AgroFresh Solutions, Inc. - FORM 10-Q - November 9, 2016

Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - AgroFresh Solutions, Inc.a093016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - AgroFresh Solutions, Inc.a093016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - AgroFresh Solutions, Inc.a093016exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36316
AgroFresh Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
46-4007249
(State or other jurisdiction of incorporation)
(IRS Employer Identification Number)
One Washington Square
510-530 Walnut Street, Suite 1350
Philadelphia, PA 19106
(Address of principal executive offices)
(267) 317-9139
(Registrant’s telephone number, including area code)
 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
(Do not check if a
smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of common stock outstanding as of November 4, 2016 was 49,923,562.
 


TABLE OF CONTENTS

2

PART I - FINANCIAL INFORMATION
AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
Successor
 
September 30,
2016
December 31, 2015
ASSETS
 

 

Current Assets:
 
 
Cash and cash equivalents
$
44,677

$
57,765

Accounts receivable, net of allowance for doubtful accounts of $1,463 and $190, respectively
75,259

66,418

Inventories
17,220

44,176

Other current assets
30,997

12,297

Total current assets
168,153

180,656

Property and equipment, net
9,746

4,606

Goodwill
62,373

56,006

Intangible assets, net
795,246

825,056

Deferred income tax assets — noncurrent
41,967

12,278

Other assets
3,185

4,072

TOTAL ASSETS
$
1,080,670

$
1,082,674

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

Current Liabilities:
 
 
Accounts payable
$
12,070

$
13,924

Current portion of long-term debt
4,250

4,250

Income taxes payable
2,989

1,801

Accrued expenses and other current liabilities
65,515

47,595

Total current liabilities
84,824

67,570

Long-term debt
404,557

406,286

Other noncurrent liabilities
182,826

164,630

Deferred income tax liabilities — noncurrent
1,517

285

Total liabilities
673,724

638,771

 
 
 
Commitments and contingencies (see Note 17)



Stockholders’ equity:
 

 

Common stock, par value $0.0001; 400,000,000 shares authorized, 50,584,943 and 49,940,548 shares issued and 49,923,562 and 49,528,214 shares outstanding at September 30, 2016 and December 31, 2015, respectively
5

5

Preferred stock; par value $0.0001, 1 share authorized and outstanding
—

—

Treasury stock; par value $0.0001, 661,381 and 412,334 shares at September 30, 2016 and December 31, 2015, respectively
(3,885
)
(2,397
)
Additional paid-in capital
475,395

472,494

Accumulated deficit
(63,629
)
(20,640
)
Accumulated other comprehensive loss
(940
)
(5,559
)
Total stockholders' equity
406,946

443,903

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,080,670

$
1,082,674

 See accompanying notes to condensed consolidated and combined financial statements.

3


AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)

 
Successor
Predecessor
Successor

Successor
Predecessor
Successor

Three Months Ended
September 30, 2016
July 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015

Nine Months Ended
September 30, 2016
January 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
Net sales
$
61,200

$
2,157

$
59,650


$
107,996

$
52,682

$
59,650

Cost of sales (excluding amortization, shown separately below)
8,905

513

45,719


48,558

10,630

45,719

Gross profit
52,295

1,644

13,931


59,438

42,052

13,931

Research and development expenses
2,983

1,084

1,946


11,220

11,599

1,946

Selling, general, and administrative expenses
15,173

1,912

12,744


49,385

16,774

12,744

Amortization of intangibles
10,080

2,410

6,815


29,878

16,895

6,815

Change in fair value of contingent consideration
(1,569
)
—

—


(4,969
)
—

—

Operating income (loss)
25,628

(3,762
)
(7,574
)

(26,076
)
(3,216
)
(7,574
)
Other (loss) income
(38
)
—

(1,462
)

16

—

(1,462
)
Income (loss) on foreign currency exchange
924

2

(263
)

682

8

(263
)
Interest expense, net
(14,526
)
—

(9,313
)

(43,850
)
—

(9,313
)
Income (loss) before income taxes
11,988

(3,760
)
(18,612
)

(69,228
)
(3,208
)
(18,612
)
Provision (benefit) for income taxes
4,676

(1,232
)
(4,591
)

(26,239
)
10,849

(4,591
)
Net income (loss)
$
7,312

$
(2,528
)
$
(14,021
)

$
(42,989
)
$
(14,057
)
$
(14,021
)
Net income (loss) per common share:
 

 

 





 
Basic
$
0.15

—

$
(0.28
)

$
(0.87
)
—

$
(0.28
)
Diluted
$
0.15

—

$
(0.28
)

$
(0.87
)
—

$
(0.28
)
Weighted average shares outstanding:
 

 

 

 



 
Basic
49,567,735

—

49,457,847


49,385,733

—

49,457,847

Diluted
49,627,800

—

49,457,847


49,385,733

—

49,457,847

 
See accompanying notes to condensed consolidated and combined financial statements.


4

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)

 
Successor
Predecessor
Successor
 
Successor
Predecessor
Successor
 
Three Months Ended
September 30, 2016
July 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
 
Nine Months Ended
September 30, 2016
January 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
Net income (loss)
$
7,312

$
(2,528
)
$
(14,021
)
 
$
(42,989
)
$
(14,057
)
$
(14,021
)
Other comprehensive income (loss):
 

 
 

 
 

 
 

Foreign currency translation adjustments
(114
)
1,034

(1,428
)
 
4,619

(1,725
)
(1,428
)
Comprehensive income (loss), net of tax
$
7,198

$
(1,494
)
$
(15,449
)
 
$
(38,370
)
$
(15,782
)
$
(15,449
)
 
See accompanying notes to condensed consolidated and combined financial statements.


5

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share and per share data)

 
The AgroFresh Business (Predecessor)
 
Preferred Stock
 
Common Stock
 
Net Parent Investment
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at
December 31, 2014,
Predecessor
—

 
$
—

 
—

 
$
—

 
$
232,293

 
$
—

 
$
2,058

 
$
234,351

Net loss
—

 
—

 
—

 
—

 
(14,057
)
 
—

 
—

 
(14,057
)
Comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(1,725
)
 
(1,725
)
Net transfers from parent
—

 
—

 
—

 
—

 
6,211

 
—

 
—

 
6,211

Balance at
July 31, 2015,
Predecessor
—

 
$
—

 
—

 
$
—

 
$
224,447

 
$
—

 
$
333

 
$
224,780


 
AgroFresh Solutions, Inc. (Successor)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in-Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at
July 31, 2015, Successor
—

 
$
—

 
6,876,248

 
$
1

 
$
7,080

 
$
(6,202
)
 
$
—

 
$
879

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
—

 
—

 
—

 
—

 
(6,160
)
 
—

 
—

 
(6,160
)
Equity-based compensation
—

 
—

 
—

 
—

 
662

 
—

 
—

 
662

Repurchase of warrants
—

 
—

 
—

 
—

 
(920
)
 
—

 
—

 
(920
)
Loss of foreign currency translation adjustment
—

 
—

 
—

 
—

 
—

 
—

 
(1,428
)
 
(1,428
)
Net loss
—

 
—

 
—

 
—

 
—

 
(14,021
)
 
—

 
(14,021
)
Balance at
September 30, 2015, Successor
1

 
$
—

 
49,940,548

 
$
5

 
$
467,520

 
$
(20,223
)
 
$
(1,428
)
 
$
445,874


 
AgroFresh Solutions, Inc. (Successor)
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at
December 31, 2015,
Successor
1

 
$
—

 
49,940,548

 
$
5

 
(412,334
)
 
$
(2,397
)
 
$
472,494

 
$
(20,640
)
 
$
(5,559
)
 
$
443,903

Stock-based compensation
—

 
—

 
—

 
—

 
—

 
—

 
2,901

 
—

 
—

 
2,901

Issuance of stock, net of forfeitures
—

 
—

 
644,395

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Repurchase of stock for treasury
—

 
—

 
—

 
—

 
(249,047
)
 
(1,488
)
 
—

 
—

 
—

 
(1,488
)
Comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(42,989
)
 
4,619

 
(38,370
)
Balance at
September 30, 2016,
Successor
1

 
$
—

 
50,584,943

 
$
5

 
(661,381
)
 
$
(3,885
)
 
$
475,395

 
$
(63,629
)
 
$
(940
)
 
$
406,946


See accompanying notes to condensed consolidated and combined financial statements.


