As used in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), the terms "Company," "
AgroFresh," "we," "us" and "our" refer to AgroFresh Solutions, Inc.and its consolidated subsidiaries, unless the context otherwise requires or it is otherwise indicated. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Report. This MD&A contains the financial measures EBITDA and Adjusted EBITDA, which are not presented in accordance with accounting principles generally accepted in the United States of America("GAAP"). These non-GAAP financial measures are being presented because management believes that they provide readers with additional insight into the Company's operational performance relative to earlier periods and relative to its competitors and they are key measures used by the Company to evaluate its performance. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. A reconciliation of EBITDA and Adjusted EBITDA to the most comparable GAAP measure is provided in this MD&A.
Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Report including, without limitation, statements in this MD&A regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements. When used in this Report, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results and/or the timing of events could differ materially from those contemplated by these forward-looking statements due to a number of factors, including those discussed under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2021(the "2021 Form 10-K") as well as the update to those Risk Factors disclosed in Part II, Item 1A of this Report. Any forward-looking statements included in this Report are based only on information currently available to the Company and speak only as of the date on which such statements are made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are qualified in their entirety by this paragraph.
AgroFreshis 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. AgroFreshhas key products registered in over 50 countries, and supports customers by protecting approximately 25,000 storage rooms globally. AgroFresh'ssolutions range from near-harvest with Harvista™ and LandSpring™ to its flagship post-harvest SmartFresh™ Quality System. Additional post-harvest freshness solutions include fungicides that can be applied to meet various customer operational requirements, in either a foggable (ActiMist™) or liquid (ActiSeal™) delivery form. To supplement our near- and post-harvest product solutions, our FreshCloud™ digital technology platform includes analytical, diagnostic and tracking services that provide a range of value-added capabilities to help customers optimize the quality of their produce. Beyond apples, SmartFresh technology can provide ready-to-eat freshness for other fruits and vegetables including avocados, bananas, melons, tomatoes, broccoli and mangos. In December 2017, AgroFreshacquired a controlling interest in AgroFresh Fruit Protection (formerly known as Tecnidex). With this acquisition, AgroFreshexpanded its industry-leading post-harvest presence into additional crops and increased its penetration of the produce market in southern Europe, Latin Americaand Africa. For over 35 years, AgroFresh Fruit Protection has been helping fruit and vegetable producers offer clean, safe and high-quality products to customers in 18 countries. AgroFresh Fruit Protection offers a portfolio of post-harvest fungicides, coatings and disinfectants, packinghouse equipment and associated consulting and after-sale services to improves the quality and value of customers' fruit and vegetables while respecting the environment. AgroFresh Fruit Protection further diversified AgroFresh'srevenue 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 products and at the same time food waste is a major issue in the industry. About a third of the total food produced in the world is lost or wasted each year. Almost 50% of all
22 -------------------------------------------------------------------------------- Tabl e of Contents fresh fruits and vegetables are lost to spoilage.
AgroFreshplays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste. AgroFresh'sflagship SmartFresh Quality System regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables. SmartFresh degrades naturally, leaves no detectable residue and has been approved for use by many domestic and global regulatory organizations. Harvista extends the Company's proprietary technology into the field, including treatment of cherries early in the growing season and near-harvest management of apples, pears and blueberries. FreshCloud™ is our digital technology services platform, which continues to expand. Launched in 2020, FreshCloud Quality Inspection is a proprietary cloud-based mobile quality management service that digitizes what was formerly a manual quality control process and captures, organizes and analyzes quality metrics in real time. LandSpring™ is an innovative 1-MCP technology targeted to transplanted vegetable seedlings. It is currently registered for use on tomatoes, peppers and 14 other crops in the US. It reduces transplant shock, resulting in less seedling mortality and faster crop establishment, which leads to a healthier crop and improved yields. AgroFresh'sbusiness 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 most important factors are briefly discussed below.
