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, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36316
AgroFresh Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
46-4007249
(State or other jurisdiction of incorporation)
(IRS Employer Identification Number)
One Washington Square
510-530 Walnut Street, Suite 1350
Philadelphia, PA 19106
(Address of principal executive offices)
(267) 317-9139
(Registrant’s telephone number, including area code)
 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer
¨
Smaller reporting company ¨
Emerging growth company x
 
 
(Do not check if a
smaller reporting company)
 
 

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



Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of common stock outstanding as of November 3, 2017 was 50,337,382 .
 

Table of Contents

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I - FINANCIAL INFORMATION

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
 
September 30,
2017
December 31, 2016
ASSETS
 

 

Current Assets:
 
 
Cash and cash equivalents
$
75,418

$
77,312

Accounts receivable, net of allowance for doubtful accounts of $1,502 and $1,242, respectively
78,787

63,675

Inventories
16,952

15,467

Other current assets
14,319

14,047

Total current assets
185,476

170,501

Property and equipment, net
9,299

8,048

Intangible assets, net
748,793

776,584

Deferred income tax assets
7,694

8,459

Other assets
2,043

2,252

TOTAL ASSETS
$
953,305

$
965,844

 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

Current Liabilities:
 
 
Accounts payable
$
14,438

$
12,133

Current portion of long-term debt
5,313

15,250

Income taxes payable
6,017

3,121

Accrued expenses and other current liabilities
48,094

66,366

Total current liabilities
73,862

96,870

Long-term debt
402,333

392,996

Other noncurrent liabilities
70,397

140,833

Deferred income tax liabilities
22,790

—

Total liabilities
569,382

630,699

 
 
 
Commitments and contingencies (see Note 17)



Stockholders’ equity:
 

 

Common stock, par value $0.0001; 400,000,000 shares authorized, 51,001,395 and 50,698,587 shares issued and 50,340,014 and 50,037,206 shares outstanding at September 30, 2017 and December 31, 2016, respectively
5

5

Preferred stock; par value $0.0001, 1 share authorized and outstanding at September 30, 2017 and December 31, 2016
—

—

Treasury stock; par value $0.0001, 661,381 shares at September 30, 2017 and December 31, 2016
(3,885
)
(3,885
)
Additional paid-in capital
532,337

475,598

Accumulated deficit
(132,076
)
(132,200
)
Accumulated other comprehensive loss
(12,458
)
(4,373
)
Total stockholders' equity
383,923

335,145

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
953,305

$
965,844


 See accompanying notes to condensed consolidated financial statements.

3
Table of Contents

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share data)


Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Net sales
$
60,772

$
61,200

 
$
109,891

$
107,996

Cost of sales (excluding amortization, shown separately below)
11,620

8,905

 
21,365

48,558

Gross profit
49,152

52,295

 
88,526

59,438

Research and development expenses
3,071

2,983

 
10,103

11,220

Selling, general, and administrative expenses
14,462

15,173

 
44,328

49,385

Amortization of intangibles
10,445

10,080

 
31,335

29,878

Change in fair value of contingent consideration
(1,424
)
(1,569
)
 
(2,420
)
(4,969
)
Operating income (loss)
22,598

25,628

 
5,180

(26,076
)
Other (expense) income
(295
)
(38
)
 
(40
)
16

(Loss) gain on foreign currency exchange
(487
)
924

 
10,584

682

Interest expense, net
(8,638
)
(14,526
)
 
(27,495
)
(43,850
)
Income (loss) before income taxes
13,178

11,988

 
(11,771
)
(69,228
)
Income tax expense (benefit)
3,632

4,676

 
(11,895
)
(26,239
)
Net income (loss)
$
9,546

$
7,312

 
$
124

$
(42,989
)
 
 

 

 




Net income (loss) per share:
 
 
 
 
 
Basic
$
0.19

$
0.15

 
$
—

$
(0.87
)
Diluted
$
0.19

$
0.15

 
$
—

$
(0.87
)
Weighted average shares outstanding:
 

 

 
 



Basic
49,676,923

49,567,735

 
49,852,337

49,385,733

Diluted
50,169,434

49,627,800

 
50,134,591

49,385,733

 
See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

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

 
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Net income (loss)
$
9,546

$
7,312

 
$
124

$
(42,989
)
Other comprehensive income (loss):
 

 
 
 

 
Foreign currency translation adjustments
2,200

(114
)
 
(8,085
)
4,619

Comprehensive income (loss)
$
11,746

$
7,198

 
$
(7,961
)
$
(38,370
)
 
See accompanying notes to condensed consolidated financial statements.


5
Table of Contents

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

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

$
—

49,940,548

$
5

$
(2,397
)
$
472,494

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

Stock-based compensation
—

—

—

—

—

2,901

—

—

2,901

Issuance of restricted stock
—

—

644,395

—

—

—

—

—

—

Repurchase of stock for treasury
—

—

—

—

(1,488
)
—

—

—

(1,488
)
Comprehensive loss
—

—

—

—

—

—

(42,989
)
4,619

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

$
—

50,584,943

$
5

$
(3,885
)
$
475,395

$
(63,629
)
$
(940
)
$
406,946


 
Preferred Stock
Common Stock
Treasury Stock
Additional Paid-in Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
 
Shares
Amount
Shares
Amount
Amount
Balance at December 31, 2016
1

$
—

50,698,587

$
5

$
(3,885
)
$
475,598

$
(132,200
)
$
(4,373
)
$
335,145

Stock-based compensation
—

—

—

—

—

1,318

—

—

1,318

Transfer of director compensation from liability to equity
—

—

—

—

—

332

—

—

332

Issuance of restricted stock
—

—

302,808

—

—

—

—

—

—

Settlement of Dow liabilities, net of income tax
—

—

—

—

—

55,089

—

—

55,089

Comprehensive loss
—

—

—

—

—

—

124

(8,085
)
(7,961
)
Balance at September 30, 2017
1

$
—

51,001,395

$
5

$
(3,885
)
$
532,337

$
(132,076
)
$
(12,458
)
$
383,923


See accompanying notes to condensed consolidated financial statements.


6
Table of Contents

AgroFresh Solutions, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Cash flows from operating activities:




Net income (loss)
$
124

$
(42,989
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 
Depreciation and amortization
33,102

31,777

Provision for bad debts
260

—

Stock-based compensation for equity classified awards
1,318

2,901

Pension expense
227

—

Amortization of inventory fair value adjustment
—

30,377

Amortization of deferred financing costs
1,764

1,696

Accretion of contingent consideration
7,297

22,931

Decrease in fair value of contingent consideration
(2,420
)
(4,969
)
Deferred income taxes
(16,445
)
(24,910
)
Loss on sales of property
81

21

Other
93

850

Changes in operating assets and liabilities:


 
Accounts receivable
(8,699
)
(8,520
)
Inventories
(1,363
)
(2,191
)
Prepaid expenses and other current assets
(321
)
(19,627
)
Accounts payable
(9,486
)
341

Accrued expenses and other liabilities
7,691

5,272

Income taxes payable
3,050

1,206

Other assets and liabilities
(1,354
)
711

Net cash provided by (used in) operating activities
14,919

(5,123
)
Cash flows from investing activities:


 
Cash paid for property and equipment
(5,281
)
(5,449
)
Proceeds from sale of property
99

8

Other investments
(1,050
)
—

Net cash used in investing activities
(6,232
)
(5,441
)
Cash flows from financing activities:


 
Payment of Dow liabilities settlement
(10,000
)
—

Repayment of long term debt
(2,125
)
(3,188
)
Repurchase of stock for treasury
—

(1,488
)
Net cash used in financing activities
(12,125
)
(4,676
)
Effect of exchange rate changes on cash and cash equivalents
1,544

2,152

Net decrease in cash and cash equivalents
(1,894
)
(13,088
)
Cash and cash equivalents, beginning of period
77,312

57,765

Cash and cash equivalents, end of period
$
75,418

$
44,677

 
 
 
Supplemental disclosures of cash flow information:
 
 
Cash paid for:
 
 
Cash paid for interest
$
12,309

$
18,460

Cash paid for income taxes
$
1,811

$
2,487

Supplemental schedule of non-cash investing and financing activities:
 
 
Accrued purchases of property and equipment
$
1,422

$
35

Settlement of Dow liabilities not resulting from cash payment, net of deferred income taxes
$
55,089

$
—


See accompanying notes to condensed consolidated financial statements.

