HDSN 10-Q
Hudson Technologies Inc /Ny (HDSN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
For the quarterly period ended
OR
For the transition period from ____________ to ____________
Commission file number
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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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. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.) ☒
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:
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Non-accelerated filer | ☐ | Smaller reporting company | |
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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 in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common stock, $0.01 par value |
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Hudson Technologies, Inc.
Index
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- Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 | ||||
- Quantitative and Qualitative Disclosures About Market Risk | 30 | ||||
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2
PART I – FINANCIAL INFORMATION
Item 1 - Financial Statements
Hudson Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share and par value amounts)
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
(unaudited) | ||||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Trade accounts receivable – net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, less accumulated depreciation |
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Goodwill |
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Intangible assets, less accumulated amortization |
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Right of use asset |
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Other assets |
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Total Assets | $ | | $ | | ||
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Trade accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Accrued payroll |
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Current maturities of long-term debt |
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Short-term debt |
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Total current liabilities |
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Deferred tax liability |
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Long-term lease liabilities |
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Long-term debt, less current maturities, net of deferred financing costs |
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Total Liabilities |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity | $ | | $ | | ||
See Accompanying Notes to the Consolidated Financial Statements.
3
Hudson Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
(Amounts in thousands, except for share and per share amounts)
| Three months |
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ended September 30, | ended September 30, | |||||||||||
| 2022 |
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Revenues | $ | |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Amortization |
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Total operating expenses |
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Operating income |
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Other (expense) income: |
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Net interest expense | ( |
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Other income | — | | — | | ||||||||
Total other (expense) | ( |
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Income before income taxes |
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Income tax expense |
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Net income | $ | |
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Net income per common share – Basic | $ | |
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Net income per common share – Diluted | $ | |
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Weighted average number of shares outstanding – Basic |
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Weighted average number of shares outstanding – Diluted |
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See Accompanying Notes to the Consolidated Financial Statements.
4
Hudson Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(unaudited)
(Amounts in thousands, except for share amounts)
Three Months Ended September 30,
Retained | ||||||||||||||
Additional | Earnings | |||||||||||||
Common Stock | Paid-in | (Accumulated | ||||||||||||
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| Deficit) |
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Balance at July 1, 2021 |
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Issuance of common stock upon exercise of stock options | |
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Excess tax benefits from exercise of stock options | — | — | ( | — | ( | |||||||||
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Issuance of common stock for services | | | — | — | | |||||||||
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Stock compensation expense |
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Net income |
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Balance at September 30, 2021 |
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Balance at July 1, 2022 | | $ | | $ | | $ | | $ | | |||||
Issuance of common stock upon exercise of stock options | |
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Excess tax benefits from exercise of stock options | — |
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Stock compensation expense |
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Net income |
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Balance at September 30, 2022 |
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Nine Months Ended September 30,
Retained | ||||||||||||||
Additional | Earnings | |||||||||||||
Common Stock | Paid-in | (Accumulated | ||||||||||||
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| Capital |
| Deficit) |
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Balance at January 1, 2021 |
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Issuance of common stock upon exercise of stock options |
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Excess tax benefits from exercise of stock options | — | — | ( | — | ( | |||||||||
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Issuance of common stock for services | |
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Stock compensation expense |
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Net income |
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Balance at September 30, 2021 |
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Balance at January 1, 2022 | | $ | | $ | | $ | ( | $ | | |||||
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Issuance of common stock upon exercise of stock options | |
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Excess tax benefits from exercise of stock options | — | — | ( | — | ( | |||||||||
Stock compensation expense |
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Net income |
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Balance at September 30, 2022 |
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See Accompanying Notes to the Consolidated Financial Statements
5
Hudson Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
(Amounts in thousands)
| Nine months | |||||
ended September 30, | ||||||
| 2022 |
| 2021 | |||
Cash flows from operating activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to cash provided by operating activities: |
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Depreciation |
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Amortization of intangible assets |
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Forgiveness of Payroll Protection Program loan | — | ( | ||||
Lower of cost or net realizable value reserve |
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Allowance for doubtful accounts |
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Stock compensation expense | |
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Amortization of deferred finance costs |
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Loss on extinguishment of debt | | — | ||||
Deferred tax expense |
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Changes in assets and liabilities: |
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Trade accounts receivable |
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Inventories |
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Prepaid and other assets |
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Lease obligations | | | ||||
Income taxes receivable | — |
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Accounts payable and accrued expenses |
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Cash provided by operating activities |
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Cash flows from investing activities: |
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Additions to property, plant, and equipment | ( |
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Cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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Excess tax benefits from exercise of stock options | ( | ( | ||||
Payment of deferred financing cost | ( | — | ||||
(Repayment) Borrowing of short-term debt – net | — | | ||||
Proceeds from long-term debt | |
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Repayment of long-term debt |
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Cash (used in) provided by financing activities |
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Increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid during period for interest | $ | |
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Cash paid (refund) for income taxes – net | $ | |
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See Accompanying Notes to the Consolidated Financial Statements
6
Hudson Technologies, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Business
Hudson Technologies, Inc. (“Hudson” or the “Company”), incorporated under the laws of New York on January 11, 1991, is a refrigerant services company providing innovative solutions to recurring problems within the refrigeration industry. Hudson has proven, reliable programs that meet customer refrigerant needs by providing environmentally sustainable solutions from initial sale of refrigerant gas through recovery, reclamation and reuse, peak operating performance of equipment through energy efficiency and emergency air conditioning and refrigeration system repair, to final refrigerant disposal and carbon credit trading.
The Company’s operations consist of
In preparing the accompanying consolidated financial statements, and in accordance with Accounting Standards Codification (“ASC”) 855-10 “Subsequent Events”, the Company’s management has evaluated subsequent events through the date that the financial statements were filed.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information included in this quarterly report should be read in conjunction with the Company’s audited financial statements and related notes thereto for the year ended December 31, 2021. Operating results for the nine-month period ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
In the opinion of management, all estimates and adjustments considered necessary for a fair presentation have been included and all such adjustments were normal and recurring.
AIM Act
On September 23, 2021, the United States Environmental Protection Agency (“EPA”) issued the final rule establishing the framework to allocate allowances for virgin production and consumption of hydrofluorocarbon refrigerants (“HFCs”). The EPA is responsible for the administration of the HFC phase down enacted by Congress under the AIM Act.
The AIM Act directs the EPA to address the reduction in virgin HFCs and provides authority to do so in three respects:
| 1) | phase down the production and consumption of listed HFCs, |
| 2) | manage these HFCs and their substitutes, and |
| 3) | facilitate the transition to next-generation technologies. |
Congress also required that EPA shall consider ways to promote reclamation in all phases of its implementation of the AIM Act. The final rule introduces a stepdown of
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Consolidation
The consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, represent all companies of which Hudson directly or indirectly has majority ownership or otherwise controls. Significant intercompany accounts and transactions have been eliminated. The Company’s consolidated financial statements include the accounts of wholly-owned subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company. The Company does not present a statement of comprehensive income (loss) as its comprehensive income (loss) is the same as its net income (loss).
Fair Value of Financial Instruments
The carrying values of financial instruments including cash, trade accounts receivable and accounts payable approximate fair value at September 30, 2022 and December 31, 2021, because of the relatively short maturity of these instruments. The carrying value of debt approximates fair value, due to the variable rate nature of the debt, as of September 30, 2022 and December 31, 2021. See Note 2 for further details.
Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade accounts receivable. The Company maintains its temporary cash investments in highly-rated financial institutions and, at times, the balances exceed FDIC insurance coverage. The Company’s trade accounts receivable are primarily due from companies throughout the United States. The Company reviews each customer’s credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors associated with the credit risk of specific accounts, historical trends, and other information. The carrying value of the Company’s accounts receivable is reduced by the established allowance for doubtful accounts. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve for the remaining accounts receivable balances. The Company adjusts its reserves based on factors that affect the collectability of the accounts receivable balances.
