effects, including:

 

·                  default and foreclosure on our assets if our operating revenues are insufficient to repay our debt obligations;

 

·                  acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

 

·                  our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand;

 

·                  our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;

 

·                  our inability to pay dividends on our common stock; and

 

·                  using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, our ability to pay expenses, make capital expenditures and acquisitions, and fund other general corporate activities.

 

We are subject to credit risks related to our accounts receivable, and failure to collect our accounts receivable could adversely affect our results of operations and financial condition.

 

The failure to collect outstanding receivables could have an adverse impact on our business, financial condition and results of operations. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, then we might be

 

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required to make additional allowances, which would adversely affect our results of operations in the period in which the determination or allowance was made. Bad debt write offs were less than 0.5% of revenues in each of 2014 and 2015.

 

While we occasionally obtain letters of credit or other security for payment from customers or distributors, enforcing that security is a lengthy and expensive process, and the eventual sale of the security may not ultimately cover the underlying trade receivable balance. Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities. The current economic climate and volatility in the price of the underlying agricultural commodities could increase the likelihood of such defaults and bankruptcies. If a material portion of our customers or distributors were to become insolvent or otherwise were not able to satisfy their obligations to us, we would be materially harmed.

 

No single customer accounted for more than 10% of our consolidated net sales in 2015, 2014 or 2013. At December 31, 2015 and 2014, no individual customer accounted for greater than 10% of our consolidated accounts receivable balance.

 

Failure to comply with the Foreign Corrupt Practices Act, or FCPA, and other similar anti-corruption laws, could subject us to penalties and damage our reputation.

 

We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain certain policies and procedures, including maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Certain of the jurisdictions in which we conduct business are at a heightened risk for corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery, and anti-kickback laws to which we are subject. Our employees, distributors, dealers and agents may not always take actions that are consistent with our policies designed to ensure compliance, particularly when they are confronted by pressures from competitors and others to act in a manner that is inconsistent with such policies. If we, or our intermediaries, fail to comply with the requirements of the FCPA, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.

 

Our operations rely heavily on information systems for management of our supply chain, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our planned AdvanStore product offering relies particularly heavily on information systems for monitoring, data collection and analysis. Our operations depend upon our ability to protect our computer equipment and systems, which, in the case of AdvanStore systems, are not located within our physical control, against damage from physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in customer service and reduce efficiency in our operations. Remediation of such problems could result in significant, unplanned capital investments.

 

We use hazardous materials in our business and are subject to regulation and potential liability under environmental laws.

 

Our business is subject to a wide range of stringent laws and regulations that relate to the raw material supply chain, environmental compliance and disposition of any hazardous wastes. As with any chemical manufacturing enterprise, there are inherent hazards associated with chemical manufacturing and the related storage and transportation of raw materials, and the potential that accidents or noncompliance with laws and regulations by us, or our contract manufacturers, could disrupt our operations or expose us to significant losses or liabilities. We cannot predict the adverse impact that new environmental regulations, or new interpretations of existing regulations, might have on the research, development, production, and marketing of our products.

 

We rely on unaffiliated contract manufacturers to produce certain products or key components of products. Also, our suppliers or toll manufacturers may use hazardous materials in connection with producing our products. We may also from time to time send wastes to third parties for disposal. In the event of a lawsuit or investigation, we could be subject to claims for liability for any injury caused to persons or property by exposure to, or release of, such hazardous materials or wastes. Further, we may be required to indemnify our suppliers, toll manufacturers, or waste disposal contractors against damages and other liabilities arising out of the production, handling, or storage of our products or raw materials or the disposal of related wastes. Such indemnification obligations could have an adverse effect on our business, financial condition and results of operations.

 

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We may need to recognize impairment charges related to goodwill, identified intangible assets and fixed assets.

 

We have recognized substantial balances of goodwill and identified intangible assets as a result of the Business Combination, and we may record additional goodwill and other intangible assets as a result of any acquisitions we may complete in the future. We are required to test goodwill and any other intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. There is significant judgment required in the analysis of a potential impairment of goodwill, identified intangible assets and fixed assets. If, as a result of a general economic slowdown, deterioration in one or more of the markets in which we operate or impairment in our financial performance and/or future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have a material adverse effect on our financial condition and results of operations.

 

Risks Related to Our Separation from Dow

 

Our inability to transition successfully to being an independent company may have a material adverse effect on our business or results of operations.

 

Until the consummation of the Business Combination on July 31, 2015, the AgroFresh Business was a part of the integrated operations of Dow. As a result of the Business Combination, we became an independent company and it cannot be assured that we will make the transition successfully. For example, certain of our accounting and information technology systems have historically been a part of Dow’s larger operations and may not be able to successfully transition to independent operations in a timely manner, or at all, or at a higher than anticipated cost. Any delays in implementing required systems may lead to increased operating expenses. Any failure or delay in implementing these systems could also result in material misstatements in our financial statements or delays in meeting reporting obligations. Any failure to transition successfully to an independent company may have a material adverse effect on our business, financial condition or results of operations.

 

Our historical financial information may not be indicative of our future results as an independent company.

 

Our historical financial information may not reflect what our results of operations, financial position and cash flows would have been had we been an independent company during the periods presented. This is primarily a result of the following factors:

 

·                  our historical financial information reflects cost allocation for services historically provided by Dow and we expect these allocations to be different from the costs we will incur for these services as a smaller independent company, including with respect to services we expect will be provided by Dow under the Transition Services Agreement and other agreements with Dow and its affiliates. We expect that in some instances the costs incurred for these services as a smaller independent company will be higher than the share of total Dow expenses assessed to us historically; and

 

·                  our historical financial information does not reflect the debt and related interest expense that we have incurred in connection with the Business Combination.

 

Dow provides a number of services to us pursuant to a Transition Services Agreement. When such agreement terminates, we will be required to replace such services, and the economic terms of the new arrangements may be less favorable to us.

 

Under the terms of a Transition Services Agreement we entered into with Dow upon the consummation of the Business Combination (the “Transition Services Agreement”), Dow provides us, for a fee, specified support services related to corporate functions for various terms following the Business Combination, such as marketing and sales support (one year term), customer service (one year term), supply chain (one year term), purchasing (one year term), finance (six month term), information systems services (five year term), environmental, health and safety (six month term), and general consulting (one year term), unless earlier terminated according to the terms of the Transition Services Agreement. As each of the foregoing services terminates pursuant to the terms of the Transition Services Agreement, we will be required to either enter into a new agreement with Dow or other services providers or assume the responsibility for these functions. We cannot assure you that the economic terms of the new arrangements will be similar to those under our current arrangements with Dow. If we are unable to renew or replace such arrangements on a comparable basis, our business, financial condition and results of operations may be materially and adversely affected.

 

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 (the “Tax Receivables Agreement”), we are required to pay annually to Dow 85% 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.

 

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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.

 

In certain cases, payments by us under the Tax Receivables Agreement may be accelerated by us or significantly exceed the tax benefits we realize in respect of the tax attributes subject to the Tax Receivables Agreement.

 

The Tax Receivables Agreement allows us, at any time, to elect an early termination of the Tax Receivables Agreement, in which case we would make an immediate payment equal to the present value of the anticipated future payments to Dow under the Tax Receivables Agreement, after the termination date. Such payment would be based on certain valuation assumptions and deemed events set forth in the Tax Receivables Agreement, including the assumption that we have sufficient taxable income to fully utilize such tax benefits. In addition, in the event of certain acquisition transactions by us or a change of control of us, an alternative calculation mechanism will apply to determine the amount paid to Dow under the Tax Receivables Agreement, which alternative calculation mechanism could result in payments to Dow that are greater than the tax benefits actually realized by us in respect of the tax attributes subject to the Tax Receivables Agreement. Accordingly, payments under the Tax Receivables Agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits and may be significantly greater than the benefits we realize in respect of the tax attributes subject to the Tax Receivables Agreement. In these situations, our obligations under the Tax Receivables Agreement could have a substantial negative impact on our liquidity. We may not be able to finance our obligations under the Tax Receivables Agreement and any indebtedness we incur may limit our subsidiaries’ ability to make distributions to us to pay these obligations. In addition, our obligations under the Tax Receivables Agreement could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control that could otherwise be in the best interests of our stockholders.

 

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Risks Related to Our Securities

 

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 December 31, 2015, Dow and the Sponsor (and its affiliates) owned approximately 35% and 9%, respectively, of our outstanding common stock. In addition, the Sponsor currently beneficially owns a significant percentage of our outstanding warrants, and we expect that Dow will own a significant percentage of our outstanding warrants on or about April 30, 2016, pursuant to the terms of the Warrant Purchase Agreement we entered into in connection with the consummation of the Business Combination, as amended. 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.

