AgroFresh Solutions, Inc. (NASDAQ:AGFS), a global leader in produce freshness solutions, announced financial results for the third quarter and nine months ended September 30, 2016. AgroFresh became a stand-alone company upon the closing of a transaction with The Dow Chemical Company (“Dow”) on July 31, 2015 (the “Business Combination”). AgroFresh is in the business of preserving and enhancing the quality and freshness of food, reducing food waste and improving productivity.
Jordi Ferre-CEO commented, “Our third-quarter performance was mixed in the face of a smaller than forecasted apple harvest, and more aggressive, price-driven competition. While we maintained a 90 percent-plus market share for SmartFresh, strategic pricing decisions were instituted in order to prevent significant long-term erosion of that leadership position. The diversification of the portfolio was enhanced as the number of acres treated with Harvista so far this year has increased by more than 50 percent, but were less than our prior projections. Other new product offerings are important longer term, but are not yet making meaningful revenue contributions. Given that our performance year-to-date for both sales and EBITDA are down compared with our first nine-month results in 2015, we cannot reasonably expect to make up all of that difference – nor grow — in the fourth quarter. As a result, we’re making adjustments to our full-year guidance.
Ferre added, “My immediate assessment as I joined the company is that the AgroFresh organization has operated largely in a world with limited competition and we are now adapting fast to the new reality, with smarter and more aggressive competitive strategies. We believe that there is significant untapped value in this business, and we urgently are implementing new strategies for converting our industry leading service and technical expertise into additional revenue streams while we continue to look for ways to diversify our portfolio through partnerships and acquisitions.”
The Company now expects full year 2016 net sales to be $160 million to $165 million. The expected decrease is primarily attributable to a decline in the average price of SmartFresh in North America. Adjusted EBITDA for 2016 is expected to be between $77 million and $82 million, because of the lower anticipated net sales.
Financial Highlights for the Third Quarter of 2016
Net sales for the third quarter of 2016 were $61.2 million, versus $61.8 million in the third quarter of 2015.
Cost of sales for the third quarter of 2016 was $8.9 million, versus $46.2 million in the third quarter of 2015. The amount in the prior year period includes $38.7 million of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 85 percent in the third quarter of 2016 versus 88 percent in the third quarter of 2015.
Research and development expenses for the third quarter of 2016 were $3.0 million, flat versus the third quarter of 2015. Selling, general and administrative expenses for the third quarter of 2016 were $15.2 million, compared with $14.6 million for the same period in the prior year.
Net income for the third quarter of 2016 was $7.3 million compared to net loss of $16.5 million in the same quarter of 2015. The increase in net income is attributable to the absence of inventory step up amortization costs, which were $38.7 million in the same period in the prior year. This increase was offset by additional interest expense of $5.2 million in the third quarter of 2016 as well as the recognition of income tax expense of $4.7 million in the third quarter of 2016 compared to the recognition of income tax benefit of $5.7 million in the same period in the prior year.
EBITDA was $36.8 million for the third quarter of 2016 compared to EBITDA of $36.1 million in the same quarter of 2015. The period-over-period change in EBITDA is mainly attributable to non-cash gains.
Financial Highlights for the First Nine Months of 2016
Net sales for the first nine months of 2016 were $108.0 million, down 4 percent from $112.3 million in the prior year period. The decrease was primarily attributable to lower net sales in the Southern Hemisphere in the first half of 2016.
Cost of sales for the first nine months of 2016 was $48.6 million, as compared to $56.3 for the first nine months of 2015. Included in these amounts were $30.4 million in the current year and $38.7 million in the prior year of amortization of inventory step up. If the amortization of inventory step-up is excluded, gross profit margin would have been 83 percent in the first nine months of 2016 versus 84 percent in the first nine months of 2015.
Research and development expenses for the first nine months of 2016 were $11.2 million, versus $13.5 million for the first nine months of 2015. The decline was driven by the discontinuation of certain projects following the Company’s separation from Dow. Selling, general and administrative expenses for the first nine months of 2016 were $49.4 million, versus $29.5 million for the prior year period, which include additional costs for severance payments and litigation, and expenses associated with being a public company.
Net loss for the first nine months of 2016 was $43.0 million compared with a net loss of $28.1 million for the first nine months of 2015. The increase in net loss is attributable to higher interest expense and selling, general and administrative costs, partially offset by taxes.
EBITDA was $35.5 million for the first nine months of 2016 compared with EBITDA of $51.5 million in the same period of the prior year. The period-over-period decline in EBITDA is attributable to higher selling, general and administrative costs.
Balance Sheet and Cash Flow
The balance sheet as of September 30, 2016 reflects long-term debt of $404.6 million and short-term debt of $4.3 million associated with the financing of the Business Combination. At September 30, 2016, the ending cash position for the Company was $44.7 million.
The Company used $5.1 million of cash in operating activities in the first nine months of 2016 compared to $22.8 million in the same period in the prior year.
The Company will conduct a conference call to discuss its third quarter 2016 results at 8:30 a.m. Eastern Time on November 9, 2016. To access the call, please dial (877) 407-4018 from the U.S. or (201) 689-8471 from outside the U.S. The conference call I.D. number is 13648899. The call will also be available as a live webcast with an accompanying slide presentation, which can be accessed on the “Events & Presentation” tab of the Investor Relations section of the Company’s website, www.agrofresh.com. All participants should call or access the website approximately 10 minutes before the conference call begins.
A telephonic replay of this conference call will also be available by dialing (844) 512-2921 (US) and (412) 317-6671 (International) from 11:30 am ET on November 9, 2016 until 11:59 pm ET on November 23, 2016.
Basis for Presentation
As a result of the Business Combination, the Company was identified as the acquirer for accounting purposes, and the AgroFresh Business, which is the business conducted by Dow prior to the closing of the Business Combination, through a combination of wholly-owned subsidiaries and operations of Dow, including through AgroFresh Inc. in the United States, is the acquiree and accounting Predecessor for periods prior to July 31, 2015 (the “Closing Date”). Where we discuss results for the three and nine month periods ended September 30, 2015, we are referring to the combined results of the Predecessor for the period from January
AgroFresh Solutions, Inc. (NASDAQ: AGFS) is a global industry leader in providing innovative data-driven specialty solutions aimed at enabling growers and packers of fresh produce to preserve and enhance the freshness, quality and value of fresh produce and to maximize the percentage of produce supplied to the market relative to the amount of produce grown. Its flagship product is the SmartFresh™ Quality System, a freshness protection technology proven to maintain firmness, texture and appearance of fruits during storage and transport. SmartFresh is currently commercialized in over 40 countries worldwide. Additionally the company has a number of different solutions and application technologies that have either been launched (Harvista, RipeLock, Landspring) or will be launched in the future that will extend its footprint to other crops and steps of the global produce supply chain. For more information, please visit www.agrofresh.com.