7
Table of Contents

AgroFresh Solutions, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Description of Business

AgroFresh Solutions, Inc. (the “Company”) is a global leader in the food quality preservation and waste reduction space, providing proprietary advanced technologies and innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance its freshness, quality and value to maximize the percentage of produce supplied to the market relative to the amount of produce grown, as well as increase consumer appeal of product at retail. The Company currently offers SmartFresh TM 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 (the "Business Combination") with The Dow Chemical Company ("Dow") and changed its name to AgroFresh Solutions, Inc. Prior to consummation of the Business Combination, the Company’s efforts were limited to organizational activities, its initial public offering and related financings, and the search for suitable business acquisition transactions.

2.
Basis of Presentation and Summary of Significant Accounting Policies

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

For additional information, these condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and notes included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2016 .

Recently Issued Accounting Guidance

In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. ASU 2017-09 addresses the changes to the terms and conditions of share-based awards. The ASU is effective for periods beginning after December 15, 2017 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which has been updated through several revisions and clarifications since its original issuance. The standard will require revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which a company expects to receive in exchange for those goods or services. The standard also requires new, expanded disclosures regarding revenue recognition. The standard will be effective January 1, 2018 with early adoption permissible beginning January 1, 2017.

8

The Company is continuing to evaluate the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. As the Company continues the evaluation and implementation process, it expects that there will be an impact to the Company’s financial reporting disclosures as well as any related business operations processes and internal controls over financial reporting. As part of the assessment performed through the date of this filing, the Company has created an implementation working group, which includes internal and third-party resources. As part of its implementation plan, the Company has adopted implementation controls that will allow it to properly and timely adopt the new revenue accounting standard on its effective date. In particular, the Company adopted implementation controls related to the following:
•
Developed a detailed project plan with key milestone dates;
•
Performed education of the new accounting standard;
•
Outlined the revenue generating activities that fall within the scope of ASU 2014-09, and is continuing to assess what impact the new accounting standard will have on those activities; and
•
Monitoring and assessment of the impact of changes to ASU 2014-09 and its interpretations as they become available.

Specific considerations made to date on the impact of adopting ASU 2014-09 include:
•
Collectibility - The valuation of revenue and accounts receivable, including whether negotiated contractual prices constitute price concessions or acceptance of the customer’s credit risk and how this impacts the timing of the Company’s revenue recognition. Currently, the Company recognizes revenue for the entire sales price and separately records a provision for bad debt as a component of operating expenses.
•
Performance Obligations - The treatment of the Company’s customer contracts, including whether the various goods and services promised in these contracts are distinct performance obligations, and the timing of revenue recognition for these goods and services. Currently, revenue is recognized at the time the product is applied to the fruits or vegetables as this represents the point at which the Company’s performance obligation to the customer has been completed.
•
Variable Consideration - The estimation and constraining of variable consideration, including rebates and how the Company will allocate these items to the performance obligations to its customer contracts. Currently, revenue is recognized net of estimated payments that are expected to be paid under rebate programs.
•
Significant Financing Component - Assessing whether certain contracts with customers provide a service of financing in addition to the delivery of the goods or services. In addition, the Company is assessing whether it can apply the practical expedient alleviating the application of the significant financing component requirements if the period between when the transfers of promised goods or services to a customer and when the customer pays for that good or service is one year or less. Currently, the Company does not recognize imputed interest on its accounts receivables due to its customary trade terms that do not exceed one year.
•
Contract Costs - The Company is continuing to assess the impact of ASU 2014-09 on the costs to acquire and fulfill its customer contracts, including whether the Company can apply the practical expedient of expensing contract costs when incurred if the amortization period of the asset that the Company would have recognized is one year or less. Currently, the Company’s accounting policy is to expense contract costs as they are incurred.
•
Transition Method - The Company is expecting to use a modified retrospective method of adoption, which would require a cumulative adjustment to opening retained earnings at the date of adoption (January 1, 2018), as opposed to a full retrospective application which would require a restatement of each comparable period presented within the financial statements. The Company is continuing to assess whether a material cumulative adjustment is necessary.

The significant assessment and implementation matters to be addressed prior to adopting ASU 2014-09 are as follows:
•
Completing the Company’s review of customer contracts in scope of ASU 2014-09;
•
Calculating the transition method adjustment;
•
Determining the impact that the new accounting standard will have on the Company’s consolidated financial statements and related disclosures; and
•
Updating, as needed, the Company’s business processes, systems and controls required to comply with ASU 2014-09 upon its effective date of January 1, 2018.

The Company anticipates completing its evaluation of the impact of ASU 2014-09 during the next three months and will adopt ASU 2014-09 when it becomes effective on January 1, 2018.

In March 2017, the FASB issued ASU 2017-07, “ Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU No. 2017-07 requires employers to separate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently in the process of assessing the impact this guidance will have on its financial statements.

9

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business , in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its financial statements.

In February 2015, the FASB issued ASU 2016-2, “Leases.” This update requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. The Company is currently evaluating the impact this guidance will have on its financial statements.

3.
Settlement with Dow

On April 4, 2017, the Company entered into an agreement (the “Amendment Agreement”) with Dow, Rohm and Haas Company (“R&H”), Boulevard Acquisition Sponsor, LLC (the “Sponsor”), AgroFresh Inc., a wholly-owned subsidiary of the Company, Avenue Capital Management II, L.P. (“Avenue”) and, solely as to certain sections of the Amendment Agreement, Joel Citron, Darren Thompson and Robert J. Campbell (collectively, the “Founding Holders”), Marc Lasry and Stephen Trevor. Pursuant to the Amendment Agreement and certain related agreements entered into on the same date (as described below), among other things, the Company and Dow agreed to modify certain obligations of the Company pursuant to (i) the Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), between the Company and Dow, (ii) the Tax Receivables Agreement, dated July 31, 2015 (the “Tax Receivables Agreement”), among the Company, Dow, R&H and AgroFresh Inc., and (iii) the Warrant Purchase Agreement, dated July 31, 2015 (the “Warrant Purchase Agreement”), among the Company, Dow, R&H and the Sponsor. Each of Mr. Campbell and Mr. Lasry is a member of the Company's board of directors, Mr. Trevor was a member of the Company’s board of directors at the time the Amendment Agreement was entered into, and each of Dow and the Sponsor is a significant stockholder of the Company.