 

Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.

 

In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, which could be substantial, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:

 

·                  actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

·                  success of competitors;

 

·                  our operating results failing to meet the expectation of securities analysts or investors in a particular period;

 

·                  changes in financial estimates and recommendations by securities analysts concerning us or the agricultural or specialty chemicals industries in general;

 

·                  our ability to market new and enhanced products on a timely basis;

 

·                  changes in laws and regulations affecting our business;

 

·                  our ability to meet compliance requirements;

 

·                  commencement of, or involvement in, litigation involving us;

 

·                  changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

 

·                  the volume of shares of our common stock available for public sale;

 

·                  any major change in our board of directors or management;

 

·                  sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception

 

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that such sales could occur; and

 

·                  general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.

 

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

 

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

 

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

 

There may be sales of a substantial amount of our common stock by our current stockholders, and these sales could cause the price of our common stock to fall.

 

As of December 31, 2015, there were 49,528,214 shares of our common stock outstanding. Of our issued and outstanding shares that were issued prior to the Business Combination, all are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Future sales of our common stock may cause the market price of our securities to drop significantly, even if our business is doing well.

 

At the closing of the Business Combination, we entered in an Investor Rights Agreement (the “Investor Rights Agreement”), pursuant to which Dow, the Sponsor and the other parties thereto are entitled to demand that we register the resale of their securities subject to certain minimum requirements. Stockholders who are party to the Investor Rights Agreement also have certain “piggyback” registration rights with respect to registration statements filed subsequent to the Business Combination.

 

Upon effectiveness of any registration statement we file pursuant to the Investor Rights Agreement, and upon the expiration of the lockup period applicable to the parties to the Investor Rights Agreement, these parties may sell large amounts of our stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in our stock price or putting significant downward pressure on the price of our stock.

 

Sales of substantial amounts of our common stock in the public market after the Business Combination, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future.

 

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, 2015, 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. We expect to issue warrants to purchase an additional 3,000,000 shares of our common stock on or about April 30, 2016, pursuant to the terms of the Warrant Purchase Agreement we entered into in connection with the consummation of the Business Combination, as amended (net of 3,000,000 warrants to be surrendered by the Sponsor for cancellation pursuant to the terms of such agreement). 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. 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.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. As of the date of this report, only two securities and industry analysts publish

 

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research on us. If additional securities or industry analysts do not commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who cover or who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who covers or who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt.

 

Our second amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include:

 

·                  a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

·                  no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

·                  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

·                  the ability of our board of directors to determine whether to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

·                  a prohibition on stockholder action by written consent, which forces stockholder action to be taken at a special meeting of our stockholders;

 

·                  the requirement that an annual meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

·                  limiting the liability of, and providing indemnification to, our directors and officers;

 

·                  controlling the procedures for the conduct and scheduling of stockholder meetings;

 

·                  providing that directors may be removed prior to the expiration of their terms by stockholders only for cause; and

 

·                  advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our board of directors.

 

These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our management. Any provision of our second amended and restated certificate of incorporation or bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

 

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

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The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.

 

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. As such, we are eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock in our initial public offering.

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We have identified a material weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting or effective disclosure controls, this could have a material adverse effect on our business and stock price.

 

As a publicly traded company, we are required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. We are not including management’s report on internal control over financial reporting in this report because we completed the Business Combination on July 31, 2015, in reliance on an SEC interpretation available to the first annual report following consummation of acquisition of an operating company by a shell company, but will be required to provide such a report in our annual report for the year ending December 31, 2016. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company, which may be up to five full fiscal years following our initial public offering.

 

In connection with the preparation of our consolidated financial statements for the period ended December 31, 2015, and as discussed in Item 9A “Controls and Procedures,” we concluded that there is a material weakness in the design and operating effectiveness of our internal control over financial reporting as defined in SEC Regulation S-X. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

 

As a result of various factors including, in part, the identified material weakness in the design and operation of our internal controls over financial reporting, our management concluded that our disclosure controls and procedures as of December 31, 2015 were ineffective. Furthermore, our management may be unable to conclude in future periods that our disclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weakness in internal controls over financial reporting. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

We intend to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff, in order to remediate the material weakness that we have identified. If we are unable to remediate our existing material weakness in a timely manner, or at all, or if we identify additional weaknesses in our internal control over financial reporting in the future, our ability to accurately and timely report our financial position, results of operations, cash flows or key operating metrics could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements or other corrective disclosures. Under those circumstances, or if we are otherwise unable to comply with the requirements of Section 404 in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we no longer qualify as an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by NASDAQ (the exchange on which our securities are listed), the SEC or other regulatory authorities, which could require additional financial and management resources.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 2. PROPERTIES

 

We lease our current headquarter facility in Philadelphia, Pennsylvania, pursuant to a sub-lease from Dow. We have entered into a lease for a new headquarter facility, consisting of approximately 11,200 square feet, located in Philadelphia, with a 90 month term commencing in or about May 2016, with a five-year renewal option and an option for us to terminate the lease after 72 months. We use five primary additional leased locations worldwide to deliver product and technical services: Yakima and Wenatchee, Washington; Curico, Chile; Bologna, Italy; and Lerida, Spain. In addition, the Yakima Service Center is our product distribution center to all geographic regions around the world. We also sub-lease space from Dow in Collegeville, Pennsylvania for research and development and administrative functions and in Paris, France for administrative functions.

 

ITEM 3. LEGAL PROCEEDINGS

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock and warrants trade on the Nasdaq Capital Market under the symbols “AGFS” and “AGFSW,” respectively. From February 13, 2014 until July 31, 2015, our units also traded on the Nasdaq Capital Market, under the symbol “BLVDU.” Each of our units consisted of one share of common stock and one-half of one warrant. The common stock and warrants underlying our units began trading separately on the Nasdaq Capital Market on April 7, 2014. Each warrant entitles the holder to purchase one share of our common stock at a price of $11.50 per share, and only whole warrants are exercisable. The warrants will expire on July 31, 2020, unless redeemed earlier.

 

The following table shows, for the periods indicated, the high and low sales prices per share of our common stock and warrants as reported by Nasdaq. Prior to April 24, 2014, there was no established public trading market for our common stock and warrants.

 

 

 

Common Stock

 

Warrants

 

Quarter Ended

 

High

 

Low

 

High

 

Low

 

2014

 

 

 

 

 

 

 

 

 

Second Quarter (from April 24, 2014)(1)

 

$

12.45

 

$

9.42

 

$

2.80

 

$

0.50

 

Third Quarter

 

$

9.95

 

$

9.40

 

$

0.96

 

$

0.51

 

Fourth Quarter

 

$

9.78

 

$

9.55

 

$

0.85

 

$

0.53

 

2015

 

 

 

 

 

 

 

 

 

First Quarter

 

$

9.82

 

$

9.60

 

$

0.75

 

$

0.45

 

Second Quarter

 

$

13.35

 

$

9.80

 

$

4.00

 

$

0.69

 

Third Quarter

 

$

13.21

 

$

7.13

 

$

3.99

 

$

1.44

 

Fourth Quarter

 

$

8.93

 

$

4.61

 

$

2.22

 

$

0.50

 

 


(1)         The second quarter 2014 information reflects the high and low sales prices beginning as of April 24, 2014, which was the first day that holders of our units elected to separate their units into shares of common stock and warrants.

 

Holders of Record

 

On March 1, 2016, there were approximately 80 holders of record of our common stock and two holders of record of our warrants. Such numbers do not include beneficial owners holding securities through nominee names.

 

Dividends

 

We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future is within the discretion of our board of directors, and will be dependent upon our revenues and earnings, capital requirements and general financial condition. Our board of directors does not anticipate declaring any dividends in the foreseeable future. Further, our ability to declare dividends is limited by restrictive covenants contained in our credit facility, which includes an overall cap on the total amount of dividends we can pay, together with the total amount of shares and warrants we can repurchase, of $12.0 million per fiscal year, and imposes certain other conditions on our ability to pay dividends.

 

Issuer Purchases of Equity Securities

 

The following table shows information regarding our repurchases of our warrants during October 2015 (the only month during the quarter ended December 31, 2015 in which repurchases of warrants occurred).

 

Period

 

Total Number
of Warrants
Purchased(1)

 

Average
Price Paid
per
Warrant

 

Maximum
Dollar Value of
Warrants That
May Yet be
Purchased
Under the Plans
or Programs

 

October 1-31

 

807,161

 

$

1.97

(2)

$

 

 

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(1)         All warrants were repurchased under an authorization covering up to $2.5 million in warrants approved by our Board of Directors and publicly announced on September 10, 2015.