6

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)

Successor

Predecessor
 
Successor

Nine Months Ended
September 30,
 
January 1, through July 31,
 
August 1, through September 30,

2016

2015
 
2015
Cash flows from operating activities:





 
 
Net loss
$
(42,989
)

$
(14,057
)
 
$
(14,021
)
Adjustments to reconcile net loss to net cash used in operating activities:


 
 
 
Depreciation and amortization
30,458


17,379

 
6,891

Accretion of contingent consideration
22,931


—

 
—

Decrease in contingent consideration
(4,969
)

—

 
—

Stock based compensation
2,901


—

 
673

Amortization of inventory fair value adjustment
30,377


—

 
38,702

Amortization of deferred financing costs
1,696


—

 
—

Transaction costs
—


—

 
(4,637
)
Deferred income taxes
(24,910
)

(4,218
)
 
(4,591
)
Loss on sales of property
21


(12
)
 
—

Other
850


—

 
(160
)
Changes in operating assets and liabilities:



 
 
 
Accounts receivable
(8,520
)

42,585

 
(53,877
)
Inventories
(2,191
)

(5,756
)
 
580

Prepaid expenses and other current assets
(18,308
)

—

 
(4,316
)
Accounts payable
341


(798
)
 
10,216

Accrued expenses and other liabilities
5,272


—

 
7,355

Income taxes payable
1,206


(36,070
)
 
—

Other assets and liabilities
711


(4,651
)
 
—

Net cash used in operating activities
(5,123
)

(5,598
)
 
(17,185
)
Cash flows from investing activities:



 
 
 
Cash paid for property and equipment
(5,449
)

(676
)
 
(219
)
Proceeds from sale of property
8


63

 
—

Acquisition of business, net of cash acquired
—


—

 
(625,541
)
Restricted cash
—


—

 
220,505

Net cash used in investing activities
(5,441
)

(613
)
 
(405,255
)
Cash flows from financing activities:



 
 
 
Proceeds from long term debt
—


—

 
425,000

Payment of debt issuance costs
—


—

 
(12,889
)
Payment of revolving credit facility fees
—


—

 
(1,252
)
Other financing costs
—


—

 
(7,776
)
Repayment of long term debt
(3,188
)

—

 
(1,063
)
Proceeds from private placement
—


—

 
50,000

Borrowings under revolving credit facility
—


—

 
500

Repayments of revolving credit facility
—


—

 
(500
)
Insurance premium financing
—


—

 
1,294

Repayment of term loan
—


—

 
(380
)
Repurchase of stock for treasury
(1,488
)

—

 
(920
)
Cash transfers to/from parent, net
—


6,211

 
—

Net cash (used in) provided by financing activities
(4,676
)

6,211

 
452,014

Effect of exchange rate changes on cash and cash equivalents
2,152


—

 
(903
)
Net (decrease) increase in cash and cash equivalents
(13,088
)

—

 
28,671

Cash and cash equivalents, beginning of period
57,765


—

 
84

Cash and cash equivalents, end of period
$
44,677


$
—

 
$
28,755

 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for:
 
 
 
 
 
Interest
$
18,460

 
$
—

 
$
4,141

Income taxes
2,487

 
—

 
—

Supplemental schedule of non-cash investing and financing activities:
 
 
 
 
 
Accrued purchases of property and equipment
$
35

 
$
—

 
$
—

Issuance of common stock as consideration for acquisition of business
—

 
—

 
210,000

Acquisition-related contingent consideration
—

 
—

 
181,366

See accompanying notes to condensed consolidated and combined financial statements.

7

AgroFresh Solutions, Inc.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1.
Description of Business

AgroFresh Solutions, Inc. (the “Company”) is a global leader in the food quality preservation and waste reduction space, providing proprietary advanced technologies and innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance its freshness, quality and value to maximize the percentage of produce supplied to the market relative to the amount of produce grown, as well as increase consumer appeal of product at retail. The Company currently offers SmartFreshTM applications at customer sites through a direct service model and provides advisory services relying on its extensive knowledge on the use of its products over thousands of monitored applications. The Company operates in over 40 countries and currently derives the majority of its revenue working with customers to protect the value of apples, pears, and other produce during storage. Additionally the Company has a number of different solutions and application technologies that have either been launched (Harvista, RipeLock, Landspring) or will be launched in the future that will seek to extend its footprint to other crops and steps of the global produce supply chain.

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

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

2.
Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. These financial statements include all adjustments that are necessary for a fair presentation of the Company's consolidated results of operations, financial condition and cash flows for the periods shown, including normal, recurring accruals and other items. The consolidated results of operations for the interim periods presented are not necessarily indicative of results for the full year.

For additional information, these condensed consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and notes included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2015. As used in these notes to the condensed consolidated and combined financial statements, the “AgroFresh Business” refers to the business conducted prior to the closing of the Business Combination by The Dow Chemical Company (“Dow”) through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States.

Recently Issued Accounting Guidance

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09 "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for companies with fiscal years beginning after December 15, 2016. The Company is currently evaluating the effects of this update.


8

In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)" which requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The guidance is effective for public companies with fiscal years beginning after December 15, 2018. The Company is currently evaluating the effects of this update.

In May 2014, the FASB issued ASU 2014-9 “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 March 2016, the FASB issued ASU 2016-08 "Principal Versus Agent Considerations (Reporting Revenue Gross versus Net)" which amends the principal-versus-agent implementation guidance. This update clarifies factors in determining whether an entity is a principal or an agent and has the same effective date as ASU 2014-9. The Company is currently evaluating the effects of this update.

In April 2016, the FASB issued ASU 2016-10 "Revenue from Contracts with Customers Topic 606: Identifying Performance Obligations and Licensing." This update clarifies the implementation guidance on identifying a performance obligation and licensing and is effective on the same date as ASU 2014-09. The Company is currently evaluating the effects of this update.

In August 2016, the FASB issued ASU 2016-15 "Classification of Certain Cash Receipts and Cash Payments." This update clarifies how certain cash receipts and cash payments should be disclosed in the statement of cash flows and is effective for public companies with fiscal years beginning after December 15, 2017. The Company is currently evaluating the effects of this update.

Reclassification

The Company reclassified approximately $5.1 million of value added tax and other tax related receivables from accounts receivable to other current assets at December 31, 2015 to be consistent with the presentation at September 30, 2016.

