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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from ____ to ____
Commission File Number: 001-36316
AgroFresh Solutions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware

 
46-4007249

(State or other jurisdiction of incorporation)(IRS Employer Identification Number)
One Washington Square
510-530 Walnut Street, Suite 1350
Philadelphia, PA 19106
(Address of principal executive offices)
(267) 317-9139
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareAGFSThe NASDAQ Global Market
Warrants to purchase shares of Common StockAGFSWThe NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  
Accelerated filer
Non-accelerated filer  ☒

Smaller reporting company  
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes   No
As of June 30, 2019, the aggregate market value of the common stock held by nonaffiliates of the registrant, based on the $1.51 closing price of the registrant’s common stock as reported on the NASDAQ Stock Market on that date, was approximately $33 million. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
The number of shares of the registrant’s common stock outstanding as of February 25, 2020 was 51,195,101.

DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this annual report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2020, to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2019.
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TABLE OF CONTENTS
 
  Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain of the statements contained in this annual report on Form 10-K constitute “forward-looking statements” for purposes of federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would,” “will” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements relating to:
 
our future financial performance;
growth plans and opportunities, including planned product and service offerings;
changes in the markets in which we compete;
our ability to increase brand loyalty and awareness;
our ability to enter into alliances and complete acquisitions of other businesses;
protection of our intellectual property rights; and
the outcome of any known and unknown litigation.
 
The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” elsewhere in this report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
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PART I
 
ITEM 1. BUSINESS

Overview

AgroFresh Solutions, Inc. (the “Company”, “AgroFresh”, “we”, “us” or “our”) is a global leader in delivering innovative solutions that extend the shelf life of 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 preventing shrinkage and reducing waste.

AgroFresh’s market leadership is underpinned by our global footprint, extensive applied scientific expertise, customer intimacy, and a growing portfolio of value-added products and mission-critical advisory services. Our key products are approved for sale in over 50 countries, and support customers with over 25,000 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, from storage through retail. More importantly, AgroFresh has been able to gain a high level of trust from our customers, which is built on nearly 20 years of interaction and support. Our direct market approach, high touch service and science-based model best position us to address our customers’ needs. We believe that this is a key differentiator compared to other companies that offer limited service levels.

The following tables present a breakdown of our revenue based on solutions, crop and geography for the year ended December 31, 2019.
agfs-20191231_g1.jpgagfs-20191231_g2.jpg

Note: “EMEA” comprises Europe, the Middle East, and Africa. “Other” include revenue from pears, citrus, kiwifruit, avocados, bananas, and other crops.

AgroFresh’s core business provides solutions to extend the shelf life of fresh produce for both growers and packers. SmartFreshTM, our flagship solution, preserves the texture, firmness, taste and appearance of produce during storage, transportation and retail display. 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. Overall, the SmartFreshTM Quality System offers growers and packers an integrated freshness management solution that is highly effective and easy to deploy.

AgroFresh extended its post-harvest leadership with the acquisition in December 2017 of a controlling interest in Tecnidex Fruit Protection, S.A. (“Tecnidex”) which is based in Valencia, Spain, one of the largest citrus producing regions in the world. Tecnidex, a leading provider of fungicides, sanitizers, waxes and coatings, is primarily focused on the citrus market. Through its portfolio of post-harvest products, technology, consulting, and after-sale services, Tecnidex improves the quality and value of its clients’ fruit and vegetables while respecting the environment.

Tecnidex brought a broad catalog of solutions that enhanced our existing offering, including fungicides that can be added to our innovative ActiMistTM delivery system of foggable fungicides. The expanded offerings further diversified our revenue by expanding our ability to provide more solutions and service the citrus industry. 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. We continually seek opportunities to leverage this range of products across new geographies for both existing and new customers.

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Complementing our post-harvest solutions, AgroFresh’s HarvistaTM technology is used for near-harvest management of pome fruit (apples and pears), blueberries and cherries. Just as SmartFresh revolutionized post-harvest apple storage, we believe Harvista is starting to have a similar impact in the orchard. In apples, Harvista slows ripening, reduces fruit drop, and holds fruit on the tree longer to promote better color and fruit size. With maximum 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 apple quality compared to use of either product individually. When applied to cherries, Harvista offers an increase to yield of a minimum of 10%.

AgroFresh provides freshness solutions across the supply chain, including retail where much of the ripening process and shrinkage occurs for certain crops. This includes bananas, the largest retail fruit category, and avocados, the fastest growing fruit category. According to data from the Journal of Consumer Affairs and Food and Agriculture Organization of United Nations, it is estimated that 12-16% of banana loss occurs after the fruit reaches the grocery store. SmartFresh technology can also address this problem and improve the quality and consumer appeal of bananas. SmartFresh application enables retailers to extend the consumer-preferred yellow life of bananas an additional 2-4 days, reducing shrinkage at the store level. As part of the same diversification efforts, we are also developing and promoting applications of SmartFresh adapted to diverse customer requirements for avocados, broccoli, melons, prunes, tomatoes and mangos.

Our FreshCloud™ platform is an example of how we continue to evolve and increase the value we provide to our customers. The FreshCloudTM platform consists of produce monitoring and screening solutions with real time information delivered in the “cloud” to customers. FreshCloud capitalizes on our decades-long history of innovation and scientific know-how in the physiology of fruits and vegetables. FreshCloud consists of both enhancements to our existing service offering and customer base and new solutions to reach more crops and steps in the distribution chain. FreshCloud Storage Insights combines proprietary sensor technology and data analytics in the storage room to offer customers real-time access to unique insights into the condition of their stored fruit. FreshCloud Predictive Screening predicts the risk of disorder development during storage by analyzing gene expression at commercial harvest, resulting in more informed storage management decisions. FreshCloud Transit Insights combines sensor technology and proprietary algorithms to provide insights into the condition and quality of fruit during transit. We continue to expand the scope of our FreshCloud offerings, and we are in the process of launching FreshCloud Quality Insights, which aims to integrate quality control and machine learning to drive better decisions through integrated data, as well as digitalization of current solutions such as Harvista.

In December of 2017, AgroFresh invested $10.0 million for an approximate 15% ownership stake in and entered into a commercial agreement with FFT, provider of the award-winning It’s Fresh! ethylene removal filters in North America, Europe, the Middle East and Africa (“EMEA”) and Latin America. FFT has recently shifted its strategic focus away from retailers to growers and packers and is devoting commercial efforts to the launch of a new film technology. Due to lower projections while FFT ramps up for a new product launch, AgroFresh recognized an impairment charge on its investment in FFT during 2019.

We are subject to extensive national, state and local government regulations. We have completed more than 400 comprehensive international health and environmental tests that have shown the AgroFresh family of products, including SmartFresh and Harvista, to be safe for consumers, workers and the environment. 1-Methylcyclopropene ("1-MCP"), the active ingredient in the AgroFresh products, is metabolized by the natural processes in fruits and leaves no residue. AgroFresh products have been approved by over 50 authorities including the U.S. Environmental Protection Agency and the European Commission.

Competitive Strengths
 
We believe that the following strengths differentiate us from our competitors and serve as the foundation for our planned continued growth:
 
Leading Agricultural Innovator and Solutions Provider with Proprietary Technical Know-How. AgroFresh has been at the forefront of fresh produce preservation solutions since our inception. Our research and development team include over 40 scientists, about half with advanced degrees, who are leaders in the fields of plant physiology. Beginning with our creation of the commercial market for 1-MCP applications for use in the preservation of apples, we have produced 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 500 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. Extending our record of innovation in the post-harvest market, we entered the near-harvest market with the introduction of Harvista, which extends the ideal harvest window for apples and pears, and increases production yields for cherries and blueberries to improve harvest management and enhance fruit quality. Building on this success, we entered the fungicide market with ActiMist and
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subsequently enhanced our fungicide portfolio with the acquisition of Tecnidex in 2017. Our recent launch of FreshCloud is the latest milestone in our new product innovation. With the FreshCloud platform, we expect to be able to provide customers real time insights about the condition of their fruit using novel monitoring technologies.

