AGROFRESH SOLUTIONS, INC.
As used in this Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), the terms "Company," "AgroFresh ," "we," "us" and
"our" refer to AgroFresh Solutions, Inc. and its consolidated subsidiaries,
unless the context otherwise requires or it is otherwise indicated.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the notes thereto contained elsewhere in
this Report.
This MD&A contains the financial measures EBITDA and Adjusted EBITDA, which are
not presented in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). These non-GAAP financial measures are being
presented because management believes that they provide readers with additional
insight into the Company's operational performance relative to earlier periods
and relative to its competitors and they are key measures used by the Company to
evaluate its performance. The Company does not intend for these non-GAAP
financial measures to be a substitute for any GAAP financial information.
Readers of this MD&A should use these non-GAAP financial measures only in
conjunction with the comparable GAAP financial measures. A reconciliation of
EBITDA and Adjusted 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 regarding the Company's financial position, business strategy, the plans and objectives of management for future operations and the outcome of negotiations with respect to the recent agreement of the special committee of the Company's board of directors andPaine Schwartz Partners, LLC ("Paine Schwartz") to pursue a transaction in which Paine Schwartz would acquire all of the outstanding common stock of the Company, described below under "Recent Developments" and whether any transaction will be consummated in connection therewith, 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 endedDecember 31, 2021 (the "2021 Form 10-K") as well as the update to those Risk Factors disclosed in Part II, Item 1A of this Report. Any forward-looking statements included in this Report are based only on information currently available to the Company and speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are qualified in their entirety by this paragraph.
Business Overview
AgroFresh is a global leader in delivering innovative food preservation and waste reduction solutions for fresh produce. The Company is empowering the food industry with a range of integrated solutions designed to help growers, packers and retailers improve produce freshness and quality while reducing waste.AgroFresh has key products registered in over 50 countries, and supports customers by protecting approximately 25,000 storage rooms globally.AgroFresh's solutions range from near-harvest with Harvista™ and LandSpring™ to its flagship post-harvest SmartFresh™ Quality System. Additional post-harvest freshness solutions include fungicides that can be applied to meet various customer operational requirements, in either a foggable (ActiMist™) or liquid (ActiSeal™) delivery form. To supplement our near- and post-harvest product solutions, our FreshCloud™ digital technology platform includes analytical, diagnostic and tracking services that provide a range of value-added capabilities to help customers optimize the quality of their produce. Beyond apples, SmartFresh technology can provide ready-to-eat freshness for other fruits and vegetables including avocados, bananas, melons, tomatoes, broccoli and mangos. InDecember 2017 ,AgroFresh acquired a controlling interest in AgroFresh Fruit Protection (formerly known as Tecnidex). With this acquisition,AgroFresh expanded its industry-leading post-harvest presence into additional crops and increased its penetration of the produce market in southernEurope ,Latin America andAfrica . For over 40 years, AgroFresh Fruit Protection has been helping fruit and vegetable producers offer clean, safe and high-quality products to customers in 18 countries. AgroFresh Fruit Protection offers a portfolio of post-harvest fungicides, coatings and disinfectants, packinghouse equipment and associated consulting and after-sale services to improves the quality and value of customers' fruit and vegetables while respecting the environment. AgroFresh Fruit Protection further diversifiedAgroFresh's revenue by allowing the Company to provide solutions and service to the citrus industry. 24
--------------------------------------------------------------------------------
Tabl e of Contents
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 50% of all fresh fruits and vegetables are lost to spoilage.AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.AgroFresh's flagship SmartFresh Quality System regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables. SmartFresh degrades naturally, 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 the field, including treatment of cherries early in the growing season and near-harvest management of apples, pears and blueberries. FreshCloud™ is our digital technology services platform, which continues to expand. Launched in 2020, FreshCloud Quality Inspection is a proprietary cloud-based mobile quality management service that digitizes what was formerly a manual quality control process and captures, organizes and analyzes quality metrics in real time. LandSpring™ is an innovative 1-MCP technology targeted to transplanted vegetable seedlings. It is currently registered for use on tomatoes, peppers and 14 other crops in the US. It reduces transplant shock, resulting in less seedling mortality and faster crop establishment, which leads to a healthier crop and improved yields.AgroFresh's business is highly seasonal, driven by the timing of the apple and pear 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 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.