3.
Business Combination

On July 31, 2015 (the "Closing Date"), the Company consummated a business combination (the “Business Combination”) pursuant to the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), by and between the Company and Dow providing for the acquisition by the Company of the AgroFresh Business from Dow, resulting in AgroFresh Inc. becoming a wholly-owned, indirect subsidiary of the Company. Pursuant to the Purchase Agreement, the Company paid the following consideration to Rohm and Haas Company (“Rohm and Haas”), a subsidiary of Dow: (i) 17,500,000 shares of common stock (the “Stock Consideration”) and (ii) $635 million in cash (the “Cash Consideration”). As a result of the Business Combination, the Company was identified as the acquirer for accounting purposes, and the AgroFresh Business is the acquiree and accounting Predecessor. The Company’s financial statement presentation reflects the AgroFresh Business as the “Predecessor” for periods through the Closing Date. On the Closing Date, Boulevard was re-named AgroFresh Solutions, Inc. and is the “Successor” for periods after the Closing Date, which includes consolidation of the AgroFresh Business subsequent to the Closing Date.

In addition to the Stock Consideration and the Cash Consideration, Dow is entitled to receive the following consideration:

•
A deferred payment from the Company of $50 million, subject to the Company’s achievement of a specified
average Business EBITDA, as defined in the Purchase Agreement, over the two year period from
January 1, 2016 to December 31, 2017;
•
6 million of the Company's warrants;
•
85% of the amount of the tax savings, if any, in U.S. Federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh Inc. assets resulting from a section 338(h)(10) election that the Company and Dow made in connection with the Business Combination; and
•
reimbursement for any value-added and transfer taxes paid by Dow in conjunction with the transaction.


9

In addition, pursuant to the Purchase Agreement, the amount of the Cash Consideration paid as part of the purchase price is subject to adjustment following the Closing Date 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.

The Company accounted for its acquisition of the AgroFresh Business as a business combination under the scope of Accounting Standards Codification Topic ("ASC") 805, Business Combinations. Pursuant to ASC 805, the Company has been determined to be an accounting acquirer since the Company paid cash and equity consideration for all of the assets of the AgroFresh Business. The AgroFresh Business constitutes a business with inputs, processes and outputs. Accordingly, the acquisition of the AgroFresh Business constitutes the acquisition of a business in accordance with ASC 805 and is accounted for using the acquisition method.

The following summarizes the purchase consideration to Dow:
(in thousands)
Purchase Consideration
Cash consideration
$
635,000

Stock consideration (1)
210,000

Warrant consideration (2)
19,020

Deferred payment (3)
15,172

VAT and transfer tax reimbursable to Dow (4)
9,263

Tax amortization benefit contingency (5)
156,180

Working capital payment to Dow (6)
15,057

Total purchase price
$
1,059,692

(1)
The Company issued 17,500,000 shares of common stock valued at $12.00 per share as of July 31, 2015.
(2)
In connection with the Business Combination, the Company entered into a Warrant Purchase Agreement whereby it agreed to issue to Dow a certain number of warrants. The Company calculated the fair value of the 6,000,000 warrants expected to be issued to Dow at $3.17 per warrant as of July 31, 2015.
(3)
Pursuant to the Purchase Agreement, the Company agreed to pay Dow a deferred payment of $50 million subject to the achievement of a specified average Business EBITDA level over the two year period from January 1, 2016 to December 31, 2017. The Company estimated the fair value of the deferred payment using the Black-Scholes option pricing model.
(4)
Pursuant to the Purchase Agreement, the Company is required to reimburse Dow for any value-added or transfer taxes paid by Dow in conjunction with the Business Combination.
(5)
In connection with the Business Combination, the Company entered into a Tax Receivables Agreement with Dow. The Company estimated the fair value of future cash payments based upon its estimate that the undiscounted cash payments to be made total approximately $343 million and are based on an estimated intangible assets that are being amortized over 15 years, tax effected at 37%, with each amortized amount then discounted to present value utilizing an appropriate market discount rate to arrive at the estimated fair value of the cash payments and the associated liability.
(6)
Pursuant to the terms of the Purchase Agreement, the amount of the Cash Consideration paid as part of the purchase price is subject to adjustment following the Closing 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.



10

The Company recorded the allocation of the purchase price to the AgroFresh Business’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The purchase price allocation (in thousands) is as follows:
(in thousands)
Purchase Price Allocation
Cash and cash equivalents
$
9,459

Accounts receivable and other receivables
30,884

Inventories
120,426

Prepaid expenses and other current assets
976

Total current assets
161,745

Property and equipment
4,793

Identifiable intangible assets
841,545

Noncurrent deferred tax asset
11,125

Other assets
862

Total identifiable assets acquired
1,020,070

Accounts payable
(364
)
Accrued and other current liabilities
(9,425
)
Pension and deferred compensation
(638
)
Other long-term liabilities
(1,823
)
Current deferred tax liability
—

Deferred tax liability
(10,501
)
Other liabilities
—

Net identifiable assets acquired
997,319

Goodwill
62,373

Total purchase price
$
1,059,692

The values (in thousands) allocated to identifiable intangible assets and their estimated useful lives are as follows:
(in thousands, except useful life data)
Fair Value
 
Useful life
Software
$
45

 
4 years
Developed technology
757,000

 
12 to 22 years
Customer relationships
8,000

 
24 years
In-process research and development
39,000

 
18 years
Service provider network
2,000

 
Indefinite Life
Trade name
35,500

 
Indefinite Life
Total intangible assets
$
841,545

 
 
Weighted average life of finite-lived intangible assets
 
 
19.7
The goodwill of $62.4 million arising from the Business Combination is primarily attributable to the market position of the AgroFresh Business. This goodwill is not deductible for income tax purposes. During the third quarter of 2016, the Company began commercializing its Landspring product offering, which was previously an in-process research and development asset, and thus has begun depreciating the asset over its estimated useful life as disclosed in the table above.

If the Company and the AgroFresh Business had combined at January 1, 2015, net sales for the one and seven month period ended July 31, 2015 (Predecessor) would have been approximately $2.0 million and $51.5 million respectively, and net loss for the one and seven month period ended July 31, 2015 (Predecessor) would have been approximately $5.9 million and $37.6 million, respectively, on a pro forma basis. For the one and seven month period ended July 31, 2015 (Predecessor), the pro forma results include, on an after-tax basis, incremental interest expense of approximately $2.8 million and $19.8 million, respectively (including accretion of contingent consideration), incremental amortization of intangibles of approximately $2.1 million and $5.4 million, respectively, and incremental G&A expense of approximately $0.5 million and $3.5 million, respectively. The pro forma results do not include the impact of the amortization of the inventory step-up.


11

4.
Related Party Transactions

The Company is a party to ongoing agreements with Dow, a related party, including, but not limited to, operating-related agreements for certain transition services, seconded employees and occupancy. The Company paid Dow an aggregate of $5.8 million and $10 million for such services for the three and nine months ending September 30, 2016, respectively. These amounts were made up of ongoing costs of the Transition Service Agreement of $1.6 million and $4.4 million, rent of $0.3 million and $1.0 million, $0.6 million and $1.3 million for seconded employees, and other expenses of $3.3 million and $3.3 million for the three and nine months ending September 30, 2016, respectively. As of September 30, 2016, the Company has an outstanding payable to Dow of $2.5 million, made up of $0.6 million related to the ongoing costs of the Transition Services Agreement, $0.1 million for seconded employees and rent, and other expenses of $1.8 million. See Note 3 regarding the contingent consideration owed to Dow as part of the Business Combination.

5.
Inventories

Inventories at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
September 30,
2016
 
December 31, 2015
Raw material
$
957

 
$
819

Work-in-process
8,671

 
8,142

Finished goods (1)
6,864

 
33,784

Supplies
728

 
1,431

Total inventories
$
17,220

 
$
44,176

(1)
The amount shown above includes the unamortized fair value adjustment of $0.0 million and $30.4 million at September 30, 2016 and December 31, 2015, respectively.

