EDGAR 10-K Filing

Company CIK: 1592016
Filing Year: 2023
Filename: 1592016_10-K_2023_0001592016-23-000006.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
AgroFresh Solutions, Inc. (the “Company”, “AgroFresh”, “we”, “us” or “our”) is an agriculture technology (AgTech) innovator and global leader whose mission is to prevent food loss and waste and conserve the planet’s resources by providing a range of science-based solutions, data-driven digital technologies and high-touch customer services. AgroFresh supports growers, packers and retailers with solutions across the food supply chain to enhance the quality and extend the shelf life of fresh produce. The AgroFresh organization has 40 years of post-harvest experience across a broad range of crops, including revolutionizing the apple industry with the SmartFresh™ Quality System more than 20 years ago. The AgroFresh platform is powered by our comprehensive portfolio that includes plant-based coatings, antimicrobials, digital solutions and proprietary solutions that help improve the freshness of fruit across the supply chain from harvest to the home.
AgroFresh’s market leadership is underpinned by our global footprint, extensive applied scientific and regulatory expertise, customer intimacy and growing portfolio of value-added solutions and mission-critical advisory services. Our key products are sold in approximately 50 countries, and we support customers by protecting an estimated 25,000 fruit storage rooms globally. In addition, we provide in-depth plant physiology expertise and offer a comprehensive list of solutions spanning from near-harvest to post-harvest, and from storage through to retail. More importantly, AgroFresh has been able to gain a high level of trust from our customers, which is built on four decades of interaction and support. Our direct market approach, full portfolio of solutions, high touch customer service and science-based model best position us to address our customers’ needs and differentiates us from other companies.
The following tables present a breakdown of our revenue based on crops and geography for the year ended December 31, 2022.
Note: “Other Product Solutions” include revenue from citrus, pears, kiwifruit and other crops. “EMEA” comprises Europe, the Middle East and Africa.
AgroFresh got its start in January 1996. With the acquisition of rights in proprietary 1-MCP (1-Methlycycloproprene) technology, the Company pioneered the development and commercialization of SmartFresh. This groundbreaking ethylene management solution is a plant-growth regulator that revolutionized the apple industry by allowing for long-term storage. By 2002, SmartFresh received its first registration for commercial use in Chile, with the U.S. following shortly thereafter. The benefits of this technology now serve multiple crops in all key growing regions and have helped reduce apple waste by nearly 260,000 metric tons from 2002 to 2018 in the U.S., France and Italy alone. In the past several years, AgroFresh expanded beyond SmartFresh with the introduction of Harvista, a proprietary 1-MCP formulation used in the orchard for near-harvest application in pome fruit. Harvista helps to maximize peak ripening and fruit quality. It also allows for an expanded harvest window by keeping fruit on the tree longer to achieve optimal color, size and firmness bringing the added benefit of helping growers to optimize labor management. Harvista is now approved for use in apples, pears, cherries, and blueberries. AgroFresh further expanded into new crops and post-harvest offerings with the 2017 acquisition of Tecnidex, now integrated into AgroFresh as AgroFresh Fruit Protection S.A. ("AgroFresh Fruit Protection"), a leader in the citrus industry based in Valencia, Spain, which diversified the business into fungicides, coatings, and disinfectants. As a further step towards its long-term diversification strategy, the Company launched its digital solution in 2018 with the release of FreshCloud™, its quality insights and analytics platform.
AgroFresh’s portfolio of solutions to extend the shelf life of fresh produce is subject to extensive national, state and local government regulations. The Company has completed more than 400 comprehensive international health and environmental tests that have shown its products, including SmartFresh and Harvista, to be safe for consumers, workers and the environment.
AgroFresh products have been approved by over 50 authorities, including the U.S. Environmental Protection Agency and the European Commission.
Merger Agreement
On November 21, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Project Cloud Holdings, LLC (“Parent”), Project Cloud Merger Sub, Inc. (“Merger Sub”) and the Company. Parent and Merger Sub are affiliates of investment funds managed by Paine Schwartz Partners, LLC (“Paine Schwartz”). Upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger (the “Surviving Corporation”). As a result of the Merger, the Company will cease to be a publicly traded company, and investment funds managed by Paine Schwartz will become the indirect owner of all the Company’s outstanding capital stock.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, (x) each share of the Company’s common stock, par value $0.0001 per share (the “Shares”), issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive $3.00 in cash, without interest (collectively, the “Merger Consideration”) and (y) the share of the Company’s Series A preferred stock, par value $0.0001 per share (“Series A Share”), issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive $3.00 in cash, without interest. Such conversion of Shares and the Series A Share is subject to certain exceptions, including, as applicable, for (i) Shares owned by stockholders of the Company who did not vote in favor of the Merger Agreement and have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware, (ii) Shares owned by the Company and not held on behalf of third parties and (iii) Shares owned by Parent or Merger Sub.
Pursuant to the Merger Agreement, at the Effective Time, and as a result of the Merger, each share of Series B preferred stock, par value $0.0001 per share, of the Company (the “Series B Preferred Stock”) will be (x) converted into one share of Series B convertible preferred stock, par value $0.0001 per share, of the Surviving Corporation or (y) if so elected by Parent and, in addition to the amount required to fund the Merger Consideration, Parent has secured additional financing sufficient to (i) pay the Change of Control Redemption Price (as defined in the Certificate of Designation of Series B Convertible Preferred Stock of the Company) and (ii) repay all indebtedness for borrowed money of the Company that becomes due and payable as a result of the Merger, converted into the right to receive an amount in cash equal to the Change of Control Redemption Price.
Consummation of the Merger is subject to certain specified closing conditions, including the approval by holders of a majority of the aggregate voting power of (i) the outstanding Shares (including those held by Paine Schwartz and its affiliates) and the outstanding shares of Series B Preferred Stock, voting together as a single class, and (ii) the outstanding Shares held by stockholders who are not affiliated with Paine Schwartz, members of the Company's board of directors, certain officers of the Company, or any of their respective associates or members of their immediate family. Assuming satisfaction or waiver (to the extent permitted) of the conditions set forth in the Merger Agreement, the Company currently expects the transactions contemplated thereby to close in the first quarter of 2023.
Because the Merger is not yet complete, and except as otherwise specifically stated, the descriptions and disclosures presented elsewhere in this Report assume the continuation of AgroFresh as a public company.
Competitive Strengths
We believe that the following strengths differentiate us from our competitors and serve as the foundation for our growth through diversification strategy:
Leading Agricultural Innovator and Solutions Provider with Proprietary Technical Know-How. Since our inception, AgroFresh has been at the forefront of fresh produce preservation solutions thanks to a research and development team who are leaders in the fields of plant post-harvest physiology and material science. The acquisition of AgroFresh Fruit Protection added significant scientific capabilities to R&D in the area of coatings, fungicides and application equipment. Beginning with our creation of the commercial market for 1-MCP (a plant growth regulator, or "PGR") applications under the SmartFresh brand for use in the preservation of apples and other crops, we have compiled an extensive and exclusive database of produce physiology and consumer preferences. Building on our proprietary technical knowledge, we have developed an intellectual property portfolio, including over 375 granted and pending patents, that has enabled us to provide comprehensive and innovative solutions to a global customer base. SmartFresh delivers a substantial improvement in storage solutions for apples, pears and other crops, allowing for significantly less waste and greater productivity, as well as a constant supply of high-quality fruit throughout the year. In the U.S., we estimate that 90% of stored apples are treated with 1-MCP, and our SmartFresh technology continues to enjoy a strong leadership position in this treatment protocol. Our recent launch of VitaFresh™ Botanicals, is the
latest milestone in our new product innovation. VitaFresh Botanicals is a range of plant-based, edible coatings that keeps produce fresh and helps reduce food loss and waste by limiting fruit dehydration and extending freshness preservation.
Diversified Global Presence Across All Major Growing Regions. We have established a global footprint with key products approved in over 50 countries that supports customers with approximately 25,000 storage rooms globally. Our top ten customers represent less than 15% of the Company's total revenue, a sign of the strength and resilience of our business. The Company's global commercial platform is unique in the post-harvest industry, positioned across six continents, bringing a full suite of AgroFresh solutions and high-touch advisory services to customers in every key produce-growing region. Our ability to deliver in-depth technical services and products is a fundamental competitive advantage. We believe our global footprint provides not only a platform for growth but also greater diversification. As part of the diversification efforts, SmartFresh can optimize the consumer experience for a wide range of crops including pears, kiwis, avocado, broccoli, melon, tomato, mango and stone fruit. Our participation in a wide range of markets protects the business from crop size fluctuations in any particular market. For the year ended December 31, 2022, EMEA, North America, Latin America and Asia Pacific (including China and India) represented 47.5%, 18.9%, 22.3% and 11.3% of sales, respectively. AgroFresh Fruit Protection meaningfully contributes to our global diversification efforts.
Service-Oriented Business Model. AgroFresh’s direct service model provides a combination of product applications with mission-critical technical advisory services, which together support our above industry average margin profile. Our sales and technical support personnel maintain direct interaction with our customers in areas of product selection, product application best practices, contract negotiations and overall customer service. Furthermore, we currently have over 40 dedicated research and development scientists, about half with advanced degrees, working around the world, including at numerous research institutes and customer sites. This infrastructure has allowed us to amass a proprietary database of technical data of applied plant physiology collected throughout our more than 40-year history. In 2022, we made approximately 36,000 monitored applications of SmartFresh. Our proprietary database gives us important insights into the causes of produce spoilage for various crops varieties in different regions as well as best practices for the effective use of SmartFresh and other quality preserving solutions. As a result, our local sales and technical service teams are best positioned to provide custom advice and solutions, giving our customers confidence and peace of mind throughout the year. Furthermore, we believe FreshCloud can further bolster our integrated offerings with the addition of data-backed solutions to monitor produce quality across the supply chain. FreshCloud is designed to deliver timely, predictive insights that will help our customers improve efficiency and enhance produce freshness.
Diversification and Growth Opportunities Across the Produce Supply Chain. We believe there are significant growth opportunities to expand and diversify our business, supported by our track record of new product introductions and market penetration.
One key initiative is to increase penetration of existing technologies into current and new geographic markets. While many apple growers and packers in the U.S. and globally have adopted SmartFresh, there is potential for further growth. The market penetration of apples treated with SmartFresh has been growing internationally but remains below the levels achieved in the U.S. We have also concentrated on accelerating penetration of SmartFresh into pears, plums, kiwifruit and persimmons. Based on successful trials with customers, we are also expanding our commercial activities for SmartFresh to increase its use on avocados, melons, tomatoes, broccoli and mangos, where we believe SmartFresh can optimize the consumer experience for ripeness, color, taste and texture, especially during times when the supply-chain is elongated or challenged.
Harvista is another key product where we are actively working to expand geographic and crop regulatory approvals. As of December 31, 2022, Harvista is registered in thirteen countries and we are currently working to obtain registrations in more than six additional countries including the European Union (the "EU"). In the past few years, we received regulatory approval to apply Harvista to cherries and blueberries in the U.S., blueberries in Chile and Argentina, and apples in Australia, Brazil, Ukraine, and New Zealand, and our team is working to achieve similar registrations in other markets. In 2022, we secured emergency use permits in seven European markets so that growers could utilize and take advantage of the benefits of Harvista ahead of the first approvals expected during 2025 in the Netherlands and by the end of 2025 for other EU countries and we are seeking to have these emergency uses renewed in 2023. The main limitation to accelerated growth of Harvista is the long regulatory approval cycle in important markets like the EU.
The addition of fungicides, disinfectants and coatings has helped us to diversify our crop exposure and reduce revenue seasonality and provided new growth opportunities via cross-pollination of these technologies into AgroFresh core fruit categories. As a result of all these initiatives, we have successfully diversified our proportion of SmartFresh for apples sales from nearly 78% in 2016 down to approximately 54% as of December 31, 2022.
Building on these growth initiatives, we continuously seek opportunities to leverage our research and development ("R&D") capabilities to register and commercialize new products for currently unserved markets. At the same time, we are evaluating mergers and acquisition ("M&A") opportunities similar to AgroFresh Fruit Protection (formerly Tecnidex), as another key strategy to enhance our value proposition and drive diversified growth.
Long-Standing Relationships with Highly Diverse Customer Base. We believe our direct service model coupled with our proprietary solutions have helped us develop deep, trusted and long-tenured relationships with a diverse array of global customers including packers, growers and retailers. For over 40 years, we have operated with a large team of commercial and technical experts located in key geographies around the world to provide on-site custom advisory services. This infrastructure helps us maintain intimate and consistent interaction with our customers throughout the year to understand all aspects of harvest operations, address a variety of customer-specific issues, and ultimately improve the economics for growers, packers and retailers across the supply chain. As a result of our unique service model and comprehensive solutions, we have developed direct customer relationships in approximately 50 countries and are working with strategic customers to penetrate new geographies and markets.
“Asset-light, High-touch” Model Generates Strong Profit Margins and Free Cash Flow. Our technical expertise, long-standing customer relationships and asset-light business model drive attractive profit margins. For the year ended December 31, 2022, we generated gross margins and adjusted EBITDA margins1 of 67% and 35%, respectively. In addition, we employ an “asset-light”, outsourced production model. We use a third-party manufacturer, and have an approved qualified alternative, for our key active ingredient, 1-MCP, under a long-term contract with strict confidentiality obligations, and several other suppliers to formulate products and provide packaging services. For the manufacturing of coatings, disinfectants and equipment servicing the citrus market, we employ a manufacturing plant in Spain and use several local suppliers to formulate products and assemble equipment. As a result, our manufacturing footprint requires low capital investment. For the year ended December 31, 2022, capital expenditures were $4.1 million, or 2.6% of net sales. Our attractive margin profile coupled with our asset-light strategy result in strong free cash flow, which we expect to use to reinvest in the business and repay debt.
Strong Management Team with Deep Industry Experience. Our management team has extensive global agricultural industry experience and a proven track record of bringing innovative, value-added solutions to customers and markets around the world. The Company’s management team boasts over 125 years of combined relevant industry experience and is led by Clinton A. Lewis Jr., our chief executive officer, who brings 30-plus years of experience in the life sciences space, serving in a number of national and international leadership roles at Pfizer and Zoetis, the world’s largest animal health company.
During the past several years, our management team has effectively launched new products, established new partnerships across the supply chain and implemented a diversification strategy to drive expansion into new crop types, solutions and geographies.
The Company made several appointments to its senior leadership team in 2021-2022 that are intended to position the Company for consistent, profitable growth and to further drive the Company's diversification strategy. We believe our management team has the vision, expertise, and experience to position us for continued success as they implement our growth through diversification strategy.
Industry Overview
Food Preservation and Freshness
According to the Food and Agriculture Organization of the United Nations, over 1.3 billion metric tons of food, or approximately one third of the total food produced worldwide, is lost to spoilage or waste each year, and as much as one half of fruits and vegetables perish before being consumed. Euromonitor reports that retailers are often judged on their fresh food selection. A significant percentage of food waste at the retail level is based on qualitative factors related to consumer perception of freshness. In the U.S., the Environmental Protection Agency announced in 2015 the first-ever domestic goal to reduce food loss and waste by 50 percent by 2030.
Loss or shrinkage along the food supply chain has various causes, including degradation of fresh produce during storage and transportation.
AgroFresh strives to be the guardian of the world’s fresh produce and stands ready to lead the fresh produce industry into a more sustainable future. In 2019, we completed a detailed sustainability study about the influence of SmartFresh on the apple industry. From 2002 to 2018, we estimate that 260,000 metric tons of apple waste was prevented in the U.S., France, and Italy alone. This reduced apple spoilage equates to more than 2.5 million metric tons of water. We estimate that improving the apple supply chain in those three countries alone yielded an annual reduction of 800 thousand metric tons of carbon dioxide out of the air, which is equivalent to taking approximately 170,000 cars off the road each year. As AgroFresh invests in innovative technologies and diversifies to an even broader assortment of crops and markets, the Company is poised to make even greater contributions to the world’s sustainable food supply.
1 EBITDA margin is a non-GAAP measure. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K for more information, and for a reconciliation of EBITDA to net loss.
The fight against food waste and the conservation of our natural resources drives what we do at AgroFresh. For more than 40 years, we have been delivering innovative solutions that enhance the fresh produce supply chain process of growers, packers, and retailers. In 2021, AgroFresh became a participant of the World Resources Institute’s Champions 12.3 initiative focused on accelerating progress of Target 12.3, which calls for cutting in half per capita global food waste at the retail and consumer level and reducing food losses along the production and supply chains, including post-harvest losses, by the year 2030.
Near-Harvest Treatments
We consider applications in the orchard as “near-harvest” since they are applied right before the fruit is harvested and have synergistic effect with our post-harvest solutions. Near-harvest treatments are commonly used to improve the quality of crops and reduce harvest losses. The use of Harvista helps pome fruit growers realize better quality and bigger harvests from their orchards, while providing more control over how and when their fruit ripens, which can assist in labor management during the critical harvest window. The unique mode of action provides better control of ethylene response, so fruit matures on the grower’s schedule, helping expand the harvest window for optimal color, size and firmness.
Post-Harvest Treatments
Post-harvest treatments include treatments to manage the effects of ethylene, to prevent microbial contamination and to reduce dehydration. Naturally occurring ethylene triggers the acceleration of ripening in certain crops, reducing post-harvest life.
Controlled Atmosphere ("CA") and Dynamic Controlled Atmosphere (“DCA”) systems are used to keep stored crops within their optimal ranges of temperature and levels of oxygen and carbon dioxide. Specific oxygen and carbon dioxide levels can lower respiration in fresh produce and delay ripening. CA systems have been used for many decades with fruits and vegetables to preserve freshness. DCA, a more recent innovation, seeks to adjust levels of oxygen and carbon dioxide dynamically as the produce in storage breathes and matures. CA and DCA are only effective at preserving freshness while the fruit is kept in cold storage. However, 1-MCP treatments have been found to be complementary to these technologies by helping to better maintain the quality of apples and pears during cold storage and maintaining freshness for up to 90 days after they are removed from cold storage.
Our Business
We are an AgTech innovator in proprietary advanced technologies that enhance the freshness, quality and value of fresh produce. We currently offer SmartFresh applications at customer sites through a direct service model utilizing third-party contractors. We also provide advisory services based on our extensive knowledge on the use of 1-MCP collected through hundreds of thousands of monitored applications done as a part of the service model. Our pricing to customers is based on the service provided, not on the product sold. We operate in approximately 50 countries and derive most of our revenue working with customers to protect the value of apples, pears and other produce during storage. SmartFresh diversification efforts are focused on expanding use in underserved crops and regions, such as the U.S. and South America. Harvista is approved for sale in Argentina, Australia, Azerbaijan, Brazil, Canada, Chile, Israel, South Africa, Turkey, Ukraine, the United States and New Zealand. ActiMist was launched in the U.S. and in 2022 launched in Australia and we are seeking to expand into other countries subject to regulatory approval. In support of our growth through diversification strategy, line extensions and new services are planned for introduction to seek to strengthen our global position in post-harvest storage and to capitalize on adjacent growth opportunities in near-harvest markets.
1-MCP, the active ingredient in key solutions such as SmartFresh, Harvista and Ethylbloc, is an ethylene action inhibitor with a proven ability to maintain freshness and extend the shelf life of fresh produce. The 1-MCP molecule is structurally close to ethylene, a naturally occurring plant hormone that occurs in certain fruits and vegetables. Ethylene helps produce grow and ripen, but it eventually causes over-ripening and spoilage. 1-MCP works by blocking the ethylene receptors in plant cells, which temporarily delays the ripening process, enabling the produce to better maintain the qualities associated with freshness.
Fruits and vegetables are classified as climacteric or non-climacteric, a term referring to the process of fruit maturation. Climacteric fruits can ripen after being picked and produce much more ethylene than non-climacteric fruits, which cannot ripen after harvest. The climacteric event is a stage of fruit ripening associated with higher ethylene production and changes in the fruit including pigment changes and sugar release. The climacteric event marks the peak of edible ripeness, with fruits having the best taste and texture for consumption. The role of SmartFresh is to delay the onset of the climacteric stage until the product is ready for consumption. Apples, pears, kiwifruit, plums, persimmon, bananas, melons, peaches and tomatoes are examples of climacteric fruit. The Company continues to evaluate the commercial value of 1-MCP with a range of other climacteric fruit.
AgroFresh extended its post-harvest leadership with the acquisition of AgroFresh Fruit Protection, a leading provider of fungicides, disinfectants and coatings primarily focused on the citrus market. 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 with strength
in the Mediterranean growing region. AgroFresh Fruit Protection helped to expand our R&D capabilities and to enable us to leverage ActiMist, an innovative delivery system of foggable fungicides. Our fungicide and coatings offerings further diversify our revenue by expanding our ability to provide solutions and service to the citrus industry.
SmartFresh Value Proposition
The SmartFreshTM Quality System, our flagship solution, preserves the texture, firmness, taste and appearance of produce during storage, transportation and retail display. Available in “storage room” and “on-the-move” application formats, the SmartFresh Quality System is the original, most recognizable post-harvest choice to maintain consumer-desired produce freshness and quality and reduce waste. It allows growers and packers to deliver “just harvested” freshness on a year-round basis and enables retailers to increase customer satisfaction with fresh, high-quality produce. An integral part of the SmartFresh value proposition is a direct service model providing customers with on-site applications of SmartFresh at their storage facilities together with mission-critical and value-added advisory services. AgroFresh™ Verified is our proprietary analysis and reporting service that provides confirmation of a successful SmartFresh application in storage rooms.
The value of SmartFresh with any crop is determined by both the biological efficacy with that crop and the utility value the application delivers to the customer. The biological efficacy with apples is high; apples are sensitive to ethylene, and SmartFresh is effective at delaying ripening. In addition, SmartFresh brings high utility value by helping to keep apples fresh year-round despite their narrow harvest window, effectively extending the marketing window for growers and packers to monetize their crop. This has resulted in the widespread adoption of SmartFresh by apple growers and packers worldwide. The cost of SmartFresh translates into less than one cent per pound of apples in the United States, which is small relative to both the value of the crop and the importance of maintaining the quality of that crop during storage. Retail prices of apples in the U.S. typically range from $1.30-$4.50 per pound depending on the variety. The use of SmartFresh gives growers and packers the ability to store apples from one season to the next without losing their just picked quality characteristics.
Beneficial effects of SmartFresh have been proven across numerous apple varieties throughout the world. SmartFresh is also effective with other crops that are highly sensitive to ethylene, including pears, kiwifruit, plums, persimmons, avocados, melons, tomatoes, and broccoli, each of which requires a different application method and supply chain logistics beyond storage rooms. We also offer a corresponding solution for flowers, marketed under the EthylBloc brand name through two strategic partners that have a strong position in the global flower market.
AgroFresh’s business historically has been highly seasonal, driven by the timing of 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 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. Crop diversification is an important strategy to achieve more balanced revenues across the year, and the ability to service the citrus segment provides an opportunity for the Company to increase revenue in the fourth and first quarters, which are the two strongest quarters for citrus crops.
SmartFresh Service Model
We believe that we have developed deep, trusted relationships with our customers by combining our effective SmartFresh product with application expertise and trusted advisory services. Over the past decade we have amassed a valuable proprietary database of technical information on the best practices for the effective use of SmartFresh on a wide range of apple and pear varieties, since each fruit and fruit variety requires a different treatment protocol. The advisory services component utilizes this information to help maximize the profitability of our customers’ operations.
