AVD 10-K & 10-Q changes, risk factors and insider trading

Additionally, changes in the regulatory environment could adversely impact our ability to continue producing and/or selling certain products in our domestic and foreign markets or could increase the cost of doing so. We are sensitive to regulatory risk given the need to obtain and maintain pesticide registrations in every country in which we sell our products. Moreover, we are required to comply with protocols or applicable regulatory requirements of biological products. Protocols and regulations may change, or regulatory agencies may determine that a biological product is not approvable. There is a risk that future regulatory requirements may lead to delays in development of biologicals or limit growth from biologicals. Many countries require re-registration of pesticides to meet new and more challenging requirements; while we defend our products vigorously, these re-registration processes may result in significant additional data costs, reduced number of permitted product uses, or potential product cancellation. Compliance with changing laws and regulations may involve significant costs or capital expenditures or require changes in business practice that could result in reduced profitability. There is no guarantee that this regulatory climate will change in the near term or that the Company will be able to maintain or expand the use of many of its products in the face of such regulatory challenges.

USEPA has issued a proposed final decision (“PFD”) to cancel PCNB. In mid-2022, the USEPA issued a “proposed final decision” to cancel the fungicide PCNB, which is registered by the Company for use on golf courses and potatoes, among other uses. Under this mandate, the Company must meet a truncated schedule for defending this product, all of which is posted on a public docket. The Company has submitted proposed mitigation measures, and discussion with the program office continues. There is no guarantee that the Company will succeed in persuading USEPA not to cancel the PCNB registration.

In addition, we import raw materials and finished goods from countries outside of the United States, including but not limited to China. Our import operations are subject to complex customs laws, regulations, tax requirements, forced labor laws and trade regulations, such as tariffs set by governments, either through mutual agreements or bilateral actions. Tariffs on goods imported into the U.S., particularly goods from China, Mexico and/or Canada, have increased the cost of the goods we purchase. Additional tariffs and protectionist duties could be imposed by the U.S. with relatively short notice to us. These governmental actions could have, and any similar future actions may have, an adverse effect on our business, financial condition and results of operations. The overall effect of these risks is that our costs may increase or we may experience supply disruptions, which in turn may result in lower profitability if we are unable to offset such increases through higher prices, and/or that we may suffer a decline in sales if our customers do not accept price increases.

The distribution and sale of the Company’s products are subject to governmental approvals and thereafter ongoing governmental regulation. The Company’s products are subject to laws administered by federal, state and foreign governments, including regulations requiring registration, approval and labeling of its products. The labeling requirements restrict the use of, and type of, application for our products. More stringent restrictions could make our products less available, which would adversely affect our revenues and profitability and cash flows. Substantially all the Company’s products are subject to the USEPA (and/or similar agencies in the various territories or jurisdictions in which we do business) registration and re-registration requirements and are registered in accordance with FIFRA or similar laws. Such registration requirements are based, among other things, on data demonstrating that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved label directions. All states, where any of the Company’s products are used, also require registration before products can be marketed or used in that state. Governmental regulatory authorities have required, and may require in the future, that certain scientific data requirements be fulfilled on the Company’s products. The Company, on its behalf and also in joint efforts with other registrants, has furnished, and is currently furnishing certain required data relative to its products. There can be no assurance, however, that the USEPA or similar agencies will not request that certain tests or studies be repeated, or that more stringent legislation or requirements will not be imposed in the future. The Company can provide no assurance that any testing approvals or registrations will be granted on a timely basis, if at all, or that its resources will be adequate to meet the costs of regulatory compliance.

Climate Change may adversely affect the Company’s business. Over the course of the past several years, global climate conditions have become increasingly inconsistent, volatile and unpredictable. Many of the regions in which the Company does business have experienced excessive moisture, cold, drought and/or heat of an unprecedented nature at various times of the year. In some cases, these conditions have either reduced or obviated the need for the Company’s products, whether pre-plant, at-plant, post-emergent or at harvest. Further, climate change could disrupt our operations by causing loss of human life, impacting the availability and cost of materials needed for manufacturing, causing physical damage and partial or complete closure of our manufacturing sites or distribution centers, temporary or long-term disruption in the manufacturing and supply of products and services and disruption in our ability to deliver products and services to customers. In addition, these events and disruptions could increase insurance and other operating costs, including impacting our decisions regarding construction of new facilities to select areas less prone to climate change risks and natural disasters, which could result in indirect financial risks passed through the supply chain or other price modifications to our products and services.