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 over 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 across every major continent is a fundamental competitive advantage in our pursuit of capturing growth opportunities. We believe our global footprint provides not only a platform for growth but also greater diversification. 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, 2019, EMEA, North America, Latin America and Asia Pacific (including China and India) represented 47.8%, 24.8%, 18.7% and 8.7% of sales, respectively. The acquisition of Tecnidex meaningfully contributed to our global diversification.

Service-Oriented Business Model Creates Sustainable Competitive Advantages. AgroFresh’s direct service model provides better margins than the industry average, and comprises not only product applications but also mission-critical technical advisory services. Our sales and technical support personnel maintain direct interaction with our customers in areas of contract negotiations and overall customer service. Furthermore, we currently have over 40 dedicated research and development scientists, about half with advanced degrees, working across seven global AgroFresh locations, numerous research institutes, and customer sites. This infrastructure has allowed us to amass a proprietary database of technical data of plant physiology collected across our 20+ year history. In 2019, we made approximately 36,000 monitored applications of SmartFresh. Our proprietary database gives us unique 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. As a result, our local sales and technical service teams are best positioned to provide custom advice and solutions, giving our customers “peace of mind” between and during harvest season.

We believe FreshCloud can further bolster our integrated offerings with the addition of data-backed solutions for the monitoring of produce quality across the supply chain. FreshCloud is designed to deliver timely, predictive insights that will ultimately help our customers improve efficiency and enhance produce freshness.

We believe that our direct service model, extensive technical know-how, and brand loyalty differentiate us from competitors and sustain our competitive strengths.

Strong Momentum 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, market penetration, and mergers and acquisition (“M&A”) execution.

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. 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 outside of the U.S., as well as 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, bananas, melons, tomatoes, broccoli and mangos, where we believe SmartFresh can optimize the consumer experience for ripeness, color, taste, and texture. Related to this effort, we are repositioning RipeLock as our brand for packaging- based freshness technology solutions for fruits and vegetables.

Harvista is another key product where we are actively working to expand geographic adoption. As of December 31, 2019, Harvista is registered in eight countries and we are currently working to obtain registrations in more than ten additional countries including the European Union (the "EU"). In the past few years, we received regulatory approval to apply Harvista to cherry crops in the U.S., blueberries in Chile, and apples in Australia and our team is working to achieve similar registrations in other markets. Additionally, in 2020 we received approval for use of Harvista on apples in Brazil. The main limitation to accelerated growth of Harvista is the long regulatory approval cycle in important markets like the EU.

We have further augmented our crop solutions portfolio through our acquisition of Tecnidex. The addition of Tecnidex fungicides, sanitizers, waxes and coatings has diversified our crop exposure, reduced revenue seasonality, and provided new growth opportunities via cross-pollination of Tecnidex technologies into AgroFresh core fruit categories. As a result of all these initiatives, we have successfully diversified our proportion of sales attributable to apples from nearly 90% in July 2015 down to approximately 72% as of December 31, 2019.

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Building on these growth initiatives, we continuously seek opportunities to leverage our research and development (“R&D”) capabilities to commercialize new products for currently unserved markets. At the same time, we are looking at M&A opportunities as another key strategy to enhance our value proposition and drive 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 more than a decade, we have operated 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 cultivated direct customer relationships in more than 50 countries. We have also started some strategic customer relationships as a way to penetrate new geographies and markets.

High Profit Margins, Strong, and Consistent Cash Flow Generation. Our technical expertise, long-standing customer relationships, and asset-light business model drive attractive, sustainable profit margins. For the year ended December 31, 2019, we generated gross margins and EBITDA margins of 74% and 23%, respectively1. In addition, we employ an “asset-light”, outsourced production model. We use a single third-party manufacturer for our key active ingredient, 1-MCP, under a long-term contract with strict confidentiality obligations, to manufacture, and several other suppliers to formulate products and provide packaging services. For the manufacturing of waxes, sanitizers, and equipment servicing the citrus market, we have a combination of a manufacturing plant and several suppliers to formulate products and assemble equipment. As a result, our manufacturing footprint requires minimal capital investment and manufacturing personnel. For the year ended December 31, 2019, capital expenditures were $3.6 million, or 2.1% of net sales. Our attractive margin profile coupled with our asset-light solutions result in free cash flow generation, which will be used to reinvest in the business and repay debt.

Strong Management Team with Deep Industry Experience. Our management team has extensive food, agricultural and chemical 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 Jordi Ferre, our chief executive officer, who has over 25 years of experience in global food operations and manufacturing.

During the past several years, our management team has effectively launched new products, established new partnerships across the supply chain and completed a successful acquisition of the majority control of Tecnidex. Supported by a deep bench of professionals and a track record of execution, we believe our management team has the vision, expertise, and experience to position us for continued success and to implement our business and growth strategies.
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) income.

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. Euromonitor reports that retailers are often judged on their fresh food selection. A large 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 a variety of 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 259,500 metric tons of apple waste were diverted in the U.S., France and Italy alone. This reduced apple spoilage equates to more than 2.5 million metric tons of water. Improving the apple supply chain in those three countries during the same period took more than 10 million metric tons of carbon dioxide out of the air. This is equivalent to taking approximately two million cars off the road for one year or eliminating one billion smartphone charges. In other countries throughout the world, we estimate that SmartFresh reduced CO2 emissions by approximately 342,000 metric tons during that same period.
 
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Near-Harvest Treatments
 
Near-harvest treatments commonly used to increase the value of crops and reduce harvest losses include the use of “plant growth regulators” (“PGRs”) during the last stages of crop growth. PGRs influence the rate of growth or development of crops or affect their reaction to stress events such as harsh weather. PGRs interact with the biochemical make-up of the plant and work by mimicking or blocking the production of naturally occurring plant hormones, like ethylene. Blocking the production of ethylene allows a grower to slow down the maturation of fruit to achieve better control over the timing of harvest. PGRs have a range of effectiveness depending on factors such as environmental conditions and the timing of application. 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.
 
Post-Harvest Treatments
 
Post-harvest treatments to maximize quality and reduce loss include treatments to manage the effects of ethylene and to prevent microbial contamination. Naturally occurring ethylene triggers the acceleration of ripening in certain crops which results in a reduction of post-harvest life.

One class of post-harvest treatments enhances quality and reduces losses by controlling the environment in which produce is stored. 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 agricultural innovator in proprietary advanced technologies that enhance the freshness, quality, and value of fresh produce. We currently offer SmartFresh applications at customer sites predominately 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 tens 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 over 50 countries and derive the majority of our revenue working with customers to protect the value of apples, pears and other produce during storage. We offer Harvista in the U.S., Canada, Argentina, Chile, Turkey, Israel, Australia and South Africa, and are expanding into Brazil starting in 2020. LandSpring is being marketed primarily in the U.S. and SmartFresh diversification efforts are being marketed mainly in the U.S., Mexico and Peru. ActiMist was launched in the U.S. and is being expanded into other countries subject to regulatory approval. 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.