Harvista
Complementing our post-harvest solutions, Harvista is used for near-harvest management of apples, pears, cherries and blueberries. Our Harvista product line includes proprietary 1-MCP formulations that are specifically designed to slow ripening, reduce fruit drop and hold fruit on the tree longer to promote better color and fruit size, which are beneficial to the grower. With wide flexibility in application timing, it extends the harvest window by allowing growers to factor in ever-changing weather conditions and labor availability. We have found that the combination of Harvista in the orchard and SmartFresh in the storage room results in improved fruit quality metrics compared to use of either product individually.
Harvista extends the “ideal harvest window” for up to an additional 14 days. This added flexibility creates significant benefits both in terms of harvest logistics and crop profitability. Widening the harvest window allows for better scheduling and the optimization of limited resources, such as harvest crews and equipment. Overall, crop value is enhanced by bigger average fruit size, better color and fewer defects.
We offer Harvista through a pre-scheduled application service including ground and/or aerial applications depending on the crop and growing region. Typically, our technical staff designs the protocol in consultation with the customer, and either a third-party service provider or the customer makes the application.
Harvista is currently available in Argentina, Australia, Azerbaijan, Brazil, Canada, Chile, Israel, New Zealand, South Africa, Ukraine, Turkey and the United States. In addition to apple and pear crops, Harvista has received approval for applications to cherries and blueberries in the U.S. and Chile. We expect to pursue additional registrations and label expansions as new formulations and/or crop concepts are validated.
VitaFresh Botanicals
In 2021, we launched VitaFresh Botanicals, which is a proprietary, plant-based portfolio of coatings solutions for a wide variety of crops including citrus, avocados and mangoes. VitaFresh Botanicals utilize “anti-thirst” technology to boost the skin’s natural protection, creating a “double skin” membrane in fruit that reduces dehydration, maintains weight and locks in produce freshness throughout the supply chain. The solutions are completely turnkey and easy-to-apply as part of regular packinghouse operations. AgroFresh provides customers with all the necessary application equipment and expertise.
VitaFresh Botanicals coatings are sustainably sourced and created using certified ISO 14001 “environmental management system” standards. Excellent crop coverage at low application rates offers better cost efficiencies to operators and gives retailers a much stronger opportunity to market quality produce, while reducing food waste, increasing customer profit potential, and adding the capability to reduce the amount of plastic packaging needed for the produce.
Fungicides, Coatings and Disinfectants
In addition to VitaFresh Botanicals, we have a complete line of fungicide, coating and disinfectant solutions across various crops and application types.
ActiMistTM / ActiSealTM
Antimicrobial technology is generally delivered by airborne or liquid systems including drenching or tank. ActiMist is a thermo-fogged fungicide that works simultaneously with SmartFresh for convenience and enhanced storage room logistics. ActiSeal, a portfolio of liquid fungicides, offers broad-spectrum protection based on a full portfolio of active ingredients, and is delivered via drencher or tank. Together, these fungicides provide control of a broad spectrum of post-harvest diseases and help to protect against a wide range of fungal threats on pome, citrus and stone fruit.
TeycerTM Originals
Teycer Originals includes a full line of coatings to improve produce freshness, quality and appearance, increase shelf life and reduce food loss. These traditional edible coatings, including some with fungal protection, are used primarily for citrus, pome fruit and tropical fruit.
FreshStartTM
FreshStart is a full portfolio of biodegradable detergents and disinfectants for cleaning fruit and packaging equipment in packinghouses and reducing the threat of diseases during storage and transportation for citrus, pome fruit, stone fruit and other crops. They remove traces of sooty mold and other particles from the surface of the fruits as well as help to improve the protection of fruit against most of the main post-harvest diseases. With formulations that include fungicide and fruit preservatives, they also help increase fruit shelf life. The FreshStart line of disinfectants are used on surfaces, boxes, bins and tools in the packinghouse and during transport. FreshStart fruit disinfectants have low impact on the environment as they degrade quickly without leaving residues. They also can help decrease contaminants in water treatment and recycling systems and help make water recycling more efficient and less costly. FreshStart surface disinfectants help keep packinghouses, rooms and processing equipment free of fungus. They are useful for water recycling systems, and they work as a complement to fungicides for optimal rot control.
Control-Tec™
Control-Tec is a leading range of post-harvest systems and equipment for the application of antimicrobials, coatings, detergents and sustainable water management for packinghouses, packing lines and storage rooms. The Control-Tec portfolio also includes controlled-atmosphere solutions including automated ripening and de-greening control.
FreshCloud
We continue to evolve and expand our FreshCloud digital technology service platform of produce monitoring and screening solutions. FreshCloud Quality Inspection is a proprietary cloud-based mobile quality management service that digitizes what was formerly a manual quality control process to capture, organize and analyze quality metrics in real time. The service combines digital information from many different physical and digital sources and locations, including analytics, artificial intelligence and machine learning. This allows growers, packers, shippers and retailers to drive accuracy and consistency across their operations. FreshCloud Harvest View is an easy-to-use digital service that complements Harvista. FreshCloud Harvest View captures, organizes and presents fast and easy-to-access data insights on starch hydrolysis progression, thereby enabling growers to make timely decisions on when to apply Harvista, intended to maximize quality and yields for higher profit potential. FreshCloud Storage Insights combines proprietary technology and data analytics in the storage room to offer customers real-time insights into the condition of their stored fruit.
Marketing and Sales
The Company's post-harvest business includes solutions designed to improve yields for growers and packers. These solutions include SmartFresh, Harvista, ActiMist, digital services platform FreshCloud and a large range of antimicrobials, disinfectants, coatings, and packinghouse equipment, marketed under the brands Actiseal, FreshStart, VitaFresh Botanicals, Teycer Originals and Control-Tec, respectively.
AgroFresh's global sales teams are organized geographically across the Europe/Middle East, North America, South America and Asia Pacific regions designed to drive growth and accelerate diversification.
The technical sales support group supports the sales team and runs customer-specific trials for local crop varieties or specialized storage and distribution conditions and conducts follow-up with customers. This team works closely with customers to provide advice on appropriate protocols for SmartFresh, Harvista and other product applications such as coatings and fungicides depending on crop, variety, region, and climatic conditions. The technical sales support group draws on our extensive knowledge base of 1-MCP applications across all regions and conditions.
The marketing function is organized on a global and regional basis. This consists of corporate brand/image stewardship and regionally driven marketing management including country-specific marketing strategies, plans and tactics to drive growth and customer penetration. Marketing personnel are embedded within the Company’s operating regions to improve collaboration with local sales teams and customers and capitalize on business opportunities.
No single customer accounted for more than 10% of net sales in 2022, 2021 or 2020.
Competition
Post-harvest solutions include 1-MCP-based solutions, fungicides and coatings. The market for 1-MCP use is evolving and we have faced competition since our 1-MCP use patent expired in 2014. We estimate that citrus post-harvest applications represent approximately 60% of the total core post-harvest market, which is why we are focused on seeking to grow further in this important crop segment. The market for post-harvest solutions is fragmented with numerous regional suppliers. The four leading providers, including AgroFresh, account for more than half of global post-harvest sales. Other regional and local companies, mainly in citrus, account for the remaining post-harvest sales. Additional key players in the post-harvest industry include fungicide suppliers, such as Syngenta and Janssen PMP, which hold post-harvest registrations of fungicides previously approved for pre-harvest applications, and which use post-harvest companies, including AgroFresh, to distribute their products. In the near-harvest segment, ReTainTM is a competitive technology to Harvista that is offered in all regions except for the EU. We believe that the principal factors of competition in our industry include reputation, product quality, customer service and customer intimacy, product innovation, technical service and value creation. We believe that we compete favorably with competitors based on these and other factors. See the subsection titled “Competitive Strengths” above.
Research and Development
Research and development plays an important role at AgroFresh in providing technical support to our customers as well as building our product pipeline by identifying and developing innovative new offerings and line extensions of existing products. AgroFresh R&D is a global function with less than half of our R&D resources located in facilities in North America, and the remainder across our other regions. During fruit harvest times, we hire additional third-party contract scientists to assist AgroFresh in the execution of experiments involving Harvista, SmartFresh, VitaFresh Botanicals and ActiMist technologies. Most of the regional research and development facilities focus on business aligned research and development initiatives to develop line extensions and create new products. Research and development leverage our core competencies in a number of technical areas including post-harvest physiology, analytical chemistry, regulatory sciences, regulatory affairs, formulation science, formulation process development, organic chemistry and delivery systems. Initiatives focused on next generation solutions utilize expertise in material science, molecular biology, post-harvest pathology, diagnostics and sensor technology. Where appropriate, we partner with external companies and universities to strengthen our internal competencies. Our internal and external R&D activities focus on developing sustainable, natural solutions intended to address our customers' current and future challenges.
Intellectual Property
We are a technology-based solutions provider and, as such, rely on a combination of important intellectual property strengths, including patents, trademarks, copyrights and trade secret protection laws to protect our proprietary technology and intellectual property. We enter into confidentiality agreements with our employees, consultants, customers, service providers and vendors that generally provide that any confidential or proprietary information developed by us or on our behalf be kept confidential including, but not limited to, information related to our proprietary manufacturing process and SmartFresh service model. In the normal course of business, we provide access to our intellectual property and/or our products protected by our intellectual property to third parties through licensing or restricted use agreements.
Today a majority of our SmartFresh applications use SmartFresh ProTabsTM, an application method patented through 2022. Harvista formulations are patent protected through at least 2027. We continue to invest in application technologies as a means to provide our customers with the most relevant, convenient and effective solutions for their specific operations. Our portfolio of intellectual property totals more than 375 granted patents and patent applications in over 50 countries.
Regulation and Compliance
We are subject to extensive national, state and local government regulations, and the Company has a regulatory team that we believe is best in class, which leverages a global network of highly experienced regulatory consultants. Through this network, we have successfully obtained registrations for SmartFresh, Harvista and LandSpring in every country where the review process has been completed, and the registration process for Harvista continues in many additional countries. We have completed more than 400 comprehensive international health and environmental tests that have shown the AgroFresh family of products, including SmartFresh and Harvista, are safe for consumers, workers and the environment. 1-MCP, the active ingredient in many AgroFresh products, is metabolized by the natural processes in apples and other fruits and leaves no detectable residue when used according to the label instructions. The products have been approved by over 50 authorities including the U.S. Environmental Protection Agency and the European Commission. We do not anticipate any significant problems in obtaining future required licenses, permits or approvals necessary to expand our business. We leverage our regulatory capabilities as we expand the fungicide product lines into new countries.
For a discussion of the various risks we may face from regulation and compliance matters, see “Risk Factors” in Item 1A of this report.
Employees
As of December 31, 2022, we had approximately 300 full-time employees. None of our employees in North America are members of a union or subject to the terms of a collective bargaining agreement. In certain other countries where we operate (including Brazil, France, Germany, Italy, Netherlands and Spain), employees are members of unions or are represented by works councils. In addition, certain of our activities have been performed historically by seasonal and part-time third-party staff.
Geographic Information
Please see Note 19 - Segment and Geographical Information to the audited consolidated financial statements for geographic sales information.
Available Information
Our website address is http://www.agrofresh.com. We make available free of charge, on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after electronically filing or furnishing these reports to the Securities and Exchange Commission ("SEC"). Information contained on our website is not a part of this Annual Report on Form 10-K. We have adopted a code of business conduct applicable to our employees including our principal executive, financial and accounting officers and it is available free of charge, on our website’s investor relations page.
The SEC maintains an Internet site at http://www.sec.gov that contains our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, if any, or other filings filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and our proxy and information statements. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Ownership of our securities involves a high degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained in this report, including our historical financial statements and related notes included herein. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our business or operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.
Risks Related to the Proposed Merger
Failure to complete the Merger could negatively impact the Company's business and the market price of the shares of Company common stock.
If the Merger is not completed, depending on the circumstances that would have caused the Merger not to be completed, the price of the shares of Company common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price of the shares of Company common stock would return to the price at which the shares of Company common stock are trading as of the date of this Report. Accordingly, if the Merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of Company common stock. If the Merger is not completed, the Company's board of directors will continue to evaluate and review the Company’s business operations, indebtedness and maturity thereof, properties, dividend policy, share repurchase policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the Merger Agreement is not approved by the Company’s stockholders or if the Merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to the Company will be offered or that the Company’s business, financial condition or results of operation will not be adversely impacted.
During the pendency of the Merger being completed, we will be subject to a number of material risks, including the disruption to our business resulting from the announcement of the signing of the Merger Agreement, the diversion of management’s attention from our day-to-day business, and the substantial restrictions imposed by the Merger Agreement on the operation of our business during the period before the completion of the Merger, which may make it difficult for us to achieve our business goals if the Merger does not occur. In addition, Paine Schwartz and its affiliates would continue to hold a substantial portion of the voting power of the issued and outstanding shares of Company common stock on an as-converted basis.
Failure to complete the Merger could trigger the payment of a termination fee.
If the Merger Agreement is terminated, under specified conditions, including as a result of a change in the recommendation of the Company's board of directors or the special committee of the board or by termination by the Company of the Merger Agreement to enter into an alternative acquisition agreement providing for a superior proposal, the Company will be required to pay Parent a termination fee of $15 million.
In addition, any monetary damages payable by either the Company or Parent for any breach of the Merger Agreement or any document executed in connection therewith (including for any willful and material breach, but excluding fraud) cannot exceed, in the aggregate, $43 million plus up to $2.5 million of reimbursable costs of enforcement (plus, in the case of damages payable by Parent, any reimbursable costs that the Company incurs in assisting Parent in arranging debt financing).
If the Merger is not completed, the Company’s substantial indebtedness and the terms of its Series B Preferred Stock could adversely affect its financial condition and its ability to execute its business strategy.
The Company has a significant amount of indebtedness under a term loan that, unless refinanced, would become a current liability on December 31, 2023. As of December 31, 2022, there was approximately $260 million outstanding under the term loan. Additionally, the terms of the Series B Preferred Stock provide for mandatory cumulative dividends at a rate of 16% per annum to the holder of shares of Series B Preferred Stock, of which 50% is currently payable in cash, 37.5% is currently payable in kind, and 12.5% is currently payable in cash or in kind, at the Company’s option. The voting power of Paine Schwartz will increase as dividends are paid in kind. As a result of the Company’s substantial indebtedness and the terms of its Series B Preferred Stock, failure to complete the Merger could have important consequences, including:
•making it more difficult for the Company to satisfy its obligations with respect to its debt;
•limiting the Company’s ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions or other general corporate requirements;
•requiring a substantial portion of the Company’s cash flows from operations to be dedicated to payments on its indebtedness and the Series B Preferred Stock instead of other purposes, thereby reducing the availability of its cash flows to fund its other business needs;
•increasing its vulnerability to adverse general economic and industry conditions;
•exposing it to interest rate risk as certain of the Company’s indebtedness are at variable rates of interest;
•limiting its flexibility in planning for, or reacting to, changes in the economy and the industry in which the Company competes;
•putting the Company at a competitive disadvantage compared to its competitors with less indebtedness;
•increasing the Company’s cost of borrowing; and
•decreasing the relative voting power of the holders of the Company’s common stock.
The occurrence of any one of these events could have a material adverse effect on the Company’s business, financial condition, results of operations and ability to satisfy its obligations in respect of its outstanding indebtedness.
Risks Related to Our Business and Industry
The COVID-19 pandemic could significantly impact our business and operating results.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our business and financial performance, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, will depend on future developments, including the duration, severity and any resurgences of the pandemic, which are uncertain and cannot be predicted.
During 2022, global businesses continued to face the challenge of operating during the COVID-19 pandemic. While we managed through this unprecedented environment, our future operations could be adversely affected to the extent that coronavirus or any other epidemic harms the global economy or adversely impacts demand for fresh horticultural products. Our operations may experience disruptions in the event of a global pandemic or restriction on travel that results from a global pandemic, which may materially and adversely affect our business, financial condition and results of operations. The extent to which the coronavirus or other health epidemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted.
Increased competition in our industry can lead to pricing pressure, reduced margins or the inability of our products and services to achieve market acceptance.
Actions by new or existing competitors, including introduction of competing products or services, promotions, combinations with other products or services, or price-cutting may lower our sales or require actions to retain and attract customers which could adversely affect our profitability. Increased competition from existing or new competitors could result in price reductions, increased competition for materials, reduced margins or loss of market share, any of which could materially and adversely affect our business and our operating results and financial condition. In recent years, we have from time to time decreased pricing in certain regions to defend market share against increased competition and we may elect to take similar action in the future, depending on competitive pressures.
In addition, if the prices at which our customers sell their products increase or decrease, the demand for our products or services may change. If the demand for our products or services decreases, there could be a significant impact on our business in the applicable location or region and a material adverse effect on our revenues and results of operations.
Our relationship with our employees could deteriorate, and certain key employees could leave, which could adversely affect our business, financial condition and results of operations.
Our business involves complex operations and demands a management team and workforce that is knowledgeable and expert in many areas necessary for our operations. As a company focused on both research and development and customer service in the highly-specialized horticultural pre- and post-harvest fields, we rely on our ability to attract and retain skilled employees, consultants and contractors, including our specialized research and development and sales and service personnel. As of December 31, 2022, we employed approximately 300 full-time employees, of which approximately 150 were members of our research and development and sales and service teams. The departure of a significant number of our highly skilled employees, consultants or contractors or one or more employees who hold key regional management positions could have an adverse impact on our operations, including as a result of customers choosing to follow a regional manager to one of our competitors.
In addition, to execute our growth plan we must attract and retain highly qualified personnel. Competition for these employees exists; new members of management must have significant industry expertise when they join us or engage in significant training which, in many cases, requires significant time before they achieve full productivity. If we fail to attract, train, retain and motivate our key personnel, our business and growth prospects could be severely harmed.
In addition, certain of our key full-time employees are employed outside the United States. In certain jurisdictions where we operate, labor and employment laws may grant significant job protection to employees, including rights on termination of employment. In addition, in certain countries where we operate (including Brazil, France, Germany, Italy, Netherlands and Spain), our employees are members of unions or are represented by works councils as required by law. We are often required to consult and seek the consent or advice of these unions and/or works councils. These laws, coupled with any requirement to consult with the relevant unions or works councils, could adversely affect our flexibility in managing costs and responding to market changes and could limit our ability to access the skilled employees on which our business depends.
In addition, certain activities of our business have been performed historically by seasonal and part-time third-party contingent staff. Changes in market and other conditions (including changes in applicable law) affecting employees and/or contingent staff could adversely impact the cost to our business of maintaining our employees and third-party staffing.
We are subject to risks relating to portfolio concentration.
Our business is highly dependent on one active ingredient, 1-MCP, applied to a limited number of horticultural products. In 2022, we derived approximately 81% of our revenue working with customers using SmartFresh to protect the value of apples, pears and other produce during storage. We expect these applications, products and active ingredients to continue to account for a large percentage of our profits in the near term. Our ability to continue to market and sell products containing this active ingredient in existing and new crop segments is important to our future success.
Our net sales and gross profit have historically been generated from one service platform but future growth in net sales and gross profit will likely depend on the development of new product and service platforms, geographic expansion and expansion into new applications. Net sales and gross profit may vary significantly depending on our product, service, customer, application and geographic mix for any given period, which will make it difficult to forecast future operating results.
Our net sales and gross profit vary among our products and services, customer groups and geographic markets. This variation will increase as we attempt to increase sales into new geographies and applications, and as we diversify into other crops and introduce new product and service platforms. Net sales and gross profit, therefore, may differ in future periods from historic or current periods. Overall gross profit margins in any given period are dependent in large part on the product, service, customer and geographic mix reflected in that period’s net sales. Market conditions, competitive pressures, increased material or application costs, regulatory conditions and other factors may result in reductions in revenue or create pressure on the gross profit margins of our business in a given period. Given the nature of our business and expansion plans, the impact of these factors on our business and results of operations will likely vary from period to period and across products, services, applications and geographies. As a result, we may be challenged in our ability to accurately forecast our future operating results.
Acquisitions or investments may not yield the returns expected, which, in turn, could adversely affect our business, financial condition and results of operations.
A part of our growth strategy involves pursuing strategic acquisitions, as well as investments in technologies. Acquisitions present challenges, including geographical coordination, personnel integration and retention of key management personnel, systems integration, the potential disruption of each company’s ongoing business, possible inconsistencies in standards, controls, procedures and policies, unanticipated costs of terminating or relocating facilities and operations, unanticipated expenses relating to such integration, contingent obligations and the reconciliation of corporate cultures. Those operations could divert management’s attention from the business, cause a temporary interruption of or loss of momentum in the business and adversely affect our results of operations and financial condition. Acquisitions are an important source of new products and
active ingredients, technologies, services, customers, geographies and channels to market. The inability to consummate and integrate new acquisitions on advantageous terms could adversely affect our ability to grow and compete effectively.
If any of the acquisitions or investments we have completed or may complete do not meet our expectations for any reason, we may not achieve our forecasted results. There can be no assurance that the pre-acquisition analyses and the diligence we conducted in connection with any acquisition or investment will uncover all material issues that may be present in a particular target business or investment, or that factors outside of the target business or investment and outside of our control will not later arise. In such event, we may be required to subsequently realize restructuring, impairment or other charges that could have a significant adverse effect on our business, financial condition and results of operations.
Furthermore, we might not be able to identify additional suitable acquisition or investment opportunities or obtain necessary financing on acceptable terms and might also spend time and money investigating and negotiating with potential acquisition or investment targets but not complete the transaction.
Conditions in the global economy may adversely affect our net sales, gross profit and financial condition and may result in delays or reductions in our spending that could have a material adverse effect on our business, financial condition and results of operations.
Although demand for fresh horticultural products is somewhat inelastic in developed economies, the fresh produce and flower industries that we sell to can be affected by material changes in supply, market prices, exchange rates and general economic conditions. Delays or reductions in our customers’ purchasing or shifts to lower-cost alternatives that result from tighter economic market conditions would reduce demand for our products and services and could, consequently, have a material adverse effect on our business, financial condition and results of operations.
Our substantial level of indebtedness could materially and adversely affect our business, financial condition and results of operations.
We have a significant amount of indebtedness. As of December 31, 2022, our total indebtedness was approximately $261 million, including approximately $260 million in outstanding principal under a term loan with a scheduled maturity date of December 31, 2024. This substantial level of debt could have a variety of negative effects, including:
•default and foreclosure on our assets if our operating revenues are insufficient to repay our debt obligations;
•acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;
•our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand;
•our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding;
•our inability to pay dividends on our common stock; and
•using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, our ability to pay expenses, make capital expenditures and acquisitions and fund other general corporate activities.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations and to meet our dividend obligations to our preferred stockholder depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors, some of which are beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness and the dividend obligations attached to our preferred stock.
If our cash flows and capital resources are insufficient to fund our debt service and dividend obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. If we are unable to make payments or
otherwise default on our debt obligations, the lenders could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.
Our expansion depends on further penetration in existing markets and growth into new geographic markets, products, services and applications.