The highly competitive nature of our markets could adversely affect our ability to maintain or grow revenues. Increased generic presence in agricultural chemical markets has been driven by the number of significant product patents and product data protections that have expired in the last decade, and this trend is expected to continue. Also, there are changing competitive dynamics in the agrochemical industry as some of our competitors have consolidated, resulting in them having greater scale and diversity, as well as market reach. These competitive differences may not be overcome and may erode our business. Agriculture in many countries is changing and new technologies (e.g., precision pest prediction or application, data management) continue to emerge. At this time, the scope and potential impact of these technologies are largely unknown but could have the potential to disrupt our business.

We have identified material weaknesses in our internal control over financial reporting, which has led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2024. If we are unable to remediate the material weaknesses, discover additional weaknesses, or are unable to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting, our results of operations, stock price and investor confidence in our Company could be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting as of the end of each fiscal year. In addition to the Company’s evaluation, our independent registered public accounting firm provides an opinion regarding the effectiveness of our internal control over financial reporting. As disclosed in more detail in Part II, Item 9A, “Controls and Procedures” below, we identified material weaknesses as of December 31, 2024, in our internal control over financial reporting. In particular, we have identified issues in principles associated with the control environment, control activities and risk assessment components of the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). Specifically, a) within the Company’s Australian component (AgNova), the Company identified that the individuals performing control activities within the component were not sufficiently trained or adequately supervised, and lacked appropriate reporting lines and accountability; b) due to insufficient resources to facilitate a timely financial close process, the Company identified that there was a material weakness in the operation of internal controls over financial reporting specific to the controls being performed timely and further, within AgNova, the Company did not have sufficient segregation of duties in place; c) the Company identified that it did not design and implement an effective risk assessment and specifically, did not identify and assess changes to the business that could significantly impact the system of internal control; and d) the Company identified a deficiency that constituted a material weakness related to the review of customer agreements related to the accrued program costs and customer prepayments balances; specifically, the Company did not perform a sufficiently precise review in order to appropriately consider all agreed-upon terms with customers in its determination of the accrued program costs and customer prepayments balances. Management concluded that these issues constitute material weaknesses relating to the Company’s internal control over financial reporting (control environment, control activities and risk assessment).

Internal controls related to our financial reporting systems are important to accurately reflect our financial position and results of operations in our financial reports. If, as a result of the ineffectiveness of our internal controls, we cannot provide reliable financial statements, our business decision processes may be adversely affected, our business and results of operations could be harmed, investors could lose confidence in our reported financial information, and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected.

Management has taken action to begin remediating the identified material weaknesses; however, we cannot be certain when remediation will be fully completed, or if our remediation efforts will be successful. Additional information regarding the initial remediation efforts is disclosed in more detail in Part II, Item 9A, “Controls and Procedures” below. In addition, we could in the future identify additional internal control deficiencies that could rise to the level of a significant deficiency or material weakness or uncover material errors in financial reporting. During the course of our evaluation, we may identify areas requiring improvement and may be required to design additional enhanced processes and controls to address issues identified through this review. In addition, there can be no assurance that such remediation efforts will be successful, that our internal control over financial reporting will be effective as a result of these efforts or that any such future significant deficiencies identified may not be material weaknesses that would be required to be reported in future periods. In addition, we cannot provide assurance that our independent registered public accounting firm will be able to attest that such internal controls are effective when they are required to do so.

If we fail to fully remediate the control deficiencies that contributed to the identified material weaknesses and maintain effective disclosure controls and procedures or internal control over financial reporting, our ability to accurately record, process, and report financial information and, consequently, our ability to prepare financial statements within required time periods, could be adversely affected. Failure to maintain effective internal controls could result in a failure to comply with SEC rules and regulations, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation, investigations or enforcement actions, negatively affect investor confidence in our financial statements, and adversely impact our stock price and ability to access capital markets. The defense of any such claims, investigations or enforcement actions could cause the diversion of the Company’s attention and resources and could cause us to incur significant legal and other expenses even if the matters are resolved in our favor.