For the nine month period ended September 30, 2022 there was no customer accounting for greater than
The loss of a principal customer or a decline in the economic prospects of and/or a reduction in purchases of the Company’s products or services by any such customer could have a material adverse effect on the Company’s operating results and financial position.
Cash and Cash Equivalents
Temporary investments with original maturities of ninety days or less are included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of refrigerant products available for sale, are stated at the lower of cost, on a first-in first-out basis, or net realizable value. Where the market price of inventory is less than the related cost, the Company may be required to write down its inventory through a lower of cost or net realizable value adjustment, the impact of which would be reflected in cost of sales on the Consolidated Statements of Operations. Any such adjustment would be based on management’s judgment regarding future demand and market conditions and analysis of historical experience.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including internally manufactured equipment. The cost to complete equipment that is under construction is not considered to be material to the Company’s financial position. Provision for depreciation is recorded (for financial reporting purposes) using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over the shorter of economic life or terms of the respective leases. Costs of maintenance and repairs are charged to expense when incurred.
Due to the specialized nature of the Company’s business, it is possible that the Company’s estimates of equipment useful life periods may change in the future.
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Goodwill
The Company has made acquisitions that included a significant amount of goodwill and other intangible assets. The Company applies the purchase method of accounting for acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price of the acquisition over the fair value of the net assets acquired and identified intangible assets). The Company tests its goodwill for impairment annually on a qualitative or quantitative basis (on the first day of the fourth quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. Goodwill is tested for impairment at the reporting unit level. When performing the annual impairment test, the Company has the option of first performing a qualitative assessment, which requires management to make assumptions affecting a reporting unit, to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, the Company is then required to perform a quantitative impairment assessment of goodwill. The Company has one reporting unit at September 30, 2022. Other intangible assets that meet certain criteria are amortized over their estimated useful lives.
An impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value. An impairment charge would be recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact operating results. During the fourth quarter of 2021, the Company completed its annual impairment test as of October 1 and determined in its qualitative assessment it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, resulting in no goodwill impairment. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
There were
Cylinder Deposit Liability
The cylinder deposit liability, which is included in Accrued expenses and other current liabilities on the Company’s Balance Sheet, represents the amount due to customers for the return of refillable cylinders. The Company’s Aspen Refrigerants division (“ARI”) charges its customers cylinder deposits upon the shipment of refrigerant gases that are contained in refillable cylinders. The amount charged to the customer by ARI approximates the cost of a new cylinder of the same size. Upon return of a cylinder, this liability is reduced. The cylinder deposit liability balance was $
Revenues and Cost of Sales
The Company’s products and services are primarily used in commercial air conditioning, industrial processing and refrigeration systems. Most of the Company’s revenues are realized from the sale of refrigerant and industrial gases and related products. The Company also generates revenue from refrigerant management services performed at a customer’s site and in-house. The Company conducts its business primarily within the US.
The Company applies the FASB’s guidance on revenue recognition, which requires the Company to recognize revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services transferred to its customers. In most instances, the Company’s contract with a customer is the customer’s purchase order and the sales price to the customer is fixed. For certain customers, the Company may also enter into a sales agreement outlining a framework of terms and conditions applicable to future purchase orders received from that customer. Because the Company’s contracts with customers are typically for a single customer purchase order, the duration of the contract is usually less than one year. The Company’s performance obligations related to product sales are satisfied at a point in time, which may occur upon shipment of the product or receipt by the customer, depending on the terms of the arrangement. The Company’s performance obligations related to reclamation and RefrigerantSide® services are generally satisfied at a point in time when the service is performed. Accordingly, revenues are recorded upon the shipment of the product, or in certain instances upon receipt by the customer, or the completion of the service.
9
In July 2016 the Company was awarded, as prime contractor, a five-year contract, including a five-year renewal option, which has been exercised through July 2026, by the United States Defense Logistics Agency (“DLA”) for the management, supply, and sale of refrigerants, compressed gases, cylinders, and related services. Due to the contract containing multiple performance obligations, the Company assessed the arrangement in accordance with ASC 606-10-25-14. The Company determined that the sale of refrigerants and the management services provided under the contract each have stand-alone value. Accordingly, the performance obligations related to the sale of refrigerants is satisfied at a point in time, mainly when the customer receives and obtains control of the product. The performance obligation related to management service revenue is satisfied over time and revenue is recognized on a straight-line basis over the term of the arrangement as the management services are provided.
Cost of sales is recorded based on the cost of products shipped or services performed and related direct operating costs of the Company’s facilities. In general, the Company performs shipping and handling services for its customers in connection with the delivery of refrigerant and other products. The Company elected to implement ASC 606-10-25-18B, whereby the Company accounts for such shipping and handling as activities to fulfill the promise to transfer the good. To the extent that the Company charges its customers shipping fees, such amounts are included as a component of revenue and the corresponding costs are included as a component of cost of sales.
Income Taxes
The Company is taxed at statutory corporate income tax rates after adjusting income reported for financial statement purposes for certain items. Current income tax expense reflects the tax results of revenues and expenses currently taxable or deductible. The Company utilizes the asset and liability method of accounting for deferred income taxes, which provides for the recognition of deferred tax assets or liabilities, based on enacted tax rates and laws, for the differences between the financial and income tax reporting bases of assets and liabilities.
The tax benefit associated with the Company’s net operating loss carry forwards (“NOLs”) is recognized to the extent that the Company expects to realize future taxable income. To the extent that the Company utilizes its NOLs, it will not pay tax on such income. However, to the extent that the Company’s net income, if any, exceeds the annual NOL limitation, it will pay income taxes based on the then existing statutory rates. In addition, certain states either do not allow or limit NOLs and as such the Company will be liable for certain state income taxes.
During the nine months ended September 30, 2022, the Company utilized $
The Company’s provision for income tax for the nine months ended September 30, 2022, was $
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. The Company utilizes a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of its cumulative results in recent years. Based on its assessment as of December 31, 2019, 2020, 2021, the Company concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, it recorded a valuation allowance of approximately $
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The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the taxing authorities. As of September 30, 2022, and December 31, 2021, the Company believes it had no uncertain tax positions.
Income per Common and Equivalent Shares
If dilutive, common equivalent shares (common shares assuming exercise of options) utilizing the treasury stock method are considered in the presentation of diluted income per share.
| Three Months |
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ended September 30, | ended September 30, | |||||||||||
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Net income | $ | |
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Weighted average number of shares – basic |
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Shares underlying options | |
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Weighted average number of shares – diluted | |
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During the three-month periods ended September 30, 2022 and 2021, certain options aggregating
During the nine-month periods ended September 30, 2022 and 2021, certain options aggregating
Estimates and Risks
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the use of estimates and assumptions that affect the amounts reported in these financial statements and footnotes. The Company considers these accounting estimates to be critical in the preparation of the accompanying consolidated financial statements. The Company uses information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used including potential impact of COVID-19 uncertainties. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur. The Company utilizes both internal and external sources to evaluate potential current and future liabilities for various commitments and contingencies. In the event that the assumptions or conditions change in the future, the estimates could differ from the original estimates.
Several of the Company’s accounting policies involve significant judgments, uncertainties, and estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. To the extent that actual results differ from management’s judgments and estimates, there could be a material adverse effect on the Company. On a continuous basis, the Company evaluates its estimates, including, but not limited to, those estimates related to its allowance for doubtful accounts, inventory reserves, goodwill and valuation allowance for the deferred tax assets relating to its NOLs and commitments and contingencies. With respect to trade accounts receivable, the Company estimates the necessary allowance for doubtful accounts based on both historical and anticipated trends of payment history and the ability of the customer to fulfill its obligations. For inventory, the Company evaluates both current and anticipated sales prices of its products to determine if a write down of inventory to net realizable value is necessary. In determining the Company’s valuation allowance for its deferred tax assets, the Company assesses its ability to generate taxable income in the future.