AgroFresh has extended its post-harvest leadership with the acquisition of Tecnidex, a leading provider of fungicides, sanitizers, waxes, and coatings primarily focused on the citrus market. For over 35 years, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to customers in 18 countries with particular strength in the Mediterranean region. Tecnidex brought a broad catalogue of solutions that enhanced our fungicide offering, ActiMist, an innovative delivery system of foggable fungicides. Our fungicide offerings further diversify our revenue by expanding our ability to provide solutions and service to the citrus industry.

1-MCP, the active ingredient in SmartFresh, LandSpring and Harvista, is an ethylene action inhibitor with a proven ability to maintain freshness and extend the shelf life of certain fresh produce. The 1-MCP molecule is structurally similar to ethylene, a naturally occurring plant hormone that occurs in certain fruits and vegetables. Ethylene helps produce grow and ripen, but 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. 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.

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SmartFresh Value Proposition

SmartFresh, our flagship solution, preserves the texture, firmness, taste and appearance of produce during storage, transportation and retail display. 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.

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 limited harvest window. This has resulted in the widespread adoption of SmartFresh by apple growers and packers throughout the world. The cost of SmartFresh translates into less than one cent per pound of apples, 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 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 way to achieve 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. Our acquisition of a controlling interest in Tecnidex and an increased presence in the citrus category has moderately reduced the historic concentration of sales in the second half of the year.
 
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, thereby bringing new benefits to the grower. With maximum flexibility in application timing, it extends the harvest window by allowing growers to factor in ever-changing weather conditions and labor availability, providing peace of mind. 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, the value of the crop is enhanced by bigger average fruit size, better color, and fewer defects.

We offer Harvista for apples, pears, cherries and blueberries through a pre-scheduled application service including aerial and/or ground 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.

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Harvista is currently available in the U.S., Canada, Turkey, Argentina, Brazil, Israel, Chile, Australia and South Africa, and the Company is currently compiling data for registrations in more than ten countries, which are expected to be granted on a country by country basis over the next five years. In 2017, we received regulatory approval to apply Harvista to cherries in the U.S. and blueberries in Chile. Additional registrations and label expansions are expected to be pursued as new formulations and/or crop concepts are validated.

FreshCloud

To continue to evolve and increase the value we provide to our customers, we recently launched our FreshCloud suite of produce monitoring and screening solutions. FreshCloud Storage Insights combines proprietary sensor technology and data analytics in the storage room to offer customers real-time access to unique insights into the condition of their stored fruit. FreshCloud Predictive Screening predicts the risk of disorder development during storage by analyzing gene expression at commercial harvest, resulting in more informed storage management decisions. FreshCloud Transit Insights combines sensor technology and proprietary algorithms to provide insights as to the condition and quality of fruit during transit.

LandSpring

LandSpring technology is a PGR for use on seedlings to help them withstand transplanting and other stresses encountered in the field. LandSpring suppresses the ethylene signals that would prompt a stress event in the seedling and reduce growth. Among the number of protective benefits, this technology makes seedlings less sensitive to stresses such as heat, cold, UV radiation, drought, flooding and salinity that often occur after planting. When applied before transplanting, LandSpring results in greater plant vigor and a healthier crop that is better able to withstand adverse environmental conditions and give growers the opportunity to increase yield.

Marketing and Sales

AgroFresh has consolidated the Company’s core business units under four seasoned commercial directors while adding leadership and focus to accelerate new business development activities. In 2018, we hired a director of crop diversification to lead the diversification of commercial opportunities as well as expansion into crops other than pome fruit and citrus. In 2019, we added a business leader to target citrus expansion in California, Peru and Mexico.

The Company's core post-harvest business includes solutions designed to improve the yields of growers and packers. These solutions include SmartFresh, Harvista, ActiMist, FreshCloud Storage Insights, FreshCloud Predictive Screening and a large range of fungicides, waxes and coatings, marketed under the brands Textar and Teycer, respectively.

Integration of Tecnidex continued to progress well in 2019, with all functional departments now aligned with AgroFresh’s global structure, including consolidation of all sales teams. In addition, SAP was implemented across the Tecnidex organization in April 2019.

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 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 includes global brand management and corporate brand/image stewardship and regionally developed marketing strategies and tactics to drive growth and customer penetration. Marketing personnel are embedded within the Company’s operating regions to provide maximum ability to collaborate with local sales teams and capitalize on business opportunities. Regional marketing teams interact with customers to keep them up to date on the latest research and news about AgroFresh products. Market research, including product penetration, collecting competitive intelligence and tracking other relevant market and industry information, is managed globally in conjunction with the regional teams.
 
No single customer accounted for more than 10% of net sales in 2019, 2018 or 2017.
 
Competition
 
We estimate the size of the core post-harvest market to be approximately $500 million on a global basis. The post-harvest solutions offered include 1-MCP-based solutions, fungicides and coatings, representing approximately 36%, 20% and 24% of the total market, respectively. The market for the use of 1-MCP is evolving and we have faced growing competition since the expiration of the 1-MCP use patent in 2014. We estimate that citrus applications represent approximately 60% of the total core
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post-harvest market, which is why we are focused on seeking to grow in this important crop segment. The market for post-harvest solutions is fragmented with various regional suppliers. Including AgroFresh, there are three leading providers with global reach that account for about two thirds of global post-harvest sales. Other regional players, mainly in citrus, account for approximately another 20% of post-harvest sales. Additional key players in the post-harvest industry include fungicide suppliers such as Syngenta and Janssen PMP who hold post-harvest registrations of fungicides previously approved for pre-harvest applications. In the near-harvest segment, ReTainTM is a competitive technology to Harvista that is offered by Valent 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 on the basis of these and other factors. See the subsection titled “Competitive Strengths” above.

Research and Development
 
Research and development plays an important role at AgroFresh in supporting customers as well as developing line extensions and new products. Research and development is a truly 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 (August to November in the Northern Hemisphere and late January to early May in the Southern Hemisphere), we hire additional third-party contract scientists to assist AgroFresh in the execution of experiments involving Harvista, SmartFresh, and FreshCloud 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 makes use of 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.
 
Intellectual Property
 
We are a technology-based solutions provider and, as such, rely on a combination of important intellectual property strengths, including licenses, 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 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 ProTabsTM, an application method patented through 2022, and we continue to invest in application technologies as a means to continue to facilitate an even better service to our customers. We have also generated an impressive portfolio of intellectual property with over 30 patents granted in at least one country (pending in other countries) covering 1-MCP and next generation technologies, most of which do not expire until 2025 or beyond. RipeLock and Harvista formulations are patent protected through at least 2027.
 
Regulation and Compliance
 
We are subject to extensive national, state and local government regulation, 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, RipeLock, 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 the AgroFresh products, is metabolized by the natural processes in apples and other fruits and leaves no residue. 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 that are 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, 2019, we had approximately 292 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
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(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 contingent staff.
 
Geographic Information
 
Please see Note 19 to the audited consolidated financial statements for geographic sales information.

Available Information
 
Our website is at 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
 
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 Our Business and Industry
 
Increased competition in our industry can lead to pricing pressure, reduced margins or the inability of our products and services to achieve market acceptance.
 
We serve established and knowledgeable customers in the business of growing, storing and handling fresh produce and flowers.
 
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. For example, during 2017 and 2018, we decreased pricing in the U.S. to defend market share against increased competition. We believe the situation stabilized during the 2019 season. We may elect to take similar action in other regions such as Europe 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, 2019, we employed approximately 292 full-time employees, of which approximately 148 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.

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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 2019, we derived approximately 76% 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.
 