6.
Property and Equipment

Property and equipment at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands, except for useful life data)
 
Useful life
(years)
 
September 30,
2016
December 31,
2015
Land, buildings & improvements
 
7-20
 
$
1,369

$
517

Machinery & equipment
 
1-12
 
4,268

3,664

Furniture
 
1-12
 
703

145

Construction in progress
 
 
 
4,238

539

 
 
 
 
10,578

4,865

Less: accumulated depreciation
 
 
 
(832
)
(259
)
 
 
 
 
$
9,746

$
4,606


Depreciation expense for the three and nine months ended September 30, 2016 (Successor) was $0.2 million and $0.6 million, respectively. Depreciation expense for the one and seven months ended July 31, 2015 (Predecessor) was $0.1 million and $0.5 million, respectively. Depreciation expense for the two months ended September 30, 2015 (Successor) was $0.1 million. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the condensed consolidated and combined statements of operations.


12

7.
Goodwill and Intangible Assets

The Company completes its annual impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment. The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test is necessary. Since its inception and through September 30, 2016, the Company has not recorded an impairment charge, but if the Company's stock price continues to trade at its current levels without recovery, the Company may be required to record an impairment in the future and such amount could be material. Changes in the carrying amount of goodwill for the nine months ended September 30, 2016 are as follows:
(in thousands)
 
Goodwill
Balance as of December 31, 2015
 
$
56,006

Measurement-period adjustments
 
6,367

Balance as of September 30, 2016
 
$
62,373



The Company’s other intangible assets at September 30, 2016 and December 31, 2015 consisted of the following:
 
 
September 30, 2016
 
December 31, 2015
(in thousands)
 
Gross Carrying Amount
Accumulated Amortization
Net
 
Gross Carrying Amount
Accumulated Amortization
Net
Other intangible assets:
 
 
 
 
 
 
 
 
Developed technology
 
$
757,000

$
(45,803
)
$
711,197

 
$
757,000

$
(16,360
)
$
740,640

In-process research and development
 
39,000

(181
)
38,819

 
39,000

—

39,000

Trade name
 
35,500

—

35,500

 
35,500

—

35,500

Service provider network
 
2,000

—

2,000

 
2,000

—

2,000

Customer relationships
 
8,000

(389
)
7,611

 
8,000

(139
)
7,861

Software
 
135

(16
)
119

 
60

(5
)
55

Total intangible assets
 
$
841,635

$
(46,389
)
$
795,246

 
$
841,560

$
(16,504
)
$
825,056


At September 30, 2016, the weighted-average amortization period for the finite-lived intangible assets was 18.7 years. At September 30, 2016, the weighted-average amortization period for developed technology, customer relationships, in-process research and development, and software was 18.7, 23.1, 17.1, and 4.1 years, respectively.

Estimated annual amortization expense for finite-lived intangible assets subsequent to September 30, 2016 is as follows:
(in thousands)
 
Amount
2016 (remaining)
 
$
10,446

2017
 
41,785

2018
 
41,785

2019
 
41,781

2020
 
41,773

Thereafter
 
580,176

 
 
$
757,746


8.
Accrued and Other Current Liabilities


13

The Company’s accrued and other current liabilities at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30,
2016
 
December 31, 2015
Warrant consideration
 
$
4,680

 
$
6,000

Tax amortization benefit contingency
 
13,631

 
12,332

Working capital settlement
 
15,057

 
15,057

Additional consideration due seller
 
9,263

 
—

Accrued compensation and benefits
 
5,932

 
4,815

Accrued rebates payable
 
5,520

 
6,225

Insurance premium financing payable
 
864

 
865

Severance
 
2,363

 
—

Accrued taxes
 
4,490

 
—

Other
 
3,715

 
2,301

 
 
$
65,515

 
$
47,595


14

9.
Debt
The Company’s debt at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30,
2016
December 31,
2015
Total Term Loan outstanding
 
$
408,807

$
410,536

Less: Amounts due within one year
 
4,250

4,250

Total long-term debt due after one year
 
$
404,557

$
406,286

At September 30, 2016, the Company assessed the amount recorded under the Term Loan (defined below) and the Revolving Loan (defined below) and determined that such amounts approximated fair value. The fair values of the debt are based on quoted inactive market prices and are therefore classified as Level 2 within the fair value hierarchy.

The Term Loan is presented net of deferred issuance costs, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance costs at the inception of the Term Loan were $12.9 million and as of September 30, 2016 there were $10.9 million of unamortized deferred issuance costs.

Scheduled principal repayments under the Term Loan subsequent to September 30, 2016 are as follows:
(in thousands)
 
Amount
2016 (remaining)
 
$
1,063

2017
 
4,250

2018
 
4,250

2019
 
4,250

2020
 
4,250

Thereafter
 
401,625

 
 
$
419,688

Credit Facility (Successor)

On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and its parent, AF Solutions Holdings LLC (“AF Solutions Holdings”), a wholly-owned subsidiary of the Company, as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a $425 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of September 30, 2016, the Company has issued $0.9 million of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75% or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc. The net proceeds of the Term Loan were used to fund a portion of the purchase price payable to Rohm and Haas in connection with the Business Combination. Amounts available under the Revolving Loan may also be used for working capital, general corporate purposes, and other uses, all as more fully set forth in the Credit Facility.

As of the Closing Date, the Company incurred approximately $12.9 million in debt issuance costs related to the Term Loan and $1.3 million in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The accretion in interest expense during the three and nine months ended September 30, 2016 was approximately $0.6 million and $1.7 million, respectively.

15

10.
Noncurrent Liabilities

The Company’s other noncurrent liabilities at September 30, 2016 and December 31, 2015 consisted of the following:
(in thousands)
 
September 30,
2016
 
December 31, 2015
Tax amortization benefit contingency
 
$
149,868

 
$
137,288

Deferred payment
 
28,325

 
22,700

Other
 
4,633

 
4,642

 
 
$
182,826

 
$
164,630


11.
Severance

In the first quarter of 2016, by mutual agreement, Thomas Macphee resigned as Chief Executive Officer and as a member of the Company's Board of Directors. In addition, Stan Howell resigned as the Company’s President, which was effective on April 30, 2016. According to the terms of their respective separation agreements, the Company expensed $0.0 million and $1.4 million in the three and nine months ended September 30, 2016, respectively. These amounts, which do not include stock compensation expense, were recorded in selling, general and administrative expense in the condensed consolidated and combined statement of operations. The Company expects to pay these amounts out over the next year.

Effective September 26, 2016, Margaret M. Loebl, former Chief Financial Officer, left the Company in order to pursue other professional interests. The Company incurred expense of $1.2 million for the three and nine months ended September 30, 2016, respectively, in accordance with her separation agreement. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated and combined statement of operations. The Company expects to pay this amount out over the next year.

12.
Stockholders’ Equity

The authorized common stock of the Company consists of 400,000,000 shares. Holders of the Company’s common stock are entitled to one vote for each share of common stock. As of September 30, 2016, there were 50,584,943 shares of common stock issued. As of September 30, 2016, there were warrants to purchase 15,983,072 shares of the Company’s common stock outstanding at a strike price of $11.50. Of the 15,983,072 warrants, 9,823,072 (1,201,928 warrants were subsequently repurchased during 2015) were issued as part of the units sold in the Company's initial public offering in February 2014 and 6,160,000 warrants were sold in a private placement at the time of such public offering.

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

13.
Stock-based Compensation

Stock compensation expense for the three and nine months ended September 30, 2016 (Successor) was $1.3 million and $3.2 million, respectively. There was no stock compensation expense for the one and seven months ended July 31, 2015 (Predecessor), respectively. Stock compensation expense for the two months ended September 30, 2015 (Successor) was $0.7 million. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses, and research and development expenses. At September 30, 2016, there was $2.6 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 1.9 years.