11
The Company participates in an industry that is highly regulated, and changes in the regulations affecting its business could affect its operating results. Currently the Company purchases virgin hydrochlorofluorocarbon (“HCFC”) and hydrofluorocarbon (“HFC”) refrigerants and reclaimable, primarily HCFC, HFC and chlorofluorocarbon (“CFC”), refrigerants from suppliers and its customers. To the extent that the Company is unable to source sufficient quantities of refrigerants or is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand and/or price for refrigerants sold by the Company, the Company could realize reductions in revenue from refrigerant sales, which could have a material adverse effect on its operating results and its financial position. The process of sourcing refrigerants includes various procurement costs, such as freight, processing, insurance, and other costs, relating to the delivery of refrigerants. As a result of the recently noted global supply chain issues, the Company determined it could be exposed to incremental costs related to these refrigerant purchases. These costs represent the Company’s initial estimate that are possibly subject to finalization in future periods and are recorded in accrued expenses and other current liabilities on the consolidated balance sheet as of September 30, 2022.
The Company is subject to various legal proceedings. The Company assesses the merit and potential liability associated with each of these proceedings. In addition, the Company estimates potential liability, if any, related to these matters. To the extent that these estimates are not accurate, or circumstances change in the future, the Company could realize liabilities, which could have a material adverse effect on its operating results and its financial position.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which each amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the impact of this ASU.
In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. ASU 2020-06 is not expected to have a material impact on the Company’s financial statements.
12
Note 2 - Fair Value
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3: Valuations for assets and liabilities include certain unobservable inputs in the assumptions and projections used in determining the fair value assigned to such assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Note 3 - Inventories
Inventories consist of the following:
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
(unaudited) | ||||||
(in thousands) | ||||||
Refrigerants and cylinders | $ | | $ | | ||
Less: net realizable value adjustments |
| ( |
| ( | ||
Total | $ | | $ | | ||
13
Note 4 - Property, plant and equipment
Elements of property, plant and equipment are as follows:
| September 30, |
| December 31, |
| Estimated | |||
2022 | 2021 | Lives | ||||||
(in thousands) | (unaudited) | |||||||
Property, plant and equipment | ||||||||
- Land | $ | | $ | | ||||
- Land improvements |
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- Equipment |
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- Equipment under capital lease |
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- Vehicles |
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- Lab and computer equipment, software |
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- Furniture & fixtures |
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- Leasehold improvements |
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Less: Accumulated depreciation |
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Total | $ | | $ | |
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Depreciation expense for the nine months ended September 30, 2022 and 2021 was $
Note 5 - Leases
The Company has various lease agreements with terms up to
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. common area maintenance, charges, utilities and property taxes). The Company elected the package of practical expedients permitted under the transition guidance, which allows it to carry forward its historical lease classification, its assessment on whether a contract contains a lease, and its initial direct costs for any leases that existed prior to the adoption of the new standard. The Company also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value, guarantees or material restrictive covenants.
Operating leases are included in Right of use asset, Accrued expenses and other current liabilities, and Long-term lease liabilities on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred.
Operating lease expense of $
14
The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of September 30, 2022.
September 30, | |||
Maturity of Lease Payments |
| 2022 | |
(in thousands) | (unaudited) | ||
2022 (remaining) | $ | | |
-2023 |
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-2024 |
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-2025 | | ||
-2026 | | ||
-Thereafter |
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Total undiscounted operating lease payments |
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Less imputed interest |
| ( | |
Present value of operating lease liabilities | $ | | |
Balance Sheet Classification
September 30, | |||
| 2022 | ||
(in thousands) | (unaudited) | ||
$ | | ||
Long-term lease liabilities |
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Total operating lease liabilities | $ | | |
Other Information
September 30, | |||
| 2022 | ||
Weighted-average remaining term for operating leases | years | ||
Weighted-average discount rate for operating leases |
| | % |
Cash Flows
Cash paid for amounts included in the present value of operating lease liabilities was $
Note 6 - Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method of accounting.
There were
At September 30, 2022 and December 31, 2021 the Company had $
15
The Company’s other intangible assets consist of the following:
September 30, 2022 | December 31, 2021 | |||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Amortization | Gross | Gross | ||||||||||||||||||
| Period |
| Carrying |
| Accumulated |
| Carrying |
| Accumulated | |||||||||||
(in thousands) |
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| Amount |
| Amortization |
| Net |
| Amount |
| Amortization |
| Net | ||||||
Intangible assets with determinable lives | ||||||||||||||||||||
Covenant not to compete |
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Total identifiable intangible assets | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Amortization expense for the nine months ended September 30, 2022 and 2021 was $
Note 7 - Share-based compensation
Share-based compensation represents the cost related to share-based awards, typically stock options or stock grants, granted to employees, non-employees, officers and directors. Share-based compensation is measured at grant date, based on the estimated aggregate fair value of the award on the grant date, and such amount is charged to compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. For the nine months periods ended September 30, 2022 and 2021, share-based compensation expense of $
Share-based awards have historically been made as stock options, and recently also as stock grants, issued pursuant to the terms of the Company’s stock option and stock incentive plans, (collectively, the “Plans”), described below. The Plans may be administered by the Board of Directors or the Compensation Committee of the Board or by another committee appointed by the Board from among its members as provided in the Plans. Presently, the Plans are administered by the Company’s Compensation Committee of the Board of Directors. As of September 30, 2022 there were
Stock option awards, which allow the recipient to purchase shares of the Company’s common stock at a fixed price, are typically granted at an exercise price equal to the Company’s stock price at the date of grant. Typically, the Company’s stock option awards have vested from immediately to
Effective September 17, 2014, the Company adopted its 2014 Stock Incentive Plan (“2014 Plan”) pursuant to which
Effective June 7, 2018, the Company adopted its 2018 Stock Incentive Plan (“2018 Plan”) pursuant to which
16
Effective June 11, 2020, the Company adopted its 2020 Stock Incentive Plan (“2020 Plan”) pursuant to which
All stock options have been granted to employees and non-employees at exercise prices equal to or in excess of the market value on the date of the grant.
The Company determines the fair value of share-based awards at the grant date by using the Black-Scholes option-pricing model, and has utilized the simplified method to compute expected lives of share-based awards. There were options to purchase
A summary of the activity for stock options issued under the Company’s Plans for the indicated periods is presented below:
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| Weighted | |||
Average | |||||
Exercise | |||||
Stock Option Plan Totals | Shares | Price | |||
Outstanding at December 31, 2020 |
| | $ | | |
-Cancelled | ( | $ | | ||
-Exercised | ( | $ | | ||
-Granted (1) | | $ | | ||
Outstanding at December 31, 2021 |
| | $ | | |
-Cancelled | ( | $ | | ||
-Exercised | ( | $ | | ||
-Granted | | $ | | ||
Outstanding at September 30, 2022, unaudited |
| | $ | | |
| (1) | Options to purchase |
The following is the weighted average contractual life in years and the weighted average exercise price at September 30, 2022 of:
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Average | Weighted | ||||||
Remaining | Average | ||||||
| Number of |
| Contractual |
| Exercise | ||
Options | Life | Price | |||||
Options outstanding and vested |
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| years | $ | ||
The intrinsic values of options outstanding at September 30, 2022 and December 31, 2021 were $
The intrinsic values of options unvested at September 30, 2022 and December 31, 2021 were $
The intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 were $
17
Note 8 - Short-term and Long-term debt
Elements of short-term and long-term debt are as follows:
| September 30, |
| December 31, | |||
2022 | 2021 | |||||
(in thousands) | (unaudited) | |||||
Short-term & long-term debt | ||||||
Short-term debt: | ||||||
- Revolving credit line and other debt | $ | | $ | | ||
- Term loan facility – current |
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Subtotal |
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Long-term debt: |
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- Term loan facility- net of current portion of long-term debt |
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- FILO term loan | | | ||||
- Less: deferred financing costs on term loan |
| ( |
| ( | ||
Subtotal | | | ||||
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Total short-term & long-term debt | $ | | $ | | ||
Revolving Credit Facility
On March 2, 2022, Hudson Technologies Company (“HTC”) and Hudson Holdings, Inc. (“Holdings”), as borrowers (collectively, the “Borrowers”), and Hudson Technologies, Inc (the “Company”) as a guarantor, entered into an Amended and Restated Credit Agreement (the “Amended Wells Fargo Facility”) with Wells Fargo Bank, National Association, as administrative agent and lender (“Agent” or “Wells Fargo”) and such other lenders as have or may thereafter become a party to the Amended Wells Fargo Facility. The Amended Wells Fargo facility amended and restated the prior Wells Fargo Facility entered into on December 19, 2019.