In December 2017, we completed the acquisition of a controlling interest in Tecnidex Fruit Protection, S.A.U., a leading provider of post-harvest fungicides, waxes and sanitizers for the citrus market. We may further pursue 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 Tecnidex or any other 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
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adverse effect on our business, financial condition and results of operations.

We may be adversely affected by the recent coronavirus outbreak.

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. While we have minimal business in China, our operations could be adversely affected to the extent that coronavirus or any other epidemic harms the global economy in general or demand for fresh horticultural products generally. 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.

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, 2019, our total indebtedness was approximately $407 million, including $406 million in outstanding principal under a term loan with a scheduled maturity date of July 31, 2021. 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 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.

If our cash flows and capital resources are insufficient to fund our debt service 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.

If we are unable to obtain additional debt or equity capital, restructure or refinance our indebtedness, or avail ourselves of alternative actions, our Term Loan ($405.9 million as of December 31, 2019) will become a current liability in the third quarter of 2020, which could raise doubts about our ability to continue as a going concern.

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
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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, 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
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third-party providers, or other issues affecting any such third party’s ability to meet our distribution requirements. The failure to properly perform by, switch to the competition 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 goodwill and 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
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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.
 
Our pre- and post-harvest products are subject to technical review and approval by government authorities in each country where we wish to sell our products. 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, finally, 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
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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 was the case with respect to our data in Europe in 2016 and in the United States in 2017, any third party would be 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 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 found to be 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. For example, 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
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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 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 more than 50 countries, in addition to our operations in the United States. We expect sales from international markets to represent an increasing portion of our net sales, and our acquisition of a
controlling interest in Tecnidex increased our operations outside of the United States. 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;
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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 generally do not have long-term contracts with 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, our 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
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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 2019, 2018 and 2017.
 
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 2019, 2018 or 2017. At December 31, 2019, December 31, 2018 and December 31, 2017, 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
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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 goodwill and identified intangible assets as a result of business combinations, and we may record additional goodwill and other intangible assets as a result of any acquisitions we may complete in the future. We are required to test goodwill and any other 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 goodwill, 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.
 
Risks Related to Our Securities
 
The Dow Chemical Company ("Dow") has 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, 2019, Dow owned approximately 41% of our outstanding common stock. In addition, Dow currently owns 3,000,000 of our outstanding warrants. Because of the degree of concentration of voting power (and the potential for such power to increase upon the purchase of additional stock or the exercise of warrants), your ability to elect members of our board of directors and influence our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common
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stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends, may be diminished.
 
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 those described elsewhere in this report and others such as:
 
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
success of competitors;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or the agricultural or specialty chemicals industries in general;
our ability to market new and enhanced products on a timely basis;
changes in laws and regulations affecting our business;
our ability to meet compliance requirements;
commencement of, or involvement in, litigation involving us;
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
the volume of shares of our common stock available for public sale;
any major change in our board of directors or management;
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
 
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, 2019, there were 51,178,146 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 an Investor Rights Agreement, dated July 31, 2015 (the “Investor Rights Agreement”), pursuant to which Dow and the other parties thereto are entitled to demand that we register the resale of their securities subject to certain minimum
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requirements. Stockholders who are party to the Investor Rights Agreement also have certain “piggyback” registration rights with respect to registration statements we may file.
 
Upon effectiveness of any registration statement we file pursuant to the Investor Rights Agreement, 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.
 
Warrants are exercisable for our common stock, which, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
 
As of December 31, 2019, outstanding warrants to purchase an aggregate of 15,983,072 shares of our common stock were exercisable in accordance with the terms of the warrant agreement governing those securities. All of these warrants will expire at 5:00 p.m., New York time, on July 31, 2020, or earlier upon redemption or liquidation. The exercise price of these warrants is $11.50 per share. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.
 
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 change their recommendation regarding our stock adversely, 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 chairman 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
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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 and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends 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 may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. 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.
 
While we have ceased being an “emerging growth company” as of December 31, 2019, many of the exemptions available for emerging growth companies are also available to smaller reporting companies like us that have less than $250 million of worldwide common equity held by non-affiliates. The disclosures we will be required to provide in our SEC filings will increase, but will still be less than it would be if we were not considered a smaller reporting company. Specifically, similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosures in their 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 their SEC filings, including, among other things, 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 control over financial reporting or effective disclosure controls, 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.

A deficiency discovered in our recently implemented SAP accounting system with respect to foreign currency translations caused us to file our quarterly report on Form 10-Q for the quarter ended June 30, 2018 late. 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 the reports that it files or submits under the Exchange Act 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
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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.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.

ITEM 2. PROPERTIES
 
We lease our current headquarter facility in Philadelphia, Pennsylvania, consisting of approximately 15,887 square feet. The lease has a 90 month term commencing in May 2016, with a five-year renewal option and an option for us to terminate the lease after 72 months. We also lease office space in Paris, France, consisting of approximately 7,100 square feet. The lease has a 108 month term commencing in October 2015. 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; Curico, Chile; Bologna, Italy; and Lerida, Spain. In addition, the Yakima Service Center is our product distribution center to all geographic regions around the world. Tecnidex occupies a building of five units that make up their headquarters in Valencia, Spain. Tecnidex 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 has a 60 month term that commenced in October 2015 and the other two leased units have a 120 month lease term that commenced in July 2017.

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.

In August 2016, we filed a lawsuit against MirTech, Inc. (“MirTech”), Decco U.S. Post-Harvest, Inc. (“Decco”) and certain related parties in the United States District Court for the District of Delaware. Our complaint alleged, among other things, that MirTech, a former consultant to us, appropriated our confidential information and technology, in violation of agreements between MirTech and us, and that MirTech and Decco collaborated to infringe on several of our patents. Our complaint seeks, among other relief, declarations that we are the owner of a number of patents filed by MirTech, injunctive relief to stop the infringement of our patents, and monetary damages. The claims in this lawsuit were bifurcated and a bench trial was held in March 2017 on certain of our contract claims., after which the Court ruled in the Company’s favor and against MirTech. In October 2019 there was a jury trial against Decco and its parent company, UPL Ltd.("UPL"), in which the jury awarded AgroFresh $31.1 million in damages, including punitive damage. The Company filed a post-trial motion asking the trial Court Judge to award up to $14.0 million in additional damages, and UPL and Decco filed post-trial motions asking the trial Court Judge to set aside the jury’s award and find in favor of UPL and Decco. The Court has not ruled on any of the post-trial motions to date.



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PART II

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock and warrants trade on the Nasdaq Global Select Market under the symbols “AGFS” and “AGFSW,” respectively. Each warrant entitles the holder to purchase one share of our common stock at a price of $11.50 per share, and only whole warrants are exercisable. The warrants will expire on July 31, 2020, unless redeemed earlier.
 
Holders of Record
 
On February 25, 2020, there were approximately 84 holders of record of our common stock and 5 holders of record of our warrants. Such numbers do 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 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.

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 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 measure 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.

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 with over 25,000 storage rooms globally. AgroFresh’s solutions range from near-harvest with HarvistaTM and LandSpringTM to its flagship post-harvest SmartFreshTM technology. 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 suite of FreshCloud™ analytical, diagnostic and tracking services provide a range of value-added capabilities that 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. AgroFresh is also providing customers with packaging-based advisory services and custom packaging solutions including RipeLock, which has been repositioned as our brand for packaging-based freshness technology solutions for fruits and vegetables.