Pursuant to the separations of the Company's former Chief Executive Officer, President, and Chief Financial Officer as described in Note 11, the Company has recorded a net charge of $0.7 million and $1.3 million, during the three and nine months ended September 30, 2016, respectively, for the modification and vesting of restricted stock awards less compensation previously recognized on forfeited options.

14.
Earnings Per Share


16

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. In computing dilutive income (loss) per share, basic income (loss) per share is adjusted for the assumed issuance of all potentially dilutive share-based awards, including stock options, restricted stock and warrants.

The following table is a reconciliation of net income (loss) and the shares used in calculating basic and diluted net income (loss) for the three and nine months ended September 30, 2016:
(in thousands, except share data)
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Numerator:
 
 
 
     Net income (loss)
$
7,312

 
$
(42,989
)
Denominator:
 
 
 
Weighted average common shares outstanding - Basic
49,567,735

 
49,385,733

Effect of dilutive shares:
 
 
 
Restricted stock awards to employees
5,172

 
—

Restricted stock awards to directors
54,893

 
—

Weighted average number of shares outstanding - Diluted
49,627,800

 
49,385,733

Antidilutive securities
 
 
 
Stock-based compensation awards(1):
 
 
 
Stock options
584,375

 
584,375

Restricted stock
272,897

 
332,961

Warrants:
 
 
 
Private placement warrants
6,160,000

 
6,160,000

Public warrants
9,823,072

 
9,823,072

                                                  
(1)
Stock Appreciation Rights and Phantom Shares are payable in cash and will have no impact on number of shares outstanding

Warrants and options are considered anti-dilutive and excluded when the exercise price exceeds the average market value of the Company’s common stock price during the applicable period. Performance share units are considered anti-dilutive if the performance targets upon which the issuance of the shares is contingent have not been achieved and the respective performance period has not been completed as of the end of the current period.

15.
Income Taxes

The effective tax rate for the three months ended September 30, 2016 (Successor) was 39.0%, compared to the effective tax rate of 32.8% for the one month ended July 31, 2015 (Predecessor) and 24.7% for the two months ended September 30, 2015 (Successor). The effective tax rate for the nine months ended September 30, 2016 (Successor) was 37.9%, compared to the effective tax rate of (338.2)% for the seven months ended July 31, 2015 (Predecessor) and 24.7% for the two months ended September 30, 2015 (Successor).

The effective tax rate for the three and nine months ended September 30, 2016 (Successor) differs from the US statutory tax rate of 35% due to state income taxes and certain non-deductible expenses.
With respect to the Predecessor period, the effective tax rate in the prior period was favorably impacted by an increase in valuation allowances in certain foreign jurisdictions where the Company incurred net operating losses and would not be able to receive tax benefit from such losses, thus decreasing the overall effective tax rate due to the overall pre-tax losses incurred.

16.
Segments

The authoritative guidance for disclosures about segments of an enterprise establishes standards for reporting information about segments. It defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. We currently operate and manage our business as a single reportable segment. Our chief operating decision-makers allocate resources and assess performance of the business at the consolidated level. Accordingly, we consider ourselves to be in a single operating and reportable segment structure.


17

17.
Commitments and Contingencies

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

Purchase Commitments

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


18.
Fair Value Measurements

Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of September 30, 2016:
 
 
Fair Value Measurements, Using
 
 
(in thousands)
 
Quoted prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
 
Total carrying value as of September 30, 2016
Warrant consideration(1)
 
—

 
4,680

 
—

 
4,680

Tax amortization benefit contingency(2)
 
—

 
—

 
163,498

 
163,498

Deferred acquisition payment(3)
 
—

 
—

 
28,325

 
28,325

Total
 
$
—

 
$
4,680

 
$
191,823

 
$
196,503


The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of December 31, 2015:
 
 
Fair Value Measurements, Using
 
 
(in thousands)
 
Quoted prices in active markets (Level 1)
 
Significant other observable inputs (Level 2)
 
Significant unobservable inputs (Level 3)
 
Total carrying value as of December 31, 2015
Warrant consideration(1)
 
—

 
6,000

 
—

 
6,000

Tax amortization benefit contingency(2)
 
—

 
—

 
149,620

 
149,620

Deferred acquisition payment(3)
 
—

 
—

 
22,700

 
22,700

Total
 
$
—

 
$
6,000

 
$
172,320

 
$
178,320

                                                 
(1)
This liability relates to warrants to purchase the Company's common stock and future obligations to deliver additional such warrants in relation to the Business Combination. The inputs used in the fair value measurement were directly observable quoted prices for identical assets in an inactive market.
(2)
The fair value of the tax amortization benefit contingency is measured using an income approach based on the Company's best estimate of the undiscounted cash payments to be made, tax effected at 37% and discounted to present value utilizing an appropriate market discount rate. The valuation technique used did not change during the nine months ended September 30, 2016.
(3)
The fair value of the deferred acquisition payment is measured using a Black-Scholes option pricing model and based on the Company's best estimate of the Company's average Business EBITDA, as defined in the Purchase Agreement, over the two year period from January 1, 2016 to December 31, 2017. The valuation technique used did not change during the nine months ended September 30, 2016.

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


18

The following tables present the changes during the periods presented in the Company's Level 3 financial instruments that are measured at fair value on a recurring basis. These instruments relate to contingent consideration payable to Dow in connection with the Business Combination.
(in thousands)
 
Tax amortization benefit contingency
 
Deferred acquisition payment
 
Total
Balance, December 31, 2015
 
$
149,620

 
$
22,700

 
$
172,320

Measurement period adjustment
 
2,223

 
(2,000
)
 
223

Accretion(1)
 
12,206

 
10,725

 
22,931

Mark to market adjustment(2)
 
(551
)
 
(3,100
)
 
(3,651
)
Balance September 30, 2016
 
$
163,498

 
$
28,325

 
$
191,823


                                  
(1)    Accretion expense for the three months ended September 30, 2016 was $4.0 million for the tax benefit contingency and $3.6 million for the deferred acquisition payment.
(2)    The mark to market adjustment for the three months ended September 30, 2016 was $0.6 million for the tax benefit contingency and $0.0 million for the deferred acquisition payment.

19

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

As used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), the terms “Predecessor” and the “AgroFresh Business” refer to the business conducted by The Dow Chemical Company (“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 Company’s acquisition of such business from Dow on July 31, 2015 (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 three and nine months ended September 30, 2016 may not be comparable to the Predecessor financial information for the one month ended July 31, 2015 (Predecessor) and two months ended September 30, 2015 (Successor) and seven months ended July 31, 2015 (Predecessor) and two months ended September 30, 2015 (Successor). Refer to Note 3 to the condensed consolidated and combined financial statements contained in this Report for additional information regarding 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 condensed consolidated and combined financial statements and the notes thereto contained elsewhere in this Report. 

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

Note Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Report including, without limitation,
statements in this MD&A regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements. When used in this Report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results and/or the timing of events could differ materially from those contemplated by these forward -looking statements due to a number of factors, including those discussed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K") as well as the update to those Risk Factors disclosed in Part II, Item 1A of this Report. Any
forward-looking statements included in this Report are based only on information currently available to the Company
and speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly
update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a
result of new information, future developments or otherwise. All subsequent written or oral forward looking statements attributable to the Company or persons acting on behalf of the Company are qualified in their entirety by this paragraph.