The Company’s transformation initiatives may not generate the full benefit of targeted efficiencies. During the final quarter of 2023 and full year 2024, the Company has invested in activities intended to transform both its digital platform (including business processes) and its business structures (ranging from organizational change to procurement) in the interest of achieving greater efficiencies, improving operating leverage and achieving greater market penetration. While the Company continues to pursue these initiatives and is taking all available measures to ensure success, there is no guarantee that these measures will yield the targeted results that the Company, working with its business consultants, has identified, or that the return on these initiatives will exceed the investment.

Reduced financial performance may limit the Company’s ability to borrow under its credit facility. The Company has historically grown net sales and net income through the expansion of current product lines, the acquisition of product lines from third parties and the acquisition of both domestic and international distributors with strong niche market positions. In order to finance such acquisitions, the Company has drawn upon its senior credit facility. However, the Company’s borrowing capacity under the senior credit facility depends, in part, upon its satisfaction of a negative covenant that sets a maximum ratio of borrowed debt to earnings (as measured over the trailing 12-month period). There is no guarantee that the Company will continue to generate earnings necessary to ensure that it has sufficient borrowing capacity to support future acquisitions or that, when necessary, the lender group will amend the senior credit facility to provide for such borrowing capacity. Furthermore, there is no guarantee that the Company will be able to obtain capital on equal or better terms than it enjoys under the current facility. Should that be the case, the higher the cost of capital in a new credit structure, the greater will be the potential adverse effect upon the Company’s financial performance.

Newly acquired businesses or product lines may not generate forecasted results. While the Company conducts due diligence using a combination of internal and third-party resources and applies what it believes to be appropriate criteria for each transaction before making acquisitions, there is no guarantee that a business or product line acquired by the Company will generate results that meet or exceed results that were forecasted by the Company when evaluating the acquisition. There are many factors that could affect the performance of a newly acquired business or product line. While the Company uses assumptions that are based upon due diligence and other market information in valuing a business or product line prior to concluding an acquisition, actual results generated post-closing could vary widely from the Company’s forecast and, as such, could have a material adverse effect on the Company’s financial performance in future reporting periods.

The Company’s investment in technology may not generate forecasted returns. The Company has had a history of investing in technological innovation, including with respect to natural oil technology and biorationals, as part of its growth strategy. These investments are based upon the premise that new technology will allow for safer handling or lower overall toxicity profile of the Company’s product portfolio, appeal to regulatory agencies and the markets we serve, gain commercial acceptance, and command a return that is sufficiently in excess of the investment. However, there is no guarantee that a new technology will be successfully commercialized, generate a material return or maintain market appeal. Further, many types of development costs must be expensed in the period in which they are incurred. This, in turn, tends to put downward pressure on period profitability. There can be no assurance that these expenses will be recovered through successful long-term commercialization of a new technology.

Industry consolidation may threaten the Company’s position in various markets. The global agricultural chemical industry continues to undergo significant consolidation. Many of the Company’s competitors have grown or are expected to grow through mergers and acquisitions. As a result, these competitors will tend to be in position to realize greater economies of scale, offer more diverse portfolios and thereby exert greater influence throughout the distribution channels. Consequently, the Company may find it more difficult to compete in various markets. While such merger activity may generate acquisition opportunities for the Company, there is no guarantee that the Company will benefit from such opportunities. Further, there is a risk that the Company’s future performance may be hindered by the growth of its competitors through consolidation.