In December 2017, AgroFresh acquired a controlling interest in 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, Tecnidex has been helping fruit and vegetable producers offer clean, safe and high-quality products to its regional customers in 18 countries. Through its portfolio of post-harvest fungicides, coatings, waxes and sanitizers, and associated consulting and after-sale services, Tecnidex improves the quality and value of its clients’ fruit and vegetables while respecting the environment. Tecnidex further diversified AgroFresh’s revenue by expanding the Company's ability 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 45% of all fresh fruits and vegetables, 40% of apples and 20% of bananas, are lost to spoilage. AgroFresh plays a key role in the value chain by offering products and services that maintain produce freshness and reduce waste.
 
AgroFresh’s current flagship product, SmartFresh, regulates the post-harvest ripening effects of ethylene, the naturally occurring plant hormone that triggers ripening in certain fruits and vegetables. SmartFresh is naturally biodegradable, leaves no detectable residue, and has been approved for use by many domestic and global regulatory organizations. Harvista extends the Company’s proprietary technology into the field, including treatment of cherries and blueberries early in the growing season, and near-harvest management of apples and pears. FreshCloud Storage InsightsTM is an atmospheric monitoring system that leverages the Company's extensive understanding of fruit physiology, fruit respiration, controlled atmosphere technology, and new proprietary diagnostic tools to provide improved real-time guidance to producers and packers of fresh produce regarding storage conditions so timely corrective measures can be taken. LandSpringTM is an innovative 1-MCP technology targeted to transplanted vegetable seedlings. It is currently registered for use on tomato, 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 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,
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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.
 
On July 31, 2015 (the “Closing Date”), we consummated a business combination (the “Business Combination”) pursuant to a Stock Purchase Agreement, dated April 30, 2015 (the “Purchase Agreement”), with Dow, providing for the acquisition by us of the AgroFresh business from Dow. In connection with the closing of the Business Combination, we entered into a tax receivables agreement (the "TRA"), as amended in April 2017, pursuant to which Dow was entitled to receive 50% of the tax savings, if any, that the Company realized as a result of the increase in the tax basis of assets acquired pursuant to the Business Combination. The TRA was terminated in December 2019. Also in connection with the closing of the Business Combination, AgroFresh entered into a transition services agreement with Dow. Under the agreement, Dow provided AgroFresh a suite of services for a period of time ranging from six months to five years depending on the service. While most of the Dow-provided services were complete as of December 31, 2018, certain services are expected to continue through 2020.
 
Factors Affecting the Company’s Results of Operations
 
The Company’s results of operations are affected by a number of external factors. Some of the more important factors are briefly discussed below.
 
Demand for the Company’s Offerings
 
The Company services customers in over 50 countries and derives its revenue by assisting growers and packers to optimize the value of their crops primarily through the post-harvest period. Its products and services add value to customers by reducing food spoilage and extending the life of perishable fruits. The 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 of 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 51 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 Service Model
 
AgroFresh's direct service model offers the Company’s commercially available products, including SmartFresh and Harvista. Sales and sales support personnel maintain face-to-face relationships with customers year round. Technical sales and support personnel work directly with customers to provide value-added advisory services regarding the application of SmartFresh. The actual application of SmartFresh is performed by service providers that are typically third-party contractors. The Harvista application service, through both aerial and ground application, is also administered by third-party service providers or made by our customers directly.
 
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, northern hemisphere growers harvest from August through November, and southern hemisphere growers harvest from late January to early May. As we diversify into other crops, such as citrus, we also anticipate seasonal
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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 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.
 
Asset Impairments
 
Factors that could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These risk factors are discussed in Part I, Item 1A, “Risk Factors.”
 
Goodwill
 
As discussed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in the audited consolidated financial statements, the Company tests goodwill and identifiable intangible assets with indefinite lives for impairment at least annually. Intangibles are tested for impairment using a quantitative impairment model. We test goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test. We consider the Company to be two reporting units for purposes of testing goodwill for impairment.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to our future cash flows, discount rates commensurate with the risks involved in the assets, future economic and market conditions, as well as other key assumptions. The amounts recorded in the financial statements related to goodwill are based on the best estimates and judgments of the Company’s management, although actual outcomes could differ from our estimates. In connection with the Tecnidex acquisition in 2017, we recorded goodwill with a carrying value of $6.3 million as of December 31, 2019. The estimated fair value of the Tecnidex reporting unit as of December 31, 2019 is approximately 9% greater than the carrying value of the reporting unit. A 1% increase in the assumed discount rate or a 5% decrease in projected revenues would cause the impairment test to fail.

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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

Based on the results of our annual impairment reviews, management recorded an impairment charge of $2.6 million on its SmartFresh trade name for the year ended December 31, 2018. The Company recorded an impairment charge of $1.0 million for the year ended December 31, 2019 associated with Verigo software. In determining the fair value of the trade names, the Company applied the relief from royalty methodology, which is based on the assumption that without ownership of the assets, the user of the trade name 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 three indefinite-lived trade names which passed the impairment test as of December 31, 2019 by 34%, 29%, and 8%. A 1% increase in the discount rate would cause an impairment of one of the trade names by approximately $0.2 million.

Definite-lived intangible assets, such as technology, customer relationships and software are amortized over their estimated useful lives, generally for periods ranging from 4 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 definite-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. In the fourth quarter of 2019, the Company recognized accelerated amortization expense of $34.0 million related to developed RipeLock technology based on the Company’s change in strategy for the RipeLock product. The accelerated amortization expense is included in amortization of intangibles in the consolidated statements of (loss) income.
 
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.
 
On January 1, 2018, the Company began to account 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 (loss) income, net of estimated rebates and discounts.

In periods prior to the adoption of Topic 606, revenue was recognized when (1) persuasive evidence of an arrangement existed, (2) delivery had occurred or services had been rendered, (3) the sales price was fixed or determinable, and (4) collectability was reasonably assured.

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See Note 2 to the audited consolidated financial statements for further information.

Accounting for Business Combinations
 
We account for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition date fair values. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, royalty rates and asset lives, among other items.
 
The fair values of intangible assets were estimated using an income approach, either the excess earnings method (customer relationships) or the relief from royalty method (technology and trademarks). Under the excess earnings method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable solely to the intangible asset over its remaining useful life. Under the relief from royalty method, fair value is measured by estimating future revenue associated with the intangible asset over its useful life and applying a royalty rate to the revenue estimate. These intangible assets enable us to secure markets for our products, develop new products to meet evolving business needs and competitively produce our existing products.
 
The fair values of property, plant, and equipment, other than real properties, were based on the consideration that unless otherwise identified, they will continue to be used “as is” and as part of the ongoing business. The determination of the fair value of assets acquired and liabilities assumed involves assessing factors such as the expected future cash flows associated with individual assets and liabilities and appropriate discount rates at the date of the acquisition.
 
The fair values of the various contingent consideration components were measured using the following valuation models. The fair value of the tax amortization benefit contingency was measured using an income approach based on the Company’s best estimate of the undiscounted cash payments to be made, tax effected and discounted to present value utilizing an appropriate market discount rate. The fair value of the earnout payment was measured using a Monte Carlo pricing model and based on the Company’s best projection of the Company’s revenues over the three-year period from January 1, 2018 to December 31, 2020.