Business Overview

AgroFresh is a global leader in the food quality preservation and waste reduction space, providing proprietary advanced technologies and innovative data-driven specialty solutions 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 SmartFreshTM and HarvistaTM applications at customer sites through a direct sale and service model utilizing third-party contractors. As part of the AgroFreshTM Whole Product offering, the Company also provides advisory services employing its extensive knowledge on the use of 1-Methylcyclopropene ("1-MCP") collected through thousands of monitored applications. The Company operates in over 40 countries and derives about 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 percent

20

of all fresh fruits and vegetables, 40 percent of apples, and 20 percent of bananas are lost to spoilage. AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.

AgroFresh’s current principal product, SmartFresh, regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables. SmartFresh is naturally biodegradable, leaves no detectable residue, and has been approved for use by many domestic and global regulatory organizations. Harvista extends the company’s proprietary technology into pre-harvest management of pome fruit such as apples and pears. AdvanStoreTM is an atmospheric monitoring system under development that leverages the company’s extensive understanding of fruit physiology, fruit respiration, current controlled atmosphere technology, and new proprietary diagnostic tools to provide improved and real time guidance to producers and packers of fresh produce regarding storage conditions so corrective measures can be made on a more timely basis. RipeLockTM combines the technology behind SmartFresh with modified atmosphere packaging designed specifically to preserve quality during transportation and to extend the yellow shelf life of bananas and other potential fruits. LandSpring™ is an innovative new 1-MCP technology targeted to transplanted vegetable seedlings. It is currently registered for use on tomato and pepper crops in the US. It reduces transplant shock, resulting in less seedling mortality and faster crop establishment, which leads to a healthier crop and improved yields.

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

AgroFresh is a former blank check company that completed its initial public offering on February 19, 2014. Upon the closing of the Business Combination with Dow on July 31, 2015, the Company changed its name to AgroFresh Solutions, Inc. The Company paid Dow cash consideration of $635 million and issued Dow 17.5 million shares of common stock at a deemed value of $12 per share. The transaction included a liability to Dow to deliver a variable number of warrants between the closing and April 2016. The cash consideration was funded through our initial public offering, a term loan, and a private placement of 4.878 million shares of common stock that yielded $50 million of proceeds. The transaction also has an earn-out feature whereby Dow is entitled to receive a deferred payment of $50 million in March 2018 if AgroFresh achieves a specified average level of Business EBITDA (as defined in the Stock Purchase Agreement related to the Business Combination) over 2016 and 2017. In addition, pursuant to a tax receivables agreement entered into in connection with the Business Combination, Dow is entitled to receive 85% of the tax savings, if any, that the Company realizes as a result of the increase in the tax basis of assets acquired pursuant to the Business Combination.

In connection with the closing of the Business Combination, AgroFresh entered into a transition services agreement with Dow. Under the agreement, Dow provides AgroFresh a suite of services for a period of time ranging from six months to five years depending on the service. 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. Its products and services add value to customers by reducing food spoilage and extending the life of perishable fruits. The U.S. Food and Agriculture Organization has estimated that a growing global population will require a near doubling of food production in developing countries by 2050 to meet expected demand.

This global trend, among others, creates demand for the Company’s solutions. The Company’s offerings are currently protected by patents on, among other things, the encapsulation of the active ingredient, 1-MCP.

The global produce market is a function of both the size and the yield of the crop harvested; variations in either will affect total production. 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

21

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. 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, although in some cases such applications are made by our customers directly.

The Company is shifting the terms of its contracts with service providers from annual renewal periods to two or three year durations in order to have greater certainty that experienced applicators will be available for 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 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 periods.

Foreign Currency Exchange Rates

With a global customer base and geographic footprint, the Company generates revenue and incurs costs in a number of different currencies, with the Euro comprising the most significant non-U.S. 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

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations and that require the use of complex and subjective estimates based upon management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. There have been no material changes to our critical accounting policies and estimates previously disclosed in our 2015 Form 10-K for the year ended December 31, 2015. For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates” and “Note 2 - Basis of Presentation and Summary of Significant Accounting Policies” in our 2015 Form 10-K.    

22


Results of Operations

The following table summarizes the results of operations for both the Successor and Predecessor periods:
 
Successor
Predecessor
Successor
 
Successor
Predecessor
Successor
(in thousands, except share and per share data)
Three months ended September 30, 2016
July 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
 
Nine Months Ended
September 30, 2016
January 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
Net sales
$
61,200

$
2,157

$
59,650

 
107,996

52,682

59,650

Cost of sales (excluding amortization, shown separately below)
8,905

513

45,719

 
48,558

10,630

45,719

Gross profit
52,295

1,644

13,931

 
59,438

42,052

13,931

Research and development expenses
2,983

1,084

1,946

 
11,220

11,599

1,946

Selling, general, and administrative expenses
15,173

1,912

12,744

 
49,385

16,774

12,744

Amortization of intangibles
10,080

2,410

6,815

 
29,878

16,895

6,815

Change in fair value of contingent consideration
(1,569
)
—

—

 
(4,969
)
—

—

Operating income (loss)
25,628

(3,762
)
(7,574
)
 
(26,076
)
(3,216
)
(7,574
)
Other (loss) income
(38
)
—

(1,462
)
 
16

—

(1,462
)
Income (loss) on foreign currency exchange
924

2

(263
)
 
682

8

(263
)
Interest expense, net
(14,526
)
—

(9,313
)
 
(43,850
)
—

(9,313
)
Income (loss) before income taxes
11,988

(3,760
)
(18,612
)
 
(69,228
)
(3,208
)
(18,612
)
Provision (benefit) for income taxes
4,676

(1,232
)
(4,591
)
 
(26,239
)
10,849

(4,591
)
Net income (loss)
$
7,312

$
(2,528
)
$
(14,021
)
 
(42,989
)
(14,057
)
(14,021
)
Net income (loss) per common share:
 

 

 
 
 
 
 
Basic
$
0.15

—

$
(0.28
)
 
$
(0.87
)
—

$
(0.28
)
Diluted
$
0.15

—

$
(0.28
)
 
$
(0.87
)
—

$
(0.28
)
Weighted average shares outstanding:
 

 

 
 
 



 
Basic
49,567,735

—

49,457,847

 
49,385,733

—

49,457,847

Diluted
49,627,800

—

49,457,847

 
49,385,733

—

49,457,847


Comparison of Results of Operations for the three months ended September 30, 2016 (Successor) compared to the one month ended July 31, 2015 (Predecessor) and two months ended September 30 2015 (Successor).

Net Sales

Net sales were $61.2 million for the three months ended September 30, 2016 as compared to $2.2 million for one month ended July 31, 2015 and $59.7 million for the two months ended September 30, 2015.

Cost of Sales

Cost of sales was $8.9 million for the three months ended September 30, 2016 as compared to $0.5 million for one month ended July 31, 2015 and $45.7 million for the two months ended September 30, 2015. The amount in the prior year period includes $38.7 million of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 85 percent in the third quarter of 2016 versus 88 percent in the third quarter of 2015.

Research and Development Expenses

Research and development expenses were $3.0 million for the three months ended September 30, 2016 as compared to $1.1 million for one month ended July 31, 2015 and $1.9 million for the two months ended September 30, 2015.


23

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $15.2 million for the three months ended September 30, 2016 compared to $1.9 million for one month ended July 31, 2015 and $12.7 million for the two months ended September 30, 2015.

Amortization of Intangibles

Amortization of intangible assets was $10.1 million for the three months ended September 30, 2016 compared to $2.4 million for one month ended July 31, 2015 and $6.8 million for the two months ended September 30, 2015. See Note 7 to the condensed consolidated and combined financial statements contained in this Report for more information regarding the intangible assets acquired in the Business Combination.