Under the terms of the Amended Wells Fargo Facility, the Borrowers may borrow up to $
Amounts borrowed under the Amended Wells Fargo Facility may be used for working capital needs, certain permitted acquisitions, and to reimburse drawings under letters of credit.
Interest under the Amended Wells Fargo Facility is payable in arrears on the first day of each month. Interest charges with respect to Revolving Loans are computed on the actual principal amount of Revolving Loans outstanding at a rate per annum equal to (A) with respect to Base Rate loans, the sum of (i) a rate per annum equal to the higher of (1)
In connection with the closing of the Amended Wells Fargo Facility, the Company also entered into a First Amendment to Guaranty and Security Agreement, dated as of March 2, 2022 (the “Amended Revolver Guaranty and Security Agreement”), pursuant to which the Company and certain subsidiaries are continuing to unconditionally guarantee the payment and performance of all obligations owing by Borrowers to Wells Fargo, as Agent for the benefit of the revolving lenders. Pursuant to the Amended Revolver Guaranty and Security Agreement, Borrowers, the Company and certain other subsidiaries are continuing to grant to the Agent, for the benefit of the Wells Fargo Facility lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.
18
The Amended Wells Fargo Facility contains a financial covenant requiring the Company to maintain at all times minimum liquidity (defined as availability under the Amended Wells Fargo Facility plus unrestricted cash) of at least $
The Amended Wells Fargo Facility also contains customary non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers’ ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.
The Company evaluated the Amended Wells Fargo Facility in accordance with the provisions of ASC 470 to determine if the amendment was a modification or an extinguishment of debt and concluded that the amendment was a modification of the original revolving credit facility for accounting purposes. As a result, the Company capitalized an additional $
The commitments under the Amended Wells Fargo Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on March 2, 2027, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated sooner following an event of default or in the event of certain other cross-defaults.
2022 Term Loan Facility
On March 2, 2022, Hudson Technologies Company (“HTC”), an indirect subsidiary of Hudson Technologies, Inc. (the “Company”), and the Company’s subsidiary Hudson Holdings, Inc., as borrowers (collectively, the “Borrowers”), and the Company, as guarantor, became obligated under a Credit Agreement (the “Term Loan Facility”) with TCW Asset Management Company LLC, as administrative agent (“Term Loan Agent”) and the lender parties thereto (the “Term Loan Lenders”).
Under the terms of the Term Loan Facility, the Borrowers have immediately borrowed $
The Term Loan matures on March 2, 2027, or earlier upon certain acceleration or cross default events. Principal payments on the Term Loan are required on a quarterly basis, commencing with the quarter ended March 31, 2022, in the amount of
19
Interest on the Term Loan is generally payable monthly, in arrears. Interest charges with respect to the Term Loan are computed on the actual principal amount of the Term Loan outstanding at a rate per annum equal to (A) with respect to Base Rate loans, the sum of (i) a rate per annum equal to the higher of (1)
Borrowers and the Company granted to the Term Loan Agent, for the benefit of the Term Loan Lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.
The Term Loan Facility contains a fixed charge coverage ratio covenant and a leverage ratio covenant, each tested quarterly. The fixed charge coverage ratio (“FCCR”) covenant requires compliance with specified levels of (i) EBITDA minus unfunded capital expenditures to (ii) interest expense, scheduled principal payments, and other specified payments, in each case as specified in the Term Loan Facility, for a trailing four quarter period. For the period ended September 30, 2022, the FCCR was
In connection with the closing of the Term Loan Facility, the Company also entered into a Guaranty and Security Agreement, dated as of March 2, 2022 (the “Term Loan Guarantee”), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance of all obligations owing by Borrowers to Term Loan Agent, as agent for the benefit of the Term Loan Lenders.
The Term Loan Agent and the Agent have entered into an intercreditor agreement governing the relative priority of their security interests granted by the Borrowers and the Guarantor in the collateral, providing that the Agent shall have a first priority security interest in the accounts receivable, inventory, deposit accounts and certain other assets (the “Revolving Credit Priority Collateral”) and the Term Loan Agent shall have a first priority security interest in the equipment, real property, capital stock of subsidiaries and certain other assets (the “Term Loan Priority Collateral”).
Termination of Prior Term Loan Facility
In conjunction with entry into the new Term Loan Facility as described above, on March 2, 2022 the Company’s existing term loans set forth in the Term Loan Credit and Security Agreement with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder, as amended (the “Prior Term Loan Facility”), which had a principal balance of approximately $
The Company was in compliance with all covenants, under the Amended Wells Fargo Facility and the Term Loan Facility, as of September 30, 2022.
The Company’s ability to comply with these covenants in future quarters may be affected by events beyond the Company’s control, including general economic conditions, weather conditions, regulations and refrigerant pricing. Therefore, the Company cannot make any assurance that it will continue to be in compliance during future periods.
20
The Company believes that it will be able to satisfy its working capital requirements for the foreseeable future from anticipated cash flows from operations and available funds under the Amended Wells Fargo Facility. Any unanticipated expenses, including, but not limited to, an increase in the cost of refrigerants purchased by the Company, an increase in operating expenses or failure to achieve expected revenues from the Company’s RefrigerantSide(R) Services and/or refrigerant sales or additional expansion or acquisition costs that may arise in the future would adversely affect the Company’s future capital needs. There can be no assurance that the Company’s proposed or future plans will be successful, and as such, the Company may require additional capital sooner than anticipated, which capital may not be available on acceptable terms, or at all.
CARES Act Loan
On April 23, 2020 the Company received a loan in the amount of $
Capital Lease Obligations
The Company rents certain equipment with a de minimis net book value at September 30, 2022 under leases which have been classified as capital leases.