Amendment Agreement

Pursuant to the Amendment Agreement, the Company agreed to pay Dow the aggregate amount of $20.0 million , of which $10.0 million was paid on April 4, 2017 and the remaining $10.0 million is payable on or before January 31, 2018 , in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, and (iii) the amount payable to Dow pursuant to the Tax Receivables Agreement on account of the 2015 tax year. As of March 31, 2017, these liabilities, inclusive of accrued interest, were approximately $17.0 million , $9.3 million , and $12.0 million , respectively. During the nine months ended September 30, 2017 , the liabilities were reduced by approximately $18.2 million .

Also pursuant to the Amendment Agreement, each of Avenue and Dow agreed to make available to the Company a credit facility, providing for loans of up to $50.0 million each, for use to complete one or more potential acquisitions prior to December 31, 2019, in each case subject to approval by both Avenue and Dow.

First Amendment to Tax Receivables Agreement

The Company, Dow, R&H and AgroFresh Inc. entered into a First Amendment to the Tax Receivables Agreement (the “TRA Amendment”). The TRA Amendment reduces, from 85% to 50% , the percentage that the Company is required to pay to Dow pursuant to the Tax Receivables Agreement of the annual tax savings, if any, in U.S. Federal, state and local income tax or franchise tax that the Company actually realizes as a result of the increase in tax basis of the AgroFresh assets resulting from a Section 338(h)(10) election that the Company and Dow made in connection with the transactions contemplated by the Purchase Agreement. During the nine months ended September 30, 2017 the liability to Dow was reduced by approximately $75.3 million as a result of the TRA Amendment.





10

Stock Buyback Agreement

The Company and Dow entered into a letter agreement (the “Stock Buyback Agreement”), pursuant to which Dow agreed to use its reasonable best efforts to purchase up to 5,070,358 shares of the Company’s common stock in the open market (representing approximately 10% of the total number of shares of the Company’s common stock then outstanding), over a period of up to 18 months .

Termination of Warrant Purchase Agreement

The Company, Dow, R&H and the Sponsor entered into a letter agreement, pursuant to which the Warrant Purchase Agreement was terminated effective immediately.

As a result of the Amendment Agreement, the TRA Amendment and the termination of the Warrant Purchase Agreement, the Company reduced the related liabilities during the first nine months of 2017 as follows:

(amounts in millions)
Nine Months Ended
September 30, 2017
Amendment Agreement
$
18.2

Warrant Purchase Agreement
1.6

TRA Amendment
75.3

Deferred tax adjustment related to Dow settlement
(40.0
)
Total reduction in related liabilities
$
55.1


The Company recorded an increase to additional paid in capital, net of deferred income taxes of $40.0 million , as an offset to the reduction in related liabilities, as the Company entered into the April 4, 2017 agreements with related parties and the transaction has been treated as a capital transaction.

4.
Related Party Transactions

Pursuant to the Business Combination the Company consummated on April 30, 2015 with Dow, a related party, the Company agreed to certain obligations with Dow pursuant to the Purchase Agreement, the Tax Receivables Agreement, and the Warrant Purchase Agreement, dated July 31, 2015. On April 4, 2017 the Company and Dow amended the Purchase Agreement and the Tax Receivables Agreement pursuant to the Amendment Agreement and TRA Amendment, and entered into the Stock Buyback Agreement, each as described under Note 3 above.

The Company is also a party to ongoing agreements with Dow, including, but not limited to, operating-related agreements for certain transition services, seconded employees and occupancy. In connection with a transition services agreement entered into in connection with the Business Combination, the Company paid Dow a $5.0 million set-up fee which is being amortized from September 2015 through December 2017, which is the period during which the services are expected to be provided.

The Company incurred expenses for such services for the nine months ended September 30, 2017 and September 30, 2016 as follows:

(amounts in thousands)
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Amortization of prepayment related to set-up of transition services
$
620

$
1,319

Ongoing costs of transition services agreement
2,228

3,604

Rent expense
693

951

Amortization of prepayment related to Dow importation services
—

397

Other expenses
379

835

Total incurred expenses
$
3,920

$
7,106



11

As of September 30, 2017 and September 30, 2016 , the Company had an outstanding payable to Dow of $0.7 million and $2.5 million , respectively. See Notes 9 and 11 for other related party disclosures.

The Company has a minority investment in RipeLocker, LCC ("RipeLocker"), a company led by George Lobisser, a director of AgroFresh. On November 29, 2016, the Company entered into a Mutual Services Agreement (the “Services Agreement”) with George Lobisser and RipeLocker, LLC. Pursuant to the Services Agreement, Mr. Lobisser is entitled to receive a consulting fee of $5,000 per full day for time spent performing consulting services under this Agreement (pro-rated for any partial day), plus reimbursement for out-of-pocket expenses. In February 2017, the Company and Mr. Lobisser agreed to substantially curtail any mutual consulting services to be provided under the Services Agreement, and that any further services would be provided at no charge. For the nine months ended September 30, 2017 , there were no material amounts paid and as of September 30, 2017 , there were no material amounts owed to RipeLocker or Mr. Lobisser for consulting services.

5.
Inventories

Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands)
September 30,
2017
December 31, 2016
Raw material
$
1,143

$
1,649

Work-in-process
6,323

7,963

Finished goods
8,694

5,132

Supplies
792

723

Total inventories
$
16,952

$
15,467


6.
Other Current Assets

The Company's other current assets at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands)
September 30,
2017
December 31, 2016
VAT receivable
$
9,783

$
9,306

Prepaid income tax asset
2,066

1,910

Other
2,470

2,831

Total other current assets
$
14,319

$
14,047


7.
Property and Equipment

Property and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands, except for useful life data)
Useful life
(years)
September 30,
2017
December 31,
2016
Leasehold improvements
7-20
$
1,775

$
1,463

Machinery & equipment
1-12
7,105

6,066

Furniture
1-12
967

843

Construction in progress
 
1,463

781

 
 
11,310

9,153

Less: accumulated depreciation
 
(2,011
)
(1,105
)
Total property and equipment, net
 
$
9,299

$
8,048


Depreciation expense for the three and nine months ended September 30, 2017 was $0.3 million and $0.9 million , respectively.
Depreciation expense for the three and nine months ended September 30, 2016 was $0.2 million and $0.6 million , respectively.
Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the condensed consolidated statements of income (loss).

12






8.
Intangible Assets

The Company’s intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:

 
September 30, 2017
 
December 31, 2016
(in thousands)
Gross Carrying Amount
Accumulated Amortization
Net
 
Gross Carrying Amount
Accumulated Amortization
Impairment
Net
Other intangible assets:
 
 
 
 
 
 
 
 
Developed technology
$
757,000

$
(85,071
)
$
671,929

 
$
757,000

$
(55,623
)
$
—

$
701,377

In-process research and development
39,000

(2,347
)
36,653

 
39,000

(722
)
—

38,278

Trade name
26,000

—

26,000

 
35,500

—

(9,500
)
26,000

Service provider network
2,000

—

2,000

 
2,000

—

—

2,000

Customer relationships
8,000

(722
)
7,278

 
8,000

(472
)
—

7,528

Software
1,200

(320
)
880

 
660

(104
)
—

556

Software not yet placed in service
3,974

—

3,974

 
753

—

—

753

Other
100

(21
)
79

 
100

(8
)
—

92

Total intangible assets
$
837,274

$
(88,481
)
$
748,793

 
$
843,013

$
(56,929
)
$
(9,500
)
$
776,584


At September 30, 2017 , the weighted-average amortization period remaining for the finite-lived intangible assets was 17.6 years. At September 30, 2017 , the weighted-average amortization periods remaining for developed technology, customer relationships, in-process R&D, software and other was 17.6 , 21.9 , 17.0 , 3.3 , and 4.8 years, respectively.