See Note 3 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 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 financial 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
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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 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:
 
(in thousands)Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Net sales$170,065  $178,786  $164,026  
Cost of sales (excluding amortization, shown separately below)45,049  46,271  32,655  
Gross profit125,016  132,515  131,371  
Research and development expenses14,112  13,873  13,779  
Selling, general, and administrative expenses59,446  65,770  61,847  
Amortization of intangibles81,119  45,946  41,910  
Impairment of long lived assets11,424  2,600  —  
Change in fair value of contingent consideration(330) (3,018) (26,948) 
Operating (loss) income (40,755) 7,344  40,783  
Other income13  429  611  
(Loss) gain on foreign currency exchange(4,127) (1,722) 13,344  
Interest expense, net(33,784) (34,451) (35,755) 
(Loss) Income before income taxes(78,653) (28,400) 18,983  
(Benefit) provision for income taxes(17,143) 1,840  (4,579) 
Net (loss) income including non-controlling interests$(61,510) $(30,240) $23,562  
Less: Net loss (income) attributable to non-controlling interests$678  $180  $(91) 
Net (loss) income attributable to AgroFresh Solutions, Inc$(60,832) $(30,060) $23,471  

Comparison of Results of Operations for the year ended December 31, 2019 and the year ended December 31, 2018.
 
Net Sales
 
Net sales were $170.1 million for the year ended December 31, 2019, as compared to net sales of $178.8 million for the year ended December 31, 2018. The impact of the change in foreign currency exchange rates compared to 2018 reduced revenue by $3.3 million. Excluding this impact, revenue decreased approximately 3.0%.

The remaining decrease in net sales was due to increased competition and decreased pear crop size in Europe. Tecnidex sales decreased 4.7% on an absolute basis and decreased 0.1% on a constant currency basis versus the prior year period. Offsetting these decreases was growth in SmartFresh in Latin America, sales of Harvista in North America and Latin America and new revenue associated with FreshCloud.
 
Cost of Sales
 
Cost of sales was $45.0 million for the year ended December 31, 2019, as compared to $46.3 million for the year ended December 31, 2018. Gross profit margin was 73.5% in 2019 versus 74.1% in 2018. The margin was relatively stable and in line with our expectations.
 
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Research and Development Expenses
 
Research and development expenses were $14.1 million for the year ended December 31, 2019, as compared to $13.9 million for the year ended December 31, 2018. The increase in research and development expenses is primarily related to $0.5 million of severance costs.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $59.4 million for the year ended December 31, 2019, as compared to $65.8 million for the year ended December 31, 2018, a decrease of 9.6%. Included in selling, general and administrative expenses were $8.8 million in 2019 and $9.0 million in 2018 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 10.7% from 2018 to 2019, driven by ongoing cost optimization initiatives.
 
Amortization of Intangibles
 
Amortization of intangibles was $81.1 million for the year ended December 31, 2019, as compared to $45.9 million for the year ended December 31, 2018. The increase in amortization is due to accelerated Ripelock amortization of $34.0 million and software additions during 2019.

Impairment of Assets

During the year ended December 31, 2019, the Company recorded an impairment charge of $1.0 million associated with Verigo software following a partnership agreement with a new technology provider and an impairment of $10.1 million on investments and $0.4 million of other assets. During the year ended December 31, 2018, the Company recorded an impairment charge of $2.6 million related to the estimated decline in the fair value of the SmartFresh trade name.

Change in fair value of contingent consideration
 
The Company recorded a $0.3 million gain in the year ended December 31, 2019 related to the change in the fair value of contingent consideration, as compared to a $3.0 million gain for the year ended December 31, 2018. As discussed in Note 3 to the audited consolidated financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the deferred payment and the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings. For the year ended December 31, 2018, the deferred payment and the tax amortization benefit contingency mark-to-market gains were $0.3 million and $2.8 million, respectively. For the year ended December 31, 2019, the Company recognized a deferred payment gain of $0.4 million and a tax amortization benefit contingency loss of $0.1 million. In December 2019, the TRA was terminated, and the Company paid to Dow an aggregate of $16 million in settlement of all past and estimated future liabilities that would have been owed under the TRA.
 
Other Income
 
Other income was $0.0 million for the year ended December 31, 2019, as compared to $0.4 million of income for the year ended December 31, 2018.
 
Loss on foreign currency

Loss on foreign currency was $4.1 million for the year ended December 31, 2019 as compared to a loss of $1.7 million for the year ended December 31, 2018. The loss was primarily due to inflation in Argentina during 2019, as compared to 2018, when translation losses were included in equity until July 1, 2018.

Interest Expense, Net
 
Interest expense, net was $33.8 million for the year ended December 31, 2019, as compared to $34.5 million for the year ended December 31, 2018. The decrease was primarily driven by lower accretion on the TRA of $0.3 million, increase in the recognition of the gain on hedging activity of $1.1 million and increase of interest income of $0.5 million, which was partially offset by higher interest on our credit facility of $1.5 million.

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Income Tax Provision
 
Our effective tax rate was 21.8% for the year ended December 31, 2019, as compared to (6.5)% for the year ended December 31, 2018. 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. It is also affected by discrete items that may occur in any given year. On December 22, 2017 the Tax Cuts and Jobs Act ("TCJA") was enacted in the U.S. The TCJA significantly revised the U.S. federal corporate income tax by, among other things, lowering the corporate income tax rate to 21%, implementing a territorial tax system, imposing a limitation on tax deductibility of U.S. interest expense, and the inclusion of “global intangible low-taxed income” (“GILTI”).

During the year ended December 31, 2019, certain income was recognized that did not receive a tax cost related to the elimination of intercompany profit in inventory. In addition, there was a valuation allowance increase in the U.S., offset by valuation allowance decreases in Japan, Netherlands, and Turkey.

Comparison of Results of Operations for the year ended December 31, 2018 and the year ended December 31, 2017.
 
Net Sales
 
Net sales were $178.8 million for the year ended December 31, 2018, as compared to net sales of $164.0 million for the year ended December 31, 2017. The increase in net sales in fiscal year 2018 from fiscal year 2017 was driven by the addition of Tecnidex which contributed $20.8 million, partially offset by SmartFresh declines in the Pacific Northwest region of the United States where the business was negatively impacted by a smaller than normal apple harvest. As the Company continues to diversify, and with the addition of Tecnidex, SmartFresh sales in the Pacific Northwest represented less than 10% of the Company's overall revenue in 2018.

Additionally, foreign currency negatively impacted revenue in 2018 by $1.4 million, mostly driven by the Euro, and ASC-606 deferred revenue negatively impacted sales in 2018 by $1.1 million. Excluding these items along with the impact of Tecnidex, organic sales were essentially flat compared to 2017.

Cost of Sales
 
Cost of sales was $46.3 million for the year ended December 31, 2018, as compared to $32.7 million for the year ended December 31, 2017. Gross profit margin was 74.1% in 2018 versus 80.1% in 2017. The decrease in margin was primarily driven by the addition of Tecnidex, strategic pricing initiatives in the core business and the impact of ASC 606 deferred revenue.
 
Research and Development Expenses
 
Research and development expenses were $13.9 million for the year ended December 31, 2018, as compared to $13.8 million for the year ended December 31, 2017. Tecnidex added $1.2 million of cost. Excluding these costs, research and development costs were down reflecting our resource allocation strategy that supports initiatives which drive continued diversification beyond apples.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses were $65.8 million for the year ended December 31, 2018, as compared to $61.8 million for the year ended December 31, 2017. The increase was primarily driven by the addition of Tecnidex which
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contributed $5.2 million in costs. Excluding Tecnidex, selling general and administrative expenses were $60.6 million, down 1% for the year, reflecting the impact of cost optimization initiatives.
 
Amortization of Intangibles
 
Amortization of intangibles was $45.9 million for the year ended December 31, 2018, as compared to $41.9 million for the year ended December 31, 2017. The increase in amortization of intangibles is primarily due to the addition of Tecnidex amortization of $1.6 million.