Change in Fair Value of Contingent Consideration
 
As discussed in Note 3 to the condensed consolidated and combined financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the warrant consideration, the deferred payment, and the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings. For the three months ended September 30, 2016, the Company recognized a $1.0 million gain related to the reduction in the fair value of the warrant consideration and a $0.6 million gain resulting from a reduction in the fair value of the tax amortization benefit contingency.

Interest Expense
 
Interest expense was $14.5 million for the three months ended September 30, 2016 compared to $0.0 million for the one month ended July 31, 2015 and $9.3 million for the two months ended September 30, 2015.

Income taxes
 
Income tax expense was $4.7 million for the three months ended September 30, 2016 compared to income tax benefit of $1.2 million for the one month ended July 31, 2015 and $4.6 million for the two months ended September 30, 2015.

Comparison of Results of Operations for the nine months ended September 30, 2016 (Successor) compared to the seven months ended July 31, 2015 (Predecessor) and two months ended September 30, 2015 (Successor)

Net Sales

Net sales were $108.0 million for the nine months ended September 30, 2016 as compared to $52.7 million for the seven months ended July 31, 2015 and $59.7 million for two months ended September 30, 2015. The decrease was primarily attributable to lower net sales in the Southern Hemisphere in the first half of 2016.

Cost of Sales

Cost of sales was $48.6 million for the nine months ended September 30, 2016 as compared to $10.6 million for the seven months ended July 31, 2015 and $45.7 million for two months ended September 30, 2015. Included in these amounts were $30.4 million in the current year and $38.7 million in the prior year of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 83 percent in the first nine months of 2016 versus 84 percent in the first nine months of 2015.
 
Research and Development Expenses

Research and development expenses were $11.2 million for the nine months ended September 30, 2016 as compared to $11.6 million for the seven months ended July 31, 2015 and $1.9 million for two months ended September 30, 2015. The decline was driven by the discontinuation of certain projects following the Company’s separation from Dow.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $49.4 million for the nine months ended September 30, 2016 compared to $16.8 million for the seven months ended July 31, 2015 and $12.7 million for two months ended September 30, 2015. This

24

increase in selling, general, and administrative expenses for the nine months ended September 30, 2016, as compared to the combined nine month periods ended September 30, 2015, was primarily driven by non-recurring costs to establish the Company as a separate public company of $13.3 million, incremental recurring expenses of $6.5 million to support the Company's standalone infrastructure, severance costs of $3.9 million and litigation costs of $0.9 million.

Amortization of Intangibles

Amortization of intangible assets was $29.9 million for the nine months ended September 30, 2016 compared to $16.9 million for the seven months ended July 31, 2015 and $6.8 million for two months ended September 30, 2015. See Note 7 to the condensed consolidated and combined financial statements contained in this Report for more information regarding the intangible assets acquired in the Business Combination.

Change in Fair Value of Contingent Consideration
 
As discussed in Note 3 to the condensed consolidated and combined financial statements contained in this Report, 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 nine months ended September 30, 2016, the Company recognized a $3.1 million gain resulting from a reduction in the fair value of the deferred payment, a $1.3 million gain related to the mark to market adjustment of the warrant consideration and a $0.6 million gain resulting in from a reduction in the fair value of the tax amortization benefit contingency.

Interest Expense
 
Interest expense was $43.9 million for the nine months ended September 30, 2016 compared to $0.0 million for the seven months ended July 31, 2015 and $9.3 million for the two months ended September 30, 2015.

Income taxes
 
Income tax benefit was $26.2 million for the nine months ended September 30, 2016 compared to income tax expense of $10.8 million for the seven months ended July 31, 2015 and income tax benefit of $4.6 million for the two months ended September 30, 2015.

Non-GAAP Measure

The following table sets forth the non-GAAP financial measure of EBITDA. The Company believes this non-GAAP financial measure provides meaningful supplemental information as it is used by the Company’s management to evaluate the Company’s performance, is more indicative of future operating performance of the Company, and facilitates a better comparison among fiscal periods, as the non-GAAP measure excludes items that are not considered core to the Company’s operations. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.

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

 
Successor
Predecessor
Successor
 
Successor
Predecessor
Successor
(in thousands)
Three months ended September 30, 2016
July 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
 
Nine Months Ended
September 30, 2016
January 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
GAAP Net income (loss)
$
7,312

$
(2,528
)
(14,021
)
 
$
(42,989
)
$
(14,057
)
$
(14,021
)
Provision (benefit) for income taxes
4,676

(1,232
)
(4,591
)
 
(26,239
)
10,849

(4,591
)
Amortization of inventory step-up(1)
—

—

38,702

 
30,377

—

38,702

Interest expense(2)
14,526

—

9,313

 
43,850

—

9,313

Depreciation and amortization
10,269

2,466

7,969

 
30,458

17,379

7,969

Non-GAAP EBITDA*
$
36,783

$
(1,294
)
$
37,372

 
$
35,457

$
14,171

$
37,372



25

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

*Changes in Financial Metric Reporting
The Company is implementing a change to its reporting of non-GAAP metrics. The Company will no longer report adjusted EBITDA as a non-GAAP financial metric. Instead, Agrofresh has commenced this quarter reporting non-GAAP EBITDA as the key non-GAAP financial measure of the business. The Company believes this change will improve the transparency of the business and increase the comparability of the Company's results.


26



Liquidity and Capital Resources
Cash Flow

 
 
Successor
 
Predecessor
Successor
(in thousands) $
 
Nine Months Ended
September 30, 2016
 
January 1, 2015 through July 31, 2015
August 1, 2015 through September 30, 2015
Net cash used in operating activities
 
(5,123
)
 
(5,598
)
(17,185
)
Net cash used in investing activities
 
(5,441
)
 
(613
)
(405,255
)
Net cash (used in) provided by financing activities
 
(4,676
)
 
6,211

452,014


Cash used in operating activities was $5.1 million for the nine months ended September 30, 2016, comprised of a net loss of $43.0 million plus $57.2 million of non-cash items added back to arrive at cash, plus cash generated by a decrease in net operating assets of $19.7 million. Non-cash items added back to net loss were comprised mainly of depreciation, amortization and accretion of the contingent consideration of $53.4 million, $30.4 million of amortization of the step-up in inventory recorded as a result of the Business Combination, stock-based compensation of $2.9 million, amortization of deferred financing fees of $1.7 million and other non-cash items of $0.8 million offset by a deferred tax benefit of $24.9 million and a decrease in contingent consideration of $5.0 million. Cash used in operations was $22.7 million for the combined nine months ended September 30, 2015, comprised of net loss of $28.1 million plus depreciation and amortization of $24.2 million, less a deferred tax benefit of $8.8 million.
Cash used in investing activities for the nine months ended September 30, 2016 was for the purchase of fixed assets and leasehold improvements of $5.4 million. Cash used in investing activities for the combined nine months ended September 30, 2015 related to funds used as part of the Business Combination. Cash used in financing activities for the nine months ended September 30, 2016 was for the repayment of debt in the amount of $3.2 million and the purchase of treasury stock in the amount of $1.5 million. Cash provided by financing activities for the combined nine months ended September 30, 2015 was funding from the Predecessor's parent as well as net proceeds from the term loan.

Liquidity

On July 31, 2015, the Company consummated the Business Combination, pursuant to which the Company issued 17,500,000 shares of common stock at a deemed value of $12.00 per share and paid cash consideration of $635.0 million at the closing. The cash consideration was funded through the Company's initial public offering, the Term Loan (defined below) and the sale of our PIPE shares (defined below).