(2)         Exclusive of commissions paid on account of such purchases.

 

The following table shows information regarding our repurchases of shares of our common stock during November and December 2015 (the only months during the quarter ended December 31, 2015 in which repurchases of our common stock occurred).

 

Period

 

Total Number
of Shares
Purchased(1)

 

Average
Price Paid
per
Share

 

Maximum
Dollar Value of
Shares That
May Yet be
Purchased
Under the Plans
or Programs(4)

 

November 1-30

 

105,000

 

$

5.71

(2)

$

9,397,836

(3)

December 1-31

 

307,334

 

$

5.82

(2)

$

7,602,797

(3)

 

 

412,334

 

 

 

 

 

 


(1)         All shares were repurchased under an authorization covering up to $10.0 million in shares approved by our Board of Directors and publicly announced on November 18, 2015.

(2)         Exclusive of commissions paid on account of such purchases.

(3)         Includes commissions to be paid on future repurchases.

(4)         An additional 249,047 shares were repurchased under the plan during January 2016 at an average purchase price of $5.95, exclusive of commissions paid.

 

Stock Performance Graph

 

The following graph compares the cumulative total return (assuming reinvestment of dividends) from February 19, 2014 (the date that we consummated our initial public offering) to December 31, 2015 for (i) our common stock, (ii) the S&P SmallCap 600 Index (the “Index”) and (iii) the S&P 600 Materials Group Index (the “Materials Group Index”). The graph assumes the investment of $100 on April 24, 2014 in each of our common stock, the Index and the stocks comprising the Materials Group Index.

 

GRAPHIC

 

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Total Return To Shareholders

(Includes reinvestment of dividends)

 

 

 

QUARTERLY RETURN PERCENTAGE

 

 

 

Quarter Ending

 

Company / Index

 

3/31/14

 

6/30/14

 

9/30/14

 

12/31/14

 

3/31/15

 

6/30/15

 

9/30/15

 

12/31/15

 

AgroFresh Solutions Inc.

 

0.40

 

-2.48

 

-1.03

 

-0.62

 

1.66

 

27.55

 

-36.48

 

-20.28

 

S&P SmallCap 600 Index

 

3.81

 

2.07

 

-6.73

 

9.85

 

3.96

 

0.19

 

-9.27

 

3.72

 

S&P SmallCap 600 Materials Index

 

5.06

 

3.95

 

-6.82

 

-0.78

 

-3.11

 

-4.12

 

-20.38

 

0.53

 

 

 

 

Base

 

INDEXED RETURNS

 

 

 

Period

 

Quarter Ending

 

Company / Index

 

2/19/14

 

3/31/14

 

6/30/14

 

9/30/14

 

12/31/14

 

3/31/15

 

6/30/15

 

9/30/15

 

12/31/15

 

AgroFresh Solutions Inc.

 

$

100

 

$

100.40

 

$

97.91

 

$

96.90

 

$

96.30

 

$

97.90

 

$

124.88

 

$

79.32

 

$

63.24

 

S&P SmallCap 600 Index

 

$

100

 

$

103.81

 

$

105.96

 

$

98.83

 

$

108.56

 

$

112.86

 

$

113.08

 

$

102.60

 

$

106.42

 

S&P SmallCap 600 Materials Index

 

$

100

 

$

105.06

 

$

109.20

 

$

101.75

 

$

100.96

 

$

97.83

 

$

93.80

 

$

74.68

 

$

75.07

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

As used in this section, 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 “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. As a result, financial information for the seven months ended July 31, 2015 and the five months ended December 31, 2015 may not be comparable to the Predecessor financial information for the twelve months ended December 31, 2014. Refer to Note 3 to the audited consolidated financial statements contained in this report for additional information on the acquisition accounting for the Business Combination.

 

The following tables present selected consolidated and combined historical financial data for the Successor and the Predecessor as of the dates and for each of the periods indicated. The selected consolidated historical data for the Successor for the period from inception (August 1, 2015) to December 31, 2015 and as of December 31, 2015 has been derived from our audited consolidated financial statements included in this annual report. The selected combined historical data for the Predecessor for the period from January 1, 2015 to July 31, 2015, the years ended December 31, 2014 and 2013 and as of December 31, 2014 have been derived from our audited combined financial statements included in this annual report. The selected combined historical data for the Predecessor for the year ended December 31, 2012 and as of December 31, 2013 have been derived from the Predecessor’s audited combined financial statements, which are not included in this annual report. The selected historical consolidated and combined financial data included below and elsewhere in this annual report are not necessarily indicative of future results and should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this annual report and our audited consolidated and combined financial statements and related notes.

 

Statements of (Loss) Income Data

 

 

 

Successor

 

 

Predecessor

 

 

 

Period from
August 1, 2015
to December
31, 2015

 

 

Period from
January 1,
2015 to July
31, 2015

 

Year Ended
December 31,
2014

 

Year Ended
December 31,
2013

 

Year Ended
December
31, 2012

 

Net sales

 

$

111,081

 

 

$

52,682

 

$

180,508

 

$

158,789

 

$

128,396

 

Gross profit

 

19,329

 

 

42,052

 

149,849

 

129,359

 

103,013

 

Operating (loss) income

 

(10,056

)

 

(3,216

)

69,260

 

52,602

 

29,756

 

(Loss) income before income taxes

 

(33,669

)

 

(3,208

)

69,256

 

52,597

 

29,492

 

Income tax (expense) benefit

 

(19,232

)

 

10,849

 

41,399

 

25,141

 

16,330

 

Net (loss) income

 

(14,437

)

 

(14,057

)

27,857

 

27,456

 

13,162

 

Basic earnings per share

 

(0.29

)

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

(0.29

)

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data

 

 

 

Successor

 

 

Predecessor

 

 

 

December 31, 2015

 

 

December 31, 2014

 

December 31, 2013

 

Cash & cash equivalents

 

$

57,765

 

 

$

 

$

 

Working capital (1)

 

113,086

 

 

9,996

 

18,787

 

Total assets

 

1,082,674

 

 

337,506

 

358,921

 

Total debt obligations

 

410,536

 

 

 

 

Total equity

 

443,903

 

 

234,351

 

265,328

 

 


(1)  Working capital is defined as current assets less current liabilities.

 

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ITEM 7. 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. As a result, financial information for the seven months ended July 31, 2015 and the five months ended December 31, 2015 may not be comparable to the Predecessor financial information for the twelve months ended December 31, 2014. Refer to Note 3 to the audited consolidated financial statements contained in this report for additional information on the acquisition accounting for the Business Combination.

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the notes thereto. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A of Part I of this report, as well as those discussed in the “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this report.

 

This MD&A contains certain financial measures, in particular Adjusted EBITDA and Constant Currency Adjusted EBITDA, which are not presented in accordance with GAAP. These non-GAAP financial measures are being presented because management believes that they provide readers with additional insight into the Company’s operational performance relative to earlier periods and relative to its competitors. Adjusted EBITDA and Constant Currency Adjusted EBITDA are key measures used by the Company to evaluate its performance. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Reconciliations of Adjusted EBITDA and Constant Currency Adjusted EBITDA to the most comparable GAAP measures are provided in this MD&A.

 

Business Overview

 

AgroFresh is a global agricultural innovator in proprietary technologies that preserve the quality and value of fresh produce such as apples, pears, kiwifruit, avocados, and flowers from orchard and field to the produce section of the supermarkets and ultimately into the homes of consumers across the globe. The Company currently offers SmartFresh applications at customer sites through a direct service model utilizing third-party contractors. As part of the AgroFresh™ Whole Product offering, The Company also provides advisory services employing its extensive knowledge on the use of 1-MCP collected through thousands of monitored applications. The Company operates in over 40 countries and derives over 90% of its revenue working with customers to protect the value of apples, pears, and other produce during storage.

 

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% of all fresh fruits and vegetables, including 40% of apples and 20% 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, thus, reduce waste.

 

AgroFresh’s current principal product, SmartFresh, regulates the post-harvest ripening effects of ethylene, the naturally occurring plant regulator 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. AdvanStore is an atmospheric monitoring system under development that leverages the company’s extensive understanding of fruit physiology, fruit respiration, current controlled atmosphere technology, and new proprietary diagnostic tools. RipeLock 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.