During 2024, AVD took decisive and necessary measures to transform its entire enterprise into a platform for stronger growth and profitability. First, the Company engaged third party consultants to initiate a business transformation on multiple fronts (e.g., driving down supply chain cost, optimizing manufacturing, establishing strategic go-to-market approach and structural reorganization). These transformation efforts are expected to yield substantial benefits by 2026. Second, working with ERP provider QAD, the Company initiated a global-wide digital transformation to put all our businesses on one ERP platform with standardized processes. Third, the Company recruited and hired a new CEO to help expedite the transformation, following a charge to "simplify, execute and deliver." Fourth, in the process of examining its investments, inventory trends and assets, the Company concluded that certain assets - primarily, the Company’s investment in SIMPAS, and two herbicide products - were impaired. Taken together with the goodwill impairment, various business transformation related expenses, the expenses associated with the decision to voluntarily recall Dacthal products, and certain inventory write downs, the Company incurred nonrecurring charges of $117,355 during 2024. That said, the vast majority of business transformation expenses were incurred in 2024, and in subsequent years, the Company will be advancing the implementation plan largely through internal resources. Further, the Company proceeds into 2025 with an improved balance sheet and strong, focused leadership for realizing the benefits from our transformation efforts.

Turning to financial performance, the Company’s overall performance in 2024 declined as compared to 2023 due in part to the uneven impact of nonrecurring charges as described in the immediately preceding paragraph and in part to persistently low commodity prices and high input costs which negatively impacted the agricultural economy. Supply chains are beginning to normalize, but given the current economic backdrop it may be some time before consumers are inclined to meaningfully increase their inventory levels. Some pockets of strength are present, with biofertilizers, biostimulants and biochemicals growing much faster than the broader agricultural economy. The Company has made significant investment in these areas of growth, has benefited from this investment and expects to do so in the future. Across the broader agricultural economy, the company expects a gradual recovery looking forward from 2024, during which channel inventory was higher-than-historically normal.

Within this context, the Company experienced a drop in overall sales of approximately 5% during 2024, with domestic sales down 9% and international sales increasing by 1%. Most of the underperformance in sales was driven by two factors - a 40% drop in sales of the granular insecticide Aztec following unusually high sales in the prior year as a result of a period of product unavailability, and the impact of the voluntary cancellation and recall of the herbicide Dacthal.

Cost of sales remained high, increasing by 7% to end at 78% of net sales. The increase is attributed to the impact of the Dacthal recall which resulted in approximately $12,200 in credits to customers and $3,153 in inventory write downs and disposal costs, the decision to record additional reserves in the amount of $21,417 regarding obsolete and slow-moving inventories resulting from the Company's strategic review of its product portfolio to identify areas that were not positively contributing to generating shareholder value. and, where relevant, the estimated disposal costs. Further, the Company experienced some pockets of generic pressure in our international markets resulting in lowering prices to maintain market position. In addition, the Company incurred higher raw material costs as a result of inflationary pressure on raw material input prices. Finally, factory performance generated a higher net expense, as compared to 2023, as the Company worked to manage inventory levels in the face of market destocking activity. As a result, gross margin dropped to 22% in 2024 from 31% as compared to the prior year.

Operating expenses rose by about 42% in 2024, as compared to 2023, due primarily to certain non-cash asset impairment charges and our digital and structural transformation strategy. Primarily as a result of the nonrecurring impairment charges, operating expenses rose as a percentage of net sales to 40% in 2024, as compared to 27% in 2023.

Net sales of our U.S. crop business were 15% lower than those of the prior year. The three key factors driving performance lower were the recall of Dacthal, lower sales of Aztec and lower agriculture acreage planted. During 2024, the Company halted manufacturing and then voluntarily cancelled the product registration for Dacthal following USEPA's preliminary findings of a potential adverse effect based upon a single study. The product recall associated with this cancellation negatively impacted 2024 revenue and profitability. With respect to Aztec, customer purchases exceeded end-user demand in 2023, and these customers worked down excess inventory in 2024, negatively impacting sales of this high-margin product. We expect demand patterns for Aztec to normalize over 2025. Further, negatively impacting results were the number of agriculture acres planted, as compared to 2023, with corn acres 4% lower than the prior year. Weak agricultural commodity prices, leading to lower farm net-income, were the reason that fewer acres were planted in 2024.