OnOctober 24, 2022 , a special committee of the Company's board of directors agreed with Paine Schwartz to pursue a transaction in which Paine Schwartz would acquire all of the outstanding common stock of the Company, which transaction would be conditioned upon, among other things, approval of the holders of a majority of the Common Stock owned by disinterested stockholders. This proposed transaction is not yet certain and is subject to, among other things, Paine Schwartz's satisfaction of confirmatory diligence and negotiation and execution of definitive documentation. The potential timing of this proposed transaction, if effected, is not yet known, and no agreement between Paine Schwartz and the Company relating to the proposed transaction will be created unless definitive documentation is executed and delivered by the appropriate parties.
Factors Affecting the Company's Results of Operations
Impact of COVID-19
InMarch 2020 , the COVID-19 outbreak was declared aNational Public Health Emergency which continues to spread throughout the world and has adversely impacted global activity and contributed to significant volatility in financial markets. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. During the nine months endedSeptember 30, 2022 , the COVID-19 pandemic did not have a significant adverse impact on our results of operations. However, there were numerous obstacles presented and some localized financial impacts of the pandemic, including fluctuations in customer demand and spending pattern changes. While the Company is following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of its workforce, including implementing remote working arrangements and varying procedures for essential workforce, we cannot be 100% certain that there will not be any incidents across our global operations that may cause service interruptions. The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the coronavirus outbreak, although the Company operates in an industry that thus far has not been as severely impacted as others. Nevertheless, the outbreak presents some uncertainty and risk with respect to the Company and its performance and financial results.
Demand for the Company's Offerings
The Company sells to customers in approximately 50 countries and derives its revenue by assisting growers and packers to optimize the value of their crops primarily in the near and post-harvest periods. The Company's products and services add value to customers by reducing food spoilage and extending the life of perishable fruits.The Food and Agriculture Organization of the United Nations 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 projected to reach 9 billion people. 25 -------------------------------------------------------------------------------- Tabl e of Contents This global trend, among others, creates demand for the Company's solutions. The Company's offerings are currently protected by patent filings in 45 countries. The global produce market is a function of both the size and the yield of the crop harvested; variations in either will affect total production. Given the nature of the agricultural industry, weather patterns may impact total production and the Company's resulting commercial opportunities. The Company supports a diverse customer base whose end markets vary due to the type of fruit and quality of the product demanded in their respective markets. Such variation across end markets also affects demand for the Company's services.
Customer Pricing
The Company's offerings are priced based on the value they provide to the Company's customers. From time to time, the Company adjusts the pricing of its offerings to address market trends. The Company's offerings are priced based on the value they provide to the Company's customers and based on market economic factors including, but not limited to, inflation, currency exchange and materials cost. The timing of pricing and economic factors could cause margin fluctuation. In addition, the Company's pricing model may include rebate arrangements for long-term agreements and/or significant volume achievements.
Integrated Direct Service Model
AgroFresh offers the Company's commercially available products, including SmartFresh and Harvista, primarily through a direct service model. Sales and sales support personnel maintain face-to-face relationships with customers year round. Technical sales and support personnel work 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. Harvista is applied through both ground and aerial application, which are administered by third-party service providers or made by our customers directly.
Most of the Company's service providers are operating under multi-year contracts. Management believes the quality and experience of its service providers deliver clear commercial benefits.
Seasonality
The Company's operations are subject to seasonal variation due to the timing of the growing seasons around the world. For our core crops of apples and pears, southern hemisphere growers harvest from late January to early May, and northern hemisphere growers harvest from August through November. For citrus crops, there are seasonal variations in this business due to the northern hemisphere citrus harvest, which spans from October to March. Since the majority of the Company's sales are in northern hemisphere countries, a proportionately greater share of its revenue is realized during the second half of the year. There are also variations in the seasonal demands from year to year depending on weather patterns and crop size. This seasonality and variations in seasonal demand could impact the ability to compare results between periods.