Estimated annual amortization expense for finite-lived intangible assets, excluding amounts not placed in service, subsequent to September 30, 2017 is as follows:

(in thousands)
Amount
2017 (remaining)
$
10,518

2018
42,071

2019
42,052

2020
41,919

2021
41,814

Thereafter
538,445

Total
$
716,819



13

9.
Accrued and Other Current Liabilities

The Company’s accrued and other current liabilities at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands)
September 30,
2017
December 31, 2016
Warrant consideration
$
—

$
1,080

Tax amortization benefit contingency
3,744

17,535

Working capital settlement
—

17,000

Additional consideration due seller
—

9,263

Dow settlement liability
10,000

—

Accrued compensation and benefits
7,628

6,352

Accrued rebates payable
5,931

4,701

Insurance premium financing payable
953

578

Severance
412

1,564

Accrued taxes
8,561

4,598

Other
10,865

3,695

Total accrued and other current liabilities
$
48,094

$
66,366


Refer to Note 3 regarding the contingent consideration owed to Dow as part of the Business Combination.

10.
Debt

Credit Facility

On July 31, 2015, in connection with the consummation of the Business Combination, AgroFresh Inc. as the borrower and its parent, AF Solutions Holdings LLC (“AF Solutions Holdings”), a wholly-owned subsidiary of the Company, as the guarantor, entered into a Credit Agreement with Bank of Montreal, as administrative agent (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, 2017 , the Company has issued $0.5 million of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan has a scheduled maturity date of July 31, 2019. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75% or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). At September 30, 2017 , the effective interest rate was 6.68% . The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.

Certain restrictive covenants are contained in the Credit Facility, which the Company was in compliance with as of September 30, 2017 . The Credit Facility imposes an overall cap on the total amount of dividends the Company can pay, together with the total amount of shares and warrants the Company can repurchase, of $12 million per fiscal year, and imposes certain other conditions on the Company’s ability to pay dividends.

The Company’s debt, net of unamortized discounts and deferred financing fees, at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands)
September 30,
2017
December 31,
2016
Total Term Loan outstanding
$
407,646

$
408,246

Less: Amounts due within one year
5,313

15,250

Total long-term debt due after one year
$
402,333

$
392,996



14

At September 30, 2017 , the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately $416.5 million . The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the fair value hierarchy.

The Term Loan is presented net of deferred issuance costs, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance costs at the inception of the Term Loan were $12.9 million and as of September 30, 2017 there were $8.9 million of unamortized deferred issuance costs.

Scheduled principal repayments under the Term Loan subsequent to September 30, 2017 are as follows:

(in thousands)
Amount
2017 (remaining)
$
2,125

2018
4,250

2019
4,250

2020
4,250

2021
401,625

Total
$
416,500


Beginning with the year ended December 31, 2016, the Company is required to prepay Term Loan Borrowings and Incremental Term Loan Borrowings in an aggregate amount equal to 50% of the Excess Cash Flow for the fiscal year; provided that such amount of the Excess Cash Flow in any fiscal year shall be reduced by (i) the aggregate amount of prepayments of Term Loans and Incremental Term Loans made, (ii) to the extent accompanied by permanent reductions of Revolving Commitments, the aggregate amount of prepayments of Revolving Loans (other than prepayments financed with the proceeds of Indebtedness), (iii) repaid borrowings of Revolving Loans made on the Effective Date to account for any additional original issue discount or upfront fees that are implemented pursuant to the Fee Letter and (iv) the aggregate amount of cash dividends paid by the Company or Holdings to Holdings or Boulevard for the payment of the Seller Earnout; provided further that, prepayments of Term Loan Borrowings and Incremental Term Loan Borrowings shall only be required if 50% of the Excess Cash Flow for such fiscal year exceeds $5 million . The amount due under this provision for the year ended December 31, 2016 was originally estimated to be $11.0 million , but it was subsequently determined that no amount was payable for such year. There are no amounts due under this provision as of September 30, 2017 .

At September 30, 2017 , there was $416.5 million outstanding under the Term Loan and no balance outstanding under the Revolving Loan.

In July 2015, the Company incurred approximately $12.9 million in debt issuance costs related to the Term Loan and $1.3 million in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The interest expense related to the amortization of the debt issuance costs during the three and nine months ended September 30, 2017 was approximately $0.6 million and $1.8 million , respectively.

11.
Other Noncurrent Liabilities

The Company’s other noncurrent liabilities at September 30, 2017 and December 31, 2016 consisted of the following:

(in thousands)
September 30,
2017
December 31, 2016
Tax amortization benefit contingency
$
65,855

$
132,724

Deferred payment
—

2,498

Other
4,542

5,611

Total other noncurrent liabilities
$
70,397

$
140,833






15

12.
Severance

There was $0.2 million and $0.3 million severance expense for the three and nine months ended September 30, 2017 , respectively. For the three and nine months ended September 30, 2016 , there was $1.2 million and $2.6 million of severance expense, respectively. This amount, which does not include stock compensation expense, was recorded in selling, general and administrative expense in the condensed consolidated statements of income (loss). As of September 30, 2017 , the Company had $0.6 million of severance liability, of which $0.4 million will be paid out over the next year.

13.
Stockholders’ Equity

The authorized common stock of the Company consists of 400,000,000 shares with a par value of $0.0001 per share. Holders of the Company’s common stock are entitled to one vote for each share of common stock. As of September 30, 2017 , there were 50,340,014 shares of common stock outstanding. As of September 30, 2017 , there were warrants to purchase 15,983,072 shares of the Company’s common stock outstanding at a strike price of $11.50 . Of the 15,983,072 warrants, 9,823,072 were issued as part of the units sold in the Company's initial public offering in February 2014 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.

14.
Stock-based Compensation

Stock compensation expense for both equity-classified and liability-classified awards for the three and nine months ended September 30, 2017 was $0.5 million and $1.7 million , respectively. Stock compensation expense for both equity-classified and liability-classified awards for the three and nine months ended September 30, 2016 was $1.3 million and $3.2 million , respectively. Stock compensation expense is recognized in cost of goods sold, selling, general and administrative expenses, and research and development expenses. At September 30, 2017 , there was $5.0 million of unrecognized compensation cost relating to outstanding unvested equity instruments expected to be recognized over the weighted average period of 2.03 years.


16

15.
Earnings Per Share

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

The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net income (loss) per common share:
 
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Basic weighted-average common shares outstanding
49,676,923

49,567,735

 
49,852,337

49,385,733

Effect of dilutive options, performance stock units and restricted stock
492,511

60,065

 
282,254

—

Dilute weighted-average shares outstanding
50,169,434

49,627,800

 
50,134,591

49,385,733


Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company's common stock during the period, because their inclusion would result in an anti-dilutive effect on per share amounts.

The following amounts were not included in the calculation of net income (loss) per diluted share because their effects were anti-dilutive:

(in thousands, except share data)
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Stock-based compensation awards (1) :
 
 
 
 
 
Stock options
577,500

584,375

 
577,500

584,375

Warrants:
 
 
 
 
 
Private placement warrants
6,160,000

6,160,000

 
6,160,000

6,160,000

Public warrants
9,823,072

9,823,072

 
9,823,072

9,823,072


———————————————————————————————
(1)
SARs and Phantom Shares are payable in cash and will, therefore, have no impact on number of shares.

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

16.
Income Taxes

The effective tax rate for the three and nine months ended September 30, 2017 was 27.6% and 101.1% , respectively, compared to the effective tax rate for the three and nine months ended September 30, 2016 of 39.0% and 37.9% , respectively.

The effective tax rate for the three months ended September 30, 2017 differs from the US statutory tax rate of 35% , primarily due to certain intercompany transactions that did not have a tax effect.

The effective tax rate for the nine months ended September 30, 2017 differs from the US statutory tax rate of 35% due to the release of the valuation allowance related to net deferred tax assets in the U.S. tax jurisdiction. There were a series of tax adjustments as a result of the April 2017 settlement with Dow that resulted in $40.0 million additional U.S. deferred tax liabilities. The reduction of the Company's obligations to Dow on the balance sheet impacted purchase price consideration, ultimately decreasing the Company’s intangible’s tax basis determined for ASC 740 purposes. The Company considered these future sources of taxable income as additional positive evidence when concluding the deferred tax assets within the U.S. were more likely than not to be realized and reversed a valuation allowance of $15.4 million .

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, 2017 :

(in thousands)
Level 1
Level 2
Level 3
Total
Tax amortization benefit contingency (2)
—

—

69,599

69,599

Deferred acquisition payment (3)
—

—

624

624

Stock appreciation rights (4)
—

—

57

57

Phantom shares (5)
—

—

32

32

Total
$
—

$
—

$
70,312

$
70,312


The following table presents the fair value of the Company’s financial instruments that are measured at fair value on a recurring basis as of December 31, 2016 :

(in thousands)
Level 1
Level 2
Level 3
Total
Warrant consideration (1)
$
—

$
1,080

$
—

$
1,080

Tax amortization benefit contingency (2)
—

—

150,260

150,260

Deferred acquisition payment (3)
—

—

2,498

2,498

Stock appreciation rights (4)
—

—

22

22

Phantom shares (5)
—

—

4

4

Total
$
—

$
1,080

$
152,784

$
153,864


———————————————————————————————
(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. Refer to Note 3 for additional details.
(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, 2017 . Refer to Note 3 for additional details.
(3)
The fair value of the deferred acquisition payment is measured using a Black-Scholes option pricing model and based on the Company's best estimate of the Company's average Business EBITDA, as defined in the Purchase Agreement (as defined in Note 3), 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, 2017 .

18

(4)
The fair value of the stock appreciation rights were measured using a Black Scholes pricing model during the nine months ended September 30, 2017 . The valuation technique used did not change during the nine months ended September 30, 2017 .
(5)
The fair value of phantom shares are based on the fair value of the Company's common stock. The valuation technique used did not change during the nine months ended September 30, 2017 .

There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the nine months ended September 30, 2017 .
 
At September 30, 2017 , the Company evaluated the amount recorded under the Term Loan and determined that the fair value was approximately $416.5 million . The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value.

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

The following table presents the changes during the period presented in our Level 3 financial instruments that are measured at fair value on a recurring basis. These instruments relate to contingent consideration payable to Dow in connection to the Business Combination.

(in thousands)
Tax amortization benefit contingency
Deferred acquisition payment
Stock appreciation rights
Phantom shares
Total
Balance, December 31, 2016
$
150,260

$
2,498

$
22

$
4

$
152,784

Awards granted
—

—

—

—

—

Settlement of Dow liabilities
(86,931
)
—

—

—

(86,931
)
Accretion
7,297

—

—

—

7,297

Mark to market adjustment
(1,027
)
(1,874
)
35

28

(2,838
)
Balance, September 30, 2017
$
69,599

$
624

$
57

$
32

$
70,312


19.
Subsequent Events

On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling-interest in Tecnidex Fruit Protection, S.A.U. ("Tecnidex"). Tecnidex, a privately-held international company, is a leading provider of post-harvest fungicides, waxes, and biocides for the citrus market, with clients in 18 countries. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to its regional clients.

The purchase price is approximately €22.5 million (or approximately $26.1 million based on the exchange rate as of November 7, 2017), subject to customary purchase price adjustments, payable in cash. The Company expects to fund the acquisition with cash on hand, and following the acquisition the Company will own 75 percent of the outstanding Tecnidex shares. The Company has an option to purchase the remaining shares over time. The acquisition will be treated as a business combination.

Due to the timing of the acquisition, the Company has not yet completed its initial accounting analysis. As a result, the Company is unable to provide amounts recognized as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction including any intangible assets or goodwill. The transaction is expected to close as soon as the fourth quarter of 2017.


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 “Company,” “AgroFresh,” “we,” “us” and “our” refer to AgroFresh Solutions, Inc. and its consolidated subsidiaries, unless the context otherwise requires or it is otherwise indicated.

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

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

Note Regarding Forward-Looking Statements

All statements other than statements of historical fact included in this Report including, without limitation, statements in this MD&A regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements. When used in this Report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results and/or the timing of events could differ materially from those contemplated by these forward-looking statements due to a number of factors, including those discussed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (the " 2016 Form 10-K") as well as the update to those Risk Factors disclosed in Part II, Item 1A of this Report. Any forward-looking statements included in this Report are based only on information currently available to the Company band 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

Freshness is the most important driver of consumer satisfaction when it comes to produce, and, at the same time, food waste is a major issue in the industry. About one third of the total food produced worldwide is lost or wasted each year. Nearly 45 percent of all fresh fruits and vegetables, 40 percent of apples and 20 percent of bananas, are lost to spoilage. AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.

At the core of the SmartFresh Quality System SM is AgroFresh’s principal product, SmartFresh, which 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. StoreEdge TM and AdvanStore TM  are atmospheric monitoring systems that leverage 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.

Beyond the SmartFresh Quality System, RipeLock TM  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 fruits. LandSpring TM  is an innovative 1-MCP technology for transplanted vegetable seedlings that is currently registered for use on 14 crops in the U.S. (except California), most notably tomatoes and peppers. It reduces transplant shock, resulting in less seedling mortality and faster crop establishment, which leads to a healthier crop and improved yields. EthylBloc TM technology is an ethylene action inhibitor that works naturally with flowers and plants to keep them fresh during shipping and distribution. The negative effects of ethylene have been estimated by the industry to cause up to 30 percent of losses among all flowers and plants.

20
Table of Contents

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

AgroFresh is a former blank check company that completed its initial public offering on February 19, 2014. Upon the closing of the Business Combination with Dow on July 31, 2015, the Company changed its name to AgroFresh Solutions, Inc. The Company paid Dow cash consideration of $635 million and issued Dow 17.5 million shares of common stock at a deemed value of $12 per share. The transaction included a liability to Dow to deliver a variable number of warrants between the closing and April 2016, which obligation was terminated pursuant to a letter agreement entered into on April 4, 2017. The cash consideration was funded through our initial public offering, a term loan, and a private placement of 4.9 million shares of common stock that yielded $50 million of proceeds. The transaction also has an earn-out feature whereby Dow is entitled to receive a deferred payment of $50 million in March 2018 if AgroFresh achieves a specified average level of Business EBITDA (as defined in the Stock Purchase Agreement related to the Business Combination) over 2016 and 2017. In addition, pursuant to a tax receivables agreement entered into in connection with the Business Combination, Dow was originally entitled to receive 85% of the tax savings, if any, that the Company realizes as a result of the increase in the tax basis of assets acquired pursuant to the Business Combination. Pursuant to an amendment to the tax receivables agreement entered into on April 4, 2017, the percentage was reduced from 85% to 50% for all tax years ending after December 31, 2015.