Net sales of our International businesses were 1% higher than those of the previous year. Granular soil insecticides sales, our largest international product category, exhibited strength, increasing by 10% as compared to the prior period, while herbicide sales decreased by approximately 27%. Generic crop protection products continued to create a difficult pricing environment for many of our products, and results were negatively impacted near the year-end by strength in the U.S. Dollar and the attendant effect of foreign currency exchange.

Overall costs of sales increased by 7% across our U.S. crop, U.S. non-crop and International. The increased cost of sales can be attributed to elevated raw material prices, which were fueled by broad-based inflationary pressures. In addition, as part of its strategic review, the Company has completed a comprehensive assessment of its inventories and determined that a number of items are either obsolete or slow moving and has taken a write down of $21,417 to reflect the net realizable value of these items.

Selling, general and administrative expenses increased to end at $106,295 for the year ended December 31, 2024, as compared to $103,605 in 2023. Included within this expense, the Company's leadership team made the decision to pay a modest bonus to all employees as a recognition of the steadfast support for the Company’s transformation efforts during a challenging year.

Amortization ended the year at $13,339 which was slightly up in comparison to the prior year and included accelerated amortization of $179 associated with two small assets.

Transformation cost of $20,162 relate to the Company’s digital and structural transformation project. The digital transformation effort is intended to ensure that business process owners have access to current and complete data that has been generated through standardized processes. The structural transformation effort is intended to improve operating leverage by applying business analytics to current operations, structures, products and services. Included in these costs, the Company made the decision that it was necessary to recruit a new CEO to drive the business transformation. During 2024, third party consultants were engaged by the Company to assist it in navigating the project to gain the maximum benefit at the earliest possible time.

Asset impairments of $50,414 includes costs associated with the Company’s determination that its investment in its SIMPAS technology is impaired. The impairment impacted fixed and intangible assets and resulted in a non-cash charges of $17,683. In addition, the Company recorded non-cash impairment charges related to its domestic and international goodwill assets in the amount of $27,049. Secondly, the Company concluded that there was an asset impairment related to the purchase of two herbicide products. The market for these two products has been greatly reduced by weed resistance and competitive products. As such, the Company has decided to no longer market the product, and recorded a non-cash impairment charge of $5,682.

On November 7, 2023, the Company entered into Amendment Number Six to the Third Amended Loan and Security Agreement that provided relief in respect of both financial covenants. On August 8, 2024, the Company and the lenders entered into Amendment Number Seven to the Credit Agreement, effective June 30, 2024, under which the Maximum Total Leverage Ratio was modified to 4.25 for the period ended June 30, 2024; 5.0 for the period ended September 30, 2024; 4.5 for the period ended December 31, 2024, 4.5 for the period ending March 31, 2025, 4.25 for the period ending June 30, 2025; 4.0 for the period ending September 30, 2025, and returning to 3.25 for the periods ending December 31, 2025 and thereafter. The Minimum Fixed Charge Coverage Ratio remains the same, and a new covenant (added as part of Amendment Number seven), the Minimum Modified Current Ratio of not less than 1.5 (defined as the ratio of (i) Accounts Receivable plus Inventory, to (ii) Funded Debt of the Company and its Subsidiaries on a consolidated basis). In addition, the Company may not repurchase shares, pay cash dividends to shareholders or make Permitted Acquisitions without Lenders’ consent. In addition, for purposes of calculating Consolidated EBITDA, the basket for transformation and one-time (cash and non-cash charges (which are excluded from such measure) has been increased from $5,000 to $12,500 in second quarter 2024, $45,000 (in third quarter 2024, fourth quarter 2024 and first quarter 2025), $42,500 in second quarter 2025, $15,000 in third quarter 2025 and $7,500 in fourth quarter 2025, as measured on a four-quarter trailing basis. Finally, the interest rates for the Credit Agreement, as amended, were increased by 25bps to the extent the Total Leverage Ratio equals or exceeds 4.0 and remains at the rates set forth in the Amendment Number Six to the extent the Total Leverage Ratio is below 4.0.