 

AgroFresh’s business is highly seasonal, driven by the timing of harvests in the northern and southern hemispheres. The first half of the year encompasses the southern hemisphere harvest season and the second half of the year encompasses the northern hemisphere harvest season. Since the northern hemisphere harvest 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

 

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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 30, 2016. 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 proceeds of $50 million. 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 EBITDA level over 2016 and 2017. In addition, pursuant to a tax receivables agreement entered into in connection with the Business Combination, Dow is entitled to receive 85% of the tax savings, if any, that the Company will receive as a result of the increase in the tax basis of assets acquired in connection with the Business Combination.

 

In connection with the closing of the Business Combination, AgroFresh entered into a transition services agreement with Dow. Under the agreement, Dow will provide AgroFresh a suite of services for a period of time ranging from six months to five years depending on the service. The agreement also provides 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. The Company’s products and services add value to its 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 would require a near doubling of food production in developing countries by 2050 to meet expected demand.

 

This global trend, among others, creates demand for the Company’s solutions. The Company’s offerings are currently protected by patents on 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. Because the Company’s customers operate in the agricultural industry, weather patterns may impact their total production which defines the business’s 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 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 price its products in 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. They provide comprehensive fruit physiology based technical advisory support. 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.

 

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 the next harvest season. Most of the Company’s service providers are operating under multi-year contracts. Management believes the quality and experience of its service providers delivers 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 harvest from August through November, and Southern Hemisphere growers 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

 

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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 of this seasonality could impact the ability to compare results between time 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 share of non-U.S. currencies. 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

 

Our discussion and analysis of results of operations and financial condition are based upon our financial statements. These financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 to the audited consolidated and combined financial statements.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements.

 

Asset Impairments

 

Factors that could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Part I, Item 1A, “Risk Factors.”

 

Goodwill

 

As discussed in Note 2, “Summary of Significant Accounting Policies,” in the audited consolidated financial statements, the Company tests goodwill and identifiable intangible assets with indefinite lives for impairment at least annually. Intangibles are tested for impairment using a quantitative impairment model. We test goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors, including reporting unit specific operating results and cost factors, as well as industry, market and general economic conditions, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect to bypass this qualitative assessment and perform a two-step quantitative test. Fair values under the quantitative test are estimated using a combination of discounted projected future earnings or cash flow methods and multiples of earnings in estimating fair value. We consider the Company to be one reporting unit for purposes of testing goodwill for impairment.

 

For the 2015 impairment tests, we utilized the quantitative methods to assess impairment and we concluded that goodwill was not impaired. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, Fair Value.

 

Measurement. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. We believe that the amounts recorded in the financial statements related to goodwill are based on the best estimates and judgments of the Company’s management, although actual outcomes could differ from our estimates. Our annual test of goodwill indicated that the fair value of the Company exceeded the carrying value by more than 50% as of December 31, 2015. If our projected EBITDA decreased by 10%, the fair value would still exceed the carrying value by approximately 30%. Projected EBITDA would have to fall by slightly more than 20% for goodwill to be impaired. Additionally, the Company could increase the discount rates used in its calculation by one

 

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percentage point and the fair value would still exceed the carrying value by approximately 27% as of December 31, 2015.

 

Other intangible assets

 

We conducted our 2015 annual indefinite-lived intangible assets impairment assessment as of December 31, 2015 and plan to update this assessment annually each December, unless conditions arise that would require a more frequent evaluation. In assessing the recoverability of indefinite-lived intangible assets, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value. Each year, we evaluate those intangible assets with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives. When testing indefinite-lived intangible assets for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount.  Such qualitative factors may include the following:

 

·                  Macroeconomic conditions

·                  Industry and market considerations

·                  Cost factors

·                  Overall financial performance; and

·                  Other relevant entity-specific events

 

Based on the results of our annual impairment review conducted in December 2015, management concluded that the fair value exceeded carrying value and no impairments existed.

 

Definite-lived intangible assets, such as technology, customer relationships and software are amortized over their estimated useful lives, generally for periods ranging from 4 to 24 years. The reasonableness of the useful lives of these assets is regularly evaluated. Once these assets are fully amortized, they are removed from the balance sheet.

 

The in-process research and development projects we acquired in connection with the Business Combination are considered indefinite-lived intangible assets until the abandonment or completion of the associated research and development efforts. Upon completion of the research and development process, the carrying values of acquired in-process research and development projects are reclassified as definite-lived assets and are amortized over their useful lives. If the project is abandoned, we record the write-off as a loss in the statement of (loss) income.

 

Long-Lived Assets

 

Long-lived assets, which include property, plant and equipment, and definite-lived intangible assets, are assessed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. The impairment testing involves comparing the carrying amount of the asset to the forecasted undiscounted future cash flows generated by that asset. In the event the carrying amount of the asset exceeds the undiscounted future cash flows generated by that asset and the carrying amount is not considered recoverable, an impairment exists. An impairment loss is measured as the excess of the asset’s carrying amount over its fair value and is recognized in the statement of (loss) income in the period that the impairment occurs.

 

Revenue Recognition

 

In general, revenue is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. Revenue is presented in our consolidated statements of income net of estimated rebates and discounts.

 

The majority of our revenues are generated from the application of our products to fruits and vegetables either before or after harvesting.  Revenue is recognized at the time the product is applied to the fruits or vegetables as this represents the point at which our performance obligation to the customer has been completed. Revenue is recognized net of estimated payments that are expected to be paid under customer loyalty and other rebate programs. We initially record the estimated liability for payments under these programs based on our historical experience and management’s assessment of the probability that the payments will be made. Each period, we then evaluate the liability to determine whether any adjustments are required. As there is no general right of return, we do not record a reserve for estimated sales returns.

 

Accounting for Business Combinations

 

We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase

 

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price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates and asset lives, among other items.

 

The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet evolving business needs and competitively produce our existing products.

 

The fair values of property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will continue to be used “as is” and as part of the ongoing business. The determination of the fair value of assets acquired and liabilities assumed involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.

 

The fair values of the various contingent consideration components were measured using the following valuation models. The fair value of the tax amortization benefit contingency was measured using an income approach based on the Company’s best estimate of the undiscounted cash payments to be made, tax effected and discounted to present value utilizing an appropriate market discount rate. The fair value of the deferred acquisition payment was measured using a Black-Scholes option pricing model and based on the Company’s best projection of the Company’s average adjusted EBITDA level over the two year period from January 1, 2016 to December 31, 2017. The warrant consideration was measured using directly observable quoted prices for identical assets in an inactive market. The working capital settlement was measured pursuant to the terms of the Purchase Agreement based upon the working capital of the AgroFresh Business as of the Closing Date being greater or less than a target level of working capital determined in accordance with the Purchase Agreement.

 

See Note 3 to the audited consolidated and combined financial statements for further information.

 

Stock-Based Compensation

 

During the five months ended December 31, 2015, the Company granted approximately 1.1 million non-qualified service-based stock options to certain employees with strike prices of $12.00, approximately 0.2 million stock appreciation rights (“SARs”) with strike prices of $12.00, approximately 0.6 million shares of performance-based restricted stock to certain employees and directors, and approximately 0.2 million shares of performance-based phantom stock. For the five months ended December 31, 2015, the Company recorded compensation expense of approximately $1.1 million for stock options, SARs, restricted stock and phantom stock awards.

 

Compensation expense related to the service-based non-qualified stock options granted in 2015 was determined as the grant-date fair value of the awards determined under the Hull-White option pricing model with the assumptions described below and is being recognized as compensation expense over the vesting period. The fair value of each option was estimated on the date of grant using the Hull-White option pricing model with the assumptions described below which varied based on the date of the grant.

 

Weighted average grant date fair value

 

$4.03

Risk-free interest rate

 

1.67%-1.70%

Expected life (years)

 

5.73-5.97

Estimated volatility factor

 

47.68%-47.95%

Expected dividends

 

None

 

Since the Company had limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of options. The Company did not apply a forfeiture rate to the options as there is not enough historical information available to estimate though the Company anticipates developing a forfeiture rate in future years based on forfeiture rate activity. 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 calculated as the average time to achieve the 2.0x strike exercise price in the simulation.

 

The fair value of each SAR award is estimated using the Hull-White option pricing model with the assumptions described below.

 

Weighted average grant date fair value

 

$1.74

Risk-free interest rate

 

2.24%-2.25%

Expected life (years)

 

6.40-6.54

Estimated volatility factor

 

47.5%-47.7%

Expected dividends

 

None

 

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Since the Company had limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of SAR awards. The Company did not apply a forfeiture rate to the SAR awards as there is not enough historical information available to estimate though the Company anticipates developing a forfeiture rate in future years based on actual forfeiture rate activity. 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 SAR grants. The expected life was calculated as the average time to achieve the 2.0x strike exercise price in the simulation.