In connection with the closing of the Business Combination, AgroFresh entered into a transition services agreement with Dow. Under the agreement, Dow provides AgroFresh a suite of services for a period of time ranging from six months to five years depending on the service. However, the Company expects to terminate these services by December 31, 2017. The agreement also provided for a $5 million execution fee that was paid to Dow at the closing of the Business Combination.

Recent Development

On November 7, 2017, AgroFresh signed a definitive agreement to acquire a controlling-interest in Tecnidex, a leading provider of post-harvest fungicides, waxes, and biocides for the citrus market. With this acquisition, AgroFresh expands its industry-leading post-harvest presence into additional crops, and increases its penetration of the produce market in southern Europe, Latin America and Africa.

For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to its regional clients in 18 countries. Through its portfolio of post-harvest products, technology, consulting, and after-sale services, Tecnidex improves the quality and value of its clients’ fruit and vegetables while respecting the environment. Tecnidex is based in Valencia, Spain.

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 over 3,000 customers in over 40 countries and derives its revenue by assisting growers, packers and retailers to maximize the value of their crops brought to market and consumers. The Company's products and services add value to customers by reducing food spoilage and extending the life of perishable fruits. The U.S. Food and Agriculture Organization has estimated that a growing global population will require a near doubling of food production in developing countries by 2050 to meet the expected demand of a worldwide population of 9 billion people.

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

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


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

Direct Service Model

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

The Company is shifting the terms of its contracts with service providers from annual renewal periods to two or three year durations in order to have greater certainty that experienced applicators will be available for upcoming harvest seasons. Most of the Company’s service providers are operating under multi-year contracts. Management believes the quality and experience of its service providers deliver clear commercial benefits.

Seasonality

The Company’s operations are subject to seasonal variation due to the timing of the growing seasons around the world. Northern Hemisphere growers typically harvest from August through November, and Southern Hemisphere growers typically harvest from late January to early May. Since the majority of the Company’s sales are in Northern Hemisphere countries, a proportionately greater share of its revenue is realized during the second half of the year. There are also variations in the seasonal demands from year to year depending on weather patterns and crop size. This seasonality and variations in seasonal demand could impact the ability to compare results between periods. As the Company diversifies into other crops and becomes less dependent on pome fruit, the Company expects that the impacts of seasonality will lessen.

Foreign Currency Exchange Rates

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

Domestic and Foreign Operations

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

Critical Accounting Policies and Use of Estimates

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations and that require the use of complex and subjective estimates based upon management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. There have been no material changes to our critical accounting policies and estimates previously disclosed in our 2016 Form 10-K for the year ended December 31, 2016 . For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see “Management's Discussion and Analysis of Financial Condition and Results of

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Operations - Critical Accounting Policies and Use of Estimates” and “Note 2 - Basis of Presentation and Summary of Significant Accounting Policies” in our 2016 Form 10-K. 

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Results of Operations

The following table summarizes the results of operations for both the three and nine months ended September 30, 2017 and September 30, 2016 :

(in thousands)
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Net sales
$
60,772

$
61,200

 
$
109,891

$
107,996

Cost of sales (excluding amortization, shown separately below)
11,620

8,905

 
21,365

48,558

Gross profit
49,152

52,295

 
88,526

59,438

Research and development expenses
3,071

2,983

 
10,103

11,220

Selling, general, and administrative expenses
14,462

15,173

 
44,328

49,385

Amortization of intangibles
10,445

10,080

 
31,335

29,878

Change in fair value of contingent consideration
(1,424
)
(1,569
)
 
(2,420
)
(4,969
)
Operating income (loss)
22,598

25,628

 
5,180

(26,076
)
Other (expense) income
(295
)
(38
)
 
(40
)
16

(Loss) gain on foreign currency exchange
(487
)
924

 
10,584

682

Interest expense, net
(8,638
)
(14,526
)
 
(27,495
)
(43,850
)
Income (loss) before income taxes
13,178

11,988

 
(11,771
)
(69,228
)
Income tax expense (benefit)
3,632

4,676

 
(11,895
)
(26,239
)
Net income (loss)
$
9,546

$
7,312

 
$
124

$
(42,989
)

Comparison of Results of Operations for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 .

Net Sales

Net sales were $60.8 million for the three months ended September 30, 2017 as compared to net sales of $61.2 million for the three months ended September 30, 2016 . The decrease in net sales was primarily driven by lower volume on SmartFresh driven by a late crop in the U.S., which was partially offset by an increase of $1.1 million in Harvista sales.

Cost of Sales

Cost of sales was $11.6 million for the three months ended September 30, 2017 as compared to $8.9 million for the three months ended September 30, 2016 . Gross profit margin was 85.4 percent in the third quarter of 2016 versus 80.9 percent in the third quarter of 2017 . This decrease in margin was primarily driven by an unfavorable mix towards lower margin with the decrease in SmartFresh and increase in Harvista sales.

Research and Development Expenses

Research and development expenses were $3.1 million for the three months ended September 30, 2017 as compared to $3.0 million for the three months ended September 30, 2016 .

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $14.5 million for the three months ended September 30, 2017 compared to $15.2 million for the three months ended September 30, 2016 . This decrease in selling, general and administrative expenses was primarily driven by efficiency and productivity improvements as we begin the transition off the Dow systems, along with lower severance costs, partially offset by higher expenses relating to mergers and acquisitions ("M&A")-related activities.





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Amortization of Intangibles

Amortization of intangible assets was $10.4 million for the three months ended September 30, 2017 compared to $10.1 million for the three months ended September 30, 2016 . The increase in amortization of intangibles is primarily due to the amortization of in-process research and development for our LandSpring product line, which started in September 2016.

Change in Fair Value of Contingent Consideration
 
The Company recorded a $1.4 million gain in the three months ended September 30, 2017 related to a change in the fair value of contingent consideration, as compared to a $1.6 million gain in the three months ended September 30, 2016 . As discussed in Note 3 to the 2016 audited consolidated financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the warrant consideration, the deferred payment, and the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings. For the three months ended September 30, 2017 , the deferred payment and the tax amortization benefit contingency gains were $0.6 million and $0.8 million , respectively.

Interest Expense, Net
 
Interest expense was $8.6 million for the three months ended September 30, 2017 , as compared to $14.5 million for the three months ended September 30, 2016 . Accretion on the potential deferred payment to Dow was $3.6 million for the three months ended September 30, 2016 , without a comparable expense in 2017 . Lower accretion of the Tax Receivables Agreement of $2.2 million also contributed to the decrease in interest expense.

Income taxes

Income tax expense was $3.6 million for the three months ended September 30, 2017 compared to income tax expense of $4.7 million for the three months September 30, 2016 . The effective tax rate for the three months ended September 30, 2017 differs from the U.S. statutory tax rate of 35% due to certain intercompany transactions that did not have a tax effect.

Comparison of Results of Operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 .

Net Sales

Net sales were $109.9 million for the nine months ended September 30, 2017 as compared to net sales of $108.0 million for the nine months ended September 30, 2016 . The  increase  in net sales was primarily driven by SmartFresh growth in Brazil and France and significant Harvista growth in Argentina and the U.S. We also saw slight revenue increases on sales of RipeLock, LandSpring, and EthylBloc.