On March 12, 2025, the Company entered into Amendment Number Eight to the Third Amended Loan and Security Agreement that provided relief in respect of both financial covenants, under which the Maximum Total Leverage Ratio was modified to 6.25 for the period ending March 31, 2025; 6.25 for the period ending June 30, 2025; 5.75 for the period ending September 30, 2025 and returning to 3.25 for the periods ending December 31, 2025 and thereafter. The Minimum Fixed Charge Coverage Ratio is changed to 1.15 for the period ending March 31, 2025, and returning to 1.25 for the period ending June 30, 2025 and thereafter. In addition, the Applicable Margins for the Revolver Loans are changed to 3.75% for SOFR and 2.75% as the Adjusted Base Rate; the Unused Line Fee Rate is 0.35% and the Letter of Credit Fee is 3.75%. Further, notwithstanding financial performance, the borrowing capacity is capped below the facility’s previous maximum ($275,000) by $50,000 through June 30, 2025, then by $40,000 through December 31, 2025, and then by $75,000 through the expiration of the facility. Finally, the definition of Consolidated EBITDA was changed to exclude non-recurring non-cash charges as well as cash charges that do not exceed various sums in various categories over the balance of the term.

On May 27, 2025, the Company and the lenders entered into Amendment Number Eleven to the Third Amended Loan and Security Agreement, under which events of default arising from the failure of Borrowers to be in compliance with both the Total Leverage Ratio and the Fixed Charge Coverage Ratio as of March 31, 2025, were waived. In addition, the Total Revolver Commitment was reduced from $275,000 to the following: $245,000, effective from the Closing Date through November 29, 2025; $225,000 effective from November 30, 2025, through December 30, 2025; and $200,000 from December 31, 2025, through the expiration of the agreement. In addition, the due date for audited fiscal year-end financial statements was extended to one hundred fifty-seven (157) days (after the end of the fiscal year) for 2025 only, and the due date for first quarter financial statements was extended to sixty-seven (67) days after March 31, 2025. In addition, the Maximum Total Leverage Ratio covenant was suspended for the quarters ending on June 30, 2025, September 30, 2025, and December 31, 2025, and set at 4.00 to 1.00 for the quarter ending March 31, 2026, and thereafter. Further, the Fixed Charge Coverage Ratio covenant was suspended for the quarter ending June 30, 2025, then set at 1.00 to 1.00 for the quarter ending September 30, 2025, then set at 1.25 to 1:00 for the quarter ending December 31, 2025, and thereafter.

In addition, under the terms of the Eleventh Amendment, two new covenants were added. First, commencing June 30, 2025, Borrowers must maintain Liquidity measured on a monthly basis of not less than: $30,000 for the month ending June 30, 2025; $35,000 for the month ending July 31, 2025; $4,042 for the month ending August 31, 2025; $25,000 for the month ending September 30, 2025; $3,000 for the month ending October 31, 2025; $9,292 for the month ending November 30, 2025; and $20,000 for the month ending December 31, 2025, it being understood that Liquidity will include the sum of Borrowers’ cash, plus 50% of cash held in accounts outside of the U.S. plus the amount by which the revolver commitments exceed the revolver balance (net of letters of credit). Second, Borrowers must attain minimum, year-to-date Consolidated EBITDA (reflecting the exclusion of non-recurring non-cash charges and certain other charges as per the Eighth Amendment) as measured quarterly in the following amounts: $4,500 as of June 30, 2025; $9,500 as of September 30, 2025; and $35,000 as of December 31, 2025. With these changes, with respect to Revolver Loans, the Applicable Margins for SOFR are set at 3.75% from the Closing through September 30, 2025, and then rises to 4.75% as of October 1, 2025, and thereafter, while the Adjusted Base Rate increases to 2.75% and 3.75% during those respective periods.

At December 31, 2024, by virtue of Amendment Number Eight to the Third Amended Loan and Security Agreement, the Company is deemed to be in compliance with its financial covenants. According to the terms of the Credit Agreement and based on our performance against the most restrictive covenant, the Company had the capacity to increase its borrowings by up to $28,623, as compared to $115,002 as of December 31, 2023. Furthermore, at December 31, 2024, the Company’s leverage, as defined in the credit facility agreement was 3.57. Under the terms of the latest amendment to the credit facility agreement, currently, the Company may not repurchase shares, pay cash dividends to shareholders or make Permitted Acquisitions without Lenders’ consent.