Scheduled maturities of the Company’s long-term debt and capital lease obligations are as follows:
Years ended September 30, |
| Amount | |
(in thousands) | |||
‑2023 | $ | | |
-2024 | | ||
-2025 |
| | |
-2026 |
| | |
-2027 |
| | |
Total | $ | | |
21
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements, contained in this section and elsewhere in this Form 10-Q, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the laws and regulations affecting the industry, changes in the demand and price for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants), the Company’s ability to source refrigerants, regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements that become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration, the ability to obtain financing, the ability to meet financial covenants under our financing facilities, any delays or interruptions in bringing products and services to market, the timely availability of any requisite permits and authorizations from governmental entities and third parties as well as factors relating to doing business outside the United States, including changes in the laws, regulations, policies, and political, financial and economic conditions, including inflation, interest and currency exchange rates, of countries in which the Company may seek to conduct business, the Company’s ability to successfully integrate any assets it acquires from third parties into its operations, the impact of the current COVID-19 pandemic, and other risks detailed in the Company’s Form 10-K for the year ended December 31, 2021, and in the Company’s other subsequent filings with the Securities and Exchange Commission (“SEC”). The words “believe”, “expect”, “anticipate”, “may”, “plan”, “should” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Impact of COVID-19 Pandemic
The public health crisis caused by the COVID-19 pandemic and the measures being taken by governments, businesses, including us, and the public at large to limit COVID-19’s spread may have certain negative impacts on our business including, without limitation, the following:
| ● | We may experience a decrease in sales due to the COVID-19 pandemic. In particular, sales of our products to customers, such as schools, offices and government facilities, which have shut down, have been negatively impacted. If the COVID-19 pandemic intensifies and expands geographically, its negative impacts on our sales and collectability of receivables could be more prolonged and may become more severe. |
| ● | Although we have not experienced this during 2021 or 2022, future potential disruptions in supply chains may place constraints on our ability to source refrigerants, which may increase our processing costs. |
| ● | Governmental authorities in the United States and throughout the world may continue to increase or impose new income taxes or indirect taxes, or revise interpretations of existing tax rules and regulations, as a means of financing the costs of stimulus and other measures enacted or taken, or that may be enacted or taken in the future, to protect populations and economies from the impact of the COVID-19 pandemic. Such actions could have an adverse effect on our results of operations and cash flows. |
| ● | As a result of the COVID-19 pandemic, including related governmental guidance or directives, we have, at times, required most office-based employees to work remotely. We may experience reductions in productivity and disruptions to our business routines while our remote work policy is in place. |
| ● | Attempting to comply with rapidly evolving and conflicting legal requirements regarding vaccination and/or mandatory testing of our workforce. |
| ● | Actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic may result in legal claims or litigation against us. |
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our results of operations, financial condition and cash flows. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
22
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Several of the Company’s accounting policies involve significant judgments, uncertainties and estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. To the extent that actual results differ from management’s judgments and estimates, there could be a material adverse effect on the Company. On a continuous basis, the Company evaluates its estimates, including, but not limited to, those estimates related to its inventory reserves, and valuation allowance for the deferred tax assets relating to its net operating loss carry forwards (“NOLs”) and goodwill and intangible assets.
Inventory
For inventory, the Company evaluates both current and anticipated sales prices of its products to determine if a write down of inventory to net realizable value is necessary. Net realizable value represents the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. The determination if a write-down to net realizable value is necessary is primarily affected by the market prices for the refrigerant gases we sell. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, seasonality, the availability and adequacy of supply, government regulation and policies and general political and economic conditions. At any time, our inventory levels may be substantial.
Goodwill
The Company has made acquisitions that included a significant amount of goodwill and other intangible assets. The Company applies the purchase method of accounting for acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price of the acquisition over the fair value of the net assets acquired and identified intangible assets). We test our goodwill for impairment on an annual basis (on the first day of the fourth quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. Other intangible assets that meet certain criteria are amortized over their estimated useful lives.
An impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value. An impairment charge would be recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact operating results. During the fourth quarter of 2021, we completed our annual impairment test as of October 1 and determined in our qualitative assessment that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, resulting in no goodwill impairment. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.
There were no goodwill impairment losses recognized in 2021 or the nine months ended September 30, 2022.
Other Intangibles
Intangibles with determinable lives are amortized over the estimated useful lives of the assets currently ranging from 3 to 13 years. The Company reviews these useful lives annually to determine that they reflect future realizable value.
Income Taxes
The Company is taxed at statutory corporate income tax rates after adjusting income reported for financial statement purposes for certain items. Current income tax expense reflects the tax results of revenues and expenses currently taxable or deductible. The Company utilizes the asset and liability method of accounting for deferred income taxes, which provides for the recognition of deferred tax assets or liabilities, based on enacted tax rates and laws, for the differences between the financial and income tax reporting bases of assets and liabilities.
The tax benefit associated with the Company’s net operating loss carry forwards (“NOLs”) is recognized to the extent that the Company expects to realize future taxable income. To the extent that the Company utilizes its NOLs, it will not pay tax on such
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income. However, to the extent that the Company’s net income, if any, exceeds the annual NOL limitation, it will pay income taxes based on the then existing statutory rates. In addition, certain states either do not allow or limit NOLs and as such the Company will be liable for certain state income taxes.
During the nine months ended September 30, 2022, the Company utilized $29.3 million of federal NOLs. As of September 30, 2022, the Company has fully utilized its federal NOLs. We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowance, on a quarterly basis.
The Company’s provision for income tax for the nine months ended September 30, 2022, was $13.4 million. The tax provision during the nine months ended September 30, 2022 includes a $14.4 million tax benefit related to its valuation allowance release. The effective tax rate for the nine months ended September 30, 2022, was 11.9%. Each quarter the Company assesses the realizability of deferred tax assets under ASC Topic 740. Available positive and negative evidence is used to estimate whether sufficient future taxable income will be generated to use existing deferred assets. The Company relies on future book and taxable income forecasts, including tax planning strategies and future reversals of taxable temporary differences, to support their recoverability. The assessment performed for the period ended September 30, 2022, resulted in the conclusion that it is more likely than not that the deferred tax assets will be realizable, resulting in $14.4 million of valuation allowance release during the nine month period ended September 30, 2022. When a change in valuation allowance is recognized during an interim period, a portion of the valuation allowance to be reversed must be allocated to the remaining interim periods. Based on forecasted levels of book and taxable income, we estimate a remaining valuation allowance of $0.7 million to be released during the next quarter.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of our cumulative results in recent years. Based on our assessment as of December 31, 2019, 2020, 2021, we concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, we recorded a valuation allowance of approximately $11.3 million during 2018, and due to additional losses, increased the valuation allowance through 2019 and 2020 to $19.0 million. For the year ended December 31, 2021, and due to additional income that resulted in the utilization of net operating losses of $16.8 million, we reduced the valuation allowance by $3.9 million resulting in an ending balance of $15.1 million as of December 31, 2021. During the nine months ended September 30, 2022, and as a result of the Company’s assessment that the deferred tax assets are more likely than not to become realizable, the Company reversed $14.4 million its valuation allowance, resulting in an ending valuation allowance balance of $0.7 million as of September 30, 2022. The amount of the deferred tax asset considered realizable can change if estimates of future taxable income change or if objective negative and positive evidence changes.
The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the taxing authorities. As of September 30, 2022, and December 31, 2021, the Company believes it had no uncertain tax positions.
Overview
The Company is a leading provider of sustainable refrigerant products and services to the Heating Ventilation Air Conditioning and Refrigeration (“HVACR”) industry. For nearly three decades, we have demonstrated our commitment to our customers and the environment by becoming one of the United States’ largest refrigerant reclaimers through multimillion dollar investments in the plants and advanced separation technology required to recover a wide variety of refrigerants and restoring them to Air-Conditioning, Heating, and Refrigeration Institute (“AHRI”) standard for reuse as certified EMERALD Refrigerants™.
The Company’s products and services are primarily used in commercial air conditioning, industrial processing and refrigeration systems, and include refrigerant and industrial gas sales, refrigerant management services consisting primarily of reclamation of refrigerants and RefrigerantSide® Services performed at a customer’s site, which include system decontamination to remove moisture, oils and other contaminants.
Sales of refrigerants continue to represent a significant majority of the Company’s revenues.
Results of Operations
Three-month period ended September 30, 2022 as compared to the three-month period ended September 30, 2021
Revenues for the three-month period ended September 30, 2022 were $89.5 million, an increase of $28.9 million or 48% from the $60.6 million reported during the comparable 2021 period. The increase was mainly attributable to higher selling prices of certain refrigerants sold. Higher selling prices were fueled by the implementation of the AIM Act and the virgin HFC allocation system.