Cost of Sales

Cost of sales was $21.4 million for the nine months ended September 30, 2017 as compared to $48.6 million for the nine months ended September 30, 2016 . The amount in the prior year period includes $30.4 million of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 83.2 percent in the first nine months of 2016 versus 80.6 percent in the first nine months of 2017 . The decrease in margin was primarily driven by an unfavorable mix towards lower margin with the decrease in SmartFresh and increase in Harvista sales.

Research and Development Expenses

Research and development expenses were $10.1 million for the nine months ended September 30, 2017 as compared to $11.2 million for the nine months ended September 30, 2016 . The decrease in research and development expenses reflects more targeted research activities in 2017 .

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $44.3 million for the nine months ended September 30, 2017 compared to $49.4 million for the nine months ended September 30, 2016 . This decrease in selling, general and administrative expenses was primarily driven by lower non-recurring costs to establish ourselves as a separate public company, lower severance costs and

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lower stock-based compensation, which was partially offset by legal fees associated with the MirTech litigation described below and M&A-related expenses.

Amortization of Intangibles

Amortization of intangible assets was $31.3 million for the nine months ended September 30, 2017 compared to $29.9 million for the nine months ended September 30, 2016 . The increase in amortization of intangibles is primarily due to the amortization of in-process research and development for our LandSpring product line, which started in September 2016.

Change in Fair Value of Contingent Consideration
 
The Company recorded a $2.4 million gain in the nine months ended September 30, 2017 related to a change in the fair value of contingent consideration, as compared to a $5.0 million gain in the nine months ended September 30, 2016 . As discussed in Note 3 to the 2016 audited consolidated financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the warrant consideration, the deferred payment, and the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings. For the nine months ended September 30, 2017 , the warrant consideration, the deferred payment, and the tax amortization benefit contingency losses (gains) were $0.5 million , $(1.9) million , and $(1.0) million , respectively.

Interest Expense, Net
 
Interest expense was $27.5 million for the nine months ended September 30, 2017 , as compared to $43.9 million for the nine months ended September 30, 2016 . Accretion on the potential deferred payment to Dow was $10.7 million for the nine months ended September 30, 2016 , without a comparable expense in 2017 . Interest on the working capital settlement with Dow was $0.6 million for the nine months ended September 30, 2016 , without a comparable expense in 2017 . Lower accretion of the Tax Receivables Agreement of $4.9 million also contributed to the decrease in interest expense.

Income taxes

The income tax benefit was $11.9 million for the nine months ended September 30, 2017 compared to income tax benefit of $26.2 million for the nine months September 30, 2016 . During the nine months ended September 30, 2017 , in accordance with ASC 740, Income Taxes, we released the full valuation allowance against the net deferred tax assets in the U.S. tax jurisdiction, including net operating loss deferred tax assets. During the nine months ended September 30, 2017 , we increased our deferred tax liabilities associated with intangibles due to the April 2017 settlement with Dow. The reduction of our obligations to Dow reduced purchase price consideration, which had a corresponding decrease to the tax basis of intangibles determined for ASC 740 purposes leading to the deferred tax liability increase. We considered these future sources of taxable income as positive evidence when concluding whether the deferred tax assets within the U.S. were more likely than not to be realized. We will continue to monitor the realizability of the U.S. deferred tax assets.

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Non-GAAP Measure

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

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

(in thousands)
Three Months Ended
September 30, 2017
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
GAAP net income (loss)
$
9,546

$
7,312

 
$
124

$
(42,989
)
Income tax expense (benefit)
3,632

4,676

 
(11,895
)
(26,239
)
Amortization of inventory step-up (1)
—

—

 
—

30,377

Interest expense (2)
8,638

14,526

 
27,495

43,850

Depreciation and amortization
11,056

10,438

 
33,102

31,777

Non-GAAP EBITDA
$
32,872

$
36,952

 
$
48,826

$
36,776


———————————————————————————————
(1)
The amortization of inventory step-up related to the acquisition of AgroFresh was charged to income based on the pace of inventory usage.
(2)
Interest on the term loan and accretion for debt discounts, debt issuance costs and contingent consideration.



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Liquidity and Capital Resources

Cash Flow

(in thousands)
Nine Months Ended
September 30, 2017
Nine Months Ended
September 30, 2016
Net cash provided by (used in) operating activities
14,919

(5,123
)
Net cash (used in) investing activities
(6,232
)
(5,441
)
Net cash (used in) financing activities
(12,125
)
(4,676
)

Cash provided by (used in) operating activities was $14.9 million for the nine months ended September 30, 2017 , as compared to $(5.1) million for the nine months ended September 30, 2016 . In 2017 , net income before non-cash depreciation and amortization and changes in fair value of contingent consideration (including accretion) was $38.1 million . Other non-cash charges included stock-based compensation on equity-classified awards of $1.3 million , $1.8 million of deferred financing costs, a $16.4 million increase in the net deferred tax asset, and other non-cash items of $0.7 million . Additionally, the change in net operating assets was $(10.5) million in 2017 . For the nine months ended September 30, 2016 , net income before non-cash depreciation and amortization, amortization of inventory step-up, and changes in the fair value of contingent consideration (including accretion) was $37.1 million . Other non-cash charges included stock-based compensation on equity-classified awards of $2.9 million , a $24.9 million increase in the net deferred tax asset, and other non-cash items of $2.6 million . Additionally, the change in net operating assets was $(22.8) million for the nine months ended September 30, 2016 .
Cash (used in) investing activities was $(6.2) million for the nine months ended September 30, 2017 , as compared to $(5.4) million for the nine months ended September 30, 2016 . Cash used in investing activities in 2017 was for the purchase of fixed assets and leasehold improvements of $(5.3) million , and technology investments of $(1.1) million . Cash used in 2016 was for the purchase of fixed assets and leasehold improvements, of $(5.4) million .

Cash (used in) financing activities was $(12.1) million for the nine months ended September 30, 2017 , as compared to $(4.7) million for the nine months ended September 30, 2016 . Cash used in financing activities in 2017 was for the repayment of debt in the amount of $(2.1) million and the $(10.0) million payment related to the Dow liabilities settlement. Cash used in 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 .

Liquidity

Since the consummation of the Business Combination, we have financed our operations primarily through the sale of stock, debt financings, and sales of our products and services. At September 30, 2017 , we had $75.4 million of cash and cash equivalents, compared to $77.3 million at December 31, 2016 .

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

Term Loan

On July 31, 2015, certain of our subsidiaries entered into a Credit Agreement with Bank of Montreal, as administrative agent (the “Credit Facility”). The Credit Facility consists of a $425 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10.0 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of September 30, 2017 , the Company had issued $0.5 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.


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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, 2017 was approximately $0.6 million and $1.8 million .

PIPE Shares

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

Stock Repurchase Program

In November 2015, the Company’s board of directors approved a Stock Repurchase Program totaling $10 million of the Company’s publicly-traded shares of common stock. The Repurchase Program was to remain in effect for a period of one year, until November 17, 2016. During the 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, 2017 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations other than detailed below. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Contingent Consideration

In connection with the Business Combination pursuant to the Purchase Agreement and subsequently modified by the Amendment Agreement, Dow is entitled to receive future contingent consideration and other payments from the Company in relation to (i) in 2018, a deferred payment from the Company of $50 million, subject to the Company’s achievement of a specified average Business EBITDA level over the two year period from January 1, 2016 to December 31, 2017; (ii) a Tax Receivables Agreement under which the Company is required to pay annually to Dow 50% 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 (iii) the final working capital settlement where the Company agreed to pay Dow an aggregate amount of $20.0 million in full satisfaction of the Company’s obligations with respect to (i) the working capital adjustment under the Purchase Agreement, (ii) certain transfer and value added tax reimbursement obligations under the Purchase Agreement, and (iii) amounts owed under the Tax Receivables Agreement for the 2015 tax year.