Term Loan

On July 31, 2015, certain of our subsidiaries entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a $425 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of September 30, 2016, the Company had issued $0.9 million of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75%, or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries and (b) AF Solutions Holdings LLC, including the common stock of AgroFresh Inc.

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

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

27

be accreted through interest expense for the duration of each respective debt facility. The accretion in interest expense during the three and nine months ended September 30, 2016 was approximately $0.5 million and $1.5 million, respectively.

PIPE Shares

In connection with the closing of the Business Combination, the Company issued an aggregate of 4,878,000 shares of common stock, for an aggregate purchase price of $50.0 million, in a private placement (“PIPE”).

Stock Repurchase Program

In November 2015, the Company’s board of directors approved a Stock Repurchase Program totaling $10 million of the Company’s publicly-traded shares of common stock. The Repurchase Program will remain in effect until November 17, 2016, unless terminated earlier by the Company. During the nine months ended September 30, 2016, the Company repurchased 249,047 shares of common stock at an average market price of $5.95.

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations other than detailed below. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Contingent Consideration

As part of the Business Combination, Dow is entitled to receive future contingent consideration and other payments from the Company in relation to (i) in 2018, a deferred payment from the Company of $50,000,000, subject to the Company’s achievement of a specified average Business EBITDA level over the two year period from January 1, 2016 to December 31, 2017; (ii) warrants to purchase the Company’s common stock pursuant to a Warrant Purchase Agreement; (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 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 unaudited condensed consolidated and combined financial statements contained in this Report for further discussion of contingent consideration in connection with the Business Combination.


28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk for changes in interest rates relates primarily to our Term Loan and Revolving Loan. We have not used derivative financial instruments in our investment portfolio. The Term Loan and Revolving Loan bear interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt, but do impact future earnings and cash flows, assuming other factors are held constant. Holding debt levels constant, a 100 basis point increase in the effective interest rates would have increased the Company’s interest expense by $3.2 million for the nine months ended September 30, 2016.

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 the first nine months of 2016, revenues would have decreased by approximately $7.1 million and EBITDA would have decreased by approximately $4.0 million for the nine months ended September 30, 2016.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

Despite the fact that our management was not required to make an assessment regarding internal control over financial reporting, in the course of preparing our financial statements as of and for the period ended December 31, 2015, we identified certain deficiencies in internal control over financial reporting that we believed to be a material weakness. In particular, we identified a material weakness in the design and operating effectiveness of our internal control over financial reporting that relates to the accurate and timely reporting of our operating expense accruals. This internal control failure related to ineffective design and operation of controls over our process of identifying and recording liabilities for vendor invoices received subsequent to year-end that related to our 2015 activities, which would have resulted in understated operating expenses and accrued liabilities, if left uncorrected.

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.

We commenced our remediation efforts related to the above material weakness in the first quarter of 2016. During the first nine months of 2016,

29

•
we hired additional permanent full-time finance and accounting personnel;
•
we continued building our stand-alone business and financial processes;
•
we developed formal policies and procedures related to expense cut-off validation; and
•
we conducted training and education of appropriate personnel outside the finance function regarding cost estimates and expense cut-off dates.

Our management, with the oversight of the Company’s Audit Committee, has devoted considerable effort to remediating the material weakness identified above. While we took considerable action to remediate the material weakness related to the accurate and timely reporting of our operating expense accruals existing as of December 31, 2015, such remediation has not been fully evidenced. Accordingly, we continue to test our controls implemented in 2016 to ensure that our controls are operating effectively. While there can be no assurance, we believe our material weakness will be remediated during the course of 2016.

There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




30

PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On August 3, 2016, we filed a lawsuit against MirTech, Inc. (“MirTech”), Decco U.S. Post-Harvest, Inc. (“Decco”) and certain related parties in the United States District Court for the District of Delaware. Our complaint alleges, among other things, that MirTech, a former consultant to AgroFresh, appropriated AgroFresh’s confidential information and technology, in violation of agreements between MirTech and AgroFresh, and that MirTech and Decco are collaborating to infringe on several of AgroFresh’s patents. Our complaint seeks, among other relief, declarations that we are the owner of a number of patents filed by MirTech, injunctive relief to stop the infringement of our patents, and monetary damages.


ITEM 1A. RISK FACTORS

Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider, in addition to the historical financial statements and related notes and other information set forth in this Report, the risk factors discussed in Part I - Item 1A - Risk Factors included in our 2015 Form 10-K and the factors set forth below, all of which could materially affect our business or future results. Except as set forth below, there have been no material changes to the risk factors disclosed in our 2015 Form 10-K. If any of the risks or uncertainties described in any of such risk factors actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.

If we do not successfully manage the transition associated with the appointment of a new chief executive officer and chief financial officer, our business may be harmed.

Our current Chief Executive Officer, Jordi Ferre, and Chief Financial Officer, Katherine M. Harper, both commenced their employment with us on October 3, 2016. Our former Chief Executive Officer and Chief Financial Officer resigned from such positions in March 2016 and September 2016, respectively. In addition, our former President resigned from such position effective in April 2016. Any changes that may result from hiring our new Chief Executive Officer or Chief Financial Officer can create uncertainty and may negatively impact our ability to execute our business strategy quickly and effectively. In addition, management transition periods can be difficult as the new management gains detailed knowledge of our operations, and friction or further management changes or disruptions could result from changes in strategy and management style. Until we integrate our new Chief Executive Officer and Chief Financial Officer, we may be unable to successfully manage our business and growth objectives, and our business could suffer as a result.




31

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

None.




32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None


33

ITEM 6. EXHIBITS
Exhibit
Number
 
Exhibit
 
 
 
3.1
 
Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015.(1)
3.2
 
Series A Certificate of Designation.(1)
3.3
 
Amended and Restated Bylaws.(2)
3.4
 
Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015.(3)
4.1
 
Specimen Common Stock Certificate.(1)
4.2
 
Specimen Warrant Certificate.(1)
10.1
 
Employment Agreement, dated July 14, 2016, between the Company and Jordi Ferre. (4)
10.2
 
Employment Agreement, Dated as of September 23, 2016, between the Company and Katherine Harper. (5)
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.*
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.*
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
                                                  
*
Filed herewith
(1)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015.
(2)
Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.
(3)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015.
(4)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on July 19, 2016.
(5)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 30, 2016.



34

SIGNATURES

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

 
 
AgroFresh Solutions, Inc.
 
 
 
 
 
Date: November 9, 2016
 
 
 
 
 
By: /s/ Jordi Ferre
 
 
Name: Jordi Ferre
 
 
Title: Chief Executive Officer
 
 
 
 
 
 
 
 
By: /s/ Katherine Harper
 
 
Name: Katherine Harper
 
 
Title: Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


35

EXHIBIT INDEX
Exhibit
Number
 
Exhibit
 
 
 
3.1
 
Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015.(1)
3.2
 
Series A Certificate of Designation.(1)
3.3
 
Amended and Restated Bylaws.(2)
3.4
 
Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015.(3)
4.1
 
Specimen Common Stock Certificate.(1)
4.2
 
Specimen Warrant Certificate.(1)
10.1
 
Employment Agreement, dated July 14, 2016, between the Company and Jordi Ferre.(4)
10.2
 
Employment Agreement, Dated as of September 23, 2016, between the Company and Katherine Harper.(5)

31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.*
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Act of 1934, as amended.*
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
                                                  
*
Filed herewith
(1)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015.
(2)
Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.
(3)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015.
(4)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on July 19, 2016.
(5)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 30, 2016.


36

AgroFresh Solutions, Inc. Reports

Also read