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Cost of sales for the three-month period ended September 30, 2022 was $45.3 million or 51% of sales. The cost of sales for the three-month period ended September 30, 2021 was $37.0 million or 61% of sales. The reduction in the cost of sales percentage from 61% to 51% is primarily due to higher selling prices without similar increases in cost of goods during the third quarter of 2022 when compared to the third quarter of 2021.
Selling, general and administrative (“SG&A”) expenses for the three-month period ended September 30, 2022 were $7.2 million, an increase of $1.1 million from the $6.1 million reported during the comparable 2021 period. The increase in SG&A was primarily due to increased accounts receivable reserve as a result of increased sales, higher noncash stock compensation expense and increased expenditures related to an enhanced information technology system.
Amortization expense for both of the three-month periods ended September 30, 2022 and 2021 was $0.7 million.
Interest expense for the three-month period ended September 30, 2022 was $2.4 million, compared to the $2.8 million reported during the comparable 2021 period. Interest expense was lower due to reduced debt resulting from the Company paying down principal of its term loan debt. In addition, during the third quarter of 2021, the Company received forgiveness of the PPP loan from the SBA, resulting in $2.475 million of Other Income recorded in the Company’s Consolidated Statements of Operations, as described above.
The income tax expense for the three-month period ended September 30, 2022 was $4.6 million compared to income tax expense of $0.7 million for the three month period ended September 30, 2021. The tax provision during the three months ended September 30, 2022 includes a $2.8 million tax benefit related to its valuation allowance release. The key driver of higher income tax expense was due to increased profitability. Income tax expense for federal and state income tax purposes was determined by applying statutory income tax rates to pre-tax income after adjusting for certain items.
The net income for the three-month period ended September 30, 2022 was $29.4 million, an increase of $13.5 million from the $15.9 million of net income reported during the comparable 2021 period, primarily due to higher revenues, as described above.
Nine month period ended September 30, 2022 as compared to the nine month period ended September 30, 2021
Revenues for the nine-month period ended September 30, 2022 were $277.8 million, an increase of $122.8 million or 79% from the $155.0 million reported during the comparable 2021 period. The increase was mainly attributable to higher selling prices of certain refrigerants sold. Higher selling prices were fueled by the implementation of the AIM Act and the virgin HFC allocation system.
Cost of sales for the nine-month period ended September 30, 2022 was $130.2 million or 47% of sales. The cost of sales for the nine-month period ended September 30, 2021 was $100.3 million or 65% of sales. The reduction in the cost of sales percentage from 65% to 47% is primarily due to higher selling prices and lower costs of certain refrigerants sold during the first nine months of 2022 when compared to the first nine months of 2021.
Selling, general and administrative (“SG&A”) expenses for the nine-month period ended September 30, 2022 were $21.1 million, an increase of $1.5 million from the $19.6 million reported during the comparable 2021 period. The increase in SG&A was primarily due to increased accounts receivable reserve as a result of increased sales, higher noncash stock compensation expense and increased expenditures related to an enhanced information technology system.
Amortization expense for both nine-month periods ended September 30, 2022 and 2021 was $2.1 million.
Interest expense for the nine-month period ended September 30, 2022 was $12.3 million, compared to the $8.5 million reported during the comparable 2021 period. Interest expense was higher due to the extinguishment of prior term loan debt, as described in “Liquidity and Capital Resources” below. In addition, during the third quarter of 2021, the Company received forgiveness of the PPP loan from the SBA, resulting in $2.475 million of Other Income recorded in the Company’s Consolidated Statements of Operations, as described earlier.
The income tax expense for the nine-month period ended September 30, 2022 was $13.4 million compared to income tax expense of $0.8 million for the nine month period ended September 30, 2021. The tax provision during the nine months ended September 30, 2022 includes a $14.4 million tax benefit related to its valuation allowance release. The effective tax rate for the nine months ended September 30, 2022 was 11.9%. The key driver of higher income tax expense was due to increased profitability. For 2022 and 2021, income tax expense for federal and state income tax purposes was determined by applying statutory income tax rates to pre-tax income after adjusting for certain items.
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Net income for the nine-month period ended September 30, 2022 was $98.7 million, an increase of $72.6 million from the $26.1 million of net income reported during the comparable 2021 period, primarily due to higher revenues, as described above.
Liquidity and Capital Resources
At September 30, 2022, the Company had working capital, which represents current assets less current liabilities, of $133.5 million, an increase of $78.0 million from the working capital of $55.5 million at December 31, 2021. The increase in working capital is primarily attributable to increased profitability and the timing of borrowings, accounts receivable and inventory.
Inventories and trade receivables are principal components of current assets. At September 30, 2022, the Company had inventories of $120.2 million, an increase of $26.1 million from $94.1 million at December 31, 2021. The increase in the inventory balance is primarily due to increases in inventory cost in 2022, consistent with the increase in selling price of certain refrigerants. The Company’s ability to sell and replace its inventory on a timely basis and the prices at which it can be sold are subject, among other things, to current market conditions and the nature of supplier or customer arrangements and the Company’s ability to source CFC and HCFC based refrigerants (which are no longer being produced) and HFC refrigerants (virgin production currently in the process of being phased down).
At September 30, 2022, the Company had trade receivables, net of allowance for doubtful accounts, of $38.7 million, an increase of $24.5 million from $14.2 million at December 31, 2021, mainly due to increased sales. The Company’s trade receivables are concentrated with various wholesalers, brokers, contractors and end-users within the refrigeration industry that are primarily located in the continental United States. The Company has historically financed its working capital requirements through cash flows from operations, the issuance of debt and equity securities, and bank borrowings.
Net cash provided by operating activities for the nine-month period ended September 30, 2022 was $60.0 million, when compared to net cash provided by operating activities of $8.0 million for the comparable 2021 period. The variance is primarily due to increased net income in 2022, primarily as a result of increased selling price of certain refrigerants sold, partially offset by increased accounts receivable and inventories.
Net cash used in investing activities for the nine-month period ended September 30, 2022 was $1.7 million compared with net cash used in investing activities of $0.7 million for the comparable 2021 period, mainly due to timing of capital expenditures related to our plants.
Net cash used by financing activities for the nine-month period ended September 30, 2022 was $46.7 million compared with net cash provided by financing activities of $0.8 million for the comparable 2021 period. The Company refinanced its term loan debt during the first quarter of 2022, as described below, and also paid down a significant portion of its term loan during 2022.
At September 30, 2022, cash and cash equivalents were $15.0 million, or approximately $11.5 million higher than the $3.5 million of cash and cash equivalents at December 31, 2021.
Revolving Credit Facility
On March 2, 2022, Hudson Technologies Company (“HTC”) and Hudson Holdings, Inc. (“Holdings”), as borrowers (collectively, the “Borrowers”), and Hudson Technologies, Inc (the “Company”) as a guarantor, entered into an Amended and Restated Credit Agreement (the “Amended Wells Fargo Facility”) with Wells Fargo Bank, National Association, as administrative agent and lender (“Agent” or “Wells Fargo”) and such other lenders as have or may thereafter become a party to the Amended Wells Fargo Facility. The Amended Wells Fargo facility amended and restated the prior Wells Fargo Facility entered into on December 19, 2019.
Under the terms of the Amended Wells Fargo Facility, the Borrowers may borrow up to $90 million consisting of: (i) $15 million immediately borrowed in the form of a “first in last out” term loan (the “FILO Tranche”) and (ii) from time to time, up to $75 million at any time consisting of revolving loans (the “Revolving Loans”) in a maximum amount up to the lesser of $75 million and a borrowing base that is calculated based on the outstanding amount of the Borrowers’ eligible receivables and eligible inventory, as described in the Amended Wells Fargo Facility. The Amended Wells Fargo Facility also contains a sublimit of $9 million for swing line loans and $2 million for letters of credit.
Amounts borrowed under the Amended Wells Fargo Facility may be used for working capital needs, certain permitted acquisitions, and to reimburse drawings under letters of credit.
Interest under the Amended Wells Fargo Facility is payable in arrears on the first day of each month. Interest charges with respect to Revolving Loans are computed on the actual principal amount of Revolving Loans outstanding at a rate per annum equal to (A)
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with respect to Base Rate loans, the sum of (i) a rate per annum equal to the higher of (1) 1.0%, (2) the federal funds rate plus 0.5%, (3) one month term SOFR plus 1.0%, and (4) the prime commercial lending rate of Wells Fargo, plus (ii) between 1.25% and 1.75% depending on average monthly undrawn availability and (B) with respect to SOFR loans, the sum of the applicable SOFR rate plus between 2.36% and 2.86% depending on average quarterly undrawn availability. Interest charges with respect to the FILO Tranche are computed on the actual principal amount of FILO Tranche loans outstanding at a rate per annum equal to (A) with respect to Base Rate FILO Tranche loans, the sum of (i) a rate per annum equal to the higher of (1) 1.0%, (2) the federal funds rate plus 0.5%, (3) one month term SOFR plus 1.0%, and (4) the prime commercial lending rate of Wells Fargo, plus (ii) 6.5% and (B) with respect to SOFR FILO Tranche loans, the sum of the applicable SOFR rate plus 7.50%.
In connection with the closing of the Amended Wells Fargo Facility, the Company also entered into a First Amendment to Guaranty and Security Agreement, dated as of March 2, 2022 (the “Amended Revolver Guaranty and Security Agreement”), pursuant to which the Company and certain subsidiaries are continuing to unconditionally guarantee the payment and performance of all obligations owing by Borrowers to Wells Fargo, as Agent for the benefit of the revolving lenders. Pursuant to the Amended Revolver Guaranty and Security Agreement, Borrowers, the Company and certain other subsidiaries are continuing to grant to the Agent, for the benefit of the Wells Fargo Facility lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.
The Amended Wells Fargo Facility contains a financial covenant requiring the Company to maintain at all times minimum liquidity (defined as availability under the Amended Wells Fargo Facility plus unrestricted cash) of at least $5 million, of which at least $3 million must be derived from availability. The Amended Wells Fargo Facility also contains a springing covenant, which takes effect only upon a failure to maintain undrawn availability of at least $11.25 million or upon an election by the Borrowers to increase the inventory component of the borrowing base, requiring the Company to maintain a Fixed Charge Coverage Ratio (FCCR) of not less than 1.00 to 1.00, as of the end of each trailing period of twelve consecutive months commencing with the month prior to the triggering of the covenant. The FCCR (as defined in the Wells Fargo Facility) is the ratio of (a) EBITDA for such period, minus unfinanced capital expenditures made during such period, to (b) the aggregate amount of (i) interest expense required to be paid (other than interest paid-in-kind, amortization of financing fees, and other non-cash interest expense) during such period, (ii) scheduled principal payments (but excluding principal payments relating to outstanding Revolving Loans under the Amended Wells Fargo Facility), (iii) all net federal, state, and local income taxes required to be paid during such period (provided, that any tax refunds received shall be applied to the period in which the cash outlay for such taxes was made), (iv) all restricted payments paid (as defined in the Amended Wells Fargo Facility) during such period, and (v) to the extent not otherwise deducted from EBITDA for such period, all payments required to be made during such period in respect of any funding deficiency or funding shortfall with respect to any pension plan. The FCCR covenant ceases after the Borrowers have been in compliance therewith for two consecutive months.
The Amended Wells Fargo Facility also contains customary non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers’ ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.
The Company evaluated the Amended Wells Fargo Facility in accordance with the provisions of ASC 470 to determine if the amendment was a modification or an extinguishment of debt and concluded that the amendment was a modification of the original revolving credit facility for accounting purposes. As a result, the Company capitalized an additional $0.9 million of deferred financing costs in connection with the amendment, which, along with the $0.2 million of remaining deferred financing costs of the original revolving facility, is being amortized over the remaining five year term of the Amended Wells Fargo Facility.
The commitments under Amended the Wells Fargo Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on March 2, 2027, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated sooner following an event of default or in the event of certain other cross-defaults.
2022 Term Loan Facility
On March 2, 2022, Hudson Technologies Company (“HTC”), an indirect subsidiary of Hudson Technologies, Inc. (the “Company”), and the Company’s subsidiary Hudson Holdings, Inc., as borrowers (collectively, the “Borrowers”), and the Company, as guarantor, became obligated under a Credit Agreement (the “Term Loan Facility”) with TCW Asset Management Company LLC, as administrative agent (“Term Loan Agent”) and the lender parties thereto (the “Term Loan Lenders”).
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Under the terms of the Term Loan Facility, the Borrowers have immediately borrowed $85 million pursuant to a term loan (the “Term Loan”). Amounts borrowed under the Term Loan Facility were used by the Borrowers to repay the outstanding principal amount and related fees and expenses under the Prior Term Loan Facility (as defined below) and for other corporate purposes. The Company paid approximately $4.3 million of term loan deferred financing costs.
The Term Loan matures on March 2, 2027, or earlier upon certain acceleration or cross default events. Principal payments on the Term Loan are required on a quarterly basis, commencing with the quarter ended March 31, 2022, in the amount of 5% of the original principal amount of the outstanding Term Loan per annum. The Term Loan Facility also requires annual payments of 50% of Excess Cash Flow (as defined in the Term Loan Facility); provided that commencing with the year ending December 31, 2023 such payments may be reduced depending upon the Company’s leverage ratio (as defined in the Term Loan Facility) for the applicable year. The Term Loan Facility also requires mandatory prepayments of the Term Loan in the event of certain asset dispositions, debt issuances, and other events. The Term Loan may be prepaid at the option of the Borrowers subject to a prepayment premium of 3% in year one, 2% in year two, 1% in year three, and zero in year four and thereafter.
Interest on the Term Loan is generally payable monthly, in arrears. Interest charges with respect to the Term Loan are computed on the actual principal amount of the Term Loan outstanding at a rate per annum equal to (A) with respect to Base Rate loans, the sum of (i) a rate per annum equal to the higher of (1) 2.0%, (2) the federal funds rate plus 0.5%, (3) one month term SOFR plus 1.0%, and (4) the prime commercial lending rate quoted by The Wall Street Journal, plus (ii) between 6.0% and 7.0% depending on the applicable leverage ratio and (B) with respect to SOFR loans, the sum of the applicable SOFR rate plus between 7.0% and 8.0% depending on the applicable leverage ratio.
Borrowers and the Company granted to the Term Loan Agent, for the benefit of the Term Loan Lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.
The Term Loan Facility contains a fixed charge coverage ratio covenant and a leverage ratio covenant, each tested quarterly. The fixed charge coverage ratio (“FCCR”) covenant requires compliance with specified levels of (i) EBITDA minus unfunded capital expenditures to (ii) interest expense, scheduled principal payments, and other specified payments, in each case as specified in the Term Loan Facility, for a trailing four quarter period. For the period ended September 30, 2022, the FCCR was 5.36 to 1.0 against a requirement of at least 1.10 to 1.0. The leverage ratio (“LR”) covenant is tested as of the last day of each fiscal quarter. The LR is the ratio of (i) funded debt as of such date minus the lesser of $15,000,000 or the Company’s unrestricted cash to (b) trailing twelve-month EBITDA, in each case as specified in the Term Loan Facility. As of September 30, 2022, the LR was approximately 0.41 to 1.0, compared to the maximum of 4.00 to 1.0. The Term Loan Facility also contains customary non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers’ ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.
In connection with the closing of the Term Loan Facility, the Company also entered into a Guaranty and Security Agreement, dated as of March 2, 2022 (the “Term Loan Guarantee”), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance of all obligations owing by Borrowers to Term Loan Agent, as agent for the benefit of the Term Loan Lenders.
The Term Loan Agent and the Agent have entered into an intercreditor agreement governing the relative priority of their security interests granted by the Borrowers and the Guarantor in the collateral, providing that the Agent shall have a first priority security interest in the accounts receivable, inventory, deposit accounts and certain other assets (the “Revolving Credit Priority Collateral”) and the Term Loan Agent shall have a first priority security interest in the equipment, real property, capital stock of subsidiaries and certain other assets (the “Term Loan Priority Collateral”).
Termination of Prior Term Loan Facility
In conjunction with entry into the new Term Loan Facility as described above, on March 2, 2022 the Company’s existing term loans set forth in the Term Loan Credit and Security Agreement with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder, as amended (the “Prior Term Loan Facility”), which had a principal balance of approximately $63.9 million after payment of a $16.0 million excess cash flow amount thereunder, was repaid in full, together with associated required lender fees and expenses of $3.3 million, and the Prior Term Loan Facility was terminated. The termination of the Prior Term Loan Facility constituted an extinguishment of debt, which resulted in the Company recording an additional $4.6 million of interest expense during the first quarter of 2022, which included the aforementioned $3.3 million of prior lender fees and expenses and $1.3 million of pre-existing deferred financing costs from the Prior Term Loan Facility.
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The Company was in compliance with all covenants, under the Amended Wells Fargo Facility and the Term Loan Facility, as of September 30, 2022.
The Company’s ability to comply with these covenants in future quarters may be affected by events beyond the Company’s control, including general economic conditions, weather conditions, regulations and refrigerant pricing. Therefore, we cannot make any assurance that we will continue to be in compliance during future periods.
The Company believes that it will be able to satisfy its working capital requirements for the foreseeable future from anticipated cash flows from operations and available funds under the Amended Wells Fargo Facility. Any unanticipated expenses, including, but not limited to, an increase in the cost of refrigerants purchased by the Company, an increase in operating expenses or failure to achieve expected revenues from the Company’s RefrigerantSide(R) Services and/or refrigerant sales or additional expansion or acquisition costs that may arise in the future would adversely affect the Company’s future capital needs. There can be no assurance that the Company’s proposed or future plans will be successful, and as such, the Company may require additional capital sooner than anticipated, which capital may not be available on acceptable terms, or at all.
CARES Act Loan
On April 23, 2020 the Company received a loan in the amount of $2.475 million from Meridian Bank under the Paycheck Protection Program (“PPP”) pursuant to the CARES Act. The loan had a term of two years, was unsecured, and bore interest at a fixed rate of one percent per annum, with the first nine months of principal and interest deferred. As a result of the COVID-19 pandemic, in applying for the loan the Company made a good faith assertion based upon the degree of uncertainty introduced to the capital markets and the industries affecting the Company’s customers and the Company’s dependency to curtail expenses to fund ongoing operations. The PPP loan proceeds have been used in part to help offset payroll costs as stipulated in the legislation. All or a portion of the PPP loan may be forgiven by the U.S. Small Business Administration (“SBA”) upon application by the Company and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs and other covered areas, such as rent payments, mortgage interest and utilities, as applicable. During the third quarter of 2021, the Company received forgiveness of the loan from the SBA, resulting in $2.475 million of Other Income recorded in the Company’s Consolidated Statements of Operations.
Inflation
Inflation, historically or the current rise, has not had a material impact on the Company’s operations.
Reliance on Suppliers and Customers
The Company participates in an industry that is highly regulated, and changes in the regulations affecting our business could affect our operating results. Currently the Company purchases virgin HCFC and HFC refrigerants and reclaimable, primarily HCFC and CFC, refrigerants from suppliers and its customers. Under the Clean Air Act the phase-down of future production of certain virgin HCFC refrigerants commenced in 2010 and has been fully phased out by the year 2020, and production of all virgin HCFC refrigerants is scheduled to be phased out by the year 2030. To the extent that the Company is unable to source sufficient quantities of refrigerants or is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand and/or price for refrigerants sold by it, the Company could realize reductions in revenue from refrigerant sales, which could have a material adverse effect on the Company’s operating results and financial position.
For the nine month period ended September 30, 2022 there was no customer accounting for greater than 10% of the Company’s revenues. For the nine-month period ended September 30, 2021 there was one customer accounting for 10% of the Company’s revenues and at September 30, 2021 there were $3.0 million of accounts receivable from this customer.
The loss of a principal customer or a decline in the economic prospects of and/or a reduction in purchases of the Company’s products or services by any such customer could have a material adverse effect on the Company’s operating results and financial position.
Seasonality and Weather Conditions and Fluctuations in Operating Results
The Company’s operating results vary from period to period as a result of weather conditions, requirements of potential customers, non-recurring refrigerant and service sales, availability and price of refrigerant products (virgin or reclaimable), changes in reclamation technology and regulations, timing in introduction and/or retrofit or replacement of refrigeration equipment, the rate of expansion of the Company’s operations, and by other factors. The Company’s business is seasonal in nature with peak sales of refrigerants occurring in the first nine months of each year. During past years, the seasonal decrease in sales of refrigerants has resulted in losses particularly in the fourth quarter of the year. In addition, to the extent that there is unseasonably cool weather
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throughout the spring and summer months, which would adversely affect the demand for refrigerants, there would be a corresponding negative impact on the Company. Delays or inability in securing adequate supplies of refrigerants at peak demand periods, lack of refrigerant demand, increased expenses, declining refrigerant prices and a loss of a principal customer could result in significant losses. There can be no assurance that the foregoing factors will not occur and result in a material adverse effect on the Company’s financial position and significant losses. The Company believes that to a lesser extent there is a similar seasonal element to RefrigerantSide® Service revenues as refrigerant sales.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which each amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the impact of this ASU.
In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. ASU 2022-06 is not expected to have a material impact on our financial statements.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We are exposed to market risk from fluctuations in interest rates on the Amended Wells Fargo Facility and on the Term Loan Facility. The Amended Wells Fargo Facility is a $90,000,000 secured facility with a $15,000,000 outstanding balance as of September 30, 2022. The Term Loan Facility has a balance of $42,875,000 as of September 30, 2022. Future interest rate changes on our borrowing under the Term Loan Facility and the Amended Wells Fargo Facility may have an impact on our consolidated results of operations.
If the loan bearing interest rate changed by 1%, the annual effect on interest expense would be approximately $0.7 million as of September 30, 2022.
Refrigerant Market
We are also exposed to market risk from fluctuations in the demand, price and availability of refrigerants. To the extent that the Company is unable to source sufficient quantities of refrigerants or is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand and/or price for refrigerants sold by the Company, the Company could realize reductions in revenue from refrigerant sales or write-downs of inventory, which could have a material adverse effect on our consolidated results of operations.
Item 4 - Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods
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specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, the Company’s controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control and misstatements due to error or fraud may occur and not be detected on a timely basis.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded there were no such changes.
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PART II – OTHER INFORMATION
Item 1A – Risk Factors
Please refer to the Risk Factors in Part I, Item 1A of the Company’s Form 10-K for the year ended December 31, 2021. There have been no material changes to such matters during the quarter ended September 30, 2022.
Item 6 - Exhibits
Exhibit |
| Description |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | ||
32.2 | ||
101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
HUDSON TECHNOLOGIES, INC. | ||||
By: | /s/ Brian F. Coleman |
| November 8, 2022 | |
Brian F. Coleman | Date | |||
Chairman of the Board, President and Chief Executive Officer | ||||
By: | /s/ Nat Krishnamurti |
| November 8, 2022 | |
Nat Krishnamurti | Date | |||
Chief Financial Officer |
|
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