 

In addition to the share-based awards described above, as of December 31, 2015, a total of 55,125 outstanding founder shares were held by three of the Company’s initial independent directors (the “Director Shares”). The Director Shares were subject to achievement of two performance conditions — the Company completing its initial public offering and completing a business combination within 21 months of the initial public offering.

 

The grant date fair value of the Director Shares was estimated as of their deemed grant date of January 31, 2014. The aggregate fair value of the Director Shares of $0.4 million was recognized as an expense upon consummation of the Business Combination, at which point the performance conditions had been achieved.

 

The fair value of the Director Shares was estimated using a Monte Carlo Simulation Model that used the following assumptions:

 

Risk-free interest rate

 

1.96

%

Expected life (years)

 

6.47

 

Estimated volatility factor

 

31.16

%

Expected dividends

 

None

 

 

See Note 13 to the audited consolidated and combined financial statements contained in this report for further detail on stock based compensation.

 

Income taxes

 

The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.

 

Income tax related penalties are included in the provision for income taxes. In evaluating the ability to realize deferred tax assets, the Company relies on taxable income in prior carryback years, the future reversals of existing taxable temporary differences, future taxable income, and tax planning strategies.

 

The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than “more likely than not.”

 

Recently Issued Accounting Standards and Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption when implementing this standard. On July 9, 2015, the FASB voted to defer the effective date of this ASU by one year to December 15, 2017, for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is currently evaluating the effects of this update.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” The update requires an entity to measure

 

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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 amendments in this update are effective for annual and interim periods beginning after December 15, 2016 and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the effects of this update.

 

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” The update requires that an acquirer in a business combination recognize adjustments to provisional amounts, and related changes in depreciation, amortization or other income effects, that are identified during the measurement period in the reporting period in which the adjustment amount is determined. In addition, an entity is required to present separately the portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update are effective for annual and interim periods beginning after December 15, 2015 and should be applied prospectively. Early adoption is permitted.  We early adopted this standard in the year ended December 31, 2015 and this standard had no impact on our consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This update eliminates the requirement to classify deferred tax assets and liabilities as current or long-term based on how the related assets or liabilities are classified. All deferred taxes are now required to be classified as long-term including any associated valuation allowances. This guidance is effective for public companies for fiscal years beginning after December 15, 2016 with early adoption permitted on either a prospective or retrospective basis. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset to a net non-current deferred tax asset in the Company’s Consolidated Balance Sheet as of December 31, 2015. No prior periods were retrospectively adjusted.

 

In February 2015, the FASB issued ASU 2016-02, “Leases.” This update requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU 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.

 

Results of Operations

 

The following table summarizes the results of operations for both the Successor and Predecessor periods:

 

 

 

Successor

 

 

Predecessor

 

(in thousands)

 

August 1, 2015
Through
December 31, 2015

 

 

January 1, 2015
Through
July 31, 2015

 

Year Ended
December 31, 2014

 

Year Ended
December 31, 2013

 

Net sales

 

$

111,081

 

 

$

52,682

 

$

180,508

 

$

158,789

 

Cost of sales (excluding amortization, shown separately below)

 

91,752

 

 

10,630 

 

30,659

 

29,430

 

Gross profit

 

19,329

 

 

42,052

 

149,849

 

129,359

 

Research and development expenses

 

5,256

 

 

11,599

 

19,399

 

17,837

 

Selling, general, and administrative expenses

 

31,317

 

 

16,774

 

31,534

 

29,153

 

Amortization of intangibles

 

16,504

 

 

16,895 

 

29,656

 

29,767

 

Change in fair value of contingent consideration

 

(23,692

)

 

 

 

 

Operating (loss) income

 

(10,056

)

 

(3,216

)

69,260

 

52,602

 

Other (expense) income

 

(24

)

 

8

 

 

 

Loss on foreign currency exchange

 

(387

)

 

 

 

 

Interest expense, net

 

(23,202

)

 

 

(4

)

(5

)

(Loss) income before income taxes

 

(33,669

)

 

(3,208

)

69,256

 

52,597

 

(Benefit) provision for income taxes

 

(19,232

)

 

10,849

 

41,399

 

25,141

 

Net (loss) income

 

$

(14,437

)

 

$

(14,057

)

$

27,857

 

$

27,456

 

 

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Comparison of Results of Operations for January 1, 2015 through July 31, 2015 (Predecessor), August 1, 2015 through December 31, 2015 (Successor) and the twelve months ended December 31, 2014 (Predecessor):

 

Net Sales

 

Net sales were $52.7 million for the seven months ended July 31, 2015 and $111.1 million for the five months ended December 31, 2015, as compared to net sales of $180.5 for the twelve months ended December 31, 2014. The overall decrease in net sales in fiscal year 2015 from fiscal year 2014 was primarily related to a smaller Northern Hemisphere apple crop, primarily in North America. The Company estimates that the North American apple crop size was down roughly 20% versus 2014.

 

Net sales in North America decreased to $58.8 million for 2015, down 20% from $73.5 million in 2014. The decrease in net sales is primarily due to a smaller apple crop in North America compared to 2014. Other fruits increased by $0.2 million, or 6.5%, as compared to 2014. Net sales in EMEA decreased by 4.6% to $64.9 million in 2015, from $68.0 million in 2014. Excluding currency impact of $9.8 million, EMEA net sales increased by $6.7 million, primarily due to increased penetration in apples and other fruits in South Africa, Italy and France, among others. Net sales in Latin America decreased $0.5 million, mainly due to a smaller apple crop in Brazil and Chile, offset by increased penetration in Argentina and Mexico. Net sales in the Asia Pacific region increased by $1.6 million due to revenue growth of $1.0 million, or 22%, in New Zealand and by $0.6 million, or 39%, in South Korea and Japan as compared to 2014.

 

Cost of Sales

 

Cost of sales was $10.6 million for the seven months ended July 31, 2015 and $91.8 million for the five months ended December 31, 2015, as compared to $30.7 million for the twelve months ended December 31, 2014. The increase in the cost of sales in fiscal year 2015 as compared to fiscal year 2014 was primarily driven by $73.1 million of amortization of the inventory step-up adjustments, resulting from the purchase price allocation for the Business Combination discussed in Note 3 to the audited consolidated financial statements. Excluding the amortization of inventory step-up adjustments of $73.1 million, the cost of sales was down from $30.7 in fiscal year 2014.

 

Research and Development Expenses

 

Research and development expenses were $11.6 million for the seven months ended July 31, 2015 and $5.3 million for the five months ended December 31, 2015, as compared to $19.4 million for the twelve months ended December 31, 2014. Research and development expenses declined due to discontinuation of certain projects.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses were $16.8 million for the seven months ended July 31, 2015 and $31.3 million for the five months ended December 31, 2015, as compared to $31.5 million for the twelve months ended December 31, 2014. This increase in selling, general, and administrative expenses for fiscal year 2015 as compared to fiscal year 2014 was primarily driven by $8.3 million of one-time expenses, transaction costs related to the closing of the Business Combination of $1.8 million, and Transition Services Agreement expense of $2.6 million.

 

Amortization of Intangibles

 

Amortization of intangibles was $16.9 million for the seven months ended July 31, 2015 and $16.5 million for the five months ended December 31, 2015, as compared to $29.7 million for the twelve months ended December 31, 2014. Amortization increased slightly due to the increased value of intangible assets recognized by the Company resulting from the fair valuation of assets and liabilities assumed related to the Business Combination.

 

Change in fair value of contingent consideration

 

The change in fair value of contingent consideration was $0.0 million for the seven months ended July 31, 2015 and $23.7 million for the five months ended December 31, 2015, as compared to $0.0 million for the twelve months ended December 31, 2014. As discussed in Note 3 to the 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 five months ended December 31, 2015, the warrant consideration, the deferred payment, and the tax amortization benefit contingency incurred mark-to-market (gains) losses of ($13.0 million), $0.4 million and ($11.1 million), respectively.

 

Other (Expense) Income

 

Other (expense) income was $0.0 million for the seven months ended July 31, 2015 and less than $0.1 million for the five months ended December 31, 2015 as compared to of $0.0 million for the twelve months ended December 31, 2014.

 

Interest Expense, Net

 

Interest expense, net was $23.2 million for the five months ended December 31, 2015 as compared to interest expense of less than $0.1

 

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million for the twelve months ended December 31, 2014. The increase in interest expense primarily relates to interest on the Term Loan of $10.4 million, accretion on the deferred payment of $5.1 million, accretion of the Tax Receivables Agreement of $6.7 million, and amortization of debt discount of $0.8 million.