See Note 3 to the unaudited condensed consolidated financial statements contained in this Report for further discussion of contingent consideration in connection with the Business Combination.


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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 $3.1 million for the nine months ended September 30, 2017 .

Foreign Currency Risk

A portion of the Company’s operations consists of manufacturing and sales activities in foreign jurisdictions. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or 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 2017 , revenues would have decreased by approximately $8.0 million and EBITDA would have decreased by approximately $4.8 million for the nine months ended September 30, 2017 .


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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

There have been no changes to our internal control over financial reporting during the quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider, in addition to the historical financial statements and related notes and other information set forth in this Report, the risk factors discussed in Part I - Item 1A - Risk Factors included in our 2016 Form 10-K and the factors set forth below, all of which could materially affect our business or future results. Except with respect to the amended and restated risk factors set forth below, there have been no material changes to the risk factors disclosed in our 2016 Form 10-K. If any of the risks or uncertainties described in any of such risk factors actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.

We are required to pay Dow for certain tax benefits we may claim, and these amounts are expected to be material.
 
Pursuant to the Tax Receivables Agreement we entered into with Dow upon the consummation of the Business Combination, as amended in April 2017 (the “Tax Receivables Agreement”), we are required to pay annually to Dow 50% of the amount of any tax savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of the increase in tax basis of our assets resulting from a section 338(h)(10) election that we and Dow made in connection with the Business Combination.

We expect that the payments that we may make under the Tax Receivables Agreement could be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding Tax Receivables Agreement payments. There may be a material negative effect on our liquidity if we do not have sufficient funds to make payments under the Tax Receivables Agreement after we have paid taxes.

Dow and   Boulevard Acquisition Sponsor, LLC (the “Sponsor”)   have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
 
As of June 30, 2017, Dow and the Sponsor (and its affiliates) owned approximately 35% and 7%, respectively, of our outstanding common stock. In addition, each of Dow and the Sponsor currently beneficially owns a significant percentage of our outstanding warrants. Because of the degree of concentration of voting power (and the potential for such power to increase upon the purchase of additional stock or the exercise of warrants), your ability to elect members of our board of directors and influence our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends, may be diminished.

Warrants are exercisable for our common stock, which, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
 
As of December 31, 2016, outstanding warrants to purchase an aggregate of 15,983,072 shares of our common stock were exercisable in accordance with the terms of the warrant agreement governing those securities. All of these warrants will expire at 5:00 p.m., New York time, on July 31, 2020, or earlier upon redemption or liquidation. The exercise price of these warrants is $11.50 per share. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.

32
Table of Contents

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On November 2, 2017, the Company’s Board of Directors amended Section 2.5(d) of the Company’s Amended and Restated Bylaws (the “Bylaws”) to implement a majority voting standard in uncontested director elections, which amendment became effective immediately. Under the amended provision, in a contested election, directors will continue to be elected by a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.
 
The foregoing description of the amendment to the Bylaws does not purport to be complete, and is qualified in its entirety by reference to the full text of the amendment to the Bylaws, a copy of which is filed as Exhibit 3.6 to this Report and incorporated in this Item by reference.


33
Table of Contents

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

———————————————————————————————
*
Filed herewith.
(1)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015.
(2)
Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.
(3)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015.
(4)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 7, 2017.




34
Table of Contents

SIGNATURES

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

 
AgroFresh Solutions, Inc.
 
Date:
November 9, 2017
 
 
 
 
/s/ Jordi Ferre
 
By:
Jordi Ferre
 
Title:
Chief Executive Officer
 
 
 
 
/s/ Katherine Harper
 
By:
Katherine Harper
 
Title:
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


35
Table of Contents

EXHIBIT INDEX
Exhibit No.
 
Description
3.1
(1)
3.2
(4)
3.3
(1)
3.4
(2)
3.5
(3)
3.6
*
4.1
(1)
4.2
(1)
31.1
*
31.2
*
32.1
*
101.INS
*
XBRL Instance Document
101.SCH
*
XBRL Taxonomy Extension Schema Document
101.CAL
*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
*
XBRL Taxonomy Extension Presentation Linkbase Document

———————————————————————————————
*
Filed herewith.
(1)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on August 6, 2015.
(2)
Incorporated by reference to Annex A to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.
(3)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 10, 2015.
(4)
Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 7, 2017.



36


EXHIBIT 3.6  

AMENDMENT TO

AMENDED AND RESTATED BYLAWS

OF

AGROFRESH SOLUTIONS, INC.

The Amended and Restated Bylaws, as amended (the “ Bylaws ”), of AgroFresh Solutions, Inc., a Delaware corporation (the “ Corporation ”), are hereby amended, pursuant to action duly taken by the board of directors of the Corporation on the date hereof, by deleting Section 2.5(d) of the Bylaws in its entirety and replacing it with the following new Section 2.5(d):

“(d)     Required Vote . Subject to the rights of the holders of one or more series of Preferred Stock, voting separately by class or series, to elect directors pursuant to the terms of such Preferred Stock, at all meetings of stockholders at which a quorum is present, a nominee for director shall be elected to the Board if a majority of the votes cast are in favor of such nominee’s election; provided, however, that if the number of nominees for director exceeds the number of directors to be elected, directors shall be elected by a plurality of the votes of the shares represented in person or by proxy at any meeting of stockholders held to elect directors and entitled to vote on such election of directors. For purposes of the immediately preceding sentence, a majority of the votes cast in respect of the election of any director means that the number of votes cast “for” such director’s election must exceed the number of votes cast “against” such director’s election, and an abstention or broker non-vote will not count as a vote “for” or “against” a director’s election. All other matters presented to the stockholders at a meeting at which a quorum is present shall be determined by the vote of a majority of the votes cast by the stockholders present in person or represented by proxy at the meeting and entitled to vote thereon, unless the matter is one upon which, by applicable law, the Certificate of Incorporation, these By Laws or applicable stock exchange rules, a different vote is required, in which case such provision shall govern and control the decision of such matter.”


Except as hereby amended, the Bylaws shall remain the same.

Adopted: November 2, 2017






EXHIBIT 31.1  
CERTIFICATE PURSUANT TO
RULES 13a-14(a) and 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jordi Ferre, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of AgroFresh Solutions, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 9, 2017
 
 
 
 
/s/ Jordi Ferre
 
By:
Jordi Ferre
 
Title:
Chief Executive Officer
 




EXHIBIT 31.2  
CERTIFICATE PURSUANT TO
RULES 13a-14(a) and 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Katherine C. Harper, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of AgroFresh Solutions, Inc.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 9, 2017
 
 
 
 
/s/ Katherine Harper
 
By:
Katherine Harper
 
Title:
Chief Financial Officer
 




EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER PURSUANT TO
18 USC. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of AgroFresh Solutions, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jordi Ferre, President and Chief Executive Officer, and Katherine C. Harper, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 
AgroFresh Solutions, Inc.
 
Date:
November 9, 2017
 
 
 
 
/s/ Jordi Ferre
 
By:
Jordi Ferre
 
Title:
Chief Executive Officer
 
 
 
 
/s/ Katherine Harper
 
By:
Katherine Harper
 
Title:
Chief Financial Officer