Impact of COVID-19
March 2020, the COVID-19 outbreak was declared a National Public HealthEmergency 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 three months ended March 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 the Company is following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of its workforce, including implementing remote working arrangements and varying procedures for essential workforce, we cannot be 100% certain that there will not be any incidents across our global operations that may cause service interruptions. The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of the coronavirus outbreak, although the Company operates in an industry that thus far has not been as severely impacted as others. Nevertheless, the outbreak presents some uncertainty and risk with respect to the Company and its performance and financial results.
Request for company offers
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 Nationshas 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, is creating 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. 23 -------------------------------------------------------------------------------- Tabl e of Contents 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
AgroFreshoffers the Company's commercially available products, including SmartFresh and Harvista, primarily through a direct service model. Sales and sales support personnel maintain face-to-face relationships with customers year round. Technical sales and support personnel work with customers to provide value-added advisory services regarding the application of SmartFresh. The actual application of SmartFresh is performed by service providers that are typically third-party contractors. Harvista is applied through both ground and aerial application, which are administered by third-party service providers or made by our customers directly.
Most of the Company’s service providers operate under multi-year contracts. Management believes that the quality and experience of its service providers provide clear business advantages.
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.
Significant Accounting Policies and Use of Estimates
Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations and that require the use of complex and subjective estimates based upon management's judgment. Because of the uncertainty inherent in such estimates, actual results may differ materially from these estimates. There have been no material changes to our critical accounting policies and estimates previously disclosed in the 2021 Form 10-K. For a description of our critical accounting policies and estimates as well as a listing of our significant accounting policies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates" and "Note 2 - Basis of Presentation and Summary of Significant Accounting Policies" in the 2021 Form 10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes these critical accounting policies reflect its most significant estimates and assumptions used in the preparation of the financial statements. 24 -------------------------------------------------------------------------------- Tabl e of Contents Results of Operations
The following table summarizes the results of operations for the three months ended
Three Months Ended March 31, (in thousands) 2022 2021 Net sales
Cost of sales (excluding depreciation, shown separately below)
11,923 10,314 Gross profit 27,966 28,678 Research and development expenses 3,051 3,298 Selling, general and administrative expenses 11,892 13,551 Amortization of intangibles 10,718 10,763 Operating income 2,305 1,066 Other income 505 14,398 (Loss) gain on foreign currency exchange (1,196) 433 Interest expense, net (4,947) (5,890) (Loss) income before income taxes (3,333) 10,007 Income taxes (benefit) expense (164) 1,823 Net (loss) income including non-controlling interest (3,169) 8,184 Less: Net loss attributable to non-controlling interest (82) (239)
Net income (loss) attributable to
(3,087) 8,423 Less: Dividends on convertible preferred stock 6,436 6,005 Net (loss) income attributable to AgroFresh Solutions, Inc. common stockholders (
Comparison of operating results for the three months ended
compared to the three months ended
Net sales were
$39.9 millionfor the three months ended March 31, 2022, as compared to net sales of $39.0 millionfor the three months ended March 31, 2021, an increase of 2.3%. The impact of the change in foreign currency exchange rates compared to the first quarter of 2021 decreased revenue by $1.2 million. Excluding this impact, revenue increased approximately 5.5%, primarily driven by leveraging a portfolio of diverse solutions. Each of the Company's diversification categories generated growth in the first quarter. Growth within Fungicides & Disinfectants was driven by market penetration and product expansion in the Middle East. The Other 1-MCP category was supported by Harvista, which experienced strong growth in South Africa, supported by an early harvest and larger crop size. This was partially offset by SmartFresh for Apple declines in the Latin Americaregion due to unfavorable weather events.
Cost of sales
Cost of sales was
$11.9 millionfor the three months ended March 31, 2022, as compared to $10.3 millionfor the three months ended March 31, 2021. Gross profit margin was 70.1% for the three months ended March 31, 2022versus 73.5% for the three months ended March 31, 2021. The lower gross margin reflects the Company's strategic transition to a more diversified product portfolio, as well as higher materials costs associated with inflationary pressures.