 

Income Tax Provision

 

Our effective tax rate was (338.2)% for the seven months ended July 31, 2015 and 57.1% for the five months ended December 31, 2015, as compared to 59.8% for the twelve months ended December 31, 2014. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year. In addition to state income taxes, the following items had the most significant impact on the difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate:

 

Five months ended December 31, 2015 (Successor): A tax impact in the amount of $4.6 million (13.5%) resulting from non-taxable marked to market gains from private placement warrants issued as purchase price accounting consideration, a tax impact in the amount of $2.0 million (6.0%) resulting from a valuation allowance released in the United States, and a tax impact in the amount of $0.4 million (1.2%) resulting from rate differences between U.S. and non-U.S. jurisdictions and other foreign items affecting the effective tax rate. No U.S. taxes were provided for those undistributed foreign earnings that are indefinitely reinvested outside the United States.

 

Seven months ended July 31, 2015 (Predecessor): The tax rate for the seven months ended July 31, 2015 was unfavorably impacted by the increase of valuation allowances ($9.3 million) primarily in Canada and South Africa and by losses in multiple foreign jurisdictions with tax rates less than 35% ($2.3 million).

 

Year Ended December 31, 2014: The tax rate for 2014 was unfavorably impacted by the increase of valuation allowances ($12.9 million) primarily in Australia, Brazil, and France and by losses in multiple foreign jurisdictions with tax rates less than 35% ($4.0 million).

 

Comparison of Results of Operations for the twelve months ended December 31, 2014 (Predecessor) and twelve months ended December 31, 2013 (Predecessor):

 

Net Sales

 

Net sales increased $21.7 million, or 13.7%, to $180.5 million for the year ended December 31, 2014 as compared to $158.8 million for the year ended December 31, 2013. The growth in net sales was primarily attributable to strong global demand for the AgroFresh Business’ core products and services within its mature markets as well as growth of its products and services in new markets. The increase in net sales was partially offset by lower prices for rebate programs and the unfavorable foreign currency impact of the strengthening U.S. dollar to the Euro. More specifically, revenue in North America increased to $73.5 million in 2014, up 14.3% from $64.2 million in 2013. Net sales increased primarily due to strong crop productivity driving increased demand for the AgroFresh Business’ post-harvest applications. The increase was magnified by the continued rapid growth of its pre-harvest applications. Revenue in EMEA increased to $68.0 million in 2014, up 16.6% from $58.4 million in 2013. The growth in net sales was primarily attributable to a sizeable apple crop as well as strong demand for the AgroFresh Business’ product applied to non-apple fruits. Revenue in Latin America increased to $25.6 million in 2014, up 7.6% from $23.8 million in 2013. Revenue growth was primarily driven by increased penetration, specifically related to the applications on apples and pears. Revenue in the Asia Pacific region increased to $13.4 million in 2014, up 8.0% from $12.4 million in 2013. The growth in net sales was primarily attributable to a strong apple growing season and increased penetration in the region.

 

Cost of Sales

 

Cost of sales increased $1.2 million, or 4.2%, to $30.7 million for the year ended December 31, 2014 as compared to $29.4 million for the year ended December 31, 2013. The increase was primarily driven by the growth in sales volumes related to the robust global apple growing season which led to an increase in service provider applications. The increase was also attributable to the rapid growth of the pre-harvest product applications.

 

Research and Development Expenses

 

Research and development expenses increased $1.6 million, or 8.8%, to $19.4 million for the year ended December 31, 2014 as compared to $17.8 million for the year ended December 31, 2013. This increase was primarily driven by increased registration expenses to support the development of the pre-harvest product applications.

 

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Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $2.4 million, or 8.2%, to $31.5 million for the year ended December 31, 2014 as compared to $29.1 million for the year ended December 31, 2013. The increase primarily related to investments made to drive higher penetration rates for the core products as well as to establish customer relationships in new geographies, among other factors.

 

Income Tax Provision

 

Provision for income taxes increased $16.3 million, or 64.7%, to $41.4 million for the year ended December 31, 2014 as compared to $25.1 million for the year ended December 31, 2013. The AgroFresh Business’ effective tax rate for the year ended December 31, 2014 was 59.8% compared to 47.8% for the year ended December 31, 2013. The increase in effective tax rate was primarily driven by losses outside of the U.S. where no tax benefit was realized due to valuation allowances, as well as by losses outside of the U.S where a tax benefit of less than 35% was realized. The tax rate for 2014 was unfavorably impacted by the increase of valuation allowances ($12.9 million) primarily in Australia, Brazil, and France and by losses in multiple foreign jurisdictions with tax rates less than 35% ($4.0 million). The tax rate for 2013 was unfavorably impacted by the increase of valuation allowance due to losses in multiple foreign jurisdictions ($8.4 million) primarily in Argentina, Italy, and France. The tax rate for 2013 was favorably impacted by earnings outside the U.S., primarily in Switzerland ($1.5 million).

 

Non-GAAP Measures

 

The following tables set forth the non-GAAP financial measures of Adjusted EBITDA and Constant Currency Adjusted EBITDA. The Adjusted EBITDA measure is consistent with the definition of Consolidated EBITDA in the Company’s Credit Agreement. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company’s management to evaluate the Company’s performance, enhance a reader’s understanding of the financial performance of the Company, are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods, as the non-GAAP measures exclude items that are not considered core to the Company’s operations. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.

 

The following is reconciliation between the non-GAAP financial measures of Adjusted EBITDA and Constant Currency Adjusted EBITDA to their most directly comparable GAAP financial measure:

 

 

 

Successor

 

 

Predecessor

 

 

 

August 1, 2015
Through December 31,
2015

 

 

January 1, 2015
Through
July 31, 2015

 

Year Ended
December 31,
2014

 

GAAP (loss) income before income taxes

 

$

(33,669

)

 

$

(3,208

)

$

69,256

 

Amortization of inventory step-up (1)

 

73,054

 

 

 

 

Transaction and acquisition related costs(2)

 

1,813

 

 

 

 

Share-based compensation(3)

 

1,080

 

 

381

 

557

 

Interest expense(4)

 

23,202

 

 

 

 

Depreciation, amortization and accretion(3)

 

19,434

 

 

17,379

 

30,311

 

Stand-alone costs(5)

 

905

 

 

 

 

Research and development cost synergies(6)

 

 

 

3,249

 

5,802

 

Other non-recurring costs(3)

 

9,860

 

 

504

 

689

 

Loss on currency translation(8)

 

387

 

 

 

 

Mark-to-market adjustments, net(7)

 

(23,692

)

 

 

 

Pro forma deferred revenue(9)

 

 

 

(1,167

)

(2,000

)

Franchise and state taxes(3)

 

371

 

 

 

 

Non-GAAP adjusted EBITDA

 

$

72,745

 

 

$

17,138

 

$

104,615

 

Constant currency adjustment(10)

 

4,355

 

 

554

 

 

Non-GAAP constant currency adjusted EBITDA

 

$

77,100

 

 

$

17,692

 

$

104,615

 

 


(1) The amortization of inventory step-up related to the acquisition of AgroFresh is charged to income based on the pace of inventory usage

(2) Costs associated with the Business Combination incurred in the current period

(3) Expenses incurred during the period added back to EBITDA related to equity compensation, depreciation & amortization largely associated with intangible assets, franchise and business and occupation taxes, pro forma run-rate savings, and certain non-recurring expenses incurred during the

 

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period primarily related to professional services, relocation costs and a write-off of inventory

(4) Interest paid on the term loan, inclusive of accretion for debt discounts and debt issuance costs, as well as accretion on contingent consideration

(5) Administrative and professional fees associated with becoming a stand-alone public company

(6) R&D savings related to two projects (Invinsa and IDC)

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

(8) Loss on currency translation relates to net gains and losses resulting from the remeasurement of assets and liabilities denominated in foreign currencies

(9) Deferred revenue associated with a revenue agreement not included in the Business Combination

(10) Constant currency figures are based upon 2015 results using 2014 average foreign exchange rates

 

In discussing our operating results, the term currency exchange rates refers to the currency exchange rates we use to convert into U.S. dollars the operating results for all countries where the functional currency is not the U.S. dollar. We calculate the effect of changes in currency exchange rates as the difference between current period activity translated using the current period’s currency exchange rates, and the comparable prior year period’s currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to constant currency operating results, this means operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better the Company’s underlying performance without the effects of currency exchange rate fluctuations.

 

The table below reflects the calculation of constant currency for net sales and Non-GAAP Adjusted EBITDA for the five months ended December 31, 2015 and seven months ended July 31, 2015.