Impairment of Long-lived Assets

During the year ended December 31, 2018, the Company recorded an impairment charge of $2.6 million related to the estimated decline in the fair value of the SmartFresh trade name. There were no indicators of impairment during the 2017 impairment assessment.

Goodwill Impairment

As a result of the Tecnidex acquisition $9.4 million was recorded to goodwill for the year ended December 31, 2017. During 2018, a measurement period adjustment was recorded to payments due to the owners of Tecnidex which resulted in $6.7 million of goodwill at December 31, 2018. The goodwill will be assessed annually for impairment. During the years ended December 31, 2018 and 2017, the Company did not record an impairment charge as a result of our annual impairment test.

Change in Fair Value of Contingent Consideration
 
The Company recorded a $3.0 million gain in the year ended December 31, 2018 related to a change in the fair value of contingent consideration, as compared to $26.9 million gain for the year ended December 31, 2017. As discussed in Note 3 to the audited consolidated financial statements, pursuant to the Business Combination, the Company entered into various forms of contingent consideration, including the warrant consideration, the deferred payment, and the tax amortization benefit contingency. These liabilities are measured at fair value each reporting date and any mark-to-market fluctuations are recognized in earnings. For 2018, the warrant consideration, the deferred payment, and the tax amortization benefit contingency mark-to-market (gains) losses were $0.0 million, $(0.3) million, and $(2.8) million, respectively. For 2017, the warrant consideration, the deferred payment, and the tax amortization benefit contingency and other incurred mark-to-market losses (gains) were $0.5 million, $(2.5) million, and $(24.9) million, respectively.
 
Other Income
 
Other income was $0.4 million for the year ended December 31, 2018, as compared to $0.6 million income for the year ended December 31, 2017.
 
(Loss) gain on Foreign Currency

Loss on foreign currency was $(1.7) million for the year ended December 31, 2018 as compared to a gain of $13.3 million for the year ended December 31, 2017. The loss was due to the strengthening of the U.S. dollar against the euro, Canadian dollar, Australian dollar, Chilean peso and Turkish lira during 2018 as compared to 2017. This was partially offset by the change to highly inflationary accounting in Argentina.

Interest Expense, Net
 
Interest expense, net was $34.5 million for the year ended December 31, 2018, as compared to $35.8 million for the year ended December 31, 2017. The decrease was primarily driven by lower accretion on the TRA of $5.0 million which was partially offset by higher interest on the Credit Facility of $3.5 million. Cash interest expense was up $15.8 million in 2018 as compared to 2017 due to timing of quarterly interest payments.
 
Income Tax Provision
 
Our effective tax rate was (6.5)% for the year ended December 31, 2018, as compared to (24.1)% for the year ended December 31, 2017. 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. It is also affected by discrete items that may occur in any given year. On December 22, 2017 the Tax Cuts and Jobs Act ("TCJA") was enacted in the U.S. The TCJA significantly revised the U.S.
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federal corporate income tax by, among other things, lowering the corporate income tax rate to 21%, implementing a territorial tax system, imposing a limitation on tax deductibility of U.S. interest expense, and the inclusion of “global intangible low-taxed income” (“GILTI”).

During the year ended December 31, 2018, certain losses occurred that did not receive a tax benefit including the unbenefited losses related to the elimination of intercompany profit in inventory. In addition to these unbenefited losses, there was a valuation allowance increase in the U.S. offset by valuation allowance decreases in Japan, Netherlands, and Turkey.

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 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) income:
 
 (in thousands)Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
GAAP net (loss) income including non-controlling interests$(61,510) $(30,240) $23,562  
(Benefit) provision for income taxes(17,143) 1,840  (4,579) 
Interest expense (1)
33,784  34,451  35,755  
Depreciation and amortization83,456  47,593  44,356  
Non-GAAP EBITDA$38,587  $53,644  $99,094  
Share-based compensation$2,714  $2,897  $2,616  
Severance related costs (2)
1,086  1,453  261  
Other non-recurring costs (3)
8,745  7,558  5,486  
Loss (gain) on foreign currency exchange (4)
4,127  1,722  (13,344) 
Contingent consideration adjustments, net (5)
(330) (3,018) (26,948) 
Impairment of assets (6)
11,424  2,600  —  
Non-GAAP Adjusted EBITDA$66,353  $66,856  $67,165  

(1) Interest on the term loan and accretion for debt discounts, debt issuance costs and contingent consideration.
(2) Severance costs related to ongoing cost optimization initiatives.
(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 relates to net losses and gains resulting from transactions denominated in a currency other than the Company's functional currency, the U.S. dollar.
(5) Non-cash adjustment to the fair value of contingent consideration, including the TRA and contingent payment related to the Tecnidex acquisition.
(6) Impairment of assets related to investments, software and trademarks.

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Liquidity and Capital Resources
 
Cash Flows
 
(in thousands)Year Ended December 31,
2019
Year Ended December 31,
2018
Year Ended December 31,
2017
Net cash provided by operating activities$20,059  $3,012  $35,389  
Net cash used in investing activities$(4,426) $(5,751) $(36,950) 
Net cash used in financing activities$(22,047) $(22,228) $(14,015) 
 
Cash provided by operating activities was $20.1 million for the year ended December 31, 2019, as compared to $3.0 million for the year ended December 31, 2018 and $35.4 million for the year ended December 31, 2017.

For the year ended December 31, 2019, net income before non-cash items was $20.5 million. Included in this amount is the impairment of intangible assets of $11.4 million, depreciation and amortization of $83.5 million, change in the fair value of contingent consideration (including accretion) of $3.1 million, deferred income taxes of $(21.6) million and other non-cash items of $5.6 million. Additionally, the change in net operating assets was $(0.4) million in 2019.

For the year ended December 31, 2018, net income before non-cash items was $32.0 million. Included in this amount is the impairment of intangible assets of $2.6 million, depreciation and amortization of $47.6 million, change in the fair value of contingent consideration (including accretion) of $0.7 million, deferred income taxes of $1.2 million, cash received on interest rate swap termination of $3.7 million and other non-cash items of $6.5 million. Additionally, the change in net operating assets was $(29.0) million in 2018.

For the year ended December 31, 2017, net income before non-cash items was $41.5 million. Included in this amount is depreciation and amortization of $44.4 million, change in the fair value of contingent consideration (including accretion) of $(18.5) million, deferred income taxes of $(12.5) million and other non-cash items of $4.6 million. Additionally, the change in net operating assets was $(6.1) million in 2017.
 
Cash used in investing activities was $4.4 million for the year ended December 31, 2019, as compared to $5.8 million for the year ended December 31, 2018 and $37.0 million for the year ended December 31, 2017. Cash used in investing activities in 2019 was the purchase of fixed assets and leasehold improvements of $4.2 million and other investments of $0.3 million. Cash used in investing activities in 2018 was for the asset acquisition of Verigo of $1.6 million and the purchase of fixed assets and leasehold improvements of $4.2 million. Cash used in investing activities in 2017 was for the acquisition of a majority share of Tecnidex, net of cash received, of $18.2 million, minority investments totaling $11.1 million and the purchase of fixed assets and leasehold improvements, net of proceeds from the sale of assets, of $7.6 million.
 
Cash used in financing activities was $22.0 million for the year ended December 31, 2019, as compared to $22.2 million for the year ended December 31, 2018 and $14.0 million for the year ended December 31, 2017. Cash used in financing activities in 2019 was for the settlement payment of the TRA of $16.0 million and the repayment of debt in the amount of $6.3 million, offset by proceeds from the issuance of stock of $0.2 million. Cash used in financing activities in 2018 was for the payment of Dow liabilities of $10.0 million, the repayment of debt in the amount of $6.1 million. Cash used in financing activities in 2017 was for the repayment of debt $4.0 million and the payment of Dow liabilities in the amount of $10.0 million.
 