Foreign Currency Exchange Rates
With a global customer base and geographic footprint, the Company generates revenue and incurs costs in a number of different currencies, with the Euro comprising the most significant non-U.S. currency. As such, the Company has both translation and transaction exposure to the fluctuations of exchange rates. The translation exposure relates to the exchange rate impacts of measuring income statements of foreign subsidiaries that do not use theU.S. Dollar as their functional currency. Fluctuations in the value of these currencies relative to theU.S. dollar can increase or decrease the Company's overall revenue and profitability as stated inU.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. The transaction exposure relates to the revaluation of working capital balances denominated in currencies other than theU.S. Dollar. Certain countries experiencing significant exchange rate fluctuations have had, and may continue to have, a significant impact on the Company's net sales, profitability and cash flows.
Domestic and Foreign Operations
The Company has both domestic and foreign operations. Fluctuations in foreign
exchange rates, regional growth-related spending in R&D and marketing expenses,
and changes in local selling prices, among other factors, may impact the
profitability of foreign operations in the future.
26
--------------------------------------------------------------------------------
Tabl e of Contents
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 the 2021 Form 10-K. For a description of our critical
accounting policies and estimates as well as a listing of our significant
accounting policies, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and Use of
Estimates" and "Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies" in the 2021 Form 10-K. Goodwill is no longer considered a
critical accounting policy as the full balance was written off as of December
31, 2021 .
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the financial statements.
Management believes these critical accounting policies reflect its most
significant estimates and assumptions used in the preparation of the financial
statements.
27
--------------------------------------------------------------------------------
Tabl e of Contents
Results of Operations
The following table summarizes the results of operations for the three and nine
months ended
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
Net sales $47,764 $49,178 $113,405 $110,094
Cost of sales (excluding amortization, shown
separately below) 15,552 15,035 36,767 32,453
Gross profit 32,212 34,143 76,638 77,641
Research and development expenses 3,150 3,329 9,085 10,123
Selling, general and administrative expenses 13,537 12,282 39,763 39,453
Amortization of intangibles 10,606 10,830 32,032 32,092
Operating income (loss) 4,919 7,702 (4,242) (4,027)
Other (expense) income (35) (299) 479 14,053
(Loss) gain on foreign currency exchange (3,299) (918) (9,373) 436
Interest expense, net (5,664) (5,465) (15,703) (16,571)
(Loss) income before income taxes (4,079) 1,020 (28,839) (6,109)
Income taxes expense (benefit) 535 208 (2,687) 2,175
Net (loss) income including non-controlling
interest (4,614) 812 (26,152) (8,284)
Less: Net loss attributable to
non-controlling interest (476) (182) (911) (441)
Net (loss) income attributable to AgroFresh
Solutions, Inc. (4,138) 994 (25,241) (7,843)
Less: Dividends on convertible preferred
stock 6,663 6,248 19,632 18,580
Net loss attributable to AgroFresh
Solutions, Inc. common stockholders ($10,801 ) ($5,254 ) ($44,873 ) ($26,423 )
Comparison of Results of Operations for the three months ended
Net sales were$47.8 million for the three months endedSeptember 30, 2022 , as compared to net sales of$49.2 million for the three months endedSeptember 30, 2021 , a decrease of 2.9%. The impact of the change in foreign currency exchange rates compared to the third quarter of 2021 decreased revenue by$3.0 million . Excluding this impact, revenue increased approximately 3.1%, primarily driven by leveraging a portfolio of diverse solutions. The SmartFresh diversification category was driven by the early timing of sales in EMEA, whileNorth America experienced later timing of sales, which was partially offset by strong demand for EthylBloc amid the recovering flower industry. SmartFresh for Apple experienced growth in EMEA,Latin America , and APAC, which was partially offset by the unfavorable conditions affecting the North American season.