 

 

 

Successor

 

 

Predecessor

 

 

 

August 1, 2015
Through
December 31, 2015

 

 

January 1, 2015
Through
July 31, 2015

 

Net Sales:

 

 

 

 

 

 

As reported

 

$

111,081

 

 

$

52,682

 

Currency exchange rate fluctuations

 

7,485

 

 

3,903

 

Constant currency adjusted net sales

 

$

118,566

 

 

$

56,585

 

 

 

 

 

 

 

 

Adjusted EBITDA:

 

 

 

 

 

 

As reported

 

$

72,745

 

 

$

17,138

 

Currency exchange rate fluctuations

 

4,355

 

 

554

 

Constant currency adjusted EBITDA

 

$

77,100

 

 

$

17,692

 

 

Note: Constant currency figures are based upon 2015 results using 2014 average foreign exchange rates

 

Liquidity and Capital Resources

 

Cash Flows

 

 

 

Successor

 

 

Predecessor

(in thousands)

 

August 1, 2015
Through
December
31, 2015

 

 

January 1,
2015
Through
July 31, 2015

 

Year Ended
December
31, 2014

 

Year Ended
December
31, 2013

 

Net cash provided by (used in) operating activities

 

$

18,780

 

 

$

(5,598

)

$

55,811

 

$

33,445

 

Net cash used in investing activities

 

$

(405,552

)

 

$

(613

)

$

(1,300

)

$

(992

)

Net cash provided by (used in) financing activities

 

$

446,706

 

 

$

6,211

 

$

(54,511

)

$

(32,453

)

 

Cash provided by (used in) operating activities was $(5.6) million for the seven months ended July 31, 2015 and $18.8 million for the five months ended December 31, 2015, as compared to $55.8 million for the twelve months ended December 31, 2014 and $33.4 million for the twelve months ended December 31, 2013. For the seven months ended July 31, 2015, net income before non-cash depreciation and amortization was $3.3 million, but this was more than offset by a $4.2 million increase in net deferred tax assets and a $4.7 million increase

 

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in net operating assets. For the five months ended December 31, 2015, 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 $63.6 million. This was largely offset by an increase in the net deferred tax asset of $19.9 million, and a $25.3 million increase in net operating assets. For the years ended December 31, 2014 and December 31, 2013, net income before depreciation and amortization of $58.3 million and $58.2 million, respectively, was consistent with the $61.9 million combined 2015 twelve month total net income before non-cash depreciation and amortization, amortization of inventory step-up, and changes in the fair value of contingent consideration (including accretion). Cash flow from operating activities for the year ended December 31, 2014, was adversely affected by a $9.7 million change in net deferred tax asset and favorably affected by a $7.3 million net reduction in net operating assets. For the year ended December 31, 2013, cash flow from operating activities was reduced by an $8.7 million change in deferred taxes and a $16.1 million increase in net operating assets.

 

Cash used in investing activities was $0.6 million for the seven months ended July 31, 2015 and $405.6 million for the five months ended December 31, 2015, as compared to $1.3 million for the twelve months ended December 31, 2014 and $1.0 million for the twelve months ended December 31, 2013. The decrease in cash for 2015 was primarily driven by $(625.5) million used in the acquisition offset by $220.5 million in proceeds from the issuance of stock in 2014, which had been recorded as restricted cash. The cash used in investing activities in 2014 and 2013 was entirely related to capital expenditures.

 

Cash provided by (used in) financing activities was $6.2 million for the seven months ended July 31, 2015 and $446.7 million for the five months ended December 31, 2015, as compared to $(54.5) million for the twelve months ended December 31, 2014 and $(32.5) million for the twelve months ended December 31, 2013. Cash provided by financing activities in 2015 was primarily driven by $425.0 million of proceeds from the issuance of debt and $50.0 million of proceeds from the private placement shares, partially offset by $(20.9) million of debt issuance and other financing costs. The cash used in financing activities in 2014 and 2013 was related to cash transfers to the parent.

 

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 (which revolving loan includes a $10 million letter-of-credit sub-facility) (the “Revolving Loan”). 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 Loans 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 be used for working capital, general corporate purposes, and other uses, all as more fully set forth in the Credit Facility. At December 31, 2015, there was $422.9 million outstanding under the Term Loan and no balance outstanding under the Revolving Loan.

 

On November 18, 2015, the Credit Facility was amended. An existing provision in the credit agreement permits the Company, subject to an overall cap of $12.0 million per fiscal year and certain other conditions, to pay dividends to the Company’s public stockholders and to redeem or repurchase, through July 31, 2016, the Company’s outstanding warrants for an aggregate purchase price of up to $10.0 million. The amendment expanded the scope of this provision to also permit the repurchase of shares of the Company’s outstanding common stock or other equity securities (subject to the same overall cap and other conditions).

 

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 period August 1, 2015 through December 31, 2015 was approximately $0.8 million.

 

As of December 31, 2015, the Company was in compliance with the senior secured net leverage covenant and the other covenants in the facility.

 

PIPE Shares

 

In connection with the closing of the Business Combination, we issued an aggregate of 4,878,048 shares of our common stock, for an aggregate purchase price of $50.0 million, in a private placement (“PIPE”).

 

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Warrant Repurchase Program

 

In September 2015, the Company’s board of directors approved a Warrant Repurchase Program totaling $2.5 million, and for the period from August 1, 2015 through December 31, 2015, we purchased 1,201,928 warrants at an average market price of $2.08, completing the authorized repurchase.

 

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 will remain in effect for a period of one year, until November 17, 2016, unless terminated earlier by the Company. During the period from August 1, 2015 through December 31, 2015 the Company repurchased 412,334 shares of common stock at an average market price of $5.79.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2015, 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.

 

Contractual Obligations

 

 

 

Payments due by period (in thousands)

 

 

 

Total

 

Less than 1
year

 

1-3 years

 

3-5 years

 

More than 5
years

 

Long-term debt-principal repayments (1)

 

$

422,875

 

$

4,250

 

$

8,500

 

$

8,500

 

$

401,625

 

Long-term debt-interest payments(1)

 

134,026

 

24,627

 

48,376

 

47,449

 

13,574

 

Transition services agreement(2)

 

15,423

 

4,918

 

5,863

 

4,642

 

 

Future lease payments(3)

 

7,506

 

1,690

 

2,716

 

2,173

 

927

 

Insurance premium financing payable (4)

 

865

 

865

 

 

 

 

Total

 

$

580,695

 

$

36,350

 

$

65,455

 

$

62,764

 

$

416,126

 

 


(1)         Long-Term Debt: 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, a wholly-owned subsidiary of the Company, as the guarantor, entered into the Credit Facility. The Credit Facility includes the $425 million Term Loan, with an amortization equal to 1.00% per year. The Term Loan has a scheduled maturity date of July 31, 2021. The interest rates on borrowings under the Term Loan are either the alternate base rate plus 3.75% or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor.

(2)         Transition Services Agreement: On July 31, 2015, in connection with, and as a condition to the Closing, Dow and AgroFresh Inc. entered into the Transition Services Agreement. Pursuant to the Transition Services Agreement, Dow agreed to provide AgroFresh Inc. with, among other things, certain marketing and sales, customer service, supply chain, environmental, health and safety, consulting, business records, packaging and storage, research and development, information technology and finance services for a limited period of time after the closing of the Business Combination (ranging from six months to five years depending on the service), in exchange for the fees set forth in the Transition Services Agreement. The Transition Services Agreement also provides for a $5 million execution fee that the Company paid to Dow at the closing of the Business Combination.

(3)         Future lease payments: The Company has future minimum payments under several non-cancelable operating leases that expire through 2024. These leases generally contain renewal options for periods ranging from three to five years and require us to pay all executory costs such as maintenance and insurance.

(4)         Insurance premium financing: The Company is party to a one-year commercial premium finance agreement. Total premiums were $1.4 million dollars at an annual percentage rate of 2.3%.

 

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 $50,000,000, subject to the Company’s achievement of a specified average EBITDA level, as defined in the Purchase Agreement, 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; (iii) a Tax Receivables Agreement under which the Company will 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

 

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section 338(h)(10) election that the Company and Dow made in connection with the Business Combination; and (iv) the final working capital settlement. See Note 3 to the audited consolidated financial statements contained in this report for further discussion of contingent consideration in connection with the Business Combination. Future payments related to the deferred payment are not included in the above contractual obligations table as payments are not certain.

 

ITEM 7A. 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 $1.8 million for the five months ended December 31, 2015.

 

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 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 2015, revenues would have decreased by approximately $5.7 million for the five months ended December 31, 2015.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

AgroFresh Solutions, Inc.