Term Loan
 
On July 31, 2015, certain of our subsidiaries entered into a Credit Agreement with Bank of Montreal, as administrative agent (as amended, the “Credit Facility”). The Credit Facility consists of a $425 million term loan (the “Term Loan”), with an amortization equal to 1.00% per year, and a $25 million revolving loan facility (the “Revolving Loan”). The Revolving Loan includes a $10 million letter-of-credit sub-facility, issuances against which reduce the available capacity for borrowing. As of December 31, 2019, the Company has issued $32.0 thousand of letters of credit, against which no funds have been drawn. The Term Loan has a scheduled maturity date of July 31, 2021, and the Revolving Loan, as amended on December 23, 2019, has a scheduled maturity date of April 1, 2021. The interest rates on borrowings under the facilities are either the alternate base rate plus 3.75% or LIBOR plus 4.75% per annum, with a 1.00% LIBOR floor (with step-downs in respect of borrowings under the Revolving Loan dependent upon the achievement of certain financial ratios). The obligations under the Credit Facility are secured by liens on substantially all of the assets of (a) AgroFresh Inc. and its direct wholly-owned domestic subsidiaries, and (b) AF Solutions Holdings, including the common stock of AgroFresh Inc.

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

As of December 31, 2019, the Company was in compliance with the covenants in the facility, other than covenants that apply only to the Company’s ability to borrow under the Revolving Loan (excluding letters of credit). On January 31, 2019, the Credit Facility was amended to decrease the total availability from $25.0 million to $12.5 million and extend the maturity of the Revolving Loan from July 31, 2019 to December 31, 2020. An existing covenant in the credit agreement was also amended to allow the Company to have access to the Revolving Loan. Subsequently, on December 23, 2019, the Revolving Loan was further amended to extend the maturity to April 1, 2021 and included favorable revisions to the senior secured net leverage ratio covenant.
 
As of the Closing Date, the Company incurred approximately $12.9 million in debt issuance costs related to the Term Loan and $1.3 million in costs related to the Revolving Loan. The debt issuance costs associated with the Term Loan were capitalized against the principal balance of the debt, and the Revolving Loan costs were capitalized in Other Assets. All issuance costs will be accreted through interest expense for the duration of each respective debt facility. The accretion in interest expense during the year ended December 31, 2019, and 2018 was approximately $2.5 million and $2.5 million, respectively.

If we are unable to obtain additional debt or equity capital, restructure or refinance our indebtedness, or avail ourselves of alternative actions, our Term Loan ($405.9 million as of December 31, 2019) will become a current liability in the third quarter of 2020.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
 

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 INFORMATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Page

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
AgroFresh Solutions, Inc.
Philadelphia, Pennsylvania
 
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, 2019 and 2018, the related consolidated statements of (loss) income, comprehensive (loss) income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with the accounting principles generally accepted in the United States of America.

Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.








/s/ DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania
March 13, 2020

We have served as the Company's auditor since 2014.

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AgroFresh Solutions, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 December 31,
2019
December 31,
2018
ASSETS
  
Current Assets:
Cash and cash equivalents$29,288  $34,852  
Accounts receivable, net of allowance for doubtful accounts of $2,232 and $2,336, respectively
68,634  67,942  
Inventories22,621  24,807  
Other current assets11,802  15,608  
Total Current Assets132,345  143,209  
Property and equipment, net13,177  13,289  
Goodwill6,323  6,670  
Intangible assets, net631,369  711,967  
Deferred income tax assets10,317  7,332  
Other assets12,161  16,820  
TOTAL ASSETS$805,692  $899,287  
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current Liabilities:
Accounts payable$15,105  $7,530  
Current portion of long-term debt4,675  6,419  
Income taxes payable5,648  4,815  
Accrued expenses and other current liabilities24,350  45,340  
Total Current Liabilities49,778  64,104  
Long-term debt398,064  400,309  
Other non-current liabilities7,246  32,066  
Deferred income tax liabilities16,574  30,232  
Total Liabilities471,662  526,711  
Commitments and Contingencies (Note 20)
Stockholders’ Equity:  
Common stock, par value $0.0001; 400,000,000 shares authorized, 51,839,527 and 51,071,573 shares issued and 51,178,146 and 50,410,192 outstanding at December 31, 2019 and December 31, 2018, respectively
5  5  
Preferred stock, par value $0.0001; 1 share authorized and outstanding at December 31, 2019 and December 31, 2018, respectively
    
Treasury stock, par value $0.0001; 661,381 shares at December 31, 2019 and December 31, 2018, respectively
(3,885) (3,885) 
Additional paid-in capital561,006  535,819  
Accumulated deficit(199,621) (138,789) 
Accumulated other comprehensive loss(31,060) (28,837) 
Total AgroFresh Stockholders’ Equity326,445  364,313  
Non-controlling interest7,585  8,263  
Total Stockholders' Equity334,030  372,576  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$805,692  $899,287  
See accompanying notes to consolidated financial statements.

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AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands, except share and per share data)
 
 Year Ended December 31,
2019
Year Ended December 31,
2018
Year Ended December 31,
2017
Net sales$170,065  $178,786  $164,026  
Cost of sales (excluding amortization, shown separately below)45,049  46,271  32,655  
Gross profit125,016  132,515  131,371  
Research and development expenses14,112  13,873  13,779  
Selling, general, and administrative expenses59,446  65,770  61,847  
Amortization of intangibles81,119  45,946  41,910  
Impairment of assets11,424  2,600    
Change in fair value of contingent consideration(330) (3,018) (26,948) 
Operating (loss) income (40,755) 7,344  40,783  
Other income13  429  611  
(Loss) gain on foreign currency exchange(4,127) (1,722) 13,344  
Interest expense, net(33,784) (34,451) (35,755) 
(Loss) Income before income taxes(78,653) (28,400) 18,983  
(Benefit) provision for income taxes(17,143) 1,840  (4,579) 
Net (loss) income including non-controlling interests(61,510) (30,240) 23,562  
Less: Net loss (income) attributable to non-controlling interests678  180  (91) 
Net (loss) income attributable to AgroFresh Solutions, Inc$(60,832) $(30,060) $23,471  
(Loss) income per common share attributable to AgroFresh stockholders: 
Basic$(1.21) $(0.60) $0.47  
Diluted$(1.21) $(0.60) $0.47  
Weighted average shares outstanding:  
Basic50,123,565  49,883,739  49,808,600  
Diluted50,123,565  49,883,739  50,191,303  
 
See accompanying notes to consolidated financial statements.

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AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
 
Year Ended December 31,
2019
Year Ended December 31,
2018
Year Ended December 31,
2017
Net (loss) income$(61,510) $(30,240) $23,562  
Other comprehensive (loss) income:
Foreign currency translation adjustments(1,185) (19,340) (8,038) 
Unrealized gain (loss) on hedging activity, net of tax of $20, $944 and $98, respectively
74  3,553  (358) 
Recognition of gain on hedging activity reclassified to net (loss) income, net of tax $(314), $(75) and $0, respectively
(1,112) (281)   
Comprehensive (loss) income, net of tax$(63,733) $(46,308) $15,166  
 
See accompanying notes to consolidated financial statements.

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AgroFresh Solutions, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
 
 Preferred StockCommon StockTreasury StockAdditional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-Controlling InterestTotal
Stockholders’
Equity
 SharesAmountSharesAmountAmount
Balance at December 31, 20161  $