Cost of Sales
Cost of sales was$15.6 million for the three months endedSeptember 30, 2022 , as compared to$15.0 million for the three months endedSeptember 30, 2021 . Excluding foreign currency translation impacts, which reduced gross profit by$3.0 million as compared to the third quarter of 2021, gross profit increased 3.1%. Gross profit margin was 67.4% for the three months endedSeptember 30, 2022 versus 69.4% for the three months endedSeptember 30, 2021 . The lower gross margin primarily reflects the Company's strategic transition to a more diversified product portfolio, unfavorable foreign currency translation, and higher material costs associated with inflationary pressures, partially offset by select price increases. 28
--------------------------------------------------------------------------------
Tabl e of Contents
Research and Development Expenses
Research and development expenses were$3.2 million and$3.3 million for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease was primarily related to timing of projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$13.5 million for the three months endedSeptember 30, 2022 , compared to$12.3 million for the three months endedSeptember 30, 2021 , an increase of 10.2% driven primarily by commercial investments. Amortization of Intangibles
Amortization of intangible assets was
Other (Expense) Income
The Company had no material other expense for the three months endedSeptember 30, 2022 as compared to other expense of$0.3 million for the three months endedSeptember 30, 2021 .
(Loss) Gain on Foreign Currency
Loss on foreign currency was$3.3 million for the three months endedSeptember 30, 2022 , as compared to a loss of$0.9 million for the three months endedSeptember 30, 2021 . During the third quarter of 2022, foreign currency losses were recognized related toU.S. dollar intercompany receivables from the euro, Argentinian peso and South African rand, which grew weaker relative to theU.S. dollar. Interest Expense, Net Interest expense was$5.7 million for the three months endedSeptember 30, 2022 , as compared to$5.5 million for the three months endedSeptember 30, 2021 due to higher interest of$0.7 million on the long-term debt as a result of increased interest rates offset by higher interest income on investments of$0.4 million .
Income Taxes
Income tax expense was$0.5 million for the three months endedSeptember 30, 2022 , compared to income tax expense of$0.2 million for the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , the quarter's largest effective tax rate modifications are related to changes in valuation allowance positions related to certain foreign jurisdictions, taxable foreign inclusions within theU.S. and certain non-deductible items.
Comparison of Results of Operations for the nine months ended
Net sales were$113.4 million for the nine months endedSeptember 30, 2022 , as compared to net sales of$110.1 million for the nine months endedSeptember 30, 2021 , an increase of 3.0%. The impact of the change in foreign currency exchange rates compared to the nine months endedSeptember 30, 2021 reduced revenue by$5.6 million . Excluding this impact, revenue increased approximately 8.1%, primarily driven by leveraging a portfolio of diverse solutions. Each of the Company's diversification categories generated growth in the nine months endedSeptember 30, 2022 , led by Antimicrobials and Coatings market penetration and expansion in EMEA. SmartFresh Diversification and Ethylbloc contributed to growth in the Other 1-MCP category. This was partially offset by SmartFresh for Apple declines in certain countries inLatin America andNorth America due to unfavorable weather and timing events. 29
--------------------------------------------------------------------------------
Tabl e of Contents
Cost of Sales
Cost of sales was$36.8 million for the nine months endedSeptember 30, 2022 , as compared to$32.5 million for the nine months endedSeptember 30, 2021 . Excluding foreign currency translation impacts, which reduced gross profit by$2.2 million as compared to the prior year-to-date period, gross profit increased 1.6%. Gross profit margin was 67.6% for the nine months endedSeptember 30, 2022 versus 70.5% for the nine months endedSeptember 30, 2021 . The lower gross margin primarily reflects the Company's strategic transition to a more diversified product portfolio, unfavorable foreign currency translation, and higher material costs associated with inflationary pressures, partially offset by price increases.
Research and Development Expenses
Research and development expenses were$9.1 million and$10.1 million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease was primarily related to timing of projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$39.8 million for the nine months endedSeptember 30, 2022 , compared to$39.5 million for the nine months endedSeptember 30, 2021 , an increase of 0.8%, driven primarily by the timing of expenses. Amortization of Intangibles
Amortization of intangible assets was
Other Income
During the nine months endedSeptember 30, 2022 , the Company had other income of$0.5 million related to the receipt of data sharing income. During the nine months endedSeptember 30, 2021 the Company had other income of$14.1 million due to the receipt of proceeds from the settlement of a litigation matter.
(Loss) Gain on Foreign Currency
Loss on foreign currency was$9.4 million for the nine months endedSeptember 30, 2022 , as compared to a gain of$0.4 million for the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2022 , foreign currency losses were recognized related toU.S. dollar intercompany receivables from the euro, Argentinian peso and South African rand, which grew weaker relative to theU.S. dollar along with losses due to the impact of hyperinflationary accounting inTurkey andArgentina .
Interest Expense, Net
Interest expense was$15.7 million for the nine months endedSeptember 30, 2022 , as compared to$16.6 million for the nine months endedSeptember 30, 2021 . The decrease was primarily due to higher interest income on investments of$1.0 million , and lower debt amortization of$0.3 million offset by higher interest of$0.5 million on the long-term debt.
Income Taxes
Income tax benefit was$2.7 million for the nine months endedSeptember 30, 2022 , compared to income tax expense of$2.2 million for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the largest effective tax rate modifications are related to changes in valuation allowance positions related to certain foreign jurisdictions, taxable foreign inclusions within theU.S. and certain non-deductible items. 30 -------------------------------------------------------------------------------- Tabl e of Contents Non-GAAP Measures The following tables set forth the non-GAAP financial measures of EBITDA, Adjusted EBITDA and non-GAAP constant currency net sales. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company's management to evaluate the Company's performance (including for incentive bonuses and bank covenant reporting), are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods. 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 measures of EBITDA and Adjusted EBITDA to their most directly comparable GAAP financial measure, net loss including non-controlling interest:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
GAAP net (loss) income including
non-controlling interest ($4,614 ) $812 ($26,152 ) ($8,284 )
Depreciation and amortization 11,360 11,522 34,252 34,122
Interest expense (1) 5,664 5,465 15,703 16,571
Income taxes expense (benefit) 535 208 (2,687) 2,175
Non-GAAP EBITDA 12,945 18,007 21,116 44,584
Share-based compensation 1,096 976 3,411 2,147
Severance related costs (2) 74 29 918 1,616
Other non-recurring costs (3) 525 242 1,035 1,762
Loss (gain) on foreign currency exchange
(4) 3,299 918 9,373 (436)
Other (income) expense (5) - 301 (515) 301
Litigation settlement - - - (14,392)
Total Adjustments 4,994 2,466 14,222 (9,002)
Non-GAAP Adjusted EBITDA $17,939 $20,473 $35,338 $35,582
(1) Interest on debt and accretion for debt discounts.
(2) Severance costs related to restructuring and cost optimization initiatives.
(3) Costs related to certain professional and other infrequent or non-recurring
fees, including those associated with refinancing efforts, litigation and M&A
related fees.
(4) Relates to net gains and losses resulting from transactions denominated in
a currency other than the Company's functional currency.
(5) Relates to non-recurring data compensation income.
The following is a reconciliation between net sales on a non-GAAP operational
basis to GAAP net sales:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
GAAP net sales $47,764 $49,178 $113,405 $110,094
Impact from changes in foreign currency
exchange rates 2,963 - 5,611 -
Non-GAAP operational net sales (1) $50,727 $49,178 $119,016 $110,094
(1) The Company provides net sales on a constant currency basis to enhance
investors' understanding of underlying business trends and operating
performance, by removing the impact of foreign currency exchange rate
fluctuations. The impact from foreign currency, calculated on a constant
currency basis, is determined by applying prior period average exchange rates to
current year results.
31
--------------------------------------------------------------------------------
Tabl e of Contents
The following is a reconciliation between gross profit on a non-GAAP operational
basis to GAAP gross profit:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2022 2021 2022 2021
GAAP gross profit $32,212 $34,143 $76,638 $77,641
Impact from changes in foreign
currency exchange rates 2,982 - 2,216 -
Non-GAAP operational gross profit (1) $35,194 $34,143 $78,854 $77,641
(1) The Company provides gross profit on a constant currency basis to enhance
investors' understanding of underlying business trends and operating
performance, by removing the impact of foreign currency exchange rate
fluctuations. The impact from foreign currency, calculated on a constant
currency basis, is determined by applying prior period average exchange rates to
current year results.
32--------------------------------------------------------------------------------
© Edgar Online, source