Philadelphia, Pennsylvania

 

We have audited the accompanying consolidated balance sheet of AgroFresh Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2015 (Successor), the combined balance sheet of the AgroFresh Business as of December 31, 2014 (Predecessor), and the related consolidated and combined statements of (loss) income, comprehensive (loss) income, stockholders’ equity, and cash flows for the five-month period ended December 31, 2015 (Successor), the seven-month period ended July 31, 2015 (Predecessor), and for each of the two years in the period ended December 31, 2014 (Predecessor).  Our audits also included the financial statement schedules listed in the Index at Item 15.  These financial statements and financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of the Successor as of December 31, 2015 and the combined financial position of the Predecessor as of December 31, 2014, and the results of operations and cash flows for the five-month period ended December 31, 2015 (Successor), the seven-month period ended July 31, 2015 (Predecessor), and for each of the two years in the period ended December 31, 2014 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 

As discussed in Notes 2 and 3 to the financial statements, on July 31, 2015 the Company acquired the AgroFresh Business from The Dow Chemical Company (“Dow”).  The Predecessor financial statements reflect the AgroFresh business while it was a business unit of Dow and include allocations of certain expenses from Dow.  The Successor financial statements include the impact of acquisition accounting.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Philadelphia, Pennsylvania

March 11, 2016

 

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ITEM 8 - FINANCIAL INFORMATION

 

AgroFresh Solutions, Inc.

CONSOLIDATED AND COMBINED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

December 31,
2015

 

 

December 31,
2014

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,765

 

 

$

 

Accounts receivable, net of allowance for doubtful accounts of $190 and $1,678, respectively

 

71,518

 

 

64,399

 

Inventories

 

44,176

 

 

12,193

 

Other assets

 

7,197

 

 

 

Deferred income tax assets

 

 

 

2,574

 

Total current assets

 

180,656

 

 

79,166

 

Property and equipment, net

 

4,606

 

 

4,134

 

Goodwill

 

56,006

 

 

155,953

 

Intangible assets, net

 

825,056

 

 

96,961

 

Deferred income tax assets

 

12,278

 

 

475

 

Other Assets

 

4,072

 

 

817

 

Total Assets

 

$

1,082,674

 

 

$

337,506

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Accounts payable

 

$

13,924

 

 

$

5,944

 

Current portion of long-term debt

 

4,250

 

 

 

Income taxes payable

 

1,801

 

 

51,137

 

Deferred income tax liabilities

 

 

 

32

 

Accrued expenses and other current liabilities

 

47,595

 

 

12,057

 

Total current liabilities

 

67,570

 

 

69,170

 

Long-term debt

 

406,286

 

 

 

Other noncurrent liabilities

 

164,630

 

 

7,461

 

Deferred income tax liabilities

 

285

 

 

26,524

 

Total liabilities

 

638,771

 

 

103,155

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 17)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, par value $0.0001; 400,000,000 shares authorized, 49,940,548 shares issued and 49,528,214 shares outstanding at December 31, 2015

 

5

 

 

 

Preferred stock; par value $0.0001, 1 share authorized and outstanding at December 31, 2015

 

 

 

 

Treasury stock; par value $0.0001, 412,334 shares at December 31, 2015

 

(2,397

)

 

 

 

Additional paid-in capital

 

472,494

 

 

 

Accumulated deficit

 

(20,640

)

 

 

Accumulated other comprehensive (loss) income

 

(5,559

)

 

2,058

 

Net parent investment

 

 

 

232,293

 

Total equity

 

443,903

 

 

234,351

 

Total liabilities and stockholders’ equity

 

$

1,082,674

 

 

$

337,506

 

 

See accompanying notes to consolidated and combined financial statements.

 

48



Table of Contents

 

AgroFresh Solutions, Inc.

CONSOLIDATED AND COMBINED STATEMENTS OF (LOSS) INCOME

(In thousands, except share and per share data)

 

 

 

Successor

 

 

Predecessor

 

 

 

August 1, 2015
Through
December 31,
2015

 

 

January 1, 2015
Through
July 31, 2015

 

Year
Ended
December 31,
2014

 

Year
Ended December
31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

111,081

 

 

$

52,682

 

$

180,508

 

$

158,789

 

Cost of sales (excluding amortization, shown separately below)

 

91,752

 

 

10,630

 

30,659

 

29,430

 

Gross profit

 

19,329

 

 

42,052

 

149,849

 

129,359

 

Research and development expenses

 

5,256

 

 

11,599

 

19,399

 

17,837

 

Selling, general, and administrative expenses

 

31,317

 

 

16,774

 

31,534

 

29,153

 

Amortization of intangibles

 

16,504

 

 

16,895

 

29,656

 

29,767

 

Change in fair value of contingent consideration

 

(23,692

)

 

 

 

 

Operating (loss) income

 

(10,056

)

 

(3,216

)

69,260

 

52,602

 

Other (expense) income

 

(24

)

 

8

 

 

 

Loss on foreign currency exchange

 

(387

)

 

 

 

 

Interest expense, net

 

(23,202

)

 

 

(4

)

(5

)

(Loss) income before income taxes

 

(33,669

)

 

(3,208

)

69,256

 

52,597

 

(Benefit) provision for income taxes

 

(19,232

)

 

10,849

 

41,399

 

25,141

 

Net (loss) income

 

$

(14,437

)

 

$

(14,057

)

$

27,857

 

$

27,456

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.29

)

 

 

 

 

Diluted

 

$

(0.29

)

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

Basic

 

49,691,206

 

 

 

 

 

Diluted

 

49,691,206

 

 

 

 

 

 

See accompanying notes to consolidated and combined financial statements.

 

49



Table of Contents

 

AgroFresh Solutions, Inc.

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

 

 

 

Successor

 

 

Predecessor

 

 

 

August 1,
2015
Through
December 31,
2015

 

 

January 1,
2015
Through
July 31, 2015

 

Year Ended
December 31,
2014

 

Year Ended
December 31,
2013

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(14,437

)

 

$

(14,057

)

$

27,857

 

$

27,456

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(5,580

)

 

(1,725

)

(4,323

)

(1,968

)

Pension and other postretirement benefit plans adjustment, net of tax of $11, $0, $0, and $0, respectively

 

21

 

 

 

 

 

Comprehensive (loss) income, net of tax

 

$

(19,996

)

 

$

(15,782

)

$

23,534

 

$

25,488

 

 

See accompanying notes to consolidated and combined financial statements.

 

50



Table of Contents

 

AgroFresh Solutions, Inc.

CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share data)

 

 

 

The AgroFresh Business (Predecessor)

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Net Parent

 

Accumulated

 

Accumulated
Other
Comprehensive

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Investment

 

Deficit

 

Income

 

Equity

 

Balance at December 31, 2013

 

 

$

 

 

$

 

 

$

 

$

258,947

 

 

$

6,381

 

$

265,328

 

Net income

 

 

 

 

 

 

 

27,857

 

 

 

27,857

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

(4,323

)

(4,323

)

Net transfers to parent

 

 

 

 

 

 

 

(54,511

)

 

 

(54,511

)

Balance at December 31, 2014

 

 

 

 

 

 

 

232,293

 

 

2,058 

 

234,351

 

Net loss

 

 

 

 

 

 

 

(14,057

)

 

 

(14,057

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(1,725

)

(1,725

)

Net transfers from parent

 

 

 

 

 

 

 

6,211

 

 

 

6,211

 

Balance at July 31, 2015

 

 

$

 

 

$

 

 

$

 

$

224,447

 

$

 

$

333

 

$

224,780

 

 

 

 

AgroFresh Solutions, Inc. (Successor)

 

 

 

Preferred Stock

 

Common Stock

 

Treasury Stock

 

Additional
Paid-in

 

Accumulated

 

Accumulated
Other
Comprehensive

 

Total
Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Income

 

Equity

 

Balance as of August 1, 2015

 

 

$

 

6,876,248

 

$

1

 

 

$

 

$

7,080

 

$

(6,203

)

$

 

$

878

 

Reclassification of redeemable shares

 

 

 

20,686,252

 

2

 

 

 

206,860

 

 

 

206,862

 

Issuance of PIPE shares

 

 

 

4,878,048

 

 

 

 

50,000

 

 

 

50,000

 

Issuance of common and preferred shares to Dow

 

1

 

 

17,500,000

 

2

 

 

 

209,998

 

 

 

210,000

 

Reclassification of warrants to accrued expenses and other current liabilities

 

 

 

 

 

 

 

(6,160

)

 

 

(6,160

)

Reclassification of warrants from to accrued expenses and other current liabilities