Our growth depends on our ability to achieve further penetration into existing markets and expand into new geographic markets where there may be little or no knowledge of our brands or service offerings. There are significant differences in fresh produce handling practices from geographic region to region. If we cannot generate further penetration in existing markets or create brand awareness and successfully adapt our sales and distribution practices to new markets, this could have an impact on our ability to generate greater revenue. Expansion into new geographic markets will require us to establish our value proposition for local fresh produce industries and to comply with new regulatory and licensing regimes. Longer registration lead times and a relatively fragmented post-harvest infrastructure in certain jurisdictions could have a material adverse effect on our results of operations and prospects in those markets.
Our growth also depends on our ability to apply current and future technologies to an expanded range of agricultural products. If the adoption of our products and services by growers, packers and retailers of these agricultural products is slower than anticipated, or if the prices that these customers are willing to pay for our products and services are lower than anticipated, this could negatively impact our ability to increase revenue from current levels.
Failure to manage our growth effectively using our existing controls and systems could harm our business, financial condition and operating results.
Our existing management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing any such growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain management and employees and to engage new material suppliers and service providers. We may not respond quickly enough to the changing demands that our expansion will impose on our management and existing infrastructure, which could harm our business, financial condition and results of operations. Failure to appropriately manage safety, human health, product liability and environmental risks could adversely impact employees, communities, stakeholders, the environment, our reputation and our business, financial condition and results of operations.
We may be unable to respond effectively to technological changes in our industry, which could reduce the demand for our products.
Our future business success will depend upon our ability to maintain and enhance our technological capabilities and develop and market products, services and applications that meet changing customer needs and market conditions in a cost-effective and timely manner. Maintaining and enhancing technological capabilities and developing new products may also require significant investments in research and development. We may not be successful in developing new products, services and technology that successfully compete or be able to anticipate changing customer needs and preferences, and our customers may not accept one or more of our new products or services. If we fail to keep pace with evolving technological innovations or fail to modify our products and services in response to customers’ needs or preferences, then our business, financial condition and results of operations could be adversely affected.
We currently rely on a limited number of suppliers to produce certain key components of our products.
We rely on unaffiliated contract manufacturers to produce certain key components of our products. There is limited available manufacturing capacity that meets our quality standards and regulatory requirements, especially for the manufacturing of the active ingredient, 1-MCP. Our 1-MCP needs are currently sourced from a single qualified supplier, although we currently have sufficient safety stock to allow us to withstand a disruption in supply from that supplier. In addition, we have qualified a second supplier to provide our active ingredient in the event of a disruption from our current supplier. However, if we are unable to arrange for sufficient production capacity among our contract manufacturers or our contract manufacturers encounter production, quality, financial, or other difficulties, including labor or geopolitical disturbances, we may encounter difficulty in meeting customer demands as we seek alternative sources of supply, or we may have to make financial accommodations to such contract manufacturers or otherwise take steps to avoid or minimize supply disruption. We may be unable to locate an additional or alternate contract manufacturer that meets our quality controls and standards and regulatory requirements in a timely manner or on commercially reasonable terms. Any such difficulties could have an adverse effect on our business, financial condition and results of operations, which could be material.
In some jurisdictions, we rely on independent distributors to distribute our products.
We rely in some jurisdictions on independent distributors to distribute our products and to assist us with the marketing, sale and servicing of certain of our products. For example, we have entered into long-term distribution relationships for our products in China, South Africa, Russia, Israel, Greece, South Korea and Mexico. As a result, delivery of services and products in these jurisdictions relies on the performance of a small number of contractual counterparties, and in most of these countries we are not directly involved in sales and service provider relationships. We cannot be certain that our distributors will focus adequate resources on selling our products and services or be successful in selling them. Some of our distributors also represent or manufacture other, potentially competing, agrochemical products. If we are unable to establish or maintain successful relationships with our distributors, we will need to further develop our own sales and distribution capabilities, which would be expensive, time-consuming and possibly not as successful in achieving market penetration, which could have a material adverse effect on our results of operations, cash flows or financial condition. In addition, the distribution of our products could be disrupted by a number of factors, including labor issues, failure to meet customer standards, bankruptcy or other financial issues affecting our third-party providers, or other issues affecting any such third party’s ability to meet our distribution requirements. The failure to properly perform by, or loss of, one or more of our distributors could have a material adverse effect on our business, financial condition and results of operations.
Our intellectual property and proprietary rights are integral to our business. Our business and results of operations could be adversely affected if we fail to protect our intellectual property and proprietary rights.
Our success depends to a significant degree upon our ability to protect and preserve our intellectual property rights, including our patent and trademark portfolio and trade secrets related to our proprietary processes, methods, formulations and other technology. Failure to protect our intellectual property rights may result in the loss of valuable technologies or impair our competitive advantage. We rely on confidentiality agreements and patent, trade secret and trademark, as well as judicial enforcement of all of the foregoing to protect such technologies and intellectual property rights. In addition, some of our technologies are not or will not be covered by any patent or patent application. With respect to our pending patent applications, we may not be successful in securing patents for these claims, which could limit our ability to protect inventions that these applications were intended to cover. In addition, the expiration of a patent can result in increased competition with consequent erosion of profit margins.
As key SmartFresh patents have expired or will expire, if we are not able to achieve further differentiation of our products and services through patented mixtures, new formulations, new delivery systems, new application methods or other means of obtaining extended patent protection, our inability to prevent competitors from developing and registering similar products could have an adverse effect on our sales of such product. Our patents also may not provide us with any competitive advantage and may be challenged by third parties. Further, our competitors may attempt to design around our patents.
In some cases, we rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally will enter into confidentiality agreements with our employees and third parties to protect our intellectual property, our confidentiality agreements could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. In addition, adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets or manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.
In addition, we rely on both registered and unregistered trademarks to protect our name and brands. Our failure to adequately maintain the quality of our products and services associated with our trademarks or any loss to the distinctiveness of our trademarks may cause us to lose certain trademark protection, which could result in the loss of brand recognition. In addition, successful third-party challenges to the use of any of our trademarks may require us to rebrand our business or certain products or services associated therewith.
We may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, or that has been designed around our patents, particularly in countries other than the United States. The unauthorized use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantages we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.
We may experience claims that our products infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products or services.
We continually seek to improve our business processes and develop new products and applications in a crowded patent space that we must continually monitor to avoid infringement. We cannot guarantee that we will not experience claims that our processes and products infringe issued patents (whether present or future) or other intellectual property rights belonging to others.
From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the ability to operate freely in our various business lines without the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could experience claims for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products. Likewise, our competitors may also already hold or have applied for patents in the United States or abroad that, if enforced or issued, could prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the United States or abroad. Any actions asserted against us could include payment of damages for infringement, stopping the use, require that we obtain licenses from these parties or substantially re-engineer our products or processes in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Further, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.
We license patent rights from third parties. If we are not able to enter into future licenses on commercially reasonable terms, if such third parties do not properly maintain or enforce the patents underlying such existing or future licenses, or if we fail to comply with our obligations under such licenses, our competitive position and business prospects could be adversely affected.
We are a party to license agreements that give us rights to third-party intellectual property that may be necessary or useful for our business, and we may enter into additional licenses in the future. If we are unable to enter into licensing arrangements on favorable terms in the future, our business may be adversely affected. In addition, if the owners of the patents we license do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects could be harmed. Without protection for the intellectual property we license, other companies might be able to offer substantially similar or identical products and/or services for sale, which could adversely affect our competitive business position and harm our business prospects.
If we fail to comply with our obligations under license agreements, our counterparties may have the right to terminate these agreements, in which event we may not be able to develop, manufacture, register, or market, or may be forced to cease developing, manufacturing, registering, or marketing, any product or service that is covered by these agreements or may face other penalties under such agreements. Such an occurrence could materially adversely affect the value of the applicable ingredient or formulated products and/or services provided by us and have an adverse effect on our business, financial condition and results of operations.
Seasonality, as well as adverse weather conditions and other natural phenomena, may cause fluctuations in our revenue and operating results.
Historically, our operations have been seasonal, with a greater portion of total net revenue and operating income occurring in the third and fourth calendar quarters. Our customers’ crops are vulnerable to adverse weather conditions and natural disasters such as storms, tsunamis, hail, tornadoes, freezing conditions, extreme heat, drought and floods, which can reduce acreage planted, lead to modified crop selection by growers and affect the timing and overall yield of harvest, each of which may reduce or otherwise alter demand for our products and services and adversely affect our business and results of operations. Weather conditions and natural disasters also affect decisions of our distributors, direct customers and end-users about the types and amounts of products and services to purchase and the timing of use of such products and services. Delays by growers in harvesting can result in deferral of orders to a future quarter or decisions to forego orders altogether in a particular growing season, either of which would negatively affect our sales in the affected period. As a result of seasonality, any factors that would negatively affect our third and fourth quarter results in any year could have an adverse impact on our business, financial condition and results of operations for the entire year.
Our products are highly regulated by governmental agencies in the countries where we conduct business. Our failure to obtain regulatory approvals, to comply with registration and regulatory requirements or to maintain regulatory approvals would have an adverse impact on our ability to market and sell our products.
Many of our products are subject to technical review and approval by government authorities in each country where we wish to sell them. While there is a general international consensus on the data needed in order to evaluate the safety of agrochemical products before they can be placed on the market (as evidenced, for example, by the standards and guidelines issued by the Organization for Economic Co-operation and Development), each country has its own legislative process and specific requirements in order to determine if identified risks are acceptable and can be managed in the local context and may be subject to frequent changes as new data requirements arise in response to scientific developments.
The regulatory requirements to which we are subject are complex and vary from country to country. To obtain new registrations, it is necessary to have a local registrant, and to understand the country’s regulatory requirements, both at the time an application for registration is submitted and when the registration decision is made, which may be several years later. A significant investment in registration data is required (covering all aspects from manufacturing specifications through storage and transport, use and disposal of unwanted product and used containers) to ensure that product performance (e.g., bio efficacy), intrinsic hazards and use patterns are fully characterized. Risk assessments are conducted by government regulatory authorities, who make the final decision on whether the documented risk associated with a product and active ingredient is acceptable prior to granting approval for sale. This process may be prolonged due to requirements for additional data or internal administrative processes. There is a risk that registration of a new product may not be obtained or that a product label may be severely reduced, restricting the use of the product. If these circumstances arise, there is a risk that the substantial investments made in product development will not lead to the projected sales that justified the investment, and our business, financial condition and results of operations may be adversely affected by failure to obtain new registrations.
Products that are already approved are subject to periodic review by regulatory authorities in many countries. Such reviews frequently require the provision of new data and more complex risk assessments. The outcome of reviews of existing registrations cannot be guaranteed; registrations may be modified or canceled. Since all government regulatory authorities have the right to review existing registrations at any time, the sustainability of the existing portfolio cannot be guaranteed. Existing registrations may be lost at any time, resulting in an immediate impact on sales. Furthermore, prior to expiration, it is necessary to renew registrations. The renewal period and processes vary by country and may require additional studies to support the renewal process. Failure to comply could result in cancellation of the registration, resulting in an impact on sales.
In addition, new laws and regulations may be introduced, or existing laws and regulations may be changed or may become subject to new interpretations, which could result in additional compliance costs, seizures, confiscations, recalls, monetary fines or delays that could affect us or our customers.
Compliance with the prevailing regulations in countries in which we conduct business is essential. If we fail to comply with government requirements, we could have registrations withdrawn immediately (loss of sales), suffer financial penalties (fines) and suffer reputational damage that could materially and adversely affect our business and our regulatory success in the future.
If the data we supply to registration authorities is used by other companies to obtain their own product registrations, “generic” copies of products in our portfolio could enter the market and our business position could be adversely affected.
In many countries, toxicity studies, data and other information relied upon by registration authorities in support of a product registration are granted “data protection” for a period of up to 15 years after the date upon which the data was originally submitted. In addition to the period of data compensability, there is in many geographies an exclusive use period of ten years during which other companies may not legally cite our data in support of registration submissions without our written permission. In some countries, there is also a period of time during which companies may cite another company’s data upon payment of data compensation. In other countries, there is no legislation at all that effectively prevents third parties from citing our proprietary regulatory data. Furthermore, after the exclusive use period and data compensation period have expired, as has occurred with respect to our data in Europe and the United States, any third party is free to cite our data in support of its registration submissions. The possibility that third parties can use our registration data to obtain their own product registrations can adversely affect our business, financial condition and results of operations by facilitating the entry of “generic” copies of products in our portfolio into the market.
Negative publicity relating to our products or business could reduce sales.
Our success depends both on our customers’ perception of our products’ effectiveness and on end-consumers’ perception of the safety of our products. We may, from time to time, be faced with negative publicity relating to public health concerns, customer complaints or litigation alleging illness or injury, negative employee, staffing and supplier relationships or other matters, regardless of whether the allegations are valid or whether we are responsible. Given the global nature of the business, the
negative impact of adverse publicity relating to one product or in one geographic region may extend far beyond the product or the country involved to affect other parts of our business. The risk of negative publicity is particularly great with respect to the performance of service providers because we are limited in the manner in which we can control them, especially on a real-time basis. The considerable expansion in the use of social media over recent years can further amplify any negative publicity that could be generated by such incidents.
Customer demand for our products and our brand’s value could diminish significantly if we receive negative publicity or if customer confidence in us or our products is otherwise eroded, which would likely result in lower sales and could have a material adverse effect on our business, financial condition and results of operations.
New information or a change in consumer attitudes and preferences regarding diet and health could result in changes in regulations and consumer consumption habits, which could have an adverse effect on our business, financial condition and results of operations.
Public awareness of, and concern about, the use of chemicals in food production has been increasing. Concerns about issues such as chemical residues in foods, agricultural worker safety and environmental impacts of agrochemicals (such as impacts on groundwater or non-target species, such as fish, birds and bees) could result in additional scrutiny of, or adversely affect the market for, our products, even when these products have been approved by governmental authorities. Such concerns could result in continued pressure for more stringent regulatory intervention and potential liability relating to health concerns arising from the use of our products in food preparation or the impact our products may have on the environment. These concerns could also influence public and customer perceptions, including purchasing preferences, the viability of our products, our reputation and the cost to comply with regulations, all of which could have a material adverse impact on our business. Some types of products that we manufacture have been subject to such scrutiny in the past, and some categories of products that we produce are currently under scrutiny and others may be in the future. We may not be able to effectively respond to changes in consumer health perceptions or to modify our product offerings to reflect trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.
Use of many of our current products is not compatible with “organic” labeling standards in all jurisdictions. As such, an increase in consumer preference for organic produce could negatively affect the demand for our products or services. Similarly, a shift in consumer preferences away from fresh produce in favor of frozen or processed food products, or towards “seasonal” or locally grown produce, could negatively affect the demand for our products or services.
We may be required to pay substantial damages for product liability claims or other legal proceedings.
We may become involved in lawsuits concerning crop damage and product inefficacy claims, in addition to intellectual property infringement disputes, claims by employees, former employees or contingent staff, and general commercial disputes. Our insurance may not apply to or fully cover any liabilities we may incur as a result of these lawsuits.
We may face potential product liability claims for or relating to products we have sold and products that we may sell in the future. Since our products are used in the food chain on a global basis, any such product liability claim could subject us to litigation in multiple jurisdictions. Product liability claims, regardless of their merits or their ultimate outcomes, are costly, divert management’s attention, and may adversely affect our reputation and demand for our products and may result in significant damages. We cannot predict with certainty the eventual outcome of pending or future product liability claims. Any of these negative effects could adversely affect our results of operations, cash flows, or financial condition. These risks exist even with respect to products that have received, or may in the future receive, regulatory approval, registration and clearance for commercial use. Unexpected quality or efficacy concerns can arise with respect to marketed products, whether or not scientifically justified, leading to product recalls, withdrawals, or declining sales, as well as product liability, personal injury and/or other claims.
Our results of operations are subject to exchange rate and other currency risks. A significant movement in exchange rates could adversely impact our results of operations and cash flows.
We conduct our business in many different currencies, primarily the U.S. dollar and the Euro. Accordingly, currency exchange rates affect our operating results. The effects of exchange rate fluctuations on our future operating results are unpredictable because of the number of currencies in which we conduct business and the potential volatility of exchange rates. We are also subject to the risks of currency controls and devaluations. Currency controls may limit our ability to convert currencies into U.S. dollars or other currencies, as needed, or to pay dividends or make other payments from funds held by subsidiaries in the countries imposing such controls, which could adversely affect our liquidity. Currency devaluations could also negatively affect our operating margins and cash flows. For example, if the U.S. dollar were to strengthen against a local currency, our operating margin would be adversely impacted in the country to the extent significant costs are denominated in U.S. dollars while our
revenues are denominated in such local currency. We operate in countries that have experienced hyperinflation in recent years, which amplifies currency risk.
Our substantial international operations subject us to risks, including unfavorable political, regulatory, labor, tax and economic conditions in other countries that could adversely affect our business, financial condition and results of operations.
Currently, we operate, or others operate on our behalf, in approximately 50 countries, in addition to our operations in the United States. We expect sales from international markets to represent an increasing portion of our total sales mix. Accordingly, our business is subject to risks related to the different legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in our international operations include, in addition to other risks discussed in this section, the following:
•agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system;
•foreign customers may have increased credit risk and different financial conditions, which may necessitate longer payment cycles or result in increased bad debt write-offs or additions to reserves related to our foreign receivables;
•foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;
•there may be delays and interruptions in transportation and importation of our products;
•general economic conditions in the countries in which we operate, including fluctuations in gross domestic product, interest rates, market demand, labor costs and other factors beyond our control, could have an adverse effect on our net sales in those countries;
•our results of operations could be affected by political or economic instability on a country-specific or global level from various causes, including the possibility of hyperinflationary conditions, natural disasters and terrorist activities and the response to such conditions and events;
•we may experience difficulties in staffing and managing multi-national operations, and face the possibility of labor disputes and unexpected adverse changes in foreign laws or regulatory requirements, including environmental, health and safety laws and laws and regulations affecting export and import duties and quotas;
•governmental policies, including farm subsidies, tariffs, tenders and commodity support programs, as well as other factors beyond our control, such as the prices of fertilizers, seeds, water, energy and other inputs, and the prices at which crops may ultimately be sold, could negatively influence the number of acres planted, the mix of crops planted and the demand for agrochemicals;
•compliance with a variety of foreign laws and regulations may be difficult; and
•we may be subject to the risks of divergent business expectations resulting from cultural incompatibility.
We do not have long-term contracts with many of our customers or service providers.
Many of our relationships with our customers are based primarily upon one-year agreements or individual sales orders. As such, these customers could cease buying products or services from us at any time, for any reason, with little or no recourse. If multiple customers or a material customer elected not to purchase products or services from us, our business prospects, financial condition and results of operations could be adversely affected.
Our traditional service model relies on short-term and long-term contracts with a large number of service providers who apply our products in most jurisdictions for our customers. Service providers’ investment in the equipment necessary to provide services to customers is also minimal. As a result, service providers with short-term contracts could cease providing services for us or provide services for a competitor upon relatively short notice. If multiple service providers or a material service provider elected not to provide services on our behalf, our business, financial condition and results of operations could be adversely affected.
Increases in costs or reductions in the supplies of raw materials we use in our manufacturing process could materially and adversely affect our results of operations.
Our operations depend upon our or our contract manufacturers' obtaining adequate supplies of raw materials on a timely basis. We typically purchase our major raw materials on a contract or as-needed basis from outside sources. The availability and
prices of raw materials may be subject to curtailment or change due to, among other things, the financial stability of our suppliers, suppliers’ allocations to other purchasers, interruptions in production by suppliers, new laws or regulations, changes in exchange rates and worldwide price levels. Additionally, we cannot guarantee that, as our supply contracts expire, we will be able to renew them, or if they are terminated, that we will be able to obtain replacement supply agreements on terms favorable to us. Our results of operations could be adversely affected if the costs of raw materials used in our manufacturing process increase significantly.
Joint development, distribution, manufacturing or venture investments that we enter into could be adversely affected by our lack of sole decision-making authority, our reliance on partners’ operational capabilities, strategic decisions and financial condition, and disputes between us and our collaborating partners.
We have a limited number of joint development and distribution agreements, and may enter into new ones in the future. Investments through joint research, development, registration, manufacturing, distribution, or other joint entities (collectively “collaborations”) may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that collaboration partners might be sold, become bankrupt, fail to fund their share of required investments, fail to meet collaboration milestones, elect to change strategy, make poor business decisions or block or delay necessary decisions. Collaboration partners may develop economic or other business interests or goals which could conflict and become incompatible with our business interests, and may be in a position to take actions opposed to our strategy and objectives. Disputes between us and our collaboration partners may result in arbitration or litigation that would increase our expenses and distract our management team from focusing their time and effort on the business, or subject the projects, investments or facilities owned by the partnership or collaboration to additional risk. In addition, we may in certain circumstances be liable for the actions of our collaboration partners, which could materially and adversely affect our business, financial condition and results of operations.
We might require additional capital to support business growth, and this capital might not be available.
We intend to continue to make investments to support our business growth and might require additional funds to finance our planned growth, including strategic acquisitions. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through issuance of equity securities, our existing stockholders could suffer significant dilution and any new equity securities that we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities. Moreover, if we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
We are subject to credit risks related to our accounts receivable, and failure to collect our accounts receivable could adversely affect our results of operations and financial condition.
The failure to collect outstanding receivables could have an adverse impact on our business, financial condition and results of operations. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, then we might be required to make additional allowances, which would adversely affect our results of operations in the period in which the determination or allowance was made. Bad debt write offs were less than 0.5% of revenues in each of 2022, 2021 and 2020.
While we occasionally obtain letters of credit or other security for payment from customers or distributors, enforcing that security is a lengthy and expensive process, and the eventual sale of the security may not ultimately cover the underlying trade receivable balance. Accordingly, we are not protected against accounts receivable default or bankruptcy by these entities. The current economic climate and volatility in the price of the underlying agricultural commodities could increase the likelihood of such defaults and bankruptcies. If a material portion of our customers or distributors were to become insolvent or otherwise were not able to satisfy their obligations to us, we would be materially harmed.
No single customer accounted for more than 10% of our consolidated net sales in 2022, 2021 or 2020. At December 31, 2022, December 31, 2021 and December 31, 2020, no individual customer accounted for greater than 10% of our consolidated accounts receivable balance.
Failure to comply with the Foreign Corrupt Practices Act, or FCPA, and other similar anti-corruption laws, could subject us to penalties and damage our reputation.
We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain certain policies and procedures, including maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Certain of the jurisdictions in which we conduct business are at a heightened risk for corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery and anti-kickback laws to which we are subject. Our employees, distributors, dealers and agents may not always take actions that are consistent with our policies designed to ensure compliance, particularly when they are confronted by pressures from competitors and others to act in a manner that is inconsistent with such policies. If we, or our intermediaries, fail to comply with the requirements of the FCPA, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
We rely heavily on information technology, and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.
Our operations rely heavily on information systems for management of our supply chain, payment of obligations, collection of cash, credit and debit card transactions and other processes and procedures. Our FreshCloud product offerings rely particularly heavily on information systems for monitoring, data collection and analysis. Our operations depend upon our ability to protect our information systems, many of which are located outside of our physical control, from failure, other catastrophic events, security breaches and other data loss, including cyber-attacks. The disruption or failure of these systems to operate effectively could result in delays in customer service and reduce efficiency in our operations. Breaches of our security measures or the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential information about us, our employees, former employees, customers or suppliers could result in legal claims or proceedings, damage to or inaccessibility of critical systems, operational disruptions and other significant costs, which could adversely affect our reputation, financial condition and results of operations.
We use hazardous materials in our business and are subject to regulation and potential liability under environmental laws.
Our business is subject to a wide range of stringent laws and regulations that relate to the raw material supply chain, environmental compliance, disposal of hazardous waste, and the manufacture, development, production, marketing and use of our products. As with any chemical manufacturing enterprise, there are inherent hazards associated with chemical manufacturing, and the storage and transportation of raw materials and our products. Exposure to hazardous materials, accidents or noncompliance with laws and regulations by us, the users of our products or our contract manufacturers, could disrupt our operations or expose us to significant losses or liabilities.
Our suppliers or contract manufacturers may use hazardous materials in connection with producing our products. We may also from time to time send wastes to third parties for disposal.
A failure to comply with the environmental, health and safety laws and regulations to which we are subject, including any permits issued thereunder, may result in environmental remediation costs, loss of permits, fines, penalties or other adverse governmental or private actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial measures. We could also be held liable for any and all consequences arising out of human exposure to hazardous materials or environmental damage. In the event of a lawsuit or investigation, we could be subject to claims for liability for any injury caused to persons or property by exposure to, or release of hazardous materials or wastes related to our products. We may also be subject to claims associated with failure to warn users of our products of risks associated with our products. Further, we may be required to indemnify our suppliers, contract manufacturers, or waste disposal contractors against damages and other liabilities arising out of the production, handling, or storage of our products or raw materials or the disposal of related wastes. Such indemnification obligations could have an adverse effect on our business, financial condition and results of operations.
Environmental laws and regulations are complex, change frequently, have tended to become more stringent and stringently enforced over time and may be subject to new interpretation. We cannot predict the adverse impact that new environmental regulations, or new interpretations of existing regulations, might have on the research, development, production and marketing of our products.
We may need to recognize impairment charges related to intangible assets and fixed assets.
We have recognized substantial balances of identified intangible assets as a result of business combinations, and we may record additional other intangible assets as a result of any acquisitions we may complete in the future. We are required to test any intangible asset with an indefinite life for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. We are also required to evaluate amortizable intangible assets and fixed assets for impairment if there are indicators of a possible impairment. There is significant judgment required in the analysis of a potential impairment of identified intangible assets and fixed assets. If, as a result of a general economic slowdown, deterioration in one or more of the markets in which we operate or impairment in our financial performance and/or future outlook, the estimated fair value of our long-lived assets decreases, we may determine that one or more of our long-lived assets is impaired. An impairment charge would be determined based on the estimated fair value of the assets and any such impairment charge could have a material adverse effect on our financial condition and results of operations.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2022, we had aggregate U.S. net operating loss carryforwards of approximately $169.3 million. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Tax Cuts and Jobs Act, federal net operating losses incurred in taxable years ending after December 31, 2017 may be carried forward indefinitely, but the deductibility of federal net operating losses generated in tax years beginning after December 31, 2017 is limited. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "IRC"), and corresponding provisions of state law, if a corporation undergoes an “ownership change” (which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We experienced an ownership change as a result of the consummation of the sale of preferred stock in July 2020. Consequently, the Company recorded a valuation allowance to reflect the reduction in expected utilization of net operating losses and other tax attributes. Future ownership changes may materially limit certain U.S. tax attributes, which may harm our future operating results by effectively increasing our future tax obligations. The Company will continue to review the realizability of the net operating losses and other tax attributes and may make additional adjustments to the valuation allowance.
If we do not successfully manage the transition associated with the appointment of a new chief executive officer, global commercial director and global R&D director, our business may be harmed.
On April 12, 2021, we announced the hiring of a new chief executive officer, and subsequently hired a new global commercial director and global R&D director. Any changes in our business strategy that may result from such hirings may have a disruptive impact on our ability to implement our business strategy and could have a material adverse effect on our business. Any changes in business strategies can create uncertainty, may negatively impact our ability to execute our business strategy quickly and effectively and may ultimately be unsuccessful. In addition, management transition periods can be difficult as the new management gains detailed knowledge of our operations, and friction or further management changes or disruptions could result from changes in strategy and management style. Until we integrate our new management members, we may be unable to successfully manage our business and growth objectives, and our business could suffer as a result.
Risks Related to Our Securities
PSP AGFS Holdings, L.P. ("PSP") and The Dow Chemical Company ("Dow") have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
As of December 31, 2022, PSP (an affiliate of Paine Schwartz) owned 145,046 shares of our Series B Preferred Stock, which is currently convertible into approximately 34.7 million shares of our outstanding common stock, representing approximately 39% of our outstanding common stock on an as-converted basis (and which votes with our common stock on an as-converted basis), and Dow owned approximately 21 million shares of our outstanding common stock. In addition, we pay dividends-in-kind on the Series B Preferred Stock on a quarterly basis. Because of the degree of concentration of voting power (and the potential for such power to increase upon the purchase of additional stock and/or the payment of dividends-in-kind), 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.
In addition, PSP and Dow have representation on the Company’s board of directors and have significant control over the management and affairs of the Company. PSP currently has four designees on the board of directors, and may have the right to appoint one or more additional directors in the future under certain circumstances. Dow (or an affiliate) has one designee on the board of directors, and may have the right to appoint an additional director in the future under certain circumstances. PSP also
has class approval rights over certain specified actions that would affect the holders of the Series B Preferred Stock, and has the right to approve certain corporate actions for so long as it continues to hold at least 10% of the shares of common stock outstanding (on an as-converted basis).
Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.
In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, which could be substantial, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including, without limitation, those described elsewhere in this report.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.
There may be sales of a substantial amount of our common stock by our current stockholders, and these sales could cause the price of our common stock to fall.
As of December 31, 2022, there were 53,718,408 shares of our common stock outstanding. Substantially all of our issued and outstanding shares are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Future sales of our common stock may cause the market price of our securities to drop significantly, even if our business is doing well.
We are party to separate agreements pursuant to which Dow and PSP are entitled to demand that we register the resale of their shares of common stock (or in the case of PSP, shares of common stock underlying Series B Preferred Stock), subject to certain conditions. These stockholders also have certain “piggyback” registration rights with respect to registration statements we may file.
Upon effectiveness of any registration statement we file pursuant to these agreements, these parties may sell large amounts of our stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in our stock price or putting significant downward pressure on the price of our stock.
Sales of substantial amounts of our common stock in the public market, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If securities or industry analysts do not provide coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who cover or who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who covers or who may cover us were to cease
coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt.
Our second amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include:
•no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
•the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
•the ability of our board of directors to determine whether to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at a special meeting of our stockholders;
•the requirement that an annual meeting of stockholders may be called only by the chair of the board of directors, the chief executive officer, or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
•limiting the liability of, and providing indemnification to, our directors and officers;
•controlling the procedures for the conduct and scheduling of stockholder meetings;
•providing that directors may be removed prior to the expiration of their terms by stockholders only for cause; and
•advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our board of directors.
These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our management. Any provision of our second amended and restated certificate of incorporation or bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion, debt repayment, and payment of dividends to PSP, and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends on our common stock as a public company in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is limited by the terms of the Merger Agreement and may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility and the terms of our outstanding Series B Preferred Stock. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
We are a smaller reporting company and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors.
We are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. As a smaller reporting company, we have relied on exemptions from certain disclosure requirements that are applicable to other public companies that are not smaller reporting companies. Among other things, we are subject to simplified executive compensation disclosures in our filings; are exempt from the provisions of Section 404 requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure
obligations in our SEC filings, including only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our common stock less attractive because we will rely on the exemptions available to smaller reporting companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
If we are unable to maintain effective internal controls over taxes or financial reporting, this could have a material adverse effect on our business and stock price.
As a publicly traded company, we are required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting for so long as we remain a smaller reporting company.
In 2020, we identified material weaknesses in our internal controls over taxes and financial reporting. Although that material weakness was subsequently remediated, our management may be unable to conclude in future periods that our disclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weaknesses in internal controls over taxes and financial reporting related to the design and operation of controls over significant nonrecurring transactions and the preparation and review of our income tax provision. For further discussion of the material weaknesses, see Item 9A. Controls and Procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act means controls and other procedures of a company that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in those reports is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
If we are unable to comply with the requirements of Section 404 in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting if and when we cease to be a smaller reporting company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by NASDAQ (the exchange on which our securities are listed), the SEC or other regulatory authorities, which could require additional financial and management resources.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We lease our current headquarter facility in Philadelphia, Pennsylvania, consisting of approximately 11,200 square feet. In 2022, the lease term was extended until November 30, 2029, with no options for early termination. We lease a facility in Spring House, Pennsylvania consisting of 14,000 square feet. The lease has a 123 month term commencing in January 2018. We use five primary additional leased locations worldwide to deliver product and technical services: Yakima, Washington; Fresno, California; Rancagua, Chile; Bologna, Italy; and Llerida, Spain. AgroFresh Fruit Protection occupies a building of five units in Valencia, Spain. Our subsidiary, AgroFresh Fruit Protection, owns two of these units (consisting of approximately 24,480 square feet) and leases the three remaining units (consisting of approximately 37,245 square feet). One of the leased units had a 60 month term that commenced in October 2015 which was extended for an additional 80 months. The other two leased units have a 120 month lease term that commenced in July 2017.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time we are named as a defendant in legal actions arising from our normal business activities. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
PART II

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq Global Select Market under the symbol “AGFS”.
Holders of Record
On February 24, 2023, there were approximately 80 holders of record of our common stock. Such number does not include beneficial owners holding securities through nominee names.
Dividends
We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future is within the discretion of our board of directors, and will be dependent upon our revenues and earnings, capital requirements and general financial condition. Our board of directors does not anticipate declaring any dividends in the foreseeable future. Further, our ability to declare dividends is limited by the terms of our Series B Preferred Stock, which prohibits us from paying dividends on our common stock without the written approval of holders of a majority of the outstanding shares of Series B Preferred Stock, and restrictive covenants contained in our credit facility, which includes an overall cap on the total amount of dividends we can pay, together with the total amount of shares and warrants we can repurchase, of $12.0 million per fiscal year, and imposes certain other conditions on our ability to pay dividends. In addition, the terms of the Merger Agreement provide that, until the earlier of the Effective Time and the termination of the Merger Agreement in accordance with its terms, we will not pay any dividends on our common stock.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide the information required by this Item.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the notes thereto contained elsewhere in this Report.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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.
Merger Agreement
As discussed in “Business - Merger Agreement” in Part I, Item 1 of this Report, on November 21, 2022, the Company entered into the Merger Agreement. Upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, Merger Sub will merge with and into the Company, with the Company surviving the Merger as the Surviving Corporation. As a result of the Merger, the Company will cease to be a publicly traded company, and investment funds managed by Paine Schwartz will become the indirect owner of all the Company’s outstanding capital stock. Consummation of the Merger is subject to certain specified closing conditions, including the approval by holders of a majority of the aggregate voting power of (i) the outstanding Shares (including those held by Paine Schwartz and its affiliates) and the outstanding shares of Series B Preferred Stock, voting together as a single class, and (ii) the outstanding Shares held by stockholders who are not affiliated with Paine Schwartz, members of the Company's board of directors, certain officers of the Company, or any of their respective associates or members of their immediate family. Assuming satisfaction or waiver (to the extent permitted) of the conditions set forth in the Merger Agreement, the Company currently expects the transactions contemplated thereby to close in the first quarter of 2023.
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 HarvistaTM and LandSpringTM to its flagship post-harvest SmartFreshTM 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.
In December 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 southern Europe, Latin America and Africa. For over 35 years, AgroFresh Fruit Protection has been helping fruit and vegetable producers offer clean, safe and high-quality products to its regional 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 improve the quality and value of our customers’ fruit and vegetables while respecting the environment. AgroFresh Fruit Protection further diversified AgroFresh’s revenue by allowing the Company to provide solutions and service to the citrus industry.
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. LandSpringTM 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.
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.
Impact of COVID-19
In March 2020, the COVID-19 outbreak was declared a National 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 year ended December 31, 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 foreign currency exchange rates and customer demand and spending pattern changes. While we are following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of our 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 expected to reach 9 billion people.
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 does not typically price its products in relation to any underlying cost of materials or services; therefore, its margins can fluctuate with changes in these costs. The
Company’s pricing may include rebate arrangements with customers in exchange for mutually beneficial long-term relationships and growth.
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 is 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. 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 R&D and marketing expenses, and changes in local selling prices, among other factors, may impact the profitability of foreign operations in the future.
Critical Accounting Policies and Use of Estimates
Our discussion and analysis of results of operations and financial condition are based upon our financial statements. These financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in the financial statements. We base our estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances and re-evaluate them on an ongoing basis. Actual results could differ from our estimates under different assumptions or conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements.
Other intangible assets
We conduct our annual indefinite-lived intangible assets impairment assessment as of December 31 of each year unless conditions arise that would require a more frequent evaluation. In assessing the recoverability of indefinite-lived intangible assets, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value. Each year, we evaluate those intangible assets with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives. When testing indefinite-lived intangible assets for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may include the following:
•Macroeconomic conditions
•Industry and market considerations
•Cost factors
•Overall financial performance; and
•Other relevant entity-specific events
In determining the fair value of its indefinite lived trade names, the Company applies the relief from royalty methodology, which is based on the assumption that without ownership of the assets, the user of the trade names would have to make a stream of payments to the owner of the trade names in return for the rights to use the trade names. By acquiring the trade name, the user avoids those payments. The Company has two indefinite-lived trade name assets, AgroFresh and SmartFresh, totaling $23.4 million, which passed the impairment test as of December 31, 2022 by 16% and 9%, respectively. A 1% increase in the discount rate would not cause an impairment of any of the trade names. The Company’s indefinite-lived trade name assets are at risk of impairment if their fair values decrease due to declines in revenues or an inability to execute management’s business strategies. Future revenue estimates are, by their nature, subjective, and actual results may differ materially from our estimates. If our ongoing revenue projections are not met or if market factors utilized in the impairment tests deteriorate, including an unfavorable change in the terminal growth rate or the weighted-average cost of capital, we may have to record impairment charges in future periods. During the year ended December 31, 2021, the Company reclassified $3.6 million of AgroFresh Fruit Protection trade name (comprising the trade name "Tecnidex") to finite-lived intangibles as the Company began marketing Tecnidex products under the AgroFresh trade name. The Tecnidex trade name is still held as a defensive asset and is being amortized over its estimated useful life of 2.5 years.
Finite-lived intangible assets, such as technology, customer relationships and software are amortized over their estimated useful lives, generally for periods ranging from 2.5 to 24 years. We assess the reasonableness of the useful lives of these assets regularly. Our assessment is based on a number of factors including competitive environment, product history, underlying product life cycles, operating strategy and the macroeconomic environment of the countries in which the products are sold. The impairment of finite-lived intangible assets is tested annually or more frequently when factors or changes in circumstances indicate that the fair value has declined below its carrying value. If any factors that could result in future impairment charge have occurred, a recoverability test is performed in which the undiscounted cash flows of the asset or asset group are compared to the carrying value. If the cash flows are not sufficient to recover the carrying value, then a fair value estimate is made of the asset or asset group to determine the amount of impairment, if any. Once these assets are fully amortized, they are removed from the balance sheet. The accelerated amortization expense is included in amortization of intangibles in the consolidated statements of operations.
Revenue Recognition
The majority of our revenues are generated from the application of our products to fruits and vegetables either before or after harvesting. Revenue is recognized at the time the product is applied to the fruits or vegetables as this represents the point at which our performance obligation to the customer has been completed.
The Company accounts for revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which is expected to be received in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following 5 steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Revenue is presented in our consolidated statements of operations, net of estimated rebates and discounts. The majority of the Company’s contracts have multiple
performance obligations primarily related to product application and post application services, which the Company provides. Revenue is deferred until the performance obligations are met.
See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements for further information.
Stock-Based Compensation
We recognize stock-based compensation expense for all share-based payment awards on a straight-line basis over the requisite service period of the award. Determining the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. See Note 16 - Stock Compensation to the audited consolidated financial statements contained in this report for further detail on stock-based compensation.
Income taxes
The provision for income taxes was determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the period. Deferred taxes result from differences between the book and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.
Income tax related penalties are included in the provision for income taxes. In evaluating the ability to realize deferred tax assets, the Company relies on taxable income in prior carryback years, the future reversals of existing taxable temporary differences, future taxable income and tax planning strategies.
The breadth of our operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes we will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. A liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than "more likely than not."
Recently Issued Accounting Standards and Pronouncements
See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to the accompanying audited consolidated financial statements for a full description of recent accounting pronouncements and our expectations of their impact, if any, on our results of operations and financial condition.
Results of Operations
The following table summarizes the results of operations:
Year Ended December 31,
(in thousands) 2022 2021 2020
Net sales $161,937 $165,989 $157,643
Cost of sales (excluding amortization, shown separately below) 53,441 48,956 42,217
Gross profit 108,496 117,033 115,426
Research and development expenses 12,062 12,931 12,357
Selling, general and administrative expenses 52,550 52,609 53,860
Amortization of intangibles 42,648 42,985 43,731
Impairment of goodwill - 6,380 -
Grant income - - (2,974)
Operating income 1,236 2,128 8,452
Other (expense) income (4,114) 14,046 1491
Debt modification and extinguishment expenses - - (5,028)
(Loss) gain on foreign currency exchange (9,333) 2,096 (2,836)
Interest expense, net (22,206) (21,774) (23,669)
Loss before income taxes (34,417) (3,504) (21,590)
Income tax (benefit) expense (613) 2,578 31,376
Net loss before non-controlling interest (33,804) (6,082) (52,966)
Less: Net (loss) income attributable to redeemable non-controlling interest (447) (659) 745
Net loss attributable to AgroFresh Solutions, Inc. (33,357) (5,423) (53,711)
Less: Dividends on convertible preferred stock 26,429 24,921 10,488
Net loss attributable to AgroFresh Solutions, Inc. common stockholders ($59,786) ($30,344) ($64,199)
Comparison of Results of Operations for the year ended December 31, 2022 and the year ended December 31, 2021.
Net Sales
Net sales were $161.9 million for the year ended December 31, 2022, as compared to net sales of $166.0 million for the year ended December 31, 2021, a decrease of 2.4%. The impact of the change in foreign currency exchange rates compared to 2021 reduced revenue by $10.1 million. Excluding this impact, revenue increased approximately 3.6%. The decrease in net sales was primarily driven by decreased sales of SmartFresh for Apple in North America, and a $9.0 million unfavorable foreign currency impact in EMEA, partially offset by increases in sales of Antimicrobials and Coatings in Africa and the Middle East.
Cost of Sales
Cost of sales was $53.4 million for the year ended December 31, 2022, as compared to $49.0 million for the year ended December 31, 2021. Gross profit margin was 67.0% in 2022 versus 70.5% in 2021. The lower gross margin reflects the Company’s transition into a more diversified product portfolio, unfavorable foreign currency translation, and higher material costs associated with inflationary pressures.
Research and Development Expenses
Research and development expenses were $12.1 million for the year ended December 31, 2022, as compared to $12.9 million for the year ended December 31, 2021. The decrease in research and development expenses was primarily due to timing of projects.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $52.6 million for the year ended December 31, 2022, as compared to $52.6 million for the year ended December 31, 2021, a decrease of 0.1%. The decrease was due to decreased incentive compensation and a continued focus on cost control initiatives, offset by litigation reserve expense of $2.6 million.
Amortization of Intangibles
Amortization of intangibles, including developed technology, customer relationships, software and trade names, was $42.6 million for the year ended December 31, 2022, as compared to $43.0 million for the year ended December 31, 2021.
Impairment of Goodwill
During the year ended December 31, 2021, the Company recorded an impairment charge of $6.4 million as a result of our segment realignment (See Note 19 - Segment and Geographical Information), reducing the Company's goodwill balance to zero. There was no such impairment recorded during the year ended December 31, 2022.
Other (Expenses)/Income
The Company incurred other expenses of $4.1 million for the year ended December 31, 2022, primarily related to transaction costs. The Company recognized $14.0 million of income for the year ended December 31, 2021, which related primarily to the receipt of proceeds from the settlement of litigation matters.
(Loss) gain on foreign currency
Loss on foreign currency was $9.3 million for the year ended December 31, 2022 as compared to a gain of $2.1 million for the year ended December 31, 2021. During 2022, foreign currency losses were recognized related to U.S. dollar intercompany receivables from the Argentinian peso, the euro and South African rand, which grew weaker relative to the U.S. dollar. During 2021, foreign currency gains were recognized related to U.S. dollar intercompany payables to the Turkish lira, which grew weaker relative to the U.S. dollar.
Interest Expense, Net
Interest expense, net was $22.2 million for the year ended December 31, 2022, as compared to $21.8 million for the year ended December 31, 2021. The increase was primarily due to higher interest of $2.1 million on the long-term debt, offset by higher interest income on investments of $1.4 million, and lower debt amortization of $0.1 million.
Income Tax Provision
Our effective tax rate was 1.8% for the year ended December 31, 2022, as compared to (73.6)% for the year ended December 31, 2021. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions.
In 2021, the Company recorded valuation allowances against deferred tax assets in certain foreign jurisdictions where the Company did not have sufficient evidence to support the future taxable income to realize its deferred tax assets. In 2022, the Company released valuation allowances against deferred tax assets in certain foreign jurisdictions where sufficient evidence was present to support future taxable income to realize its deferred tax assets. In addition, the Company incurred increased pre-tax losses in 2022 compared to 2021, increasing the overall tax benefit recorded.
Non-GAAP Measures
The following table sets forth the non-GAAP financial measures of EBITDA and Adjusted EBITDA. 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 incentive bonuses and for 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:
Year Ended December 31,
(in thousands) 2022 2021 2020
GAAP net loss including non-controlling interests
($33,804) ($6,082) ($52,966)
Expense (Benefit) provision for income taxes (613) 2,578 31,376
Interest expense (1)
22,206 21,774 23,669
Depreciation and amortization 45,639 45,745 46,970
Non-GAAP EBITDA 33,428 64,015 49,049
Share-based compensation 4,620 3,213 3,598
Severance related costs (2)
1,127 2,292 885
Other non-recurring costs (3)
1,219 2,315 3,240
Loss (gain) on foreign currency exchange (4)
9,333 (2,096) 2,836
Impairment of goodwill - 6,380 -
Debt modification and extinguishment costs - - 5,028
Other (income) expense (5)
(515) 301 (2,974)
Litigation recovery - (14,392) (1,600)
Transaction costs (6)
4,643 - -
Litigation reserve 2,602 - -
Total Adjustments 23,029 (1,987) 11,013
Non-GAAP Adjusted EBITDA $56,457 $62,028 $60,062
(1) Interest on debt, accretion for debt discounts, debt issuance costs and contingent consideration.
(2) Severance costs related to continued focus on cost control initiatives and restructuring.
(3) Costs related to certain professional and other infrequent or non-recurring fees, including those associated with litigation and M&A related fees.
(4) Loss (gain) on foreign currency exchange related to net gains and losses resulting from transactions denominated in a currency other than the Company's functional currency.
(5) Other (income) expense related primarily to grant income.
(6) Transaction costs include non-recurring expenses related to the pending Merger
The following is a reconciliation between net sales on a non-GAAP constant currency basis to GAAP net sales:
Year Ended Year Ended December 31,
(in thousands) 2022 2021
GAAP net sales $161,937 $165,989
Impact from changes in foreign currency exchange rates 10,050 -
Non-GAAP constant currency net sales (1)
$171,987 $165,989
(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.
Liquidity and Capital Resources
Cash Flows
Year Ended Year Ended December 31,
(in thousands) 2022 2021 2020
Net cash provided by operating activities
$16,172 $52,002 $26,715
Net cash used in investing activities
($4,035) ($4,023) ($2,395)
Net cash used in financing activities
($13,624) ($31,385) ($4,859)
Cash provided by operating activities was $16.2 million for the year ended December 31, 2022, as compared to $52.0 million for the year ended December 31, 2021 and $26.7 million for the year ended December 31, 2020.
For the year ended December 31, 2022, net income before non-cash items was $9.4 million. Excluded in this amount is depreciation and amortization of $45.6 million, deferred income taxes of ($9.3) million and other non-cash items of $6.9 million. Additionally, the change in net operating assets was $6.8 million in 2022.
For the year ended December 31, 2021, net income before non-cash items was $50.1 million. Excluded in this amount is depreciation and amortization of $45.7 million, impairment of goodwill of $6.4 million, deferred income taxes of ($1.5) million and other non-cash items of $5.6 million. Additionally, the change in net operating assets was $1.9 million in 2021.
For the year ended December 31, 2020, net income before non-cash items was $27.2 million. Excluded in this amount is depreciation and amortization of $47.0 million, deferred income taxes of $29.3 million and other non-cash items of $4.0 million. Additionally, the change in net operating assets was ($0.5) million in 2020.
Cash used in investing activities was $4.0 million for the years ended December 31, 2022, and December 31, 2021 and $2.4 million for the year ended December 31, 2020. Cash used in investing activities in each of 2022 and 2021 was for the purchase of fixed assets and leasehold improvements of $4.0 million. Cash used in investing activities in 2020 was for the purchase of fixed assets and leasehold improvements of $2.4 million.
Cash used in financing activities was $13.6 million for the year ended December 31, 2022, as compared to $31.4 million for the year ended December 31, 2021 and $4.9 million for the year ended December 31, 2020. Cash used in financing activities in 2022 was for payment of dividends of $10.6 million, and the repayment of debt in the amount of $3.3 million, offset by proceeds from issuance of stock of $0.3 million. Cash used in financing activities in 2021 was for the repayment of debt in the amount of $12.4 million, payment of preferred stock redemptions of $5.3 million and payment of dividends of $13.9 million, offset by proceeds from issuance of stock of $0.3 million. Cash used in financing activities in 2020 was for the repayment of debt in the amount of $132.4 million, payment of deferred financing costs of $8.0 million, payment of preferred stock costs of $7.0 million and payment of dividends of $5.2 million, offset by proceeds from the issuance of convertible preferred stock of $145.5 million, proceeds from long term debt of $2.0 million and proceeds from the issuance of stock of $0.3 million.
Amended Credit Facility
On July 27, 2020, the Company completed a comprehensive refinancing (the “Refinancing”) by (i) entering into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with the other loan parties party thereto, Bank of Montreal, as administrative agent and the lenders party thereto, and (ii) consummating the issuance and sale to PSP of 150,000 shares of convertible preferred stock pursuant to the terms of the Investment Agreement (as defined below). The Amended Credit Agreement amends and restates in its entirety the Prior Credit Facility (defined below).
The Amended Credit Agreement provides for a $25.0 million revolving credit facility (the “Amended Revolving Loan”), which matures on June 30, 2024, and a $275.0 million term credit facility (the “Amended Term Loan” and, together with the Amended Revolving Loan, the “Amended Credit Facility”), which matures on December 31, 2024. The Amended Credit Facility includes a $5.0 million swingline commitment and a $10.0 million letter of credit sub-limit. Loans under the Amended Term Loan bear interest at a rate equal to, at the Company’s option, either the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus an Applicable Rate of 6.25% per annum, or the Alternate Base Rate plus an Applicable Rate of 5.25% per annum. Loans under the Amended Revolving Loan bear interest at a rate equal to, at the Company’s option, the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus the Applicable Rate ranging from 6.25% to 6.0% per annum, based on certain ratios. The interest rate was 10.63% and 7.25% for the years ended December 31, 2022 and
2021, respectively. The Company is also required to pay a commitment fee on the unused portion of the Amended Revolving Loan at a rate ranging from 0.5% to 0.375%, based on certain ratios. The Company is required to make mandatory prepayments of outstanding indebtedness under the Amended Credit Agreement under certain circumstances.
The obligations of AgroFresh Inc., a wholly-owned subsidiary of the Company and the borrower under the Amended Credit Facility, are initially guaranteed by the Company and the Company’s wholly-owned subsidiary, AF Solutions Holdings LLC (together with AgroFresh Inc. and the Company, the “Loan Parties”) and may in the future be guaranteed by certain other domestic subsidiaries of the Company. The obligations of the Loan Parties under the Credit Agreement and other loan documents are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets, and equity interests of certain foreign subsidiaries of the Loan Parties held by the Loan Parties (subject to certain exclusions and limitations).
At December 31, 2022, there was $259.8 million outstanding under the Amended Term Loan and no balance outstanding under the Amended Revolving Loan. At December 31, 2022, the Company evaluated the amount recorded under the Amended Term Loan and determined that the fair value was approximately $253.9 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Certain restrictive covenants are contained in the Amended Credit Agreement, and the Company was in compliance with these covenants as of December 31, 2022.
AgroFresh Fruit Protection Debt
On March 23, 2020, AgroFresh Fruit Protection entered into a €1.0 million loan agreement with Banco Santander, S.A., which provides funding through March 2023 at a 1.5% interest rate. In May 2020, AgroFresh Fruit Protection entered into a €0.3 million loan agreement with BBVA, which provides funding through May 2025 at a 2.2% interest rate. In July 2020, AgroFresh Fruit Protection entered into a €0.6 million loan agreement with Banco Santander, S.A., which provides funding through July 2025 at a 2.5% interest rate.
Preferred Stock Financing
On June 13, 2020, the Company entered into an Investment Agreement (the “Investment Agreement”) with PSP, an affiliate of Paine Schwartz, pursuant to which, subject to certain closing conditions, PSP agreed to purchase in a private placement an aggregate of $150,000,000 of convertible preferred equity of the Company. The transaction closed on July 27, 2020, and a total of 150,000 shares of the Company’s newly-designated Series B-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-1 Preferred Stock”) were purchased in such transaction (the “Private Placement”). On September 22, 2020, following the approval of the transactions contemplated by the Investment Agreement by the necessary regulatory body, the Company issued to PSP, for no additional consideration, a total of 150,000 shares of the Company’s newly-designated Series B-2 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-2 Preferred Stock”). On September 25, 2020 (the "Exchange Date"), PSP elected to exchange the shares of the Company’s Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock held by it for a total of 150,000 shares of the Company’s newly-designated Series B Preferred Stock. Accordingly, effective as of the Exchange Date, the Company issued 150,000 shares of Series B Preferred Stock, par value $0.0001 per share, to PSP and all of the shares of Series B-1 Preferred Stock and Series B-2 Preferred Stock held by PSP were cancelled. No shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock were outstanding as of December 31, 2022.
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series B Preferred Stock has a liquidation preference of $1,000 per share (the “Stated Value”). Holders of the Series B Preferred Stock are entitled to a cumulative dividend at a rate of 16% per annum, of which 50% was payable in cash and 50% was payable in kind until the first anniversary of the Closing Date, after which 50% is payable in cash, 37.5% is payable in kind, and the remaining 12.5% is payable in cash or in kind, at the Company’s option, subject in each case to adjustment under certain circumstances. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears. All dividends that are paid in kind will accrete to, and increase, the Stated Value. The applicable dividend rate is subject to increase by 2% per annum during any period that the Company is in breach of certain provisions of the applicable Certificate of Designation of the Preferred Stock. The Series B Preferred Stock has been classified as temporary equity as it may be contingently redeemable in the event of a change of control, which is outside of the Company's control.
Associated with the Series B Preferred Stock, the Company paid dividends of $12.4 million in kind and $10.6 million in cash during the year ended December 31, 2022. The Company paid dividends of $11.0 million in kind and $13.9 million in cash
during the year ended December 31, 2021. As of December 31, 2022, the Company had accrued dividends of $3.4 million. There were no accrued dividends as of December 31, 2021.
The Series B Preferred Stock is convertible into Common Stock at the election of the holder at any time at an initial conversion price of $5.00 (the “Conversion Price”). The Conversion Price is subject to customary adjustments, including for stock splits and other reorganizations affecting the Common Stock and pursuant to certain anti-dilution provisions for below market issuances. As of December 31, 2022 and December 31, 2021, the maximum number of shares of common stock that could be issued upon conversion of the outstanding shares of Series B Preferred Stock was 34.7 million and 32.2 million shares, respectively.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 - FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of AgroFresh Solutions, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AgroFresh Solutions, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Indefinite-Lived Intangible Assets - Refer to Notes 2 and 7 to the financial statements
Critical Audit Matter Description
The Company’s indefinite-lived trade names are not amortized but tested annually for impairment, and more frequently if events and circumstances indicate that the assets might be impaired. The Company conducts annual impairment tests on its indefinite-lived trade names on the last day of each fiscal year or whenever an indicator of impairment exists.
The Company’s evaluation of its indefinite-lived trade names for impairment involves the comparison of the fair value to the related asset’s carrying value. In determining the fair value of its indefinite-lived trade names, the Company applies the relief from royalty methodology, where fair value is measured by estimating future revenue associated with the trade names over their useful lives and applying royalty rates to the revenue estimates. Changes in assumptions of future revenues and the selection of the royalty rates could have a significant impact on the valuation of the Company’s trade names and the amount of an impairment charge, if any.
The Company has two indefinite-lived trade name assets, AgroFresh and SmartFresh, totaling $23.4 million, which passed the impairment test as of December 31, 2022 by 16% and 9%, respectively.
Given the significant judgments made by management to estimate the fair value of its trade names, performing audit procedures to evaluate the reasonableness of management’s assumptions of future revenues, the selection of the discount rate and the selection of the royalty rates, requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of the forecasted future revenues, the selection of the discount rate and the selection of the royalty rates included the following, among others:
•We evaluated management’s ability to accurately forecast future revenues by comparing actual results to management’s historical forecast.
•We evaluated the reasonableness of management’s forecast for revenues for each of the indefinite-lived trade names, by comparing each forecast to:
◦Historical revenues.
◦Internal communications to management and the Board of Directors.
◦Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) discount rate, and (2) royalty rates by:
◦Testing the source information underlying the determination of the discount rate, royalty rates and the mathematical accuracy of the calculation.
◦Developing a range of independent estimates and comparing those to the discount rate selected by management.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 10, 2023
We have served as the Company's auditor since 2014.
AgroFresh Solutions, Inc.
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 2022 2021
ASSETS
Current Assets:
Cash and cash equivalents $54,355 $61,930
Accounts receivable, net of allowance for doubtful accounts of $1,920 and $2,143, respectively
58,407 53,538
Inventories 25,428 19,780
Other current assets 20,540 19,878
Total Current Assets 158,730 155,126
Property and equipment, net 11,698 11,986
Intangible assets, net 504,441 546,652
Deferred income tax assets 10,365 7,392
Other assets 12,476 11,406
TOTAL ASSETS $697,710 $732,562
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $20,869 $16,969
Current portion of long-term debt 3,088 3,362
Income taxes payable 4,879 2,382
Accrued expenses and other current liabilities 37,599 26,994
Total Current Liabilities 66,435 49,707
Long-term debt 253,058 254,194
Other non-current liabilities 6,653 6,256
Deferred income tax liabilities 28,398 34,833
Total Liabilities 354,544 344,990
Commitments and Contingencies (see Note 20)
Temporary Equity:
Series B convertible preferred stock, par value $0.0001; 150 shares authorized and designated and 145 outstanding at December 31, 2022 and 150 shares authorized and designated and 145 outstanding at December 31, 2021
161,796 149,386
Redeemable non-controlling interest 7,340 7,787
Stockholders’ Equity:
Common stock, par value $0.0001; 400,000 shares authorized, 54,380 and 53,080 shares issued and 53,718 and 52,418 outstanding at December 31, 2022 and December 31, 2021, respectively
5 5
Preferred stock, par value $0.0001; 0.001 share authorized and outstanding at December 31, 2022 and December 31, 2021, respectively
- -
Treasury stock, par value $0.0001; 661 shares at December 31, 2022 and December 31, 2021, respectively
(3,885) (3,885)
Additional paid-in capital 505,570 529,303
Accumulated deficit (282,017) (248,660)
Accumulated other comprehensive loss (45,643) (46,364)
Total Stockholders' Equity 174,030 230,399
TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY $697,710 $732,562
See accompanying notes to consolidated financial statements.
AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(In thousands, except per share data) 2022 2021 2020
Net sales $161,937 $165,989 $157,643
Cost of sales (excluding amortization, shown separately below) 53,441 48,956 42,217
Gross profit 108,496 117,033 115,426
Research and development expenses 12,062 12,931 12,357
Selling, general and administrative expenses 52,550 52,609 53,860
Amortization of intangibles 42,648 42,985 43,731
Impairment of goodwill - 6,380 -
Grant income - - (2,974)
Operating income 1,236 2,128 8,452
Other (expense) income (4,114) 14,046 1,491
Debt modification and extinguishment expenses - - (5,028)
(Loss) gain on foreign currency exchange (9,333) 2,096 (2,836)
Interest expense, net (22,206) (21,774) (23,669)
Loss before income taxes (34,417) (3,504) (21,590)
Income tax (benefit) expense (613) 2,578 31,376
Net loss before non-controlling interest (33,804) (6,082) (52,966)
Less: Net (loss) income attributable to redeemable non-controlling interest (447) (659) 745
Net loss attributable to AgroFresh Solutions, Inc. (33,357) (5,423) (53,711)
Less: Dividends on convertible preferred stock 26,429 24,921 10,488
Net loss attributable to AgroFresh Solutions, Inc. common stockholders ($59,786) ($30,344) ($64,199)
Net loss per share:
Basic ($1.15) ($0.59) ($1.26)
Diluted ($1.15) ($0.59) ($1.26)
Weighted average shares outstanding:
Basic 52,192 51,410 50,770
Diluted 52,192 51,410 50,770
See accompanying notes to consolidated financial statements.
AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended December 31,
(In thousands) 2022 2021 2020
Net loss ($33,804) ($6,082) ($52,966)
Other comprehensive income (loss)
Foreign currency translation adjustments 1,016 (14,879) 1,512
Loss on hedging activity, net of tax of $-, $- and $(21), respectively
- - (74)
Recognition of gain on hedging activity reclassified to net loss, net of tax $-, $- and ($456), respectively
- - (1,802)
Pension and other postretirement benefit plans adjustment, net of tax of ($115), $98 and ($129), respectively
(295) 182 (243)
Comprehensive loss, net of tax ($33,083) $ (20,779) ($53,573)
See accompanying notes to consolidated financial statements.
AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Preferred Stock Common Stock Treasury Stock Additional
Paid-in
Capital Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Total
Stockholders’
Equity
(In thousands) Shares Amount Shares Amount Amount
Balance at December 31, 2019 - $- 51,840 $5 ($3,885) $560,890 ($192,264) ($31,060) $333,686
Stock-based compensation - - - - - 3,440 - - 3,440
Issuance of stock, net of forfeitures - - 1,156 - - - - - -
Shares withheld for taxes - - (48) - - (243) - - (243)
Issuance of common stock under employee stock purchase plan - - 145 - - 316 - - 316
Convertible preferred dividend - - - - - (10,488) - - (10,488)
Adjustment of NCI to redemption value - - - - - (1,139) 1,139 - -
Net loss attributable to AgroFresh Solutions, Inc. - - - - - - (53,711) - (53,711)
Comprehensive loss - - - - - - - (607) (607)
Balance at December 31, 2020 - - 53,092 5 (3,885) 552,776 (244,836) (31,667) 272,393
Stock-based compensation - - - - - 3,067 - - 3,067
Issuance of stock, net of forfeitures - - (36) - - - - - -
Shares withheld for taxes - - (131) - - (288) - - (288)
Issuance of common stock under employee stock purchase plan - - 154 - - 268 - - 268
Convertible preferred dividend - - - - - (24,921) - - (24,921)
Adjustment of NCI to redemption value - - - - - (1,599) 1,599 - -
Net loss attributable to AgroFresh Solutions, Inc. - - - - - - (5,423) - (5,423)
Comprehensive loss - - - - - - - (14,697) (14,697)
Balance at December 31, 2021 - - 53,080 5 (3,885) 529,303 (248,660) (46,364) 230,399
Stock-based compensation - - - - - 4,314 - - 4,314
Issuance of stock, net of forfeitures - - 1,619 - - - - - -
Shares withheld for taxes - - (590) - - (1,804) - - (1,804)
Issuance of common stock under employee stock purchase plan - - 202 - - 300 - - 300
Convertible preferred dividends - - - - - (26,429) - - (26,429)
Exercise of employee stock options - - 69 - - (114) - - (114)
Net loss attributable to AgroFresh Solutions, Inc. - - - - - - (33,357) - (33,357)
Comprehensive income - - - - - - - 721 721
Balance at December 31, 2022 - $- 54,380 $5 ($3,885) $505,570 ($282,017) ($45,643) $174,030
See accompanying notes to consolidated financial statements.
AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(In thousands) 2022 2021 2020
Cash flows from operating activities:
Net loss ($33,804) ($6,082) ($52,966)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 45,639 45,745 46,970
Stock based compensation for equity classified awards 4,314 3,067 3,440
Amortization of deferred financing cost 2,124 2,285 2,875
Provision for bad debts 467 215 (237)
Interest income on interest rate swap - - (2,258)
Deferred income taxes (9,320) (1,527) 29,251
Goodwill impairment - 6,380 -
(Loss) gain on sales of property (53) 56 162
Changes in operating assets and liabilities:
Accounts receivable 4,416 3,529 4,989
Inventories (7,031) 3,286 (1,745)
Prepaid expenses and other current assets (3,328) (5,252) (6,173)
Accounts payable 4,982 (1,368) 4,168
Accrued expenses and other liabilities 6,487 2,887 878
Income taxes payable 2,655 (1,549) (1,242)
Other assets and liabilities (1,376) 330 (1,397)
Net cash provided by operating activities 16,172 52,002 26,715
Cash flows from investing activities:
Cash paid for property and equipment (4,035) (4,023) (2,395)
Net cash used in investing activities (4,035) (4,023) (2,395)
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock - - 145,490
Payment of issuance costs for convertible preferred stock - - (7,006)
Payment of dividends (10,621) (13,933) (5,244)
Proceeds from long term debt - - 2,042
Payment of deferred financing costs - - (8,034)
Payment for redemption of convertible preferred stock - (5,330) -
Repayment of long term debt (3,303) (12,390) (132,423)
Proceeds from issuance of stock under employee stock purchase plan 300 268 316
Net cash used in financing activities (13,624) (31,385) (4,859)
Effect of exchange rate changes on cash and cash equivalents (6,088) (4,694) 752
Net (decrease) increase in cash and cash equivalents (7,575) 11,900 20,213
Cash and cash equivalents, beginning of period 61,930 50,030 29,817
Cash and cash equivalents, end of period $54,355 $61,930 $50,030
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $21,836 $19,729 $23,792
Income taxes $3,632 $5,967 $2,722
Supplemental schedule of non-cash investing and financing activities:
Accrued purchases of property and equipment $198 $103 $141
See accompanying notes to consolidated financial statements.
AgroFresh Solutions, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
AgroFresh Solutions, Inc. (the “Company”) is an agriculture technology innovator and global leader with a mission to prevent food loss and waste and conserve the planet’s resources by providing a range of science-based solutions, data-driven digital technologies and high-touch customer services. The Company supports growers, packers and retailers with solutions across the food supply chain to enhance the quality and extend the shelf life of fresh produce. The Company has 40 years of post-harvest experience across a broad range of crops, including revolutionizing the apple industry with the SmartFresh™ Quality System more than 20 years ago. The AgroFresh platform is powered by the Company's comprehensive portfolio that includes plant-based coatings, equipment and proprietary solutions that help improve the freshness supply chain from harvest to the home.
The Company has an extensive portfolio of solutions to extend freshness across the produce supply chain from near-harvest up to the point-of sale. These include HarvistaTM for near-harvest optimization and the SmartFreshTM Quality System, the Company's flagship post-harvest freshness solutions. Additional post-harvest freshness solutions include fungicides that can be applied to meet various customer operational requirements in both foggable (ActiMist™) and liquid (ActiSeal™) delivery options. The Company has a controlling interest in AgroFresh Fruit Protection S.A. ("AgroFresh Fruit Protection") (formerly Tecnidex Fruit Protection, S.A.), a leading regional provider of post-harvest fungicides, disinfectants, coatings and packinghouse equipment for the citrus market. Beyond apples and pears, SmartFresh technology can provide ready-to-eat freshness for other fruits and vegetables including avocados, bananas, melons, tomatoes, broccoli and mangos. The Company has key products registered in approximately 50 countries, and supports customers by protecting over 25,000 storage rooms globally.
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 and pears, the Company’s core crops, 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 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.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and entities in which the Company has a controlling voting interest. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current year presentation.
The Company's common stock trades on the NASDAQ Global Select Stock Market under the symbol "AGFS".
As discussed in Note 3 - Related Party Transactions, on November 21, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Project Cloud Holdings, LLC (“Parent”), Project Cloud Merger Sub, Inc. (“Merger Sub”) and the Company. Parent and Merger Sub are affiliates of investment funds managed by Paine Schwartz Partners, LLC (“Paine Schwartz”). Upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger (the “Surviving Corporation”). As a result of the Merger, the Company will cease to be a publicly traded company, and investment funds managed by Paine Schwartz will become the indirect owner of all the Company’s outstanding capital stock.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the consolidated
financial statements. Actual results could differ from these estimates. The Company’s significant estimates include impairment of identifiable intangible assets, stock-based compensation, contingent liabilities and income tax valuation allowances.
The inputs into certain of our estimates, assumptions, and judgments considered the economic implications of the COVID-19 pandemic on our critical and significant accounting estimates. The actual results experienced by us may differ from our estimates. As the COVID-19 pandemic continues to develop, many of our estimates could require increased judgment and carry a higher degree of variability and volatility, and may change materially in future periods.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COVID-19
The global health crisis caused by COVID-19 and the related government actions and stay at home orders have negatively impacted economic activity and increased political instability across the globe. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. There have been numerous obstacles presented and some localized financial impacts of the pandemic, including fluctuations in customer demand and spending pattern changes. During the year ended December 31, 2022, the COVID-19 pandemic did not have a significant adverse impact on the Company’s results of operations. 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 remote working arrangements and varying procedures for essential workforce, the outbreak presents some uncertainty and risk with respect to the Company and its performance and financial results.
Adoption of Highly Inflationary Accounting in Argentina and Turkey
GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation rate exceeds 100 percent. The Company closely monitors the inflation data and currency volatility where there are multiple data sources for measuring and reporting inflation in applicable countries. In the second quarter of 2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of June 30, 2018. As a result, the Company elected to adopt highly inflationary accounting as of July 1, 2018 for its subsidiary in Argentina. As the three-year cumulative inflation rate exceeded 100 percent as of December 31, 2022, there is no change to highly inflationary accounting in Argentina.
In the first half of 2022, the Turkish lira rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation rate in that country exceeded 100 percent as of April 1, 2022. As a result, the Company elected to adopt highly inflationary accounting as of April 1, 2022 for its subsidiary in Turkey.
Under highly inflationary accounting, the functional currencies of the Company's subsidiaries in Argentina and Turkey became the U.S. dollar, and their income statements and balance sheets will be measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates in the currencies of these countries on monetary assets and liabilities are reflected in earnings. As of December 31, 2022, and 2021, the Company’s subsidiary in Argentina had net assets of ($12.2) million and ($9.8) million, respectively. Net sales attributable to Argentina were approximately 3.4% and 3.2% of the Company’s consolidated net sales for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company’s subsidiary in Turkey had net assets of $12.1 million. Net sales attributable to Turkey were approximately 2.7% of the Company’s consolidated net sales for the year ended December 31, 2022.
Revenue Recognition
The Company accounts for revenue in accordance with Accounting Standards Codification ("ASC") 606, which requires revenue recognized to represent the transfer of promised goods or services to customers at an amount that reflects the consideration which is expected to be received in exchange for those goods or services.
Performance Obligations
The Company derives revenue from the sale of products created with proprietary technology to regulate the ripening of produce and through performing post application technical services for its customers. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s contracts have multiple performance obligations primarily related to product application and post application services, which the Company provides. For contracts with multiple performance obligations,
the Company allocates the contract’s transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. The method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company calculates the costs of satisfying a performance obligation and factors in an appropriate margin for that distinct good or service.
The transaction price is primarily fixed, as prices are governed by the terms and conditions of the Company's contracts with customers, and payment is typically made under standard terms. The Company has certain transactions that provide for variable consideration through rebate and customer loyalty programs. Depending on the program, the customer may elect to receive either a credit against its account or a cash payment. The Company recognizes an accrued provision for estimated rebates and customer loyalty program payouts at the time services are provided. The primary factors considered when estimating the provision for rebates and customer loyalty programs are the average historical experience of aggregate credits issued, the historical relationship of rebates as a percentage of total gross product sales, and the contract terms and conditions of the various rebate programs in effect at the time services are performed. The Company provides standard warranty provisions.
Performance obligations related to product application are typically satisfied at a point in time when the customer obtains control upon application. Performance obligations related to post-application services are satisfied over time and revenue is recognized using the output method, as control of the service transfers to the customer over time during and after storage of the produce. The Company believes that this method provides a faithful depiction of the transfer of value over the term of the performance obligation because the level of effort in providing these services is consistent during the service period. Performance obligations related to AgroFresh Fruit Protection sales-type leases are satisfied at the point in time that equipment is installed at the customer site.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into geographic region, product and timing of transfer of goods and services. The Company determined that disaggregating revenue into these categories achieves the disclosure objective of depicting how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Revenues for the year ended December 31, 2022
(in thousands)
Region North America
(1) EMEA
(2) Latin America
(3) Asia Pacific
(4) Total Revenue
Product
1-MCP based $28,532 $56,796 $27,039 $18,187 $130,554
Fungicides, disinfectants and coatings 1,799 17,948 7,289 93 27,129
Other* 298 2,149 1,736 71 4,254
Total $30,629 $76,893 $36,064 $18,351 $161,937
Pattern of Revenue Recognition
Products transferred at a point in time $29,861 $75,886 $35,470 $18,138 $159,355
Services transferred over time 768 1,007 594 213 2,582
Total $30,629 $76,893 $36,064 $18,351 $161,937
Revenues for the year ended December 31, 2021
(in thousands)
Region North America
(1) EMEA
(2) Latin America
(3) Asia Pacific
(4) Total Revenue
Product
1-MCP based $29,966 $63,874 $25,860 $17,195 $136,895
Fungicides, disinfectants and coatings 2,084 17,403 6,720 - 26,207
Other* 585 1,052 1,030 220 2,887
Total $32,635 $82,329 $33,610 $17,415 $165,989
Pattern of Revenue Recognition
Products transferred at a point in time $32,147 $81,297 $33,022 $17,225 $163,691
Services transferred over time 488 1,032 588 190 2,298
Total $32,635 $82,329 $33,610 $17,415 $165,989
*Other includes FreshCloud, technical services and sales-type equipment leases related to AgroFresh Fruit Protection.
(1)
North America includes the United States and Canada.
(2)
EMEA includes Europe, the Middle East and Africa.
(3)
Latin America includes Argentina, Brazil, Chile, Costa Rica, Colombia, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay.
(4)
Asia Pacific includes Australia, China, India, Japan, New Zealand, the Philippines, South Korea, Taiwan and Thailand.
Contract Assets and Liabilities
Accounting Standards Codification ("ASC") 606 Revenue from contracts with Customers requires an entity to present a revenue contract as a contract asset when the entity performs its obligations under the contract by transferring goods or services to a customer before the customer pays consideration or before payment is due. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer. The following table presents changes in the Company’s contract assets and liabilities during the year ended December 31, 2022:
(in thousands) Balance at December 31, 2021 Additions Deductions Balance at December 31, 2022
Contract assets:
Unbilled revenue $795 20,282 (19,535) $1,542
Contract liabilities:
Deferred revenue $635 5,574 (4,989) $1,220
The following table presents changes in the Company’s contract assets and liabilities during the year ended December 31, 2021:
(in thousands) Balance at December 31, 2020 Additions Deductions Balance at December 31, 2021
Contract assets:
Unbilled revenue $1,484 17,617 (18,306) $795
Contract liabilities:
Deferred revenue $1,474 4,123 (4,962) $635
The Company recognizes contract assets in the form of unbilled revenue in instances where services are performed by the Company but not billed by period end. The Company recognizes contract liabilities in the form of deferred revenue in instances where a customer pays in advance for future services to be performed by the Company. The Company generally receives payments from its customers based on standard terms and conditions. No significant changes or impairment losses occurred to contract balances during the year ended December 31, 2022. Amounts reclassified from unbilled revenue to accounts receivable for the years ended December 31, 2022 and 2021 were $19.5 million and $18.3 million, respectively. Amounts reclassified
from deferred revenue to revenue were $5.0 million and $5.0 million for the years ended December 31, 2022 and 2021, respectively.
Practical Expedients Elected
The Company has elected the following practical expedients in applying ASC 606 across all reportable segments:
Unsatisfied Performance Obligations. Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in ASC 606 and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
Contract Costs. All incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
Significant Financing Component. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Sales Tax Exclusion from the Transaction Price. The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
Shipping and Handling Activities. The Company accounts for shipping and handling activities it performs after a customer obtains control of the good as activities to fulfill the promise to transfer the good, which are recognized in cost of goods sold.
Cost of Sales
The Company's cost of sales consists of cost of materials, cost of equipment, application costs and certain supply chain costs. The Company's primary costs of sale are related to applications at customer sites through a direct service model primarily utilizing third-party service providers. Amounts recorded as cost of sales relate to direct costs incurred in connection with the purchase, delivery and application of the product. Such costs are recorded as the related revenue is recognized.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable, Net
Accounts receivable, net consists primarily of (i) outstanding amounts invoiced to end-users, re-sellers and third-party contractors and (ii) unbilled revenue in arrangements where the earnings process has been completed but invoices have not been issued as of the reporting date.
The allowance for doubtful accounts is based on forecasted losses and a review on a specific identification basis of the collectability of outstanding receivables.
Inventories
Inventories, consisting primarily of chemical products and packaging materials, are valued at the lower of cost (under the first-in, first-out method) or net realizable value. Raw materials are valued using the first-in, first-out method.
Property and Equipment
Property and equipment includes leasehold improvements, machinery and equipment and furniture. Property and equipment acquired in business combinations are initially recorded at their estimated fair value. Property and equipment acquired or constructed in the normal course of business are initially recorded at cost. The Company provides for depreciation and amortization based on the estimated useful lives of assets using the straight-line method.
Estimated useful lives are as follows:
Leasehold improvements Shorter of useful life or lease term
Machinery & Equipment 1-12 years
Furniture 1-12 years
Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the related lease term, which generally includes reasonably assured option periods expected to be exercised by the Company when the Company would suffer an economic penalty if not exercised.
Gains and losses on the disposal of assets are recorded as the difference between the net proceeds received and net carrying values of the assets disposed.
Impairment of Long-Lived Assets
Company management continually evaluates whether events or changes in circumstances might indicate that the remaining estimated useful life of long-lived assets may warrant revision, or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted cash flows in measuring whether the long-lived asset should be written down to fair value. Measurement of the amount of impairment would be based on generally accepted valuation methodologies, as deemed appropriate.
Leases
The Company determines whether a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. Operating lease right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses the incremental borrowing rate in determining the present value of lease payments. Leases with a term of 12 months or less at the commencement date are not recognized on the balance sheet and are expensed as incurred. In the consolidated statements of operations, lease expense for operating lease payments is recognized on a straight-line basis over the lease term. See Note 11 - Leases for additional information.
Selling, General and Administrative Expenses
The Company expenses selling, general and administrative costs as incurred. Selling, general and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in the Company’s administrative, finance, legal, business development, commercial, sales, marketing and human resource functions. Other expenses include professional fees from outside service providers.
Debt Issuance Costs
Debt issuance costs are capitalized and presented as a reduction of the principal balance of the debt and costs associated with the revolving loan are capitalized in Other Assets. All issuance costs are accreted through interest expense for the duration of the respective debt facilities.
Goodwill and Indefinite-lived Intangible Assets
The Company’s goodwill and indefinite-lived trade names are not amortized, but tested annually for impairment, and more frequently, if events and circumstances indicate that the asset might be impaired. The Company conducts annual impairment tests on its goodwill and indefinite lived trade names on the last day of each fiscal year or whenever an indicator of impairment exists.
As part of the Company’s goodwill impairment analysis, the fair value of its reporting unit is determined considering two valuation approaches: (1) the income approach and (2) the market approach. The income approach requires management to make significant estimates and assumptions related to the future cash flows of the reporting unit and the discount rate commensurate with the risks involved in the asset. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. If the fair value of the reporting unit exceeds its carrying value, we do not consider the goodwill impaired. If the carrying value is higher than the fair value, we recognize the difference as an impairment loss. As a result of the operating segment realignment discussed in Note 19 - Segment and Geographical
Information, the Company completed its annual evaluation of goodwill impairment and fully impaired its goodwill balance of $6.4 million during the year ended December 31, 2021.
The Company’s indefinite-lived intangible assets other than goodwill, which primarily relate to AgroFresh and SmartFresh trade names, are not amortized, but are tested at least annually for impairment using a quantitative or qualitative impairment analysis, and more frequently if events and circumstances indicate that the asset might be impaired. The quantitative impairment analysis compares the fair value of each indefinite-lived intangible asset, based on future revenues using a relief-from-royalty methodology with the carrying value of the asset. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized equal to the difference between the estimated fair value of the indefinite-lived intangible asset and its carrying amount. During the year ended December 31, 2022, the Company did not have any impairment charges.
Finite-Lived Intangible Assets
Intangible assets subject to amortization primarily consist of acquired technology and customer relationships and are amortized on a straight-line basis over their estimated useful lives.
Stock-Based Compensation
The Company grants various stock-based compensation awards to its officers, employees and board of directors with time-based and/or performance-based vesting conditions. Awards without cash settlement conditions are equity-classified. The Company measures and recognizes compensation expense over the vesting period based on their estimated grant date fair values.
Phantom stock awards and stock appreciation rights either require or provide the holder of the award with the option to settle in cash. The Company's awards with cash settlement conditions are accounted for as liabilities, and the Company measures and recognizes compensation expense over the vesting period based on their estimated fair values as of the most recent reporting date.
Fair values for options and stock appreciation rights are estimated using an option pricing model. Fair values for restricted stock and phantom stock awards are based on the closing price of the Company’s common stock on the grant date and the measurement date.
Compensation expense for the Company’s stock-based compensation awards is generally recognized on a straight-line basis over the vesting period of the award. For awards with performance conditions, compensation expense is recognized only if satisfaction of the performance condition is considered probable of being achieved.
Compensation expense for the Employee Stock Purchase Plan is recognized based on the employee contributions and market price of the stock as of the grant date.
Research and Development
Expenditures for research and development costs, which primarily relate to internal compensation costs and professional service fees, are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that a tax position will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
Contingencies
The Company recognizes liabilities for loss contingencies when it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. The Company’s ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. The Company records legal settlement costs when those costs are probable and reasonably estimable.
Redeemable Non-Controlling Interest
Non-controlling interest that is redeemable upon the occurrence of an event that is not solely within the Company's control is reported in the temporary equity section between total liabilities and shareholders' equity in the Company's consolidated balance sheets. The Company adjusts the Redeemable non-controlling interest balance to reflect the redemption amount each reporting period.
Credit Concentration Risk
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of cash deposits. The Company maintains cash balances at financial institutions with strong credit ratings. Generally, amounts invested with financial institutions are in excess of FDIC insurance limits.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which we would transact, and the Company also considers assumptions that market participants would use when pricing the asset or liability.
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. We use inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of assets or liabilities.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The fair values are determined based on model-based techniques such as discounted cash flow models using inputs that we could not corroborate with market data.
Foreign Currency
An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. Assets and liabilities are translated at period-end rates; income statement amounts are translated at average rates during the course of the period.
Translation gains and losses of those operations that use local currency as the functional currency, are included in accumulated other comprehensive (loss) income in the consolidated balance sheets.
Foreign currency exchange transaction gain (loss) is the result of remeasuring transactions denominated in a currency other than our primary currency and is reported in the consolidated statements of operations as a separate line within other income (expense).
Recently Issued Accounting Standards and Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which introduces a new current expense credit loss model to measure impairment on certain types of financial instruments. This update requires an entity to use a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. In addition, the FASB issued various amendments during 2018 and 2019 to clarify the provisions of ASU 2016-13. The Company adopted the new guidance on January 1, 2020. The adoption of this standard did not have a material impact on the financial statements of the Company.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and also improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the new guidance on January 1, 2021. The adoption of the new guidance did not have a material impact on the consolidated financial statements of the Company.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The Company adopted the new guidance on December 31, 2022. The adoption of the new guidance did not have a material impact on the consolidated financial statements of the Company.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company will adopt the new guidance on January 1, 2023. The adoption of the new guidance is not expected to have a material impact on the consolidated financial statements of the Company.
3. Related Party Transactions
On June 13, 2020, in connection with the execution of the Investment Agreement (as defined in Note 15- Series B Convertible Preferred Stock and Stockholders’ Equity), the Company, PSP AGFS Holdings, L.P. (“PSP”) and Rohm and Haas Company ("R&H") entered into a side agreement, pursuant to which the parties agreed that if PSP or its affiliates has the right to designate at least 50% of the total directors on the Company’s board of directors pursuant to the Investment Agreement, so long as R&H or its affiliates beneficially owns at least 20% of the Company’s outstanding common stock (on a fully diluted, “as converted” basis), the Company and the board of directors will increase the size of the board of directors by one member and the board will elect a designee selected by R&H to fill the newly-created vacancy. Such right is in addition to any right that R&H has to appoint a member of the board pursuant to its ownership of the Company’s Series A preferred stock (see Note 15- Series B Convertible Preferred Stock and Stockholders’ Equity).
During 2016, the Company made a minority investment in RipeLocker, LLC ("RipeLocker"), a company led by George Lobisser who was formerly a director of the Company. In February 2019, the Company made a further minority investment in RipeLocker. As of and for the years ended December 31, 2022 and December 31, 2021, there were no material amounts paid or owed to RipeLocker or Mr. Lobisser. Mr. Lobisser resigned as a director of the Company on February 18, 2021.
On November 21, 2022, the Company entered into the Merger Agreement. Upon the terms and subject to the conditions set forth in the Merger Agreement, among other things, Merger Sub will merge with and into the Company, with the Company surviving the Merger (the “Surviving Corporation”). As a result of the Merger, the Company will cease to be a publicly traded company, and investment funds managed by Paine Schwartz will become the indirect owner of all the Company’s outstanding capital stock.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, (x) each share of the Company’s common stock, par value $0.0001 per share (the “Shares”), issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive $3.00 in cash per share, without interest (collectively, the “Merger Consideration”) and (y) the share of the Company’s Series A preferred stock, par value $0.0001 per share (“Series A Share”), issued and outstanding immediately prior to the Effective Time, will be converted into the right to receive $3.00 in cash, without interest. Such conversion of Shares and the Series A Share is subject to certain exceptions, including, as applicable, for (i) Shares owned by stockholders of the Company who did not vote in favor of the Merger Agreement and have perfected and not withdrawn a demand for appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware, (ii) Shares owned by the Company and not held on behalf of third parties and (iii) Shares owned by Parent or Merger Sub.
Pursuant to the Merger Agreement, at the Effective Time, and as a result of the Merger, each share of Series B preferred stock, par value $0.0001 per share, of the Company (the “Series B Preferred Stock”) will be (x) converted into one share of Series B convertible preferred stock, par value $0.0001 per share, of the Surviving Corporation or (y) if so elected by Parent and, in addition to the amount required to fund the Merger Consideration, Parent has secured additional financing sufficient to (i) pay the Change of Control Redemption Price (as defined in the Certificate of Designation of Series B Convertible Preferred Stock of the Company) and (ii) repay all indebtedness for borrowed money of the Company that becomes due and payable as a result of the Merger, converted into the right to receive an amount in cash equal to the Change of Control Redemption Price.
Consummation of the Merger is subject to certain specified closing conditions, including the approval by holders of a majority of the aggregate voting power of (i) the outstanding Shares (including those held by Paine Schwartz and its affiliates) and the outstanding shares of Series B Preferred Stock, voting together as a single class, and (ii) the outstanding Shares held by stockholders who are not affiliated with Paine Schwartz, members of the Company's board of directors, certain officers of the Company, or any of their respective associates or members of their immediate family.
4. Inventories
Inventories at December 31, 2022 and December 31, 2021, consisted of the following:
December 31,
(in thousands) 2022 2021
Raw material $3,963 $2,726
Work-in-process 4,266 3,746
Finished goods 16,337 12,520
Supplies 862 788
Total inventories $25,428 $19,780
5. Other Current Assets
The Company’s other current assets at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands) 2022 2021
VAT receivable $12,780 $10,220
Prepaid income tax asset 4,533 6,256
Prepaid and other current assets 3,227 3,402
Total other current assets $20,540 $19,878
6. Property and Equipment
Property and equipment at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands, except for useful life data) Useful life
(years)
2022 2021
Buildings, land, and leasehold improvements 7 - 20 $7,353 $6,967
Machinery & equipment 1 - 12 16,202 13,158
Furniture 1 - 12 2,924 2,927
Construction in progress 587 1,780
27,066 24,832
Less: accumulated depreciation (15,368) (12,846)
Total property and equipment, net $11,698 $11,986
Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $3.0 million, $2.8 million and $3.2 million, respectively. Depreciation expense is recorded in cost of sales, selling, general and administrative expense and research and development expense in the consolidated statements of operations.
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the year ended December 31, 2022 and December 31, 2021 are as follows:
(in thousands) Amount
Balance as of December 31, 2020 $6,925
Foreign currency translation (545)
Impairment of goodwill (6,380)
Balance as of December 31, 2021 $-
Balance as of December 31, 2022 $-
As a result of the operating segment realignment discussed in Note 19 - Segment and Geographical Information, the composition of the Company's reporting units for the evaluation of goodwill impairment has changed. Historically, the Company's reporting units were identified at the operating segment level, which consisted of AgroFresh Core and AgroFresh Fruit Protection (formerly Tecnidex) and all of the Company's goodwill was assigned to the AgroFresh Fruit Protection reporting unit. Effective December 31, 2021, the Company concluded that it has one operating segment and one reporting unit, which resulted in the reassignment of its goodwill to its stand-alone reporting unit. Prior to the change, the Company tested goodwill for impairment at the previous reporting unit, which did not result in any impairment charge. Based upon the Company's impairment assessment at the new reporting unit (consolidated AgroFresh), the Company determined the carrying amount of the consolidated entity exceeded its fair value. As a result, the Company recorded $6.4 million in goodwill impairment charges during the year ended December 31, 2021.
The Company’s intangible assets at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
2022 2021
(in thousands) Gross
Carrying
Amount
Accumulated
Amortization
Net Gross
Carrying
Amount Accumulated
Amortization Net
Intangible assets with finite lives:
Developed technology $798,524 ($333,060) $465,464 $798,669 ($293,920) $504,749
Customer relationships 19,073 (8,101) 10,972 19,778 (6,948) 12,830
Software 11,816 (10,578) 1,238 10,992 (10,235) 757
Trade name 3,418 (2,051) 1,367 3,635 (727) 2,908
Other 100 (100) - 100 (92) 8
Total intangible assets with finite lives 832,931 (353,890) 479,041 833,174 (311,922) 521,252
Intangible assets with indefinite lives:
Trade name 23,400 - 23,400 23,400 - 23,400
Service provider network 2,000 - 2,000 2,000 - 2,000
Total intangible assets with indefinite lives 25,400 - 25,400 25,400 - 25,400
Total intangible assets $858,331 ($353,890) $504,441 $858,574 ($311,922) $546,652
During 2021, the Company reclassified $3.6 million of trade name to finite-lived intangibles as the Company began marketing Tecnidex branded products under the AgroFresh trade name. The Tecnidex trade name is still held as a defensive asset and is being amortized over its estimated useful life of 2.5 years, resulting in $2.1 million and $0.7 million of amortization expense recognized for the years ended December 31, 2022 and 2021, respectively.
At December 31, 2022, the weighted-average amortization periods remaining for developed technology, customer relationships, software, trade name and other was 12.5, 10.8, 2.3, 1.0 and 0.0, respectively. At December 31, 2022, the weighted-average amortization periods remaining for these finite-lived intangible assets was 12.4 years.
Amortization expense for intangible assets was $42.6 million, $43.0 million and $43.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Estimated annual amortization expense for finite-lived intangible assets subsequent to December 31, 2022 is as follows:
(in thousands) Amount
2023 $42,625
2024 41,091
2025 40,810
2026 40,389
2027 38,578
Thereafter 275,548
Total $479,041
8. Other Assets
The Company’s other assets at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands) 2022 2021
Right-of-use asset $6,904 $6,258
Long term sales-type lease receivable 3,656 2,860
Other long term receivables 1,916 2,288
Total other assets $12,476 $11,406
Other long-term receivables of $0.8 million were deemed uncollectible and were written off to other expense during the year ended December 31, 2021.
9. Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands) 2022 2021
Accrued taxes $10,931 $8,267
Accrued compensation and benefits 8,074 8,227
Accrued dividends payable 3,398 -
Litigation reserve 2,620 -
Bank overdraft 1,559 1,612
Lease liability 1,391 1,624
Deferred revenue 1,220 635
Accrued rebates payable 636 756
Severance 328 1,259
Accrued interest 76 72
Other 7,366 4,542
Total accrued and other current liabilities $37,599 $26,994
Other current liabilities include primarily professional services and research and development accruals.
10. Debt
The Company’s debt, net of unamortized deferred issuance costs, at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands) 2022 2021
Total term loan outstanding $259,750 $262,501
Unamortized deferred issuance costs (4,440) (6,434)
AgroFresh Fruit Protection loan outstanding 836 1,489
Less: Amounts due within one year 3,088 3,362
Total long-term debt due after one year $253,058 $254,194
Amended Credit Facility
On July 27, 2020, the Company completed a comprehensive refinancing (the “Refinancing”) by (i) entering into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with the other loan parties party thereto, Bank of Montreal, as administrative agent and the lenders party thereto, and (ii) consummating the transactions contemplated by the Investment Agreement (as defined and described in Note 15 - Series B Convertible Preferred Stock and Stockholders’ Equity). The
Amended Credit Agreement amends and restates in its entirety the Credit Agreement a subsidiary of the Company had with Bank of Montreal that was entered into on July 31, 2015.
The Amended Credit Agreement provides for a $25.0 million revolving credit facility (the “Amended Revolving Loan”), which matures on June 30, 2024, and a $275.0 million term credit facility (the “Amended Term Loan” and, together with the Amended Revolving Loan, the “Amended Credit Facility”), which matures on December 31, 2024. The Amended Credit Facility includes a $5.0 million swingline commitment and a $10.0 million letter of credit sub-limit. Loans under the Amended Term Loan bear interest at a rate equal to, at the Company’s option, either the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus an Applicable Rate of 6.25% per annum, or the Alternate Base Rate plus an Applicable Rate of 5.25% per annum. Loans under the Amended Revolving Loan bear interest at a rate equal to, at the Company’s option, the Adjusted Eurodollar Rate for the interest period in effect for such borrowing plus the Applicable Rate ranging from 6.25% to 6.0% per annum, based on certain ratios. The interest rate was 10.63% and 7.25% for the years ended December 31, 2022 and 2021, respectively. The Company is also required to pay a commitment fee on the unused portion of the Amended Revolving Loan at a rate ranging from 0.5% to 0.375%, based on certain ratios. The Company is required to make mandatory prepayments of outstanding indebtedness under the Amended Credit Agreement under certain circumstances. During the year ended December 31, 2021, a prepayment of principal of $9.1 million was made.
The obligations of AgroFresh Inc., a wholly-owned subsidiary of the Company and the borrower under the Amended Credit Facility, are initially guaranteed by the Company and the Company’s wholly-owned subsidiary, AF Solutions Holdings LLC (together with AgroFresh Inc. and the Company, the “Loan Parties”) and may in the future be guaranteed by certain other domestic subsidiaries of the Company. The obligations of the Loan Parties under the Credit Agreement and other loan documents are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in all tangible and intangible assets of the Loan Parties, except for certain excluded assets, and equity interests of certain foreign subsidiaries of the Loan Parties held by the Loan Parties (subject to certain exclusions and limitations).
The Refinancing was deemed a partial extinguishment of the Term Loan (as defined below) under ASC 470-50, “Debt - Modifications and Extinguishments” (Topic No. 470), whereby $107.1 million of the $403.8 million outstanding at the time of the Refinancing was deemed an extinguishment and $296.7 million was deemed a modification of debt. As such, unamortized deferred issuance costs related to the extinguishment of $0.7 million were written off in debt modification and extinguishment expenses and the remaining $1.9 million was deferred and amortized over the term of the Amended Term Loan.
In connection with the Amended Term Loan, expenses incurred related to existing lenders of $4.4 million were recognized in debt modification and extinguishment expenses. Expenses to new lenders of $1.1 million were deferred and amortized over the term of the Amended Term Loan along with $6.4 million of lender fees and issue discounts.
In total, the Company deferred debt issuance costs of $7.5 million related to the Amended Term Loan, $1.9 million related to the modification of the Term Loan and $0.5 million related to the Amended Revolving Loan. The debt issuance costs associated with the Amended Term Loan were capitalized against the principal balance of the debt, and the Amended Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense using the effective interest method for the duration of each respective debt facility. The interest expense related to the amortization of the Amended Credit Facility debt issuance costs during the years ended December 31, 2022, 2021, and 2020 was $2.0 million, $2.2 million and $0.8 million, respectively. As of December 31, 2022 there were $4.4 million of unamortized deferred issuance costs.
At December 31, 2022, there was $259.8 million outstanding under the Amended Term Loan and no balance outstanding under the Amended Revolving Loan. At December 31, 2022, the Company evaluated the amount recorded under the Amended Term Loan and determined that the fair value was approximately $253.9 million. The fair value of the debt is based on quoted inactive market prices and is therefore classified as Level 2 within the valuation hierarchy.
Certain restrictive covenants are contained in the Amended Credit Agreement, and the Company was in compliance with these covenants as of December 31, 2022.
AgroFresh Fruit Protection Debt
On March 23, 2020, AgroFresh Fruit Protection entered into a €1.0 million loan agreement with Banco Santander, S.A., which provides funding through March 2023 at a 1.5% interest rate. In May 2020, AgroFresh Fruit Protection entered into a €0.3 million loan agreement with BBVA, which provides funding through May 2025 at a 2.2% interest rate. In July 2020, AgroFresh Fruit Protection entered into a €0.6 million loan agreement with Banco Santander, S.A., which provides funding through July 2025 at a 2.5% interest rate.
Scheduled principal repayments of the Company's debt subsequent to December 31, 2022 are as follows:
(in thousands) Amount
2023 $3,088
2024 257,232
2025 188
2026 78
Total $260,586
Interest Rate Swap
The Company entered into an interest rate swap contract in August 2019. During the year ended December 31, 2020, a realized loss of $0.1 million was recognized in connection with this swap. The interest rate swap contract matured on December 31, 2020.
The Company entered into an interest rate swap contract in January 2018 to hedge interest rate risk associated with the Term Loan. The hedge was settled in September 2018 for $4.0 million, which was amortized through December 31, 2020, the remaining period of the original hedge.
PPP Loan
As part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the Company received a Paycheck Protection Program ("PPP") loan to offset eligible costs incurred during the period. Under the terms of the PPP, PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the forgiveness period.
The Company used the entire loan proceeds to fund its eligible payroll expenses and mortgage interest, avoiding furlough of office employees. As a result, the Company believed that it had met the PPP eligibility criteria for forgiveness and concluded that the loan represented, in substance, a government grant. As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” the Company recognized the entire loan amount as Grant Income during the year ended December 31, 2020. The full amount of this loan was forgiven during 2021.
11. Leases
The Company enters into lease agreements for certain facilities and vehicles that are primarily used in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease.
Most leases include an option to extend or renew the lease term. The exercise of the renewal option is at the Company's discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. The Company, in determining the present value of lease payments, uses the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
Lease expense is primarily included in general and administrative expenses in the consolidated statements of operations. Additional information regarding the Company's operating leases is as follows:
Year ended December 31,
(in thousands) 2022 2021
Operating Lease Cost
Operating leases $2,052 $2,163
Short-term leases (1)
1,229 1,004
Total lease expense $3,281 $3,167
(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
Other information on operating leases:
Year ended December 31,
2022 2021
Cash payments included in operating cash flows $3,204 $3,252
Right-of-use assets obtained in exchange for new lease $2,889 $2,309
Weighted average discount rate 7.6 % 8.2 %
Weighted average remaining lease term in years 5.7 years 5.4 years
The following table presents the contractual maturities of the Company's lease liabilities as of December 31, 2022:
(in thousands) Lease Liability
2023 $1,872
2024 1,601
2025 1,383
2026 1,224
2027 and thereafter 2,960
Total undiscounted lease payments 9,040
Less: present value adjustment 1,812
Operating lease liability $7,228
12. Other Noncurrent Liabilities
The Company’s other noncurrent liabilities at December 31, 2022 and December 31, 2021 consisted of the following:
December 31,
(in thousands) 2022 2021
Lease liability $5,837 $4,790
Other (1)
816 1,466
Total other noncurrent liabilities $6,653 $6,256
(1) Other noncurrent liabilities include long-term rebates and pension liabilities.
13. Severance
The Company expensed $1.1 million and $2.3 million of severance expense for the years ended December 31, 2022 and 2021, respectively. These amounts, which do not include stock compensation expense, were recorded in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 2022, the Company had $0.3 million of severance liability, which will be paid out over the next year.
14. Redeemable Non-Controlling Interest ("NCI")
On November 7, 2017, the Company entered into a definitive agreement to acquire a controlling-interest in AgroFresh Fruit Protection. The transaction was closed on December 1, 2017. At the effective date of the acquisition, the Company acquired 75% of the outstanding capital stock of AgroFresh Fruit Protection. In connection with the acquisition of AgroFresh Fruit Protection, the Company concurrently entered into option agreements ("Option Agreement") with the Seller related to the remaining 25% equity interest. The Option Agreement permits the residual interest to be "put" by the Seller to the Company, or to allow the Company to "call" the residual interest gradually over time as outlined in the agreement. The Seller's ownership of AgroFresh Fruit Protection represents a NCI to the Company, which is classified outside of stockholders' equity as the option of the Seller is redeemable. As of December 31, 2022 the carrying amount of the NCI was $7.3 million in the consolidated balance sheet. Any changes in the redemption value of the NCI are included as an adjustment to Additional paid-in capital on the balance sheet.
The following table summarizes the changes to the Company's Redeemable NCI.
Year Ended December 31,
(in thousands) 2022 2021
Beginning balance ($7,787) ($8,446)
Net loss attributable to redeemable non-controlling interest 447 2,258
Adjustment of NCI to redemption value - (1,599)
Ending balance ($7,340) ($7,787)
15. Series B Convertible Preferred Stock and Stockholders’ Equity
Series B Convertible Preferred Stock
On June 13, 2020, the Company entered into an Investment Agreement (the “Investment Agreement”) with PSP, an affiliate of Paine Schwartz, pursuant to which, subject to certain closing conditions, PSP agreed to purchase in a private placement an aggregate of $150,000,000 of convertible preferred equity of the Company. The transaction closed on July 27, 2020, and a total of 150,000 shares of the Company’s newly-designated Series B-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-1 Preferred Stock”) were purchased in such transaction (the “Private Placement”). On September 22, 2020, following the approval of the transactions contemplated by the Investment Agreement by the necessary regulatory body, the Company issued to PSP, for no additional consideration, a total of 150,000 shares of the Company’s newly-designated Series B-2 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-2 Preferred Stock”). On September 25, 2020 (the "Exchange Date"), PSP elected to exchange the shares of the Company’s Series B-1 Convertible Preferred Stock and Series B-2 Preferred Stock held by it for a total of 150,000 shares of the Company’s newly-designated Series B Preferred Stock. Accordingly, effective as of the Exchange Date, the Company issued 150,000 shares of Series B Convertible Preferred Stock, par value $0.0001 per share, to PSP and all of the shares of Series B-1 Preferred Stock and Series B-2 Preferred Stock held by PSP were cancelled. No shares of Series B-1 Preferred Stock or Series B-2 Preferred Stock were outstanding as of December 31, 2020.
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series B Preferred Stock has a liquidation preference of $1,000 per share (the “Stated Value”). Holders of the Series B Preferred Stock are entitled to a cumulative dividend at a rate of 16% per annum, of which 50% was payable in cash and 50% was payable in kind until the first anniversary of the Closing Date, after which 50% is payable in cash, 37.5% is payable in kind, and the remaining 12.5% is payable in cash or in kind, at the Company’s option, subject in each case to adjustment under certain circumstances. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears. All dividends that are paid in kind will accrete to, and increase, the Stated Value. The applicable dividend rate is subject to increase by 2% per annum during any period that the Company is in breach of certain provisions of the applicable Certificate of Designation of the Preferred Stock. The Series B Preferred Stock has been classified as temporary equity as it may be contingently redeemable in the event of a change of control, which is outside of the Company's control.
Associated with the Series B Preferred Stock, the Company paid dividends of $12.4 million in kind and $10.6 million in cash during the year ended December 31, 2022. The Company paid dividends of $11.0 million in kind and $13.9 million in cash during the year ended December 31, 2021. As of December 31, 2022 the Company had accrued dividends of $3.4 million.
The Series B Preferred Stock is convertible into Common Stock at the election of the holder at any time at an initial conversion price of 5.00 (“Conversion Price”). The Conversion Price is subject to customary adjustments, including for stock splits and other reorganizations affecting the Common Stock and pursuant to certain anti-dilution provisions for below market issuances. As of December 31, 2022 and December 31, 2021, the maximum number of shares of common stock that could be issued upon conversion of the outstanding shares of Series B Preferred Stock was 34.7 million and 32.2 million shares, respectively.
The below table outlines the change in Series B Preferred Stock during the years ended December 31, 2022 and 2021.
Series B-1 Convertible Preferred Stock Series B-2 Convertible Preferred Stock Series B Convertible Preferred Stock
(in thousands) Shares Amount Shares Amount Shares Amount
Balance at December 31, 2020 - - - - 150 143,728
Redemption of shares - - - - (5) (5,330)
In kind dividend - - - - - 10,988
Balance at December 31, 2021 - - - - 145 149,386
In kind dividend - - - - - 12,410
Balance at December 31, 2022 - - - - 145 161,796
In connection with the consummation of the Investment Agreement, the Company and PSP entered into a Registration Rights Agreement (as amended, the “Registration Rights Agreement”), dated as of July 27, 2020. The Registration Rights Agreement provides that the Company will use its commercially reasonable efforts to prepare and file a shelf registration statement with the SEC within 30 days following a written request by PSP, and to use its commercially reasonable efforts to cause such shelf registration statement to be declared effective as promptly as is reasonably practicable after its filing to permit the public resale of registrable securities covered by the Registration Rights Agreement. The registrable securities generally include any shares of the Company’s common stock into which the Series B Preferred Stock is convertible, and any other securities issued or issuable with respect to any such shares of common stock by way of share split, share dividend, distribution, recapitalization, merger, exchange, replacement or similar event or otherwise.
Common Stock
The authorized common stock of the Company consists of 400 million 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 December 31, 2022, there were approximately 53.7 million shares of common stock outstanding.
Series A Preferred Stock
The Company has one share of Series A Preferred Stock outstanding, which is owned by R&H. R&H, voting as a separate class, is entitled to appoint one director to the Company’s board of directors for so long as R&H 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.
Accumulated Other Comprehensive Loss
As of December 31,
(in thousands) 2022 2021
Foreign currency translation adjustments ($45,231) ($46,247)
Pension and other postretirement benefit plans (412) (117)
Total ($45,643) ($46,364)
16. Stock-based Compensation
The Company’s stock-based compensation is in accordance with the Company's amended 2015 Incentive Compensation Plan (the “Plan”), pursuant to which the Compensation Committee of the Company is authorized to grant up to 13,650,000 shares to officers and employees of the Company, in the form of equity-based awards, including time or performance based options and restricted stock. In addition, the Company may grant cash-settled awards, including stock-appreciation rights (SARs) and phantom stock awards. As of December 31, 2022, there were 5,037,128 shares available for grant under the Plan.
In June 2019, the Company's shareholders approved the 2019 Employee Stock Purchase Plan (the "ESPP"), which was effective July 1, 2019. In August 2021, the number of shares reserved for issuance under the ESPP was increased to 1.25 million shares. The ESPP allows eligible employees to purchase shares of common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods beginning January 1 and July 1 of each year, and each offering period consists of a six-month purchase period. On each purchase date, eligible employees may purchase the Company's common stock at a price per share equal to 85% of the lesser of (1) the fair
market value of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date. As of December 31, 2022, 670,306 shares had been issued under the ESPP.
Stock compensation expense for the years ended December 31, 2022, 2021 and 2020 for equity and liability-classified awards was $4.6 million, $3.2 million and $3.6 million respectively.
The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
(in thousands) 2022 2021 2020
Cost of sales $65 $32 $95
Selling, general and administrative expenses 4,253 2,896 3,192
Research and development expenses 302 285 311
Total $4,620 $3,213 $3,598
Time-Based Stock Options
During the years ended December 31, 2022 and 2021, the compensation and talent committee of the Company's board of directors (the "Compensation Committee") approved time-based stock options ("Options") to be granted to new officers and certain employees of the Company, which vest ratably over three years. No Options were granted during the year ended December 31, 2020. A summary of the status of the Company’s Options for the years ended December 31, 2022 and 2021 were as follows:
(in thousands) Number of
Share
Underlying
Awards
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual
Term (years)
Outstanding at December 31, 2020 800 $6.47 6.67
Granted 1,098 1.52 9.48
Exercised - - 0.00
Forfeited or expired (398) 4.91 5.98
Outstanding at December 31, 2021 1,500 3.62 8.34
Exercisable at December 31, 2021 360 8.56 5.15
Vested and expected to vest at December 31, 2021 1,500 3.62 8.34
Outstanding at Outstanding at December 31, 2021 1,500 3.62 8.34
Granted 55 1.69 9.39
Exercised (339) 2.01 8.42
Forfeited or expired - - 0.00
Outstanding at December 31, 2022 1,216 3.98 7.13
Exercisable at December 31, 2022 429 7.64 4.63
Vested and expected to vest at December 31, 2022 1,216 $3.98 7.13
The fair value of each Option was estimated on the date of grant using the Hull-White or Black-Scholes option pricing models with the assumptions described below. For the periods indicated, since the Company has limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of Options and the actual volatility for the Company since July 1, 2015. The Company records forfeitures as they occur. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the expected term of the Options. The expected life for the Hull-White model was calculated as the average time to achieve the 2.0x strike exercise price in the simulation. The expected life for the Black-Scholes model was estimated using the simplified method.
Weighted average grant date fair value $2.00
Risk-free interest rate 0.9 % - 3.6%
Expected life (years) 5.83
Estimated volatility factor 53.6 % - 78.1%
Expected dividends None
As of December 31, 2022, the Company had unrecognized compensation costs for Options totaling $0.7 million that is expected to be recognized over an average period of 1.5 years.
Time-Based Stock Appreciation Rights
During the year ended December 31, 2019, the Compensation Committee approved time-based stock appreciation rights ("SARs") to be granted to employees of the Company outside of the United States, which vest ratably over three years. No SARs were granted during the years ended December 31, 2022, and 2021. A summary of the Company’s SARs as of December 31, 2022 and 2021 were as follows:
(in thousands) Number
of
Awards
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual
Term (years)
Outstanding at December 31, 2020 48 $12.00 4.69
Granted - - 0.00
Exercised - - 0.00
Forfeited or expired - - 0.00
Outstanding at December 31, 2021 48 12.00 3.69
Exercisable at December 31, 2021 48 12.00 3.69
Vested and expected to vest at December 31, 2021 48 12.00 3.69
Outstanding at December 31, 2021 48 12.00 3.69
Granted - - 0.00
Exercised - - 0.00
Forfeited or expired (7) 12.00 2.68
Outstanding at December 31, 2022 41 12.00 2.70
Exercisable at December 31, 2022 41 12.00 2.70
Vested and expected to vest at December 31, 2022 41 $12.00 2.70
Holders of these SARs are entitled under the terms of the Plan to receive cash payments calculated based on the excess of the Company’s stock price over the target price in their award; consequently, these awards are accounted for as liability-type awards, and the Company measures compensation cost based on their estimated fair value at each reporting date and the number of options expected to vest.
Upon issuance, the fair value of each SAR award was estimated using the Hull-White option pricing model with the assumptions described below. For the periods indicated, since the Company has limited historical volatility information available, the expected volatility was based on actual volatility for comparable public companies projected over the expected terms of SAR awards. The Company records forfeitures as they occur. The risk-free interest rate was based on the U.S. Treasury yield curve at the time of the grant over the expected term of the SAR awards. The expected life was calculated as the average time to achieve the 2.0x strike exercise price in the simulation. SARs are liability classified within Accrued expenses and other current liabilities and they are revalued at each reporting date. The assumptions used to value the SARs as of December 31, 2022 and 2021 are presented below:
2022 2021
Fair value of awards $0.02 $0.01
Risk-free interest rate 0.3% 0.3%
Expected life (years) 1.3 1.8
Estimated volatility factor 54.5% 54.5%
Expected dividends None None
As of December 31, 2022, the Company had no unrecognized compensation costs for SARs.
Restricted Stock
During the years ended December 31, 2022 and 2021, the Compensation Committee approved equity-classified performance-based restricted stock units (RSUs) and time-based restricted stock and RSUs to be granted to officers and employees of the Company, which vest ratably over three years. A summary of the Company’s RSUs and restricted stock as of December 31, 2022 and 2021 were as follows:
(in thousands) Number of
Shares
Weighted-Average
Grant Date Fair
Value
Non-vested Restricted Stock & RSUs at December 31, 2020 2,454 $2.12
Granted 2,143 2.07
Vested (525) 2.69
Forfeited or expired (1,045) 1.95
Non-vested Restricted Stock & RSUs at December 31, 2021 3,027 2.05
Non-vested Restricted Stock & RSUs at December 31, 2021 3,027 2.05
Granted 2,429 1.88
Vested (1,694) 1.92
Forfeited or expired (315) 2.62
Non-vested Restricted Stock and RSUs at December 31, 2022 3,447 $1.94
Unrecognized compensation expense for performance-based restricted stock and time-based restricted stock and RSU is $4.1 million, which is expected to be recognized over a weighted average period of 1.8 years.
Phantom Stock Awards
During the years ended December 31, 2022 and 2021, the Compensation Committee approved phantom stock awards to be awarded to employees and one director of the Company located outside of the United States. Phantom stock awarded to employees vest ratably over three years. Phantom stock awarded to the director vest in one year. These awards will be settled in cash upon vesting and are therefore liability-classified within Accrued expenses and other current liabilities, requiring re-measurement at each balance sheet date. A summary of the Company’s Phantom Stock Awards as of December 31, 2022 and 2021 were as follows:
(in thousands) Number of
Awards
Weighted-Average
Grant Date Fair
Value
Non-vested phantom stock awards at December 31, 2020 326 $2.26
Granted 68 2.03
Vested (87) 2.80
Forfeited or expired (41) 2.17
Non-vested phantom stock awards at December 31, 2021 266 $2.04
Non-vested phantom stock awards at December 31, 2021 266 $2.04
Granted 96 1.86
Vested (89) 2.10
Forfeited or expired (54) 2.53
Non-vested phantom stock awards at December 31, 2022 219 $1.82
Unrecognized compensation expense for the unvested time-based phantom shares is $0.3 million, which is expected to be recognized over a weighted average period of 1.4 years.
Board of Director Grants
Certain directors receive shares of restricted stock subject to the terms, provisions and restrictions of the 2015 Incentive Compensation Plan. The shares granted during the year ended December 31, 2022 and 2021, vest over a one-year period on the one year anniversary of each holder's grant date, provided the Director is still serving as a director of the Company. Upon termination of directorship for any reason, the Director immediately forfeits any unvested shares without payment. A summary of the Company’s time-based restricted stock awarded to the board of directors for the years ended December 31, 2022 and 2021 were as follows:
(thousands) Number of
Shares
Weighted-Average
Grant Date Fair
Value
Non-vested time-based restricted stock at December 31, 2020 187 $2.48
Granted 275 1.96
Vested (157) 2.48
Forfeited or expired (30) 2.48
Non-vested time-based restricted stock at December 31, 2021 275 $1.96
Non-vested time-based restricted stock at December 31, 2021 275 $1.96
Granted 343 1.85
Vested (275) 1.96
Forfeited or expired - -
Non-vested time-based restricted stock at December 31, 2022 343 $1.85
As of December 31, 2022, the Company had unrecognized compensation costs for the Director shares of $0.4 million that is expected to be recognized over an average period of 0.6 years.
17. Earnings Per Share
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. The Company had a loss for the years ended December 31, 2022 and December 31, 2021. Therefore, the effect of convertible preferred stock and stock-based awards including options, restricted stock, restricted stock units and warrants outstanding at December 31, 2022 and December 31, 2021, respectively, have not been included in the computation of diluted loss per share because their inclusion would have been anti-dilutive.
The following is a reconciliation of the weighted-average common shares outstanding used for the computation of basic and diluted net loss per common share:
Year Ended December 31,
(thousands) 2022 2021 2020
Basic weighted-average common shares outstanding 52,192 51,410 50,770
Effect of dilutive options, performance stock units and restricted stock - - -
Diluted weighted-average shares outstanding 52,192 51,410 50,770
Securities that could potentially be dilutive are excluded from the computation of diluted earnings (loss) per share when a loss from continuing operations exists, when the exercise price exceeds the average closing price of the Company's common stock during the period, or for contingently issued shares, if such contingency is not met at the end of the reporting period, because their inclusion would result in an anti-dilutive effect on per share amounts.
The following represents the weighted average number of shares that could potentially dilute basic earnings per share in the future:
Year Ended December 31,
(thousands) 2022 2021
Convertible preferred stock 33,048 23,153
Stock-based compensation awards (1):
Stock options 1,531 1,217
Restricted Stock Units 4,494 3,330
(1) SARs and Phantom Options are payable in cash so will therefore have no impact on number of shares.
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.
18. Income Taxes
Loss before income taxes consists of the following components:
Year Ended December 31,
(in thousands) 2022 2021 2020
Domestic ($33,229) $1,270 ($26,460)
Foreign (1,188) (4,774) 4,870
Total ($34,417) ($3,504) ($21,590)
Significant components of income taxes are as follows:
Year Ended December 31,
(in thousands) 2022 2021 2020
Currently payable:
Federal $1,603 $1,090 $377
State and local 142 26 4
Foreign 6,962 2,989 1,744
Total currently payable 8,707 4,105 2,125
Deferred:
Federal (5,793) (1,629) 27,705
State and local (289) (195) 305
Foreign (3,238) 297 1,241
Total deferred (9,320) (1,527) 29,251
Provision (benefit) for income taxes ($613) $2,578 $31,376
A reconciliation of income tax provision (benefit) at the U.S. Federal statutory income tax rate to actual income tax provision (benefit) is as follows:
Year Ended December 31,
(in thousands) 2022 2021 2020
Tax at statutory rate ($7,228) ($736) ($4,534)
State income taxes, net of federal tax benefit (86) (128) 364
Effect of foreign items 1,099 88 1,502
Valuation allowance and unbenefited losses (870) 4,280 33,478
Deferred tax rate changes (23) (755) 71
Transaction costs 1,004 (1,070) (131)
Tax incentives (250) (226) (311)
Disallowed foreign expenses and exchange losses 2,256 228 1,746
Sub Part F / Global intangible low taxed income 372 - -
Unrecognized tax benefits 814 79 (817)
Goodwill impairment - 1,340 -
Withholding taxes 1,200 - -
Other 1,099 (522) 8
Provision (benefit) for income taxes ($613) $2,578 $31,376
Income tax expense (benefit) for the year ended December 31, 2022, 2021 and 2020 include certain discrete tax items for changes in valuation allowances, foreign effective rate items and other rate modifying items.
The Tax Cuts and Jobs Act ("TCJA") subjects a U.S. corporation to tax on its global intangible low-taxed income ("GILTI"). U.S. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factor such amounts into the measurement of its deferred taxes (“deferred method”). The Company elected to use the period cost method and estimated no impact on tax expense in tax year 2021. The Company provided no tax provision impact related to base erosion and anti-abuse tax (“BEAT”) provisions of the TCJA, as the Company’s average gross receipts are under $500 million. In addition, the Company has not been eligible for a benefit for foreign derived intangible income (“FDII”) due to the Company’s U.S. net operating loss positions in tax year 2019, 2020 and 2021 and no foreign derived intangible income in 2022.
The Company’s U.S. operations have incurred cumulative taxable losses through December 31, 2022. The Company’s U.S. net operating loss carry forwards and carry forwards of other tax attributes are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. The utilization of the tax attributes may become restricted in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Section 382 and Section 383 of the IRC, as well as similar state tax provisions. This could limit the amount of the tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will generally be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. Please refer to Note 3 - Related Party Transactions regarding the ownership change in the year ended December 31, 2020. The Company completed a Section 382 study and determined the ownership change gave rise to the restrictions that will limit the realizability of certain U.S. tax attributes and built-in losses related to future intangible amortization tax deductions.
For the year ended December 31, 2022, the Company recorded a tax benefit of $0.9 million for the net decrease in valuation allowances related to deferred tax assets that are not able to be realized. The Company did not have sufficient evidence to support future taxable income to realize the deferred tax assets associated with net operating losses and various other deferred tax assets in certain foreign jurisdictions (Argentina, Korea, Brazil, Poland, Australia, New Zealand, Mexico, Morocco, Turkey, South Africa, Peru and Italy) in 2021. In 2022, new evidence supporting the realization of certain deferred tax assets (Brazil, Morocco and Peru) resulted in the foreign tax benefit of $0.6 million. In addition to the foreign valuation allowance impact, the Company recorded a tax benefit of $0.3 million for a decrease in the U.S. valuation allowance for an additional source of future taxable income related to the increase in the indefinite-lived intangible deferred tax liability in the current year.
For the year ended December 31, 2021, the Company recorded a tax expense of $4.3 million for the net increase in valuation allowances related to deferred tax assets that will no longer be able to be realized. The unrealizable deferred tax assets within foreign jurisdictions resulted in a tax expense of $4.3 million. In addition to the foreign valuation allowance impact, there were two offsetting valuation allowance impacts recorded in the U.S. The Company recorded a tax benefit of $0.2 million for a
decrease in the U.S. valuation allowance for an additional source of future taxable income related to the increase in the indefinite-lived intangible deferred tax liability in the current year. A $0.2 million tax expense for untaxed income related to the elimination of intercompany profit in inventory made up the last component of the change in valuation allowance for the prior tax period.
For the year ended December 31, 2020, the Company recorded a tax expense of $33.5 million for the net increase in valuation allowances related to deferred tax assets that will no longer be able to be realized. The unrealizable deferred tax assets relate to the aforementioned Section 382 limitations on U.S. tax attributes for a tax expense of $36.3 million. After the annual limitation was determined in the Section 382 study, the Company did not have sufficient evidence to support future taxable income to realize the deferred tax assets associated with non-deductible net interest expense, U.S. and state net operating losses, and future intangible amortization tax deductions. The remaining $2.8 million tax benefit included in the net $33.5 million change in valuation allowance tax expense relates to a tax benefit of $0.3 million for decreases in foreign valuation allowances in Japan, Netherlands and Turkey, offset by immaterial increases in South Africa and Peru, and a tax benefit of $2.5 million for untaxed income related to the elimination of intercompany profit in inventory.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2022 and December 31, 2021 are as follows:
December 31,
(in thousands) 2022 2021
Deferred tax assets:
Pension and other retiree obligations $170 $265
Other accruals and reserves 12,132 6,132
Loss and credit carryforwards 43,242 43,737
Interest expense deduction limitation carryforward 13,501 8,975
Investments 2,044 2,075
Right-of-use asset 1,709 1,574
Other 687 3,527
Valuation allowance (57,416) (61,677)
Deferred tax assets 16,069 4,608
Deferred tax liabilities:
Inventory (1,238) (432)
Intangible assets other than goodwill (24,461) (24,508)
Property, plant and equipment (679) (376)
Unrealized foreign currency gains (6,131) (5,236)
Lease liability (1,593) (1,497)
Deferred tax liabilities (34,102) (32,049)
Net deferred tax (liabilities) assets ($18,033) ($27,441)
The Company makes significant judgments regarding the realizability of its deferred tax assets (principally net operating losses). The carrying value of deferred tax assets is based on the Company’s assessment that it is more likely than not that the Company will realize these assets after consideration of all available positive and negative evidence.
Gross operating loss carryforwards amounted to $15.0 million for foreign jurisdictions, $169.3 million for U.S. federal and $24.7 million for U.S. states at December 31, 2022. These operating loss carryforwards relate to the years 2015 through current 2022 tax periods. On December 31, 2022, none of the operating loss carryforwards were subject to expiration in 2023. The operating loss carryforwards expiring in years 2024 through 2030 make up $2.3 million of the recorded deferred tax asset. The operating loss carryforwards expiring in years 2031 through 2040 make up $9.6 million of the recorded deferred tax asset. The remaining deferred tax asset relating to operating loss carryforwards of $28.7 million have an indefinite expiration. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
As of December 31, 2022, management determined that sufficient negative evidence exists to conclude that it is more-likely-than-not that certain income tax assets in the U.S., Argentina, Korea, Belgium, Japan, Poland, Australia, New Zealand, Mexico, Turkey, South Africa, and Italy are not realizable, and therefore, retained or recorded a new valuation allowance accordingly.
The Company has recorded tax credits in the U.S. for research and development expenditures and foreign taxes that were generated in tax years 2015 through 2022 for a total amount of $2.6 million. The foreign tax credits will begin to expire in 2025 and the research and development credits will begin to expire in 2035.
U.S. income and foreign withholding taxes have not been recognized for the difference between the financial reporting and tax basis of the investments in foreign subsidiaries that are indefinitely reinvested outside the U.S. This amount may be recognized upon a sale or liquidation of the subsidiary. There is not a gross temporary difference as of December 31, 2022, since the tax basis of investments in foreign subsidiaries is in excess of the financial reporting basis.
Uncertain Tax Positions
Year ended December 31,
(in thousands) 2022 2021 2020
Beginning Balance $883 $859 $2,670
Additions of tax positions of the current year 1,797 - -
Additions to tax positions of the prior years 516 166 209
Reductions of tax positions of the prior years - (52) (1,236)
Reductions related to prior tax positions due to foreign currency (62) (90) (633)
Expiration of statutes of limitations (735) - (151)
Ending Balance $2,399 $883 $859
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. As of December 31, 2022, and 2021, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company's financial statements, of $2.4 million and $0.9 million, respectively. If recognized in the fiscal years ended December 31, 2022 and 2021, $2.4 million and $0.9 million, respectively, of these benefits would have reduced income tax expense and the effective tax rate. Of these amounts, approximately $0.0 million and $0.0 million of the Company's unrecognized tax benefits at December 31, 2022 and 2021, respectively, are indemnified and the release of the indemnification asset will have an offsetting impact to the effective tax rate of the Company. Of the $2.4 million and $0.9 million benefits at December 31, 2022 and 2021, respectively, approximately $0.4 million and $0.2 million have been recorded as a reduction to the related deferred tax asset for the net operating loss in accordance with Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists for all periods. The total amount of unrecognized tax benefits is not expected to change within 12 months of the reporting date. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefit within the provision for income taxes in the consolidated statements of operations. The Company recorded a decrease of $0.4 million of interest and penalties as part of "Provision for income taxes" in the Company's consolidated statements of operations during the period ending December 31, 2022. Cumulative interest and penalties of $0.4 million and $0.9 million are recorded as part of Income taxes payable for December 31, 2022 and 2021, respectively.
19. Segment and Geographical Information
Segments
ASC 280 requires use of the management approach for segment reporting. The management approach is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. In prior periods, the Company had operated and managed the business as two reportable segments, AgroFresh Core and AgroFresh Fruit Protection (formerly Tecnidex). During the fourth quarter of the year ended December 31, 2021, the Company determined that it had one reportable segment, due to changes in senior management, as well as the integration of AgroFresh Fruit Protection with the Company's Core business operational and reporting structure. As a result of this change in segment reporting, the Company retrospectively revised prior period results, by segment, to conform to the current period presentation. For the year ended December 31, 2022, the Company has operated and managed the business as one reportable segment.
Geographic Regions
Net sales by geographic region, based on the location of the customer, were as follows:
Year Ended December 31,
(in thousands) 2022 2021 2020
Net sales:
North America (1)
$30,629 $32,635 $33,759
Latin America (2)
36,064 33,610 28,731
EMEA (3)
76,893 82,329 79,413
Asia Pacific (4)
18,351 17,415 15,740
Total Net sales $161,937 $165,989 $157,643
(1) North America includes the United States and Canada.
(2) Latin America includes Argentina, Brazil, Chile, Columbia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico, Peru and Uruguay.
(3) EMEA includes Europe, the Middle East and Africa.
(4) Asia Pacific includes Australia, China, India, Japan, New Zealand, South Korea, Taiwan, Thailand and the Philippines.
20. 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.
On October 14, 2019, the Company was awarded a verdict of $31.1 million in damages, related to, among other things, trade secret misappropriation and willful patent infringement, in its litigation against Decco Post-Harvest, Inc. ("Decco") and Decco's parent company, UPL Limited. The award was subsequently reduced by $18 million in connection with post-verdict review by the Court. During the year ended December 31, 2021, the lawsuit was settled, paid and is considered closed.
During the fourth quarter of 2022, the Company received notice from several customers in Italy that pears treated with one of the Company's products contained trace amounts of a fungicide that is not approved for use in Italy on pears. The Company has reserved $2.6 million based on a proposed settlement, which is included in selling, general and administrative expenses on the consolidated statements of operations. The Company has also referred the matter to the vendor that supplied the product to AgroFresh and has made claims with the Company's insurance carriers for potential reimbursement.
The Company received three letters on behalf of purported stockholders of the Company requesting that the Company make certain supplemental disclosures in addition to the information already disclosed in the Preliminary Proxy Statements issued in connection with the Merger. Additionally, a stockholder of the Company made a written demand to inspect certain books and records of the Company related to the Merger pursuant to Delaware General Corporation Law Section 220. The Company is in the process of considering the letters received to date and what, if any, actions it will take in response to them.
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 price and do not commit the business to obligations outside the normal customary terms for similar contracts, and these payment obligations are considered insignificant.
21. 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 December 31, 2022:
(in thousands)
Level 1
Level 2
Level 3
Liability-classified stock compensation (1)
$- $- $381
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, 2021:
(in thousands) Level 1 Level 2 Level 3
Liability-classified stock compensation (1)
$- $- $241
(1) The fair value of the stock appreciation right was measured using a Black-Scholes pricing model during the years ended December 31, 2022 and December 31, 2021. The fair value of phantom shares is based on the fair value of the Company's common stock. The fair value of performance based phantom shares was measured using estimated performance payout factors. For the year ended December 31, 2021, certain phantom shares were measured using a Monte Carlo pricing model.
There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 of the fair value hierarchy during the years ended December 31, 2022 and December 31, 2021.
At December 31, 2022, the Company evaluated the amount recorded under the Amended Term Loan and determined that the fair value was approximately $253.9 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 tables present the changes during the periods presented in our Level 3 financial instruments that are measured at fair value on a recurring basis.
(in thousands) Liability-classified stock compensation
Balance at December 31, 2021 $241
Stock compensation activity 140
Balance at December 31, 2022 $381
22. Other (Expenses)/Income
The Company had other expenses of $(4.1) million and income of $14.0 million for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company had expenses of $(4.1) million primarily related to transaction related expenses, including legal, consulting and other due diligence costs. During the year ended December 31, 2021, the Company had other income of $14.0 million due to the receipt of proceeds from the settlement of a litigation matter.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company's disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily applied its judgment in evaluating and implementing possible controls and procedures.
As of December 31, 2022, our management, with the participation of our CEO and CFO, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2022 in the Company's internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.
Our internal control over financial reporting include those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria in Internal Control-Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment using those criteria, management concluded that our internal control over financial reporting as of December 31, 2022 was effective.
Changes in Internal Control over Financial Reporting
Other than the remediation of the previously disclosed material weaknesses described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the Company’s most recently completed fiscal quarter, and there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for its 2023 Annual Meeting of Stockholders or included in an amendment to this Report, which, in either case, will be filed no later than 120 days after December 31, 2022.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for its 2023 Annual Meeting of Stockholders or included in an amendment to this Report, which, in either case, will be filed no later than 120 days after December 31, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for its 2023 Annual Meeting of Stockholders or included in an amendment to this Report, which, in either case, will be filed no later than 120 days after December 31, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for its 2023 Annual Meeting of Stockholders or included in an amendment to this Report, which, in either case, will be filed no later than 120 days after December 31, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will either be incorporated herein by reference to the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for its 2023 Annual Meeting of Stockholders or included in an amendment to this Report, which, in either case, will be filed no later than 120 days after December 31, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted either because they are not applicable, not required, or because the required information is included in the consolidated financial statements or the notes thereto. The following documents are filed as part of this report:
Page
(1) Financial Statements
(2) Financial Statements Schedule
(3) Exhibits
The Exhibits required to be filed are set forth on the Index to Exhibits immediately preceding the signature page to this Report and are incorporated herein by reference.
INDEX TO EXHIBITS
Exhibit No. 10 Description
1.1
(19) ATM Sales Agreement, dated June 25, 2020, between AgroFresh Solutions, Inc. and Virtu Americas LLC.
2 (26) Agreement and Plan of Merger, dated as of November 21, 2022, by and among Project Cloud Holdings, LLC, Project Cloud Merger Sub, Inc. and AgroFresh Solutions, Inc.
3.1
(2) Second Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 31, 2015.
3.2
(2) Series A Certificate of Designation.
3.3
(3) Amended and Restated Bylaws.
3.4
(4) Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of September 3, 2015.
3.5
(16) Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation
3.6
(13) Amendment to the Amended and Restated Bylaws of AgroFresh Solutions, Inc., effective as of November 2, 2017.
3.7
(5) Certificate of Designation of Series B Convertible Preferred Stock.
4.1
(2) Specimen Common Stock Certificate.
4.4
* Description of securities.
10.1
(6) Form of Indemnification Agreement.
10.2
(23) Amended and Restated Credit Agreement, dated July 27, 2020
10.3
(23) Registration Rights Agreement, dated July 27, 2020, between the Company and PSP AGFS Holdings, L.P.
10.4
(7) Investment Agreement, dated June 13, 2020, between the Company and PSP AGFS Holdings, L.P.
10.5
(2) Investor Rights Agreement, dated July 31, 2015, by and among AgroFresh Solutions, Inc., The Dow Chemical Company, Rohm and Haas Company, Boulevard Acquisition Sponsor, LLC, Robert J. Campbell, Joel Citron and Darren Thompson.
10.6
(2) Tax Receivables Agreement, dated July 31, 2015, by and among AgroFresh Solutions, Inc., AgroFresh Inc., The Dow Chemical Company and Rohm and Haas Company.
10.7
(9) AgroFresh Solutions, Inc. Incentive Compensation Plan.
10.8
(11) Employment Agreement, dated July 14, 2016, between AgroFresh Solutions, Inc. and Jordi Ferre.
10.9
(12) Services Agreement, dated November 29, 2016, among AgroFresh Solutions, Inc., RipeLocker LLC and George Lobisser.
10.10
(14) Form of Stock Option Agreement used in connection with the AgroFresh Solutions, Inc. 2015 Incentive Compensation Plan
10.11
(14) Form of Restricted Stock Agreement used in connection with the AgroFresh Solutions, Inc. 2015 Incentive Compensation Plan
10.12
(15) Agreement dated April 4, 2017, among the registrant, The Dow Chemical Company, Rohm and Haas
10.13
(15) First Amendment to Tax Receivables Agreement, dated April 4, 2017, among the registrant, The Dow Chemical Company, Rohm and Haas Company and AgroFresh Inc.
10.14
(15) Letter Agreement, dated April 4, 2017, between the registrant and The Dow Chemical Company.
10.15
(15) Letter Agreement, dated April 4, 2017, among the registrant, The Dow Chemical Company, Rohm and Haas Company and Boulevard Acquisition Sponsor, LLC.
10.16
(16) First Amendment to 2015 Incentive Compensation Plan
10.17
(1) Employment Agreement, dated as of September 15, 2015, between AgroFresh Solutions, Inc. and Thomas Ermi.
10.18
(8) Offer Letter, dated August 20, 2018 between the Company and Graham Miao.
10.19
(17) Amendment No. 2 to Credit Agreement, dated as of January 31, 2019.
10.20
(18) Termination Agreement, dated December 20, 2019, among the registrant, The Dow Chemical Company, Rohm and Haas Company and AgroFresh Inc.
10.21
(20) Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Jordi Ferre.
10.22
(20) Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Graham Miao.
10.23
(20) Change in Control Executive Severance Agreement, dated August 30, 2019, between the Company and Thomas Ermi.
10.24
(20) Amended and Restated Employment Agreement, dated August 30, 2019.
10.25
(21) Second Amendment to 2015 Incentive Compensation Plan
10.26
(22) 2019 Employee Stock Purchase Plan
10.27
(24) Employment Agreement, dated April 12, 2021, between the Company and Clinton Lewis.
10.28
(24) Change in Control Executive Severance Agreement, dated April 12, 2021, between the Company and Clinton Lewis.
10.29
(25) Waiver Letter, dated October 26, 2022
10.30
(26) Voting and Support Agreement, dated as of November 21, 2022, by and among AgroFresh Solutions, Inc., Paine Schwartz Partners, LLC, Paine Schwartz Food Chain Fund V GP, L.P., Paine Schwartz Food Chain Fund V GP, Ltd., PSP AGFS Holdings, L.P., Kevin Schwartz and, solely for purposes of Section 10(b) and Sections 12 through 23 thereof, Paine Schwartz Food Chain Fund V, L.P.
14.1
(10) AgroFresh Solutions, Inc. Code of Business Conduct.
21.1
* List of subsidiaries.
23.1
* Consent of Deloitte & Touche LLP.
24.1
* Power of Attorney (included on the signature page to this report).
31.1
* Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
31.2
* Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
32.1
** Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
101.INS * XBRL Instance Document
101.SCH * XBRL Taxonomy Extension Schema
101.CAL * XBRL Taxonomy Calculation Linkbase
101.LAB * XBRL Taxonomy Label Document
101.PRE * XBRL Presentation Linkbase Document
101.DEF * XBRL Definition Linkbase Document
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* Filed herewith.
** Furnished herewith.
(1) Incorporated by reference to an exhibit to the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission on March 22, 2018.
(2) 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.
(3) 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.
(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 September 10, 2015.
(5) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on September 28, 2020
(6) Incorporated by reference to an exhibit to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-193320) filed with the Securities and Exchange Commission on February 11, 2014.
(7) 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 15, 2020.
(8) 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 30, 2018.
(9) Incorporated by reference to Annex C to the Company’s definitive proxy statement (File No. 001-36197) filed with the Securities and Exchange Commission on July 16, 2015.
(10) 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 19, 2015.
(11) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on July 19, 2016.
(12) 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 December 5, 2016.
(13) Incorporated by reference to an exhibit to the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission on November 9, 2017.
(14) Incorporated by reference to an exhibit to the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission on March 16, 2017.
(15) 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 April 6, 2017.
(16) 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.
(17) 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 February 1, 2019.
(18) 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 December 20, 2019.
(19) 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 26, 2020.
(20) 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 6, 2019
(21) Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 15, 2019.
(22) Incorporated by reference to Appendix B to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 15, 2019.
(23) Incorporated by reference to an exhibit to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on July 29, 2020.
(24) 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 April 12, 2021.
(25) 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 October 27, 2022.
(26) 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 November 23, 2022.