Research and development costs
Research and development expenses were
25 -------------------------------------------------------------------------------- Tabl e of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses were
$11.9 millionfor the three months ended March 31, 2022, compared to $13.6 millionfor the three months ended March 31, 2021, a decrease of 12.2%. Included in selling, general and administrative expenses were $0.3 millionin the current year and $0.8 millionin the prior year of costs associated with non-recurring items that include M&A and litigation, along with severance. Excluding these items, selling general and administrative expenses decreased approximately 9.0% in the first quarter versus the prior year period, driven primarily by the timing of expenses. Amortization of Intangibles Amortization of intangible assets was $10.7 millionfor the three months ended March 31, 2022, compared to $10.8 millionfor the three months ended March 31, 2021. Other Income Other income was $0.5 millionfor the three months ended March 31, 2022, as compared to income of $14.4 millionfor the three months ended March 31, 2021. Other income in 2021 was due to the receipt of proceeds from the settlement of a litigation matter.
(Loss) Gain on foreign currency
Loss on foreign currency was
$1.2 millionfor the three months ended March 31, 2022, as compared to a gain of $0.4 millionfor the three months ended March 31, 2021. During the first quarter of 2022, foreign currency losses were recognized related to U.S.dollar intercompany receivables from the euro and Argentinian peso, which grew weaker relative to the U.S.dollar.
Interest expense, net
Interest expense was
$4.9 millionfor the three months ended March 31, 2022, as compared to $5.9 millionfor the three months ended March 31, 2021. The decrease was primarily due to higher interest income on investments of $0.3 million, lower debt amortization of $0.3 millionand to lower interest on the long-term debt due to a lower principal balance of $0.2 million.
Income tax benefit was
$0.2 millionfor the three months ended March 31, 2022, compared to income tax expense of $1.8 millionfor the three months ended March 31, 2021. For the three months ended March 31, 2022, the quarter's largest effective tax rate modification is related to foreign exchange currency gains and losses and certain non-taxable items. 26 -------------------------------------------------------------------------------- Tabl e of Contents Non-GAAP Measures The following tables set forth the non-GAAP financial measures of EBITDA, Adjusted EBITDA and non-GAAP constant currency net sales. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company's management to evaluate the Company's performance (including for incentive bonuses and bank covenant reporting), are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.
The following is a reconciliation of the non-GAAP financial measures of EBITDA and Adjusted EBITDA to their most directly comparable GAAP financial measure, net income (loss) including investments not giving control:
Three Months Ended March 31, (in thousands) 2022 2021 GAAP net (loss) income including non-controlling interest (
$3,169) $8,184Depreciation and amortization 11,444 11,423 Interest expense (1) 4,947 5,890 Income taxes (benefit) expense (164) 1,823 Non-GAAP EBITDA 13,058 27,320 Share-based compensation 988 891 Severance related costs (2) 73 - Other non-recurring costs (3) 186 766 Loss (gain) on foreign currency exchange (4) 1,196 (433) Other income (5) (515) - Litigation settlement - (14,392) Total Adjustments 1,928 (13,168) Non-GAAP Adjusted EBITDA $14,986 $14,152(1) Interest on debt and accretion for debt discounts. (2) Severance costs related to restructuring and cost optimization initiatives. (3) Costs related to certain professional and other infrequent or non-recurring fees, including those associated with restructuring, litigation and M&A related fees. (4) Loss (gain) on foreign currency exchange relates to net gains and losses resulting from transactions denominated in a currency other than the Company's functional currency. (5) Other income relates to non-recurring data compensation income.
The following is a reconciliation of non-GAAP constant currency net sales to GAAP net sales:
Three Months Ended March 31, (in thousands) 2022 2021 GAAP net sales
$39,889 $38,992Impact from changes in foreign currency exchange rates 1,231 - Non-GAAP constant currency net sales (1) $41,120 $38,992(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. 27
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