The Company’s financial performance during the quarter improved over the comparable period last year with net sales up 7%. This performance included US Crop sales that were up 17%, while Specialty net sales rose 6%, and International sales declined by 7%.

The global crop protection market improved during the first quarter of 2026. However, dynamic economic and political factors, such as sudden tariff shifts and unannounced military activity in international shipping lanes, along with high cost of capital, caused growers to remain somewhat cautious and continue buying goods on a just-in-time basis.

In spite of constrained procurement practices within the distribution channel, the Company’s financial performance improved with respect to both sales and profitability. Increased sales of higher volume products along with flat cost of goods and continued efficiency of manufacturing operations generated gross profits that improved 27% quarter-over-quarter and gross margins that ended at 31% for the first quarter of 2026, as compared to 26% in the same quarter of the prior year.

Operating expenses increased by approximately 6% but remained flat when expressed as a percentage of net sales at 29.6% compared to 29.8% in the same quarter of the prior year. Within operating expenses, selling expenses were flat, general and administrative expenses increased by approximately 7%, and research, product development and regulatory expenses were down 7%.

Interest expense rose by about $2,025 due to increased borrowing, primarily driven by the new loan agreements, and increased interest rates from the revolving line of credit that was retired, and by the two term loans that replaced it on March 13, 2026.

Our domestic crop business recorded net sales during the first quarter of 2026 that were 17% higher than those of the first quarter of 2025 ($67,028 vs. $57,176 in the prior year), due largely to strong improvements in industry demand, and in particular for the Company’s herbicides (Impact and First Rate), Aztec granular soil insecticide, and Bidrin cotton insecticide. We experienced steady sales of soil fumigants and many other products, which were partially offset by lower sales of cotton defoliant, Folex, due to a seasonal shift in orders. All in all, performance across the US Crop portfolio saw strong improvements, as compared to the same period of 2025.

Our domestic Specialty business posted 6% increase in net sales over Q1 the prior year driven primarily by strong OHP performance, as the result of increased demand for their biological product solutions. Sales in other market segments including professional pest control, turf, and landscape were relatively flat to Q1 of 2025 based on seasonality.

Net sales of our international businesses decreased by 7% during the period. The business experienced lower sales in Brazil relative to the same period of the prior year, primarily due to the first quarter of 2025 benefiting from the delayed delivery of goods from the final quarter of 2024 into the first quarter of 2025, and lower sales through the Agrinos business in India. These trends were partially offset by improved sales in Central America, led by its launch of Mocap in Ecuador for use on bananas, as well as in Mexico, by higher sales of non-crop vegetation control products and more normalized channel inventories.

Operating expenses increased by 6% to $36,528 for the three months ended March 31, 2026, as compared to the same period in 2025. The change in operating expenses by department are as follow:

Other general and administrative expenses increased by $1,222 for the three months ended March 31, 2026, as compared to the same period of the prior year. The main drivers were increased accruals for incentive compensation reflecting the Company’s financial performance in comparison to the prior year, and higher audit fees.

Amortization declined slightly during the first three months of 2026, as compared to the same period of the prior year as a result of the retirement of fully written down assets in the prior year.

Transformation expenses related to the Company’s digital and structural transformation project and manufacturing footprint optimization amounted to $2,804, as compared to $2,191 in the prior period. The increase was driven by the Los Angeles plant reorganization costs in the amount of $2,433, partially offset by lower consulting and strategic advisory services. The Los Angeles plant reorganization is expected to be completed by December 31, 2026 and is part of the Company's optimization efforts of its manufacturing footprint, reconfiguring the Los Angeles site by ending synthesis operations on that site and building upon strengths and capabilities at its Axis manufacturing site. The cost incurred relate to a reduction in force of certain personnel, material waste disposal and other related expenses. No such costs were incurred during the three months ended March 31, 2025.

Interest costs net of capitalized interest were $5,790 in the first three months of 2026, as compared to $3,765 in the same period of 2025. Interest costs are summarized in the following table: