Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
¨
Yes
x
No
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act
¨
Yes
x
No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule12b-2
of the Exchange Act.
The aggregate market value of registrant’s
common stock held by non-affiliates at June 30, 2016 was approximately $96,210,824. As of March 1, 2017 there were 41,518,820
shares of the registrant’s common stock outstanding
.
Portions of the Registrant's Proxy Statement
for its Annual Meeting of Stockholders to be held on June 14, 2017, are incorporated by reference in Part III of this Report.
Except as expressly incorporated by reference, the Registrant's Proxy Statement shall not be deemed to be part of this Form 10-K.
Part I
Item 1. Business
General
Hudson Technologies, Inc., 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. The Company’s operations consist of one reportable segment. 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, consisting of system decontamination to remove moisture, oils and other contaminants.
In addition, the Company’s SmartEnergy OPS
TM
service is a web-based real time continuous monitoring service applicable
to a facility’s refrigeration systems and other energy systems. The Company’s Chiller Chemistry® and Chill Smart®
services are also predictive and diagnostic service offerings. As a component of the Company’s products and services, the
Company also participates in the generation of carbon offset projects. The Company operates principally through its wholly-owned
subsidiary, Hudson Technologies Company. Unless the context requires otherwise, references to the “Company”, “Hudson”,
“we", “us”, “our”, or similar pronouns refer to Hudson Technologies, Inc. and its subsidiaries.
The Company's executive offices are located
at One Blue Hill Plaza, Pearl River, New York and its telephone number is (845) 735-6000. The Company maintains a website at
www.hudsontech.com
,
the contents of which are not incorporated into this filing.
Industry Background
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, hydro chlorofluorocarbon (“HCFC”) and hydro fluorocarbon (“HFC”) refrigerants and reclaimable,
primarily HCFC, HFC and chlorofluorocarbon (“CFC”) refrigerants from suppliers and its customers. Effective January
1, 1996, the Clean Air Act, as amended (the “Act”) prohibited the production of virgin CFC refrigerants and limited
the production of virgin HCFC refrigerants. Effective January 2004, the Act further limited the production of virgin HCFC refrigerants
and federal regulations were enacted which established production and consumption allowances for HCFC refrigerants and which imposed
limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin HCFC refrigerants
is scheduled to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants is scheduled
to be phased out by 2030. In October 2014, the EPA published a final rule providing further reductions in the production and consumption
allowances for virgin HCFC refrigerants for the years 2015 through 2019 (the “Final Rule”). In the Final Rule, the
EPA has established a linear annual phase down schedule for the production or importation of virgin HCFC-22 that started at approximately
22 million pounds in 2015 and reduces by approximately 4.5 million pounds each year and ends at zero in 2020.
HFC refrigerants are used as substitutes for
CFC and HCFC refrigerants in certain applications. As a result of the increasing restrictions and limitations on the production
and use of CFC and HCFC refrigerants, various segments of the air conditioning and refrigeration industry have been replacing
or modifying equipment that utilize CFC and HCFC refrigerants and have been transitioning to equipment that utilize HFC refrigerants
and hydrofluoro-olefins (“HFO”). HFC refrigerants are not ozone depleting chemicals and are not currently regulated
under the Act. However, certain HFC refrigerants are highly weighted greenhouse gases that are believed to contribute to global
warming and climate change and, as a result, are now subject to various state and federal regulations relating to the sale, use
and emissions of HFC refrigerants. The Company expects that HFC refrigerants eventually will
be replaced by HFOs or other types of products with lower global warming potentials.
In October 2016, more than 200 countries, including the United States, agreed to amend the Montreal Protocol
to phase down production of HFCs by 85% between now and 2047. The amendment establishes timetables for all developed and developing
countries to freeze and then reduce production and use of HFCs, with the first reductions by developed countries starting in 2019.
The amendment becomes effective January 1, 2019 if twenty countries ratify the amendment. To date, the amendment has not been ratified
by the United States.
The Act, and the federal regulations enacted
under authority of the Act, have mandated and/or promoted responsible use practices in the air conditioning and refrigeration
industry, which are intended to minimize the release of refrigerants into the atmosphere and encourage the recovery and re-use
of refrigerants. The Act prohibits the venting of CFC, HFC and HCFC refrigerants, and prohibits and/or phases down the production
of CFC and HCFC refrigerants.
The Act also mandates the recovery of
CFC and HCFC refrigerants and also promotes and encourages re-use and reclamation of CFC and HCFC refrigerants. Under the
Act, owners, operators and companies servicing cooling equipment utilizing CFC and HCFC refrigerants are responsible for the
integrity of the systems regardless of the refrigerant being used. In November 2016, the EPA issued a final rule extending
these requirements to HFCs and to certain other refrigerants that are approved by the EPA as alternatives for CFC and
HCFC refrigerants.
Products and Services
From its inception, the Company has sold refrigerants,
and has provided refrigerant reclamation and refrigerant management services that are designed to recover and reuse refrigerants,
thereby protecting the environment from release to the atmosphere and the corresponding ozone depletion and global warming impact.
The reclamation process allows the refrigerant to be re-used thereby eliminating the need to destroy or manufacture additional
refrigerant and eliminating the corresponding impact to the environment associated with the destruction and manufacturing.
The Company believes it is the largest refrigerant reclaimer in the United States. Additionally, the Company has created
alternative solutions to reactive and preventative maintenance procedures that are performed on commercial and industrial refrigeration
systems. These services, known as RefrigerantSide® Services, complement the Company’s refrigerant sales and refrigerant
reclamation and management services. The Company has also developed SmartEnergy OPS
TM
that identify inefficiencies
in the operation of air conditioning and refrigeration systems and assists companies to improve the energy efficiency of their
systems and save operating costs and improve system reliability. In addition, the Company is pursuing potential opportunities
for the creation and monetization of verified emission reductions.
Refrigerant and Industrial Gas Sales
The Company sells reclaimed and virgin (new)
refrigerants to a variety of customers in various segments of the air conditioning and refrigeration industry, and sells industrial
gases to a variety of industry segments. The Company continues to sell reclaimed CFC based refrigerants, which are no longer manufactured.
Virgin, non-CFC refrigerants, including HCFC and HFC refrigerants, are purchased by the Company from several suppliers and resold
by the Company, typically at wholesale. Additionally, the Company regularly purchases used or contaminated refrigerants, some
of which are CFC based, from many different sources, which refrigerants are then reclaimed using the Company's high speed proprietary
reclamation equipment, its proprietary Zugibeast® system, and then are resold by the Company.
Refrigerant Management Services
The Company provides a complete offering of
refrigerant management services, which primarily include reclamation of refrigerants, laboratory testing through the Company’s
laboratory, which has been certified by the Air Conditioning, Heating and Refrigeration Institute (“AHRI”), and banking
(storage) services tailored to individual customer requirements. Hudson also separates “crossed” (i.e. commingled)
refrigerants and provides re-usable cylinder refurbishment and hydrostatic testing services.
RefrigerantSide® Services
The Company provides decontamination and recovery
services that are performed at a customer's site through the use of portable, high volume, high-speed proprietary equipment, including
the patented Zugibeast® system. Certain of these RefrigerantSide® Services, which encompass system decontamination,
and refrigerant recovery and reclamation, are also proprietary and are covered by process patents.
In addition to the decontamination and recovery
services previously described, the Company also provides predictive and diagnostic services for its customers. The Company
offers diagnostic services that are intended to predict potential problems in air conditioning and refrigeration systems before
they occur. The Company’s Chiller Chemistry® offering integrates several fluid tests of an operating system and
the corresponding laboratory results into an engineering report providing its customers with an understanding of the current condition
of the fluids, the cause for any abnormal findings and the potential consequences if the abnormal findings are not remediated.
Fluid Chemistry®, an abbreviated version of the Company’s Chiller Chemistry® offering, is designed to quickly identify
systems that require further examination.
The Company has also been awarded several
US patents for its SmartEnergy OPS
TM
, which is a system for measuring, modifying and improving the efficiency of energy
systems, including air conditioning and refrigeration systems, in industrial and commercial applications. This service is a web-based
real time continuous monitoring
service applicable to a facility’s chiller plant systems. The SmartEnergy OPS
TM
offering enables customers to monitor and improve their chiller plant performance and proactively identify and correct system
inefficiencies. SmartEnergy OPS
TM
is able to identify specific inefficiencies in the operation of chiller plant systems
and, when used with Hudson’s RefrigerantSide
®
Services, can increase the efficiency of the operating systems
thereby reducing energy usage and costs. Improving the system efficiency reduces power consumption thereby directly reducing CO
2
emissions at the power plants or onsite. Lastly, the Company’s ChillSmart
®
offering, which
combines the system optimization with the Company’s Chiller Chemistry
®
offering, provides a snapshot of a
packaged chiller’s operating efficiency and health. ChillSmart® provides a very effective predictive maintenance tool
and helps our customers to identify the operating chillers that cause higher operating costs.
The Company’s engineers who developed
and support Smart Energy OPS
TM
are recognized as Energy Experts and Qualified Best Practices Specialists by the United
States Department of Energy (“DOE”) in the areas of Steam and Process Heating under the DOE “Best Practices”
program, and are the Lead International Energy Experts for steam, chillers and refrigeration systems for the United Nations Industrial
Development Organization (“UNIDO”). The Company’s staff have trained more than 4,000 industrial plant
personnel in the US and internationally, and have developed and are currently delivering training curriculums in 12 different
countries. The Company’s staff have completed more than 200 industrial ESAs in the US and internationally.
Carbon Offset Projects
CFC refrigerants are ozone depleting substances
and are also highly weighted greenhouse gases that contribute to global warming and climate change. The destruction of CFC refrigerants
may be eligible for verified emission reductions that can be converted and monetized into carbon offset credits that may be traded
in the emerging carbon offset markets. The Company is pursuing opportunities to acquire CFC refrigerants and is developing relationships
within the emerging environmental markets in order to develop opportunities for the creation and monetization of verified emission
reductions from the destruction of CFC refrigerants.
In October 2015, the American Carbon Registry
(“ACR”) established a methodology to provide, among other things, a quantification framework for the creation of carbon
offset credits for the use of certified reclaimed HFC refrigerants. The Company is pursuing opportunities to acquire HFC refrigerants
and is developing relationships within the emerging environmental markets in order to develop opportunities for the creation and
monetization of verified emission reductions from the reclamation of HFC refrigerants.
The following is a summary of revenues over
the last three years:
Years Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and related sales
|
|
$
|
101,344
|
|
|
$
|
75,154
|
|
|
$
|
50,460
|
|
RefrigerantSide
®
Services
|
|
|
4,137
|
|
|
|
4,568
|
|
|
|
5,350
|
|
Total
|
|
$
|
105,481
|
|
|
$
|
79,722
|
|
|
$
|
55,810
|
|
Hudson's Network
Hudson operates from a network of facilities
located in:
Pearl River, New York
|
—Company headquarters and administrative offices
|
Champaign, Illinois
|
—Reclamation and separation of refrigerants and cylinder refurbishment center;
|
|
RefrigerantSide® Service depot
|
Nashville, Tennessee
|
—Reclamation and separation of refrigerants and cylinder
refurbishment center
|
Ontario, California
|
—Reclamation and cylinder refurbishment center
|
Catano, Puerto Rico
|
—Reclamation center and RefrigerantSide® Service depot
|
Auburn, Washington
|
—RefrigerantSide® Service depot
|
Baton Rouge, Louisiana
|
—RefrigerantSide® Service depot
|
Charlotte, North Carolina
|
—RefrigerantSide® Service depot
|
Escondido, California
|
—RefrigerantSide® Service depot
|
Stony Point, New York
|
—RefrigerantSide® Service depot
|
Tulsa, Oklahoma
|
—Energy and Carbon Services
|
Hampstead, New Hampshire
|
—Telemarketing office
|
Pottsboro, Texas
|
—Telemarketing office
|
Strategic Alliances
The Company believes that the international
market for refrigerant reclamation, sales and services is equal in size to the United States market for those sales and services.
The Company has Alliances in Europe and South Africa, and over time, the Company expects to introduce its technology and offerings
to several other markets around the world.
Suppliers
The Company's financial performance and its
ability to sell refrigerants is in part dependent on its ability to obtain sufficient quantities of virgin, non-CFC based refrigerants,
and of reclaimable CFC and non-CFC based, refrigerants from manufacturers, wholesalers, distributors, bulk gas brokers and from
other sources within the air conditioning, refrigeration and automotive aftermarket industries, and on corresponding demand for
refrigerants. The Company's refrigerant sales include CFC based refrigerants, which are no longer manufactured. Additionally,
the Company's refrigerant sales include non-CFC based refrigerants, including HCFC and HFC refrigerants, which are the most-widely
used refrigerants. Effective January 1, 1996, the Act limited the production of virgin HCFC refrigerants, which production was
further limited in January 2004. Federal regulations enacted in January 2004 established production and consumption allowances
for HCFCs and imposed limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain
virgin HCFC refrigerants is scheduled to be phased out during the period 2010 through 2020 and production of all virgin HCFC refrigerants
is scheduled to be phased out by 2030. In October 2014, the EPA published the Final Rule providing further reductions in the production
and consumption allowances for virgin HCFC refrigerants for the years 2015 through 2019. In the Final Rule, the EPA has established
a linear annual phase down schedule for the production or importation of virgin HCFC-22 that will start at approximately 22 million
pounds in 2015 and reduce by approximately 4.5 million pounds each year and end at zero in 2020.
In October 2016, more than 200 countries, including the United States, agreed to amend the Montreal Protocol
to phase down production of HFCs by 85% between now and 2047. The amendment establishes timetables for all developed and developing
countries to freeze and then reduce production and use of HFCs, with the first reductions by developed countries starting in 2019.
The amendment becomes effective January 1, 2019 if twenty countries ratify the amendment. To date, the amendment has not been ratified
by the United States.
Customers
The Company provides its services
to commercial, industrial and governmental customers, as well as to refrigerant wholesalers, distributors, contractors and
to refrigeration equipment manufacturers. Agreements with larger customers generally provide for standardized pricing
for specified services. The Company generates sales by purchase order on a real-time basis and therefore does not carry a
backlog of sales.
For the year ended December 31, 2016, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
30% of the Company’s revenues. At December 31, 2016, there were no outstanding receivables from these customers.
For the year ended December 31, 2015, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
33% of the Company’s revenues. At December 31, 2015, there were no outstanding receivables from these customers.
For the year ended December 31, 2014, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
25% of the Company’s revenues. At December 31, 2014, there were $0.7 million in outstanding receivables from these customers.
Marketing
Marketing programs are conducted through the
efforts of the Company's executive officers, Company sales personnel, and third parties. Hudson employs various marketing methods,
including direct mailings, technical bulletins, in-person solicitation, print advertising, response to quotation requests and
the internet through the Company’s website (
www.hudsontech.com
). Information on the Company's website is not part
of this report.
The Company's sales personnel are compensated
on a combination of a base salary and commission. The Company's executive officers devote significant time and effort to customer
relationships.
Competition
The Company competes primarily on the basis
of the performance of its proprietary high volume, high-speed equipment used in its operations, the breadth of services offered
by the Company, including proprietary RefrigerantSide® Services and other on-site services, and price, particularly with respect
to refrigerant sales.
The Company competes with numerous regional
and national companies that market reclaimed and virgin refrigerants and provide refrigerant reclamation services. Certain of
these competitors possess greater financial, marketing, distribution and other resources for the sale and distribution of refrigerants
than the Company and, in some instances, serve a more extensive geographic area than the Company.
Hudson's RefrigerantSide® Services provide
new and innovative solutions to certain problems within the refrigeration industry and, as such, the demand and market acceptance
for these services are subject to uncertainty. Competition for these services primarily consists of traditional methods of solving
the industry's problems. The Company’s marketing strategy is to educate the marketplace that its alternative solutions are
available and that RefrigerantSide® Services are superior to traditional methods.
Insurance
The Company carries insurance coverage that
it considers sufficient to protect the Company's assets and operations. The Company currently maintains general commercial liability
insurance and excess liability coverage for claims up to $11,000,000 per occurrence and $12,000,000 in the aggregate. The Company
attempts to operate in a professional and prudent manner and to reduce potential liability risks through specific risk management
efforts, including ongoing employee training.
The refrigerant industry involves potentially
significant risks of statutory and common law liability for environmental damage and personal injury. The Company, and in certain
instances, its officers, directors and employees, may be subject to claims arising from the Company's on-site or off-site services,
including the improper release, spillage, misuse or mishandling of refrigerants classified as hazardous or non-hazardous substances
or materials. The Company may be held strictly liable for damages, which could be substantial, regardless of whether it exercised
due care and complied with all relevant laws and regulations.
Hudson maintains environmental impairment
insurance of $10,000,000 per occurrence, and $10,000,000 annual aggregate, for events occurring subsequent to November 1996.
Government Regulation
The business of refrigerant sales, reclamation
and management is subject to extensive, stringent and frequently changing federal, state and local laws and substantial regulation
under these laws by governmental agencies, including the EPA, the United States Occupational Safety and Health Administration
(“OSHA”) and the United States Department of Transportation (“DOT”).
Among other things, these regulatory authorities
impose requirements which regulate the handling, packaging, labeling, transportation and disposal of hazardous and non-hazardous
materials and the health and safety of workers, and require the Company and, in certain instances, its employees, to obtain and
maintain licenses in connection with its operations. This extensive regulatory framework imposes significant compliance burdens
and risks on the Company.
Hudson and its customers are subject to the
requirements of the Act, and the regulations promulgated thereunder by the EPA, which make it unlawful for any person in the course
of maintaining, servicing, repairing, and disposing of air conditioning or refrigeration equipment, to knowingly vent or otherwise
release or dispose of ozone depleting substances, and non-ozone depleting substitutes, used as refrigerants.
Pursuant to the Act, reclaimed refrigerant
must satisfy the same purity standards as newly manufactured, virgin refrigerants in accordance with standards established by
AHRI prior to resale to a person other than the owner of the equipment from which it was recovered. The EPA administers a certification
program pursuant to which applicants certify to reclaim refrigerants in compliance with AHRI standards. The Company is one of
only four certified refrigerant testing laboratories in the United States under AHRI’s laboratory certification program,
which is a voluntary program that certifies the ability of a laboratory to test refrigerant in accordance with the AHRI 700 standard.
In addition, the EPA has established a mandatory
certification program for air conditioning and refrigeration technicians. Hudson's technicians have applied for or obtained such
certification.
The Company may also be subject to regulations
adopted by the EPA which impose reporting requirements arising out of the importation of certain HCFCs, and arising out of the
importation, purchase, production, use and/or emissions of certain greenhouse gases, including HFCs.
The Company is also subject to regulations
adopted by the DOT which classify most refrigerants handled by the Company as hazardous materials or substances and imposes requirements
for handling, packaging, labeling and transporting refrigerants and which regulate the use and operation of the Company’s
commercial motor vehicles used in the Company’s business.
The Resource Conservation and Recovery Act
of 1976, as amended ("RCRA"), requires facilities that treat, store or dispose of hazardous wastes to comply with certain
operating standards. Before transportation and disposal of hazardous wastes off-site, generators of such waste must package and
label their shipments consistent with detailed regulations and prepare a manifest identifying the material and stating its destination.
The transporter must deliver the hazardous waste in accordance with the manifest to a facility with an appropriate RCRA permit.
Under RCRA, impurities removed from refrigerants consisting of oils mixed with water and other contaminants are not presumed to
be hazardous waste.
The Emergency Planning and Community Right-to-Know
Act of 1986, as amended, requires the annual reporting by the Company of Emergency and Hazardous Chemical Inventories (Tier II
reports) to the various states in which the Company operates and requires the Company to file annual Toxic Chemical Release Inventory
Forms with the EPA.
The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (“CERCLA”), establishes liability for clean-up costs and environmental damages
to current and former facility owners and operators, as well as persons who transport or arrange for transportation of hazardous
substances. Almost all states have similar statutes regulating the handling and storage of hazardous substances, hazardous wastes
and non-hazardous wastes. Many such statutes impose requirements that are more stringent than their federal counterparts. The
Company could be subject to substantial liability under these statutes to private parties and government entities, in some instances
without any fault, for fines, remediation costs and environmental damage, as a result of the mishandling, release, or existence
of any hazardous substances at any of its facilities.
The Occupational Safety and Health Act of
1970, as amended mandates requirements for a safe work place for employees and special procedures and measures for the handling
of certain hazardous and toxic substances. State laws, in certain circumstances, mandate additional measures for facilities handling
specified materials.
The Company is also subject to regulations
adopted by the California Air Resources Board which impose certain reporting requirements arising out of the reclamation and sale
of refrigerants that takes place within the State of California.
The Company believes that it is in material
compliance with all applicable regulations material to its business operations.
Quality Assurance & Environmental
Compliance
The Company utilizes in-house quality and
regulatory compliance control procedures. Hudson maintains its own analytical testing laboratory, which is AHRI certified, to
assure that reclaimed refrigerants comply with AHRI purity standards and employs portable testing equipment when performing on-site
services to verify certain quality specifications. The Company employs ten persons engaged full-time in quality control and to
monitor the Company's operations for regulatory compliance.
Employees
On December 31, 2016, the Company had 137
full time employees including air conditioning and refrigeration technicians, chemists, engineers, sales and administrative personnel.
None of the Company's employees are represented by a union. The Company believes it has good relations with its employees.
Patents and Proprietary Information
The Company holds several U.S. and foreign
patents, as well as pending patent applications, related to certain RefrigerantSide® Services and supporting systems developed
by the Company for systems and processes for measuring and improving the efficiency of refrigeration systems, and for certain
refrigerant recycling and reclamation technologies. These patents will expire between February 2017 and April 2031.
The Company believes that patent protection
is important to its business. There can be no assurance as to the breadth or degree of protection that patents may afford the
Company, that any patent applications will result in issued patents or that patents will not be circumvented or invalidated. Technological
development in the refrigerant industry may result in extensive patent filings and a rapid rate of issuance of new patents. Although
the Company believes that its existing patents and the Company's equipment do not and will not infringe upon existing patents
or violate proprietary rights of others, it is possible that the Company's existing patent rights may not be valid or that infringement
of existing or future patents or violations of proprietary rights of others may occur. In the event the Company's equipment or
processes infringe, or are alleged to infringe, patents or other proprietary rights of others, the Company may be required to
modify the design of its equipment or processes, obtain a license or defend a possible patent infringement action. There can be
no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement
or proprietary rights violation action or that the Company will not become liable for damages.
The Company also relies on trade secrets and
proprietary know-how, and employs various methods to protect its technology. However, such methods may not afford complete protection
and there can be no assurance that others will not independently develop such know-how or obtain access to the Company's know-how,
concepts, ideas and documentation. Failure to protect its trade secrets could have a material adverse effect on the Company.
SEC Filings
The Company makes available on its internet
website copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments
thereto, as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.
Item 1A. Risk Factors
There are many important factors, including
those discussed below (and above as described under “Patents and Proprietary Information”), that have affected, and
in the future could affect Hudson’s business including, but not limited to, the factors discussed below, which should be
reviewed carefully together with the other information contained in this report. Some of the factors are beyond Hudson’s
control and future trends are difficult to predict.
Our existing and future debt obligations
could impair our liquidity and financial condition.
Our existing credit facility, which currently
expires in June 2020, is secured by substantially all of our assets and contains formulas that limit the amount of our borrowings
under the facility. Moreover, the terms of our credit facility also include negative covenants that, among other things, may limit
our ability to incur additional indebtedness. If we violate any loan covenants and do not obtain a waiver from our lender, our
indebtedness under the credit facility would become immediately due and payable, and the lender could foreclose on its security,
which could materially adversely affect our business and future financial condition and could require us to curtail or otherwise
cease our existing operations.
We may need additional financing to
satisfy our future capital requirements, which may not be readily available to us
.
Our capital requirements may be significant
in the future. In the future, we may incur additional expenses in the development and implementation of our operations. Due to
fluctuations in the price, demand and availability of new refrigerants, our existing credit facility that expires in June 2020
may not in the future be sufficient to provide all of the capital that we need to acquire and manage our inventories of new refrigerant.
As a result, we may be required to seek additional equity or debt financing in order to develop our RefrigerantSide® Services
business, our refrigerant sales business and our other businesses. We have no current arrangements with respect to, or sources
of, additional financing other than our existing credit facility. There can be no assurance that we will be able to obtain any
additional financing on terms acceptable to us or at all. Our inability to obtain financing, if and when needed, could materially
adversely affect our business and future financial condition and could require us to curtail or otherwise cease our existing operations.
Adverse weather or economic downturn
could adversely impact our financial results.
Our business could be negatively impacted
by adverse weather or economic downturns. Weather is a significant factor in determining market demand for the refrigerants sold
by us, and to a lesser extent, our RefrigerantSide® Services. Unusually cool temperatures in the spring and summer tend to
depress demand for, and price of, refrigerants we sell. Protracted periods of cooler than normal spring and summer weather could
result in a substantial reduction in our sales which could adversely affect our financial position as well as our results of operations.
An economic downturn could cause customers to postpone or cancel purchases of the Company’s products or services. Either
or both of these conditions could have severe negative implications to our business that may exacerbate many of the risk factors
we identified in this report but not limited, to the following:
Liquidity
These conditions could reduce our liquidity
and this could have a negative impact on our financial condition and results of operations.
Demand
These conditions could lower the demand and/or
price for our product and services, which would have a negative impact on our results of operations.
The nature of our business exposes us
to potential liability.
The refrigerant recovery and reclamation industry
involves potentially significant risks of statutory and common law liability for environmental damage and personal injury. We,
and in certain instances, our officers, directors and employees, may be subject to claims arising from our on-site or off-site
services, including the improper release, spillage, misuse or mishandling of refrigerants classified as hazardous or non-hazardous
substances or materials. We may be strictly liable for damages, which could be substantial, regardless of whether we exercised
due care and complied with all relevant laws and regulations. Our current insurance coverage may not be sufficient to cover potential
claims, and adequate levels of insurance coverage may not be available in the future at a reasonable cost. A partially or completely
uninsured claim against us, if successful and of sufficient magnitude would have a material adverse effect on our business and
financial condition.
Our business and financial condition
is substantially dependent on the sale and continued environmental regulation of refrigerants.
Our business and prospects are largely dependent
upon continued regulation of the use and disposition of refrigerants. Changes in government regulations relating to the emission
of refrigerants into the atmosphere could have a material adverse effect on us. Failure by government authorities to otherwise
continue to enforce existing regulations or significant relaxation of regulatory requirements could also adversely affect demand
for our services and products.
Our business is subject to significant
regulatory compliance burdens.
The refrigerant reclamation and management
business is subject to extensive, stringent and frequently changing federal, state and local laws and substantial regulation under
these laws by governmental agencies, including the EPA, the OSHA and DOT. Although we believe that we are in material compliance
with all applicable regulations material to our business operations, amendments to existing statutes and regulations or adoption
of new statutes and regulations which affect the marketing and sale of refrigerant could require us to continually alter our methods
of operation and/or discontinue the sale of certain of our products resulting in costs to us that could be substantial. We may
not be able, for financial or other reasons, to comply with applicable laws, regulations and permit requirements, particularly
as we seek to enter into new geographic markets. Our failure to comply with applicable laws, rules or regulations or permit requirements
could subject us to civil remedies, including substantial fines, penalties and injunctions, as well as possible criminal sanctions,
which would, if of significant magnitude, materially adversely impact our operations and future financial condition.
A number of factors could negatively
impact the price and/or availability of refrigerants, which would, in turn, adversely affect our business and financial condition.
Refrigerant sales continue to represent
a significant majority of our revenues. Therefore, our business is substantially dependent on the availability of both new
and used refrigerants in large quantities, which may be affected by several factors including, without limitation: (i)
commercial production and consumption limitations imposed by the Act and legislative limitations and ban on HCFC
refrigerants; (ii) the ban on production of CFC based refrigerants under the Act; (iii) the amendment to the Montreal
Protocol, if ratified, and any legislation and regulation enacted to implement the amendment, could impose limitations on
production and consumption of HFC refrigerants; (iv) introduction of new refrigerants and air conditioning and refrigeration
equipment; (v) price competition resulting from additional market entrants; (vi) changes in government regulation on the use
and production of refrigerants; and (vii) reduction in demand for refrigerants. We do not maintain firm agreements with any
of our suppliers of refrigerants and we do not hold allowances permitting us to purchase and import HCFC refrigerants from
abroad. Sufficient amounts of new and/or used refrigerants may not be available to us in the future, particularly as a result
of the further phase down of HCFC production, or may not be available on commercially reasonable terms. Additionally, we may
be subject to price fluctuations, periodic delays or shortages of new and/or used refrigerants. Our failure to obtain and
resell sufficient quantities of virgin refrigerants on commercially reasonable terms, or at all, or to obtain, reclaim and
resell sufficient quantities of used refrigerants would have a material adverse effect on our operating margins and results
of operations.
As a result of competition, and the
strength of some of our competitors in the market, we may not be able to compete effectively.
The markets for our services and products
are highly competitive. We compete with numerous regional and national companies which provide refrigerant recovery and reclamation
services, as well as companies which market and deal in new and reclaimed alternative refrigerants, including certain of our suppliers,
some of which possess greater financial, marketing, distribution and other resources than us. We also compete with numerous manufacturers
of refrigerant recovery and reclamation equipment. Certain of these competitors have established reputations for success in the
service of air conditioning and refrigeration systems. We may not be able to compete successfully, particularly as we seek to
enter into new markets.
Issues relating to potential global
warming and climate change could have an impact on our business.
Refrigerants are considered to be strong greenhouse
gases that are believed to contribute to global warming and climate change and are now subject to various state and federal regulations
relating to the sale, use and emissions of refrigerants. Current and future global warming
and climate change or related legislation and/or regulations may impose additional compliance burdens on us and on our customers
and suppliers which could potentially result in increased administrative costs, decreased demand in the marketplace for our products,
and/or increased costs for our supplies and products. In addition, an amendment to the Montreal Protocol has established timetables for all developed and developing
countries to freeze and then reduce production and use of HFCs by 85% between now and 2047, with the first reductions by developed
countries starting in 2019. The amendment becomes effective January 1, 2019 if twenty countries ratify the amendment. To date,
the amendment has not been ratified by the United States. It is unclear if the United States will ratify the amendment and, if
it does ratify the amendment, what legislation and/or regulations will be enacted to implement the amendment.
The loss of key management personnel
would adversely impact our business.
Our success is largely dependent upon the
efforts of our Chief Executive Officer and Chairman. The loss of his services would have a material adverse effect on our business
and prospects.
We have the ability to designate and
issue preferred stock, which may have rights, preferences and privileges greater than Hudson’s common stock and which could
impede a subsequent change in control of us.
Our Certificate of Incorporation authorizes
our Board of Directors to issue up to 5,000,000 shares of “blank check” preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares, without further shareholder approval. The rights of the
holders of our common stock will be subject to, and may be adversely affected by, the rights of holders of any additional preferred
stock that may be issued by us in the future. Our ability to issue preferred stock without shareholder approval could have the
effect of making it more difficult for a third party to acquire a majority of our voting stock, thereby delaying, deferring or
preventing a change in control of us.
If our common stock were delisted from
NASDAQ it could be subject to “penny stock” rules which would negatively impact its liquidity and our shareholders’
ability to sell their shares.
Our common stock is currently listed on the
NASDAQ Capital Market. We must comply with numerous NASDAQ Marketplace rules in order to continue the listing of our common stock
on NASDAQ. There can be no assurance that we can continue to meet the rules required to maintain the NASDAQ listing of our common
stock. If we are unable to maintain our listing on NASDAQ, the market liquidity of our common stock may be severely limited.
Our management has significant control
over our affairs.
Currently, our officers and directors collectively
own approximately 13% of our outstanding common stock. Accordingly, our officers and directors are in a position to significantly
affect major corporate transactions and the election of our directors. There is no provision for cumulative voting for our directors.
We may fail to successfully integrate
any acquisitions made by us into our operations.
As part of our business strategy, we may look
for opportunities to grow by acquiring other product lines, technologies or facilities that complement or expand our existing
business. We may be unable to identify suitable acquisition candidates or negotiate acceptable terms. In addition, we may not
be able to successfully integrate any assets, liabilities, customers, systems or management personnel we may acquire into our
operations and we may not be able to realize related revenue synergies and cost savings within expected time frames. There can
be no assurance that we will be able to successfully integrate any prior or future acquisition.
Our information technology systems,
processes, and sites may suffer interruptions, failures, or attacks which could affect our ability to conduct business.
Our information technology
systems provide critical data connectivity, information and services for internal and external users. These include, among other
things, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements,
storing project information and other processes necessary to manage the business. Our systems and technologies, or those of third
parties on which we rely, could fail or become unreliable due to equipment failures, software viruses, cyber threats, terrorist
acts, natural disasters, power failures or other causes. Cybersecurity threats are evolving and include, but are not limited to,
malicious software, cyber espionage, attempts to gain unauthorized access to our sensitive information, including that of our customers,
suppliers, and subcontractors, and other electronic security breaches that could lead to disruptions in mission critical systems,
unauthorized release of confidential or otherwise protected information, and corruption of data. Although we utilize various procedures
and controls to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficient
to prevent security threats from materializing. If any of these events were to materialize, the costs related to cyber or other
security threats or disruptions may not be fully insured or indemnified and could have a material adverse effect on our reputation,
operating results, and financial condition.
Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
The Company's headquarters are located in
a 6,100 square foot office facility located in a multi-tenant building in Pearl River, New York. The building is leased from an
unaffiliated third party at an annual rental of approximately $150,000 pursuant to an agreement expiring in December 2021.
The Company's Champaign, Illinois facility
is located in a 48,000 square foot building, which was purchased by the Company in May 2005 for $999,999. On June 1, 2012, the
Company entered into a mortgage note with Busey Bank for $855,000. The note bears interest at the fixed rate of 4% per annum,
amortizing over 60 months and maturing on June 1, 2017. The mortgage note is secured by the Company’s land and building
located in Champaign, Illinois. As of December 31, 2016, the Company has $93,000 outstanding under this mortgage.
The Company has established a second facility
in Champaign, Illinois, which is a 135,000 square foot facility. The
building is leased from an unaffiliated third party at an annual rental of $504,000, pursuant to an arrangement expiring in December
2018.
The Company’s Nashville, Tennessee facility
is a 33,000 square foot office facility leased from an unaffiliated third party at an annual rental of $173,000 pursuant to an
agreement expiring March 2018.
The Company’s Ontario, California facility
is a 20,000 square foot facility leased from an unaffiliated third party at an annual rental of $90,000 pursuant to an agreement
expiring in December 2018.
The Company’s Catano, Puerto Rico facility
is a 15,000 square foot facility leased from an unaffiliated third party at an annual rental of $124,000 pursuant to an agreement
expiring in December 2020.
The Company's Auburn, Washington depot facility
is a 6,000 square foot facility located in a multi-tenant building leased from an unaffiliated third party at an annual rental
of $39,000 pursuant to an agreement expiring August 2018.
The Company's Baton Rouge, Louisiana depot
facility is a 3,000 square foot facility located in a multi-tenant building leased from an unaffiliated third party at an annual
rental of $23,000 pursuant to an agreement expiring in May 2019.
The Company's Charlotte, North Carolina depot
facility is a 2,600 square foot facility located in a multi-tenant building leased from an unaffiliated third party at an annual
rental of $26,000 pursuant to an agreement expiring in May 2019.
The Company’s Escondido,
California depot facility is a 6,000 square foot facility leased from a company that is owned by a non-executive employee at
an annual rental of $36,000 pursuant to a month to month rental agreement.
The Company’s Stony Point, New York
depot facility is an 18,000 square foot facility located in a multi-tenant building leased from an unaffiliated third party at
an annual rental of $90,000 pursuant to an agreement expiring in June 2021.
The Company’s Tulsa, Oklahoma energy
and carbon services facility is located in a 2,304 square foot office facility located in a multi-tenant building leased from
an unaffiliated third party at an annual rental of $27,000 which includes our share of operating expenses. This lease expires
December 2017.
The Company's Hampstead, New Hampshire telemarketing
facility is located in a 2,546 square foot office facility located in a multi-tenant building leased from an unaffiliated third
party at an annual rental of $52,000 pursuant to an agreement expiring in August 2022.
The Company’s Pottsboro, Texas telemarketing
facility is located in a 1,000 square foot office facility located in a multi-tenant building leased from an unaffiliated third
party at an annual rental of $6,000 pursuant to an agreement expiring in August 2017.
In addition to the above leases, the Company
from time to time utilizes public warehouse space on a month to month basis. The Company typically enters into short-term leases
for its facilities and whenever possible extends the expiration date of such leases. The Company believes that its insurance policies
are adequate to protect the Company’s property.
Item 3. Legal
Proceedings
On April 1, 1999, the Company reported a release
of approximately 7,800 lbs. of R-11 refrigerant (the “1999 Release”), at its former leased facility in Hillburn, NY
(the “Hillburn Facility”), which the Company vacated in June 2006.
Since September 2000, last modified in March
2013, the Company signed an Order on Consent with the New York State Department of Environmental Conservation (“DEC”)
whereby the Company agreed to operate a remediation system to reduce R-11 refrigerant levels in the groundwater under and around
the Hillburn Facility and agreed to perform periodic testing at the Hillburn Facility until remaining groundwater contamination
has been effectively abated. The Company accrued, as an expense in its consolidated financial statements, the costs that the Company
believes it will incur in connection with its compliance with the Order of Consent through December 31, 2018. There can be no
assurance that additional testing will not be required or that the Company will not incur additional costs and such costs in excess
of the Company’s estimate may have a material adverse effect on the Company financial condition or results of operations.
The Company has exhausted all insurance proceeds available for the 1999 Release under all applicable policies.
In May 2000 the Hillburn Facility, as a result
of the 1999 Release, was nominated by EPA for listing on the National Priorities List (“NPL”) pursuant to CERCLA.
In September 2003, the EPA advised the Company that it had no current plans to finalize the process for listing of the Hillburn
Facility on the NPL.
During the years ended December 31,
2016, 2015 and 2014 the Company incurred none, none, and $53,000, respectively, in additional remediation costs in connection
with the matters above. The remaining liability on our Balance Sheet as of December 31, 2016 is approximately $150,000.
There can be no assurance that the ultimate outcome of the 1999 Release will not have a material adverse effect on the
Company's financial condition and results of operations. There can be no assurance that the EPA will not change its current
plans and seek to finalize the process of listing the Hillburn Facility on the NPL, or that the ultimate outcome of such a
listing will not have a material adverse effect on the Company's financial condition and results of operations.
Item 4. Mine Safety
Disclosures
Not Applicable
Notes to the
Consolidated Financial Statements
Note 1 - Summary of Significant
Accounting Policies
Business
Hudson Technologies, Inc., 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. The Company’s operations consist of one reportable segment. 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, consisting of system decontamination to remove moisture, oils and other contaminants.
In addition, the Company’s SmartEnergy OPS
TM
service is a web-based real time continuous monitoring service applicable
to a facility’s refrigeration systems and other energy systems. The Company’s Chiller Chemistry® and Chill Smart®
services are also predictive and diagnostic service offerings. As a component of the Company’s products and services, the
Company also participates in the generation of carbon offset projects. The Company operates principally through its wholly-owned
subsidiary, Hudson Technologies Company. Unless the context requires otherwise, references to the “Company”, “Hudson”,
“we", “us”, “our”, or similar pronouns refer to Hudson Technologies, Inc. and its subsidiaries.
In preparing the accompanying consolidated
financial statements, and in accordance with ASC855-10 “Subsequent Events”, the Company’s management has evaluated
subsequent events through the date that the financial statements were filed.
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.
Consolidation
The consolidated financial statements 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 as its
comprehensive income is the same as its net income.
Fair Value of Financial Instruments
The carrying values of financial instruments
including trade accounts receivable and accounts payable approximate fair value at December 31, 2016 and December 31, 2015, because
of the relatively short maturity of these instruments. The carrying value of short and long-term debt approximates fair value,
due to the variable rate nature of the debt, as of December 31, 2016 and December 31, 2015. Please see Note 2 for further details
on fair value description and hierarchy of the Company’s deferred acquisition cost.
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 year ended December 31, 2016, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
30% of the Company’s revenues. At December 31, 2016, there were no outstanding receivables from these customers.
For the year ended December 31, 2015, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
33% of the Company’s revenues. At December 31, 2015, there were no outstanding receivables from these customers.
For the year ended December 31, 2014, two
customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for
25% of the Company’s revenues. At December 31, 2014, there were $0.7 million in outstanding receivables from these customers.
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 market. 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
market 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.
Goodwill
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.
The Company performed the annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely
than not that the fair value of goodwill is less than its carrying value. In performing the qualitative assessment, we identify
and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our goodwill. These
factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such
as our actual and planned financial performance. If the results of the qualitative assessment conclude that it is not more likely
than not that the fair value of goodwill exceeds its carrying value, additional quantitative impairment testing is performed.
Revenues and Cost of Sales
Revenues are recorded upon completion
of service or product shipment and passage of title to customers in accordance with contractual terms. The Company
evaluates each sale to ensure collectability. In addition, each sale is based on an arrangement with the customer and the
sales price to the customer is fixed. In July 2016 the Company was awarded, as prime contractor, a five-year contract,
including a five-year renewal option, by the United States Defense Logistics Agency (“DLA”) for the management,
supply, and sale of refrigerants, compressed gases, cylinders and related terms. Due to the contract containing multiple
elements, the Company assessed the arrangement in accordance with Accounting Standards Codification
(“ASC”) 605-25,
Revenue Recognition: Multiple-Element Arrangements
. ASC 605-25 addresses when and how
a company that is providing more than one revenue generating activity or deliverable should separate and account for a
multiple element arrangement. The Company determined that the sale of refrigerants and the management services provided under
the contract each have stand-alone value, and accordingly revenue related to the sale of product is recognized at the time of
product shipment, and service revenue is recognized on a straight-line basis over the term of the arrangement. Annual service
revenue under the contract is approximately $2.4 million, of which $1.3 million was recognized during 2016 and recorded in
Product and related sales.
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. 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.
The Company's revenues are derived from
Product and related sales and RefrigerantSide® Services revenues. The revenues for each of
these lines are as follows:
Years Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and related sales
|
|
$
|
101,344
|
|
|
$
|
75,154
|
|
|
$
|
50,460
|
|
RefrigerantSide
®
Services
|
|
|
4,137
|
|
|
|
4,568
|
|
|
|
5,350
|
|
Total
|
|
$
|
105,481
|
|
|
$
|
79,722
|
|
|
$
|
55,810
|
|
Income Taxes
The Company utilizes the asset and liability
method for recording deferred income taxes, which provides for the establishment of deferred tax asset or liability accounts based
on the difference between tax and financial reporting bases of certain 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 is expected
to recognize future taxable income. The Company assesses the recoverability of its deferred tax assets based on its expectation
that it will recognize future taxable income and adjusts its valuation allowance accordingly. As of December 31, 2016 and 2015,
the net deferred tax asset was $2.5 million and $3.7 million, respectively.
Certain states either do not allow or limit
NOLs and as such the Company will be liable for certain state taxes. To the extent that the Company utilizes its NOLs, it will
not pay tax on such income but may be subject to the federal alternative minimum tax. In addition, to the extent that the Company’s
net income, if any, exceeds the annual NOL limitation it will pay income taxes based on existing statutory rates. Moreover, as
a result of a “change in control”, as defined by the Internal Revenue Service, the Company’s ability to utilize
its existing NOLs is subject to certain annual limitations. All of the Company’s remaining $5.4 million of NOLs are subject
to annual limitations of $1.3 million.
As a result of an Internal Revenue Service
audit, the 2013 and prior federal tax years have been closed. The Company operates in many states throughout the United States
and, as of December 31, 2016, the various states’ statutes of limitations remain open for tax years subsequent to 2009.
The Company recognizes interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.
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 December
31, 2016 and 2015, the Company had no uncertain tax positions.
Income per Common and Equivalent Shares
If dilutive, common equivalent shares (common
shares assuming exercise of options and warrants) utilizing the treasury stock method are considered in the presentation of diluted
earnings per share. The reconciliation of shares used to determine net income per share is as follows (dollars in thousands):
|
|
Years ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,637
|
|
|
$
|
4,763
|
|
|
$
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares - basic
|
|
|
34,104,476
|
|
|
|
32,546,840
|
|
|
|
29,122,746
|
|
Shares underlying warrants
|
|
|
—
|
|
|
|
300,846
|
|
|
|
—
|
|
Shares underlying options
|
|
|
1,312,434
|
|
|
|
1,088,413
|
|
|
|
—
|
|
Weighted average number of shares outstanding – diluted
|
|
|
35,416,910
|
|
|
|
33,936,099
|
|
|
|
29,122,746
|
|
During the years ended December 31, 2016,
2015 and 2014, certain options and warrants aggregating 73,034, 106,290 and 4,449,624 shares, respectively, have been excluded
from the calculation of diluted shares, due to the fact that their effect would be anti-dilutive.
Estimates and Risks
The preparation of financial statements in
conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions
that affect reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities, and the results
of operations during the reporting period. Actual results could differ from these estimates.
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, and valuation allowance for the deferred tax assets relating
to its NOLs and commitments and contingencies. With respect to 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.
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 hydrochlorofluorocarbon (“HCFC”) and hydrofluorocarbon (“HFC”) refrigerants and reclaimable,
primarily HCFC, HFC and chlorofluorocarbon (“CFC”), refrigerants from suppliers and its customers. Effective January
1, 1996, the Clean Air Act (the “Act”) prohibited the production of virgin CFC refrigerants and limited the production
of virgin HCFC refrigerants. Effective January 2004, the Act further limited the production of virgin HCFC refrigerants and federal
regulations were enacted which established production and consumption allowances for HCFC refrigerants which imposed limitations
on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin HCFC refrigerants is scheduled
to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants is scheduled to be phased
out by 2030. In April 2013, the Environmental Protection Agency (“EPA”) published a final rule providing for the production
or importation of 63 million and 51 million pounds of HCFC-22 in 2013 and 2014, respectively. In October 2014, the EPA published
a final rule providing further reductions in the production and consumption allowances for virgin HCFC refrigerants for the years
2015 through 2019 (the “Final Rule”). In the Final Rule, the EPA has established a linear draw down for the production
or importation of virgin HCFC-22 that started at approximately 22 million pounds in 2015 and reduces by approximately 4.5 million
pounds each year and ends at zero in 2020.
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 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 August 2016, the FASB issued Accounting
Standards Update ("ASU") No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This ASU
addresses eight specific cash flow issues with the objective of eliminating the existing diversity in practice. The amendments
in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods
therein. We elected to adopt ASU 2016-15 as of December 31, 2016, and the adoption did not have a material impact on the presentation
of the statement of cash flows.
In June 2016, the FASB issued ASU No. 2016-13,
"Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit
loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods
therein. The Company does not expect the amended standard to have a material impact on the Company’s results of operations.
In March 2016, the FASB issued ASU No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting.”
Excess
tax benefits and deficiencies will be recognized in the consolidated statement of earnings rather than capital in excess of par
value of stock on a prospective basis. A policy election will be available to account for forfeitures as they occur, with the
cumulative effect of the change recognized as an adjustment to retained earnings at the date of adoption. Excess tax benefits
within the consolidated statement of cash flows will be presented as an operating activity (prospective or retrospective application)
and cash payments to tax authorities in connection with shares withheld for statutory tax withholding requirements will be presented
as a financing activity (retrospective application). The guidance is effective beginning in 2017.
The Company expects that
the future adoption of ASU No. 2016-09 will not have a material impact on the Company’s financial statements.
In February 2016, the FASB issued ASU 2016-02,
"
Leases (Topic 842)."
The new standard establishes a right-of-use ("ROU") model that requires a lessee
to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will
be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement
of operations. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years and early adoption is permitted. A modified retrospective transition approach is required for capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. At a minimum, adoption of ASU 2016-02 will require recording a ROU asset and a lease
liability on the Company's consolidated balance sheet; however, the Company is still currently evaluating the impact on its consolidated
financial statements. See Note 10 for the current anticipated future operating lease payments.
In November 2015, the FASB issued ASU 2015-17,
“Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires that deferred tax
liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17
apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities
and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected. For public business
entities, the amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December
15, 2016, and interim periods within those annual periods. The Company elected to early adopt ASU 2015-17 prospectively in the
fourth quarter of 2016. As a result, all deferred tax assets and liabilities have been presented as noncurrent on the consolidated
balance sheet as of December 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17
and prior periods have not been adjusted.
In September 2015, the FASB issued Accounting
Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, or
ASU 2015-16. This amendment requires the acquirer in a business combination to recognize in the reporting period in which adjustment
amounts are determined, any adjustments to provisional amounts that are identified during the measurement period, calculated as
if the accounting had been completed at the acquisition date. Prior to the issuance of ASU 2015-16, an acquirer was required to
restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. The amendments in
ASU 2015-16 are to be applied prospectively upon adoption. The Company adopted ASU 2015-16 in the fourth quarter of 2016. The
adoption of the provisions of ASU 2015-16 did not have a material impact on its results of operations or financial position.
In May 2014, the FASB issued Accounting
Standards Update ("ASU") 2014-09, "
Revenue from Contracts with Customers (Topic 606)
." The new revenue
recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that
a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for annual
periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect
adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09.
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. The valuation methodologies used
for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such
instruments pursuant to the valuation hierarchy, is set forth in the tables below.
(in thousands)
|
|
As of December 31, 2016
|
|
|
Fair Value Measurements
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition cost
|
|
$
|
789
|
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
$
|
789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As of December 31, 2015
|
|
|
Fair Value Measurements
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition cost
|
|
$
|
1,902
|
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
|
|
$
|
1,902
|
|
The following is a rollforward of deferred
acquisition costs in 2015 and 2016.
(in thousands)
|
|
Acquisition of Polar
|
|
|
2015
Acquisition
(1)
|
|
|
Total Deferred
Acquisition Cost
Payable
|
|
Balance at January 1, 2015
|
|
$
|
667
|
|
|
|
$
|
—
|
|
|
|
$
|
667
|
|
2015 Acquisition (1)
|
|
|
—
|
|
|
|
|
1,982
|
|
|
|
|
1,982
|
|
Payments
|
|
|
—
|
|
|
|
|
(445
|
)
|
|
|
|
(445
|
)
|
Total adjustments included in earnings
|
|
|
—
|
|
|
|
|
(302
|
)
|
|
|
|
(302
|
)
|
Balance at December, 31, 2015
|
|
$
|
667
|
|
|
|
$
|
1,235
|
|
|
|
$
|
1,902
|
|
Payments
|
|
|
(667
|
)
|
|
|
|
(1,010
|
)
|
|
|
|
(1,677
|
)
|
Total adjustments included in earnings
|
|
|
—
|
|
|
|
|
564
|
|
|
|
|
564
|
|
Balance at December 31, 2016
|
|
$
|
—
|
|
|
|
$
|
789
|
|
|
|
$
|
789
|
|
(1) Represents acquisition of a supplier
of refrigerants and compressed gases in January 2015.
Note 3 - Trade accounts receivable -
net
At December 31, 2016, 2015, and
2014 trade accounts receivable are net of reserves for doubtful accounts of $0.4 million, $0.3 million and $0.2 million,
respectively. The following table represents the activity occurring in the reserves for doubtful accounts in 2016, 2015 and
2014.
(in thousands)
|
|
Beginning Balance
at January 1
|
|
|
Net additions charged to
Operations
|
|
|
Deductions and Other
(1)
|
|
|
Ending Balance
at December 31
|
|
2016
|
|
$
|
335
|
|
|
$
|
21
|
|
|
$
|
9
|
|
|
$
|
365
|
|
2015
|
|
$
|
244
|
|
|
$
|
99
|
|
|
$
|
(8
|
)
|
|
$
|
335
|
|
2014
|
|
$
|
227
|
|
|
$
|
31
|
|
|
$
|
(14
|
)
|
|
$
|
244
|
|
|
(1)
|
2016 includes a reclassification
adjustment not affecting operations
|
Note 4- Inventories
Inventories, net of reserve, consist of the
following:
December
31
,
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Refrigerant and cylinders
|
|
$
|
11,168
|
|
|
$
|
11,167
|
|
Packaged refrigerants
|
|
|
57,433
|
|
|
|
50,730
|
|
Total
|
|
$
|
68,601
|
|
|
$
|
61,897
|
|
Note 5 - Property, plant and equipment
Elements of property, plant and equipment
are as follows:
December
31
,
|
|
2016
|
|
|
2015
|
|
|
Estimated Lives
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
- Land
|
|
$
|
535
|
|
|
$
|
535
|
|
|
|
- Buildings
|
|
|
830
|
|
|
|
830
|
|
|
39 years
|
- Building improvements
|
|
|
873
|
|
|
|
810
|
|
|
39 years
|
- Equipment
|
|
|
13,423
|
|
|
|
13,206
|
|
|
3-7 years
|
- Equipment under capital lease
|
|
|
248
|
|
|
|
234
|
|
|
5-7 years
|
- Vehicles
|
|
|
1,360
|
|
|
|
1,311
|
|
|
5 years
|
- Lab and computer equipment, software
|
|
|
2,652
|
|
|
|
2,499
|
|
|
3-5 years
|
- Furniture & fixtures
|
|
|
289
|
|
|
|
276
|
|
|
7-8 years
|
- Leasehold improvements
|
|
|
119
|
|
|
|
110
|
|
|
3 years
|
- Equipment under construction
|
|
|
1,654
|
|
|
|
491
|
|
|
|
Subtotal
|
|
|
21,983
|
|
|
|
20,302
|
|
|
|
Accumulated depreciation
|
|
|
14,451
|
|
|
|
12,766
|
|
|
|
Total
|
|
$
|
7,532
|
|
|
$
|
7,536
|
|
|
|
Depreciation
expense for the years ended December 31, 2016, 2015 and 2014 was $1.7 million, $1.6 million, and $0.9 million, respectively.
Note 6 - Income taxes
Income tax expense (benefit) for the years
ended December 31, 2016, 2015 and 2014 was $6.6 million, $2.9 million and ($0.9 million), respectively. The income tax expense
(benefit) for each of the years ended December 31, 2016, 2015 and 2014 was for federal and state income tax at statutory rates
applied to the pre-tax income (loss) for each of the periods.
The following summarizes the (benefit) / provision
for income taxes:
Years Ended December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,981
|
|
|
$
|
174
|
|
|
$
|
0
|
|
State and local
|
|
|
567
|
|
|
|
2
|
|
|
|
(49
|
)
|
|
|
|
5,548
|
|
|
|
176
|
|
|
|
(49
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
949
|
|
|
|
2,460
|
|
|
|
(767
|
)
|
State and local
|
|
|
131
|
|
|
|
308
|
|
|
|
(90
|
)
|
|
|
|
1,080
|
|
|
|
2,768
|
|
|
|
(857
|
)
|
Expense (benefit) for income taxes
|
|
$
|
6,628
|
|
|
$
|
2,944
|
|
|
$
|
(906
|
)
|
Reconciliation of the Company's actual tax
rate to the U.S. Federal statutory rate is as follows:
Years ended December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income tax rates
|
|
|
|
|
|
|
|
|
|
|
|
|
- Statutory U.S. federal rate
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
- States, net U.S. benefits
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
- Tax benefit from prior year
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
18
|
%
|
Total
|
|
|
38
|
%
|
|
|
38
|
%
|
|
|
56
|
%
|
As of December 31, 2016, the Company had NOL's
of approximately $5.4 million expiring through 2023, all of which are subject to annual limitations of $1.3 million.
Elements of deferred income tax assets (liabilities)
are as follows:
December
31
,
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
- Depreciation & amortization
|
|
$
|
(236
|
)
|
|
$
|
(412
|
)
|
- Reserves for doubtful accounts
|
|
|
139
|
|
|
|
127
|
|
- Inventory reserve
|
|
|
304
|
|
|
|
250
|
|
- Non qualified stock options
|
|
|
247
|
|
|
|
108
|
|
- NOL
|
|
|
2,078
|
|
|
|
3,430
|
|
- AMT credit carryforward
|
|
|
—
|
|
|
|
160
|
|
Total
|
|
$
|
2,532
|
|
|
$
|
3,663
|
|
As discussed
above in Note 1, the Company elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2016. As a result,
all deferred tax assets and liabilities have been presented as noncurrent on the consolidated balance sheet as of December 31,
2016.
The Company
considered its projected future taxable income, and associated annual limitations, in determining the amount of deferred tax assets
to recognize. The Company believes that given the extended time period that it may recognize its deferred tax assets, it is more
likely than not it will realize the benefit of these assets prior to their expiration.
Note 7 – 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.
The Company performed the annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely
than not that the fair value of goodwill is less than its carrying value. In performing the qualitative assessment, we identify
and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our goodwill. These
factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such
as our actual and planned financial performance. If the results of the qualitative assessment conclude that it is not more likely
than not that the fair value of goodwill exceeds its carrying value, additional quantitative impairment testing is performed.
The impairment test was performed at the operating
segment level as the acquired businesses have been fully integrated into our existing structure. Based on the results of the impairment
assessment performed, we concluded that it is more likely than not that the fair value of our goodwill significantly exceeds the
carrying value.
At December 31, 2016 the Company had $0.9
million of goodwill, of which $0.4 million is attributable to the acquisition of Polar Technologies, LLC and $0.4 million is attributable
to the acquisition of a supplier of refrigerants and compressed gases. Please see Note 12 for further details.
The Company’s other intangible assets consist
of the following:
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Intangible Assets with determinable lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
5
|
|
|
$
|
386
|
|
|
$
|
366
|
|
|
$
|
20
|
|
|
$
|
387
|
|
|
$
|
352
|
|
|
$
|
35
|
|
Covenant Not to Compete
|
|
|
6 - 10
|
|
|
|
1,270
|
|
|
|
322
|
|
|
|
948
|
|
|
|
1,270
|
|
|
|
171
|
|
|
|
1,099
|
|
Customer Relationships
|
|
|
3 - 10
|
|
|
|
2,000
|
|
|
|
452
|
|
|
|
1,548
|
|
|
|
2,000
|
|
|
|
236
|
|
|
|
1,764
|
|
Trade Name
|
|
|
2
|
|
|
|
30
|
|
|
|
30
|
|
|
|
0
|
|
|
|
30
|
|
|
|
24
|
|
|
|
6
|
|
Licenses
|
|
|
10
|
|
|
|
1,000
|
|
|
|
217
|
|
|
|
783
|
|
|
|
1,000
|
|
|
|
117
|
|
|
|
883
|
|
Totals identifiable intangible assets
|
|
|
|
|
|
$
|
4,686
|
|
|
$
|
1,387
|
|
|
$
|
3,299
|
|
|
$
|
4,687
|
|
|
$
|
900
|
|
|
$
|
3,787
|
|
Intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
No impairments were recognized for the years ended December 31, 2016 and December 31, 2015.
The amortization of intangible assets for
the years ended December 31, 2016, 2015, and 2014 were $0.5 million, $0.5 million and $0.1 million respectively. Future estimated
amortization expense is as follows: 2017 - $0.5 million, 2018 - $0.4 million, 2019 - $0.4 million, 2020 - $0.4 million, 2021-
$0.4 million and thereafter - $1.1 million.
Note 8 - Short-term and long-term debt
Elements of short-term and long-term debt
are as follows:
December
31
,
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Short-term & long-term debt
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
- Bank credit line
|
|
$
|
—
|
|
|
$
|
20,227
|
|
- Long-term debt: current
|
|
|
199
|
|
|
|
346
|
|
Subtotal
|
|
|
199
|
|
|
|
20,573
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
- Bank credit line
|
|
|
—
|
|
|
|
4,000
|
|
- Building and land mortgage
|
|
|
93
|
|
|
|
260
|
|
- Vehicle and equipment loans
|
|
|
70
|
|
|
|
145
|
|
- Capital lease obligations
|
|
|
188
|
|
|
|
234
|
|
- Less: current maturities
|
|
|
(199
|
)
|
|
|
(346
|
)
|
Subtotal
|
|
|
152
|
|
|
|
4,293
|
|
Total short-term & long-term debt
|
|
$
|
351
|
|
|
$
|
24,866
|
|
Bank Credit Line
On June 22, 2012, a subsidiary of Hudson
entered into a Revolving Credit, Term Loan and Security Agreement (the “PNC Facility”) with PNC Bank, National
Association, as agent (“Agent” or “PNC”), and such other lenders as may thereafter become a party to
the PNC Facility. The Maximum Loan Amount (as defined in the PNC Facility) is currently $50,000,000, and the Maximum
Revolving Advance Amount (as defined in the PNC Facility) is $46,000,000. In December 2016, the Company repaid all of its
debt under the current PNC Facility, with approximately $44 million of availability under the revolving line of credit at
December 31, 2016. In addition, there is a $130,000 outstanding letter of credit under the PNC Facility at December
31, 2016. The Termination Date of the Facility (as defined in the PNC Facility) is June 30, 2020.
Under the terms of the original PNC Facility,
as amended by the First Amendment to the PNC Facility, dated February 15, 2013, Hudson could initially borrow up to a maximum
of $40,000,000 consisting of a term loan in the principal amount of $4,000,000 and revolving loans in a maximum amount up to $36,000,000.
Amounts borrowed under the PNC Facility may be used by Hudson for working capital needs and to reimburse drawings under letters
of credit.
Interest on loans under the PNC Facility is
payable in arrears on the first day of each month with respect to loans bearing interest at the domestic rate (as set forth in
the PNC Facility) and at the end of each interest period with respect to loans bearing interest at the Eurodollar Rate (as defined
in the PNC Facility) or, for Eurodollar Rate Loans (as defined in the PNC Facility) with an interest period in excess of three
months, at the earlier of (a) each three months from the commencement of such Eurodollar Rate Loan or (b) the end of the interest
period. Interest charges with respect to loans are computed on the actual principal amount of loans outstanding during the month
at a rate per annum equal to (A) with respect to Domestic Rate Loans (as defined in the PNC Facility), the sum of the Alternate
Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) and (B) with respect to Eurodollar Rate Loans,
the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%).
Hudson granted to PNC, for itself, and as
agent for such other lenders as may thereafter become a lender under the PNC Facility, a security interest in Hudson’s receivables,
intellectual property, general intangibles, inventory and certain other assets.
The PNC Facility contains certain financial
and non-financial covenants relating to Hudson, including limitations on Hudson’s 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 PNC Facility contains a financial covenant
to maintain at all times a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00, tested quarterly on a rolling twelve month
basis. Fixed Charge Coverage Ratio is defined in the PNC Facility, with respect to any fiscal period, as the ratio of (a) EBITDA
of Hudson for such period, minus unfinanced capital expenditures (as defined in the PNC Facility) made by Hudson during such period,
minus the aggregate amount of cash taxes paid by Hudson during such period, minus the aggregate amount of dividends and distributions
made by Hudson during such period, minus the aggregate amount of payments made with cash by Hudson to satisfy soil sampling and
reclamation related to environmental cleanup at the Company’s former Hillburn, NY facility during such period (to the extent
not already included in the calculation of EBITDA as determined by the Agent) to (b) the aggregate amount of all principal payments
due and/or made, except principal payments related to outstanding revolving advances with regard to all funded debt (as defined
in the PNC Facility) of Hudson during such period, plus the aggregate interest expense of Hudson during such period. EBITDA as
defined in the PNC Facility shall mean for any period the sum of (i) earnings before interest and taxes for such period plus (ii)
depreciation expenses for such period, plus (iii) amortization expenses for such period, plus (iv) non-cash charges.
On October 25, 2013, the Company entered into
the Second Amendment to the PNC facility (the “Second PNC Amendment”) which, among other things, waived the requirement
to comply with the minimum fixed charge coverage ratio covenant of 1.10 to 1.00 for the fiscal quarter ended September 30, 2013,
under the PNC Facility, and suspended the minimum fixed charge ratio covenant until the quarterly period ended March 31, 2015.
On July 2, 2014, the Company entered into
the Third Amendment to the PNC Facility (the “Third PNC Amendment”) which, among other things, extended the term of
PNC Facility. Pursuant to the Third PNC Amendment, which was effective June 30, 2014, the Termination Date of the PNC Facility
(as defined in the PNC Facility) was extended to June 30, 2018.
On July 1, 2015, the Company entered into
the Fourth Amendment to the PNC Facility (the “Fourth PNC Amendment”). The Fourth PNC Amendment redefined the “Revolving
Interest Rate” as well as the “Term Loan Rate” (as defined in the PNC Facility) as follows:
“Revolving Interest Rate” shall
mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half
of one percent (.50%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one
percent (2.25%) with respect to the Eurodollar Rate Loans.
“Term Loan Rate” shall mean an
interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one half of one percent (.50%) with respect to the
Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%) with respect to Eurodollar
Rate Loans.
On April 8, 2016, the Company entered into
the Fifth Amendment to the PNC Facility (the “Fifth PNC Amendment”). Pursuant to the Fifth PNC Amendment, the Maximum
Loan Amount (as defined in the PNC Facility) has been increased from $40,000,000 to $50,000,000, and the Maximum Revolving Advance
Amount (as defined in the PNC Facility) has been increased from $36,000,000 to $46,000,000. Additionally, pursuant to the Fifth
PNC Amendment the Termination Date of the Facility (as defined in the PNC Facility) has been extended to June 30, 2020. In December
2016, the Company repaid its entire debt under the PNC Facility.
The Company was in compliance with all covenants,
under the PNC Facility as of December 31, 2016. 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. Although we expect to remain in compliance with all covenants in the PNC Facility, as amended, depending
on our future operating performance and general economic conditions, we cannot make any assurance that we will continue to be
in compliance.
The commitments under the PNC 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 June 30, 2020, unless the commitments are terminated for any reason or the outstanding principal amount of the loans
are accelerated sooner following an event of default.
Building and Land Mortgage
On June 1, 2012, the Company entered into
a mortgage note with Busey Bank for $855,000. The note bears interest at the fixed rate of 4% per annum, amortizing over 60 months
and maturing on June 1, 2017. The mortgage note is secured by the Company’s land and building located in Champaign, Illinois.
At December 31, 2016 the principal balance of this mortgage note was $93,000.
Vehicle and Equipment Loans
The Company has entered into various vehicle
and equipment loans. These loans are payable in 60 monthly payments through March 2020 and bear interest ranging from 0.0% to
6.7%.
Capital Lease Obligations
The Company rents certain equipment with a
net book value of approximately $249,000 at December 31, 2016 under leases which have been classified as capital leases. Scheduled
future minimum lease payments under capital leases, net of interest, are as follows:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2017
|
|
$
|
82
|
|
-2018
|
|
|
82
|
|
-2019
|
|
|
31
|
|
-2020
|
|
|
6
|
|
-2021
|
|
|
3
|
|
Subtotal
|
|
|
204
|
|
Less interest expense
|
|
|
(16
|
)
|
Total
|
|
$
|
188
|
|
Scheduled maturities of the Company's long-term
debt and capital lease obligations are as follows:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2018
|
|
$
|
93
|
|
-2019
|
|
|
47
|
|
-2020
|
|
|
9
|
|
-2021
|
|
|
3
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
152
|
|
Note 9 - Stockholders' equity
On July 7, 2010, the Company sold 2,737,500
units, with the aggregate units consisting of 2,737,500 shares of the Company’s common stock and warrants to purchase 1,368,750
shares, at a price of $2.00 per unit in a registered direct offering (the “2010 Offering”). The warrants issued as
part of the 2010 Offering had an exercise price of $2.60 per share and were exercisable for a five-year period, which commenced
on January 7, 2011. The net proceeds pursuant to the 2010 Offering were approximately $4.9 million. The value of the aggregate
number of warrants issued pursuant to the 2010 Offering was approximately $1,300,000 and such amount was charged as a component
of stockholders’ equity to additional paid-in capital.
Effective as of March 4, 2011, the Company
re-purchased warrants to purchase 150,000 shares of the Company’s common stock, at a price of $0.60 per share, which warrants
were issued in connection with the 2010 Offering.
On March 7, 2011, the remaining 1,218,750
warrants issued in connection with the 2010 Offering were amended upon consent of the holders of more than two-thirds of the remaining
warrants, to among other things, extend the expiration date of the warrants to July 7, 2016.
Between January 2016 and July
2016, 1,161,252 warrants issued in connection with the 2010 Offering were exercised at $2.60 per share. In July 2016, 7,498
warrants issued in connection with the 2010 Offering expired.
On December 8, 2016 the Company entered into
an Underwriting Agreement with two investment banking firms for themselves and as representatives for two other investment banking
firms (collectively, the “Underwriters”), in connection with an underwritten offering (the “Offering”)
of 6,428,571 shares of the Company’s common stock, par value $0.01 per share (the “Firm Shares”). Pursuant to
the Underwriting Agreement, the Company agreed to sell to the Underwriters, and the Underwriters agreed to purchase from the Company,
an aggregate of 6,428,571 shares of common stock and also granted the Underwriters a 30 day option to purchase up to 964,285 additional
shares of its common stock to cover over-allotments, if any. The Company also agreed to reimburse certain expenses incurred by
the Underwriters in the Offering.
The closing of the Offering was held on December
14, 2016, at which time the Company sold 7,392,856 shares of its common stock to the Underwriters (including 964,285 shares to
cover over-allotments) at a price to the public of $7.00 per share, less underwriting discounts and commissions, and received
gross proceeds of $51.7 million. The Company incurred approximately $3.3 million of transaction fees in connection with the Offering,
resulting in net proceeds of $48.4 million.
Note 10 - Commitments and contingencies
Rents and operating leases
Hudson utilizes leased facilities and operates
equipment under non-cancelable operating leases through August 31, 2022 as follows:
Properties
Location
|
|
Annual Rent
|
|
|
Lease Expiration
Date
|
Auburn, Washington
|
|
$
|
39,000
|
|
|
8/2018
|
Baton Rouge, Louisiana
|
|
$
|
23,000
|
|
|
5/2019
|
Champaign, Illinois
|
|
$
|
504,000
|
|
|
12/2018
|
Charlotte, North Carolina
|
|
$
|
26,000
|
|
|
5/2019
|
Escondido, California
|
|
$
|
36,000
|
|
|
Month to Month
|
Hampstead, New Hampshire
|
|
$
|
52,000
|
|
|
8/2022
|
Nashville, Tennessee
|
|
$
|
173,000
|
|
|
3/2018
|
Ontario, California
|
|
$
|
90,000
|
|
|
12/2018
|
Pearl River, New York
|
|
$
|
150,000
|
|
|
12/2021
|
Pottsboro, Texas
|
|
$
|
6,000
|
|
|
8/2017
|
Catano, Puerto Rico
|
|
$
|
124,000
|
|
|
12/2020
|
Stony Point, New York
|
|
$
|
90,000
|
|
|
6/2021
|
Tulsa, Oklahoma
|
|
$
|
27,000
|
|
|
12/2017
|
The Company rents properties and various equipment
under operating leases. Rent expense for the years ended December 31, 2016, 2015 and 2014 totaled approximately $1.4 million,
$1.2 million and $0.8 million, respectively. In addition to the properties above, the Company does at times utilize public warehouse
space on a month to month basis. The Company typically enters into short-term leases for the facilities and wherever possible
extends the expiration date of such leases.
Future commitments under operating leases
are summarized as follows:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2017
|
|
$
|
1,368
|
|
-2018
|
|
|
1,145
|
|
-2019
|
|
|
464
|
|
-2020
|
|
|
446
|
|
-2021
|
|
|
253
|
|
Thereafter
|
|
|
35
|
|
Total
|
|
$
|
3,711
|
|
Legal Proceedings
On April 1, 1999, the Company reported a release
of approximately 7,800 lbs. of R-11 refrigerant (the “1999 Release”), at its former leased facility in Hillburn, NY
(the “Hillburn Facility”), which the Company vacated in June 2006.
Since September 2000, last modified in March
2013, the Company signed an Order on Consent with the New York State Department of Environmental Conservation (“DEC”)
whereby the Company agreed to operate a remediation system to reduce R-11 refrigerant levels in the groundwater under and around
the Hillburn Facility and agreed to perform periodic testing at the Hillburn Facility until remaining groundwater contamination
has been effectively abated. The Company accrued, as an expense in its consolidated financial statements, the costs that the Company
believes it will incur in connection with its compliance with the Order of Consent through December 31, 2018. There can be no
assurance that additional testing will not be required or that the Company will not incur additional costs and such costs in excess
of the Company’s estimate may have a material adverse effect on the Company financial condition or results of operations.
The Company has exhausted all insurance proceeds available for the 1999 Release under all applicable policies.
In May 2000, the Hillburn Facility as a result
of the 1999 Release, was nominated by EPA for listing on the National Priorities List (“NPL”) pursuant to CERCLA.
In September 2003, the EPA advised the Company that it had no current plans to finalize the process for listing of the Hillburn
Facility on the NPL.
During the years ended December 31, 2016,
2015 and 2014 the Company incurred $0, $0, and $53,000, respectively, in additional remediation costs in connection with the matters
above. The remaining liability on the Company’s Balance Sheet as of December 31, 2016 is approximately $0.1 million. There
can be no assurance that the ultimate outcome of the 1999 Release will not have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the EPA will not change its current plans and seek to finalize
the process of listing the Hillburn Facility on the NPL, or that the ultimate outcome of such a listing will not have a material
adverse effect on the Company's financial condition and results of operations.
Note 11 - 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 years ended 2016, 2015 and 2014, the share-based compensation expense of $0.6 million, $0.2 million and
$0.7 million, respectively, is reflected in general and administrative expenses in the consolidated Statements of Operations.
Share-based awards have historically been
made as stock options, and recently during the third quarter 2015 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 December 31, 2016, the Plans authorized the issuance of stock options to purchase 6,000,000 shares `of
the Company’s common stock and, as of December 31, 2016 there were 3,251,340 shares of the Company’s common stock
available for issuance for future stock option grants or other stock based awards.
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 two years from the grant date and have had a contractual term ranging from three to ten years.
During the years ended December 31, 2016,
2015 and 2014, the Company issued options to purchase 1,170,534 shares, 164,506 shares and 1,055,500 shares, respectively. During
the years ended 2016, 2015 and 2014, the Company issued stock grants of 17,148 shares, 9,835 shares and no shares, respectively.
Effective July 25, 1997, the Company adopted
its 1997 Employee Stock Option Plan, which was amended on August 19, 1999, (“1997 Plan”) pursuant to which 2,000,000
shares of common stock were reserved for issuance upon the exercise of options designated as either (i) incentive stock options
(“ISOs”) under the Internal Revenue Code of 1986, as amended (the “Code”), or (ii) nonqualified options.
ISOs could be granted under the 1997 Plan to employees and officers of the Company. Non-qualified options could be granted to
consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights could
also be issued in tandem with stock options. Effective June 11, 2007, the Company’s ability to grant options or stock appreciation
rights under the 1997 Plan expired.
Effective September 10, 2004, the Company
adopted its 2004 Stock Incentive Plan (“2004 Plan”) pursuant to which 2,500,000 shares of common stock were reserved
for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock,
deferred stock or other stock-based awards. ISOs could be granted under the 2004 Plan to employees and officers of the Company.
Non-qualified options, stock, deferred stock or other stock-based awards could be granted to consultants, directors (whether or
not they are employees), employees or officers of the Company. Stock appreciation rights could also be issued in tandem with stock
options. Effective September 10, 2014, the Company’s ability to grant options or other awards under the 2004 Plan expired.
Effective August 27, 2008, the Company adopted
its 2008 Stock Incentive Plan (“2008 Plan”) pursuant to which 3,000,000 shares of common stock were reserved for issuance
(i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock, deferred
stock or other stock-based awards. ISOs may be granted under the 2008 Plan to employees and officers of the Company. Non-qualified
options, stock, deferred stock or other stock-based awards may be granted to consultants, directors (whether or not they are employees),
employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless the 2008
Plan is sooner terminated, the ability to grant options or other awards under the 2008 Plan will expire on August 27, 2018.
ISOs granted under the 2008 Plan may not be
granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the
case of persons holding 10% or more of the voting stock of the Company). Nonqualified options granted under the 2008 Plan may
not be granted at a price less than the fair market value of the common stock. Options granted under the 2008 Plan expire not
more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting
stock of the Company).
Effective September 17, 2014, the Company
adopted its 2014 Stock Incentive Plan (“2014 Plan”) pursuant to which 3,000,000 shares of common stock were reserved
for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock,
deferred stock or other stock-based awards. ISOs may be granted under the 2014 Plan to employees and officers of the Company.
Non-qualified options, stock, deferred stock or other stock-based awards may be granted to consultants, directors (whether or
not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock
options. Unless the 2014 Plan is sooner terminated, the ability to grant options or other awards under the 2014 Plan will expire
on September 17, 2024.
ISOs granted under the 2014 Plan may not be
granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the
case of persons holding 10% or more of the voting stock of the Company). Nonqualified options granted under the 2014 Plan may
not be granted at a price less than the fair market value of the common stock. Options granted under the 2014 Plan expire not
more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting
stock of the Company).
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 is incorporating the simplified method to
compute expected lives of share based awards with the following weighted-average assumptions:
Years
ended
December 31,
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
0.%-1.0
|
%
|
|
|
0.83%-1.03
|
%
|
|
|
1.00%-1.69
|
%
|
Expected volatility
|
|
|
47%-53
|
%
|
|
|
49%-60
|
%
|
|
|
59%-66
|
%
|
Expected lives
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3-5 years
|
|
A summary of the activity for the Company's
Plans for the indicated periods is presented below:
Stock Option Plan Totals
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2013
|
|
|
2,517,911
|
|
|
$
|
1.33
|
|
-Exercised
|
|
|
(292,537
|
)
|
|
$
|
1.03
|
|
-Granted
|
|
|
1,055,500
|
|
|
$
|
3.28
|
|
Outstanding at December 31, 2014
|
|
|
3,280,874
|
|
|
$
|
1.98
|
|
-Cancelled
|
|
|
(132,500
|
)
|
|
$
|
3.72
|
|
-Exercised
|
|
|
(679,291
|
)
|
|
$
|
1.65
|
|
-Granted
|
|
|
164,506
|
|
|
$
|
3.28
|
|
Outstanding at December
31, 2015
|
|
|
2,633,589
|
|
|
$
|
2.06
|
|
-Exercised
|
|
|
(589,725
|
)
|
|
$
|
2.43
|
|
-Granted
|
|
|
1,170,534
|
|
|
$
|
3.95
|
|
Outstanding at December
31, 2016
|
|
|
3,214,398
|
|
|
$
|
2.68
|
|
The following is the weighted average contractual
life in years and the weighted average exercise price at December 31, 2016 and 2015 of:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Number of
|
|
|
Remaining
|
|
Weighted Average
|
|
2016
|
|
Options
|
|
|
Contractual Life
|
|
Exercise Price
|
|
Options outstanding
|
|
|
3,214,398
|
|
|
2.0 years
|
|
$
|
2.68
|
|
Options vested
|
|
|
1,191,368
|
|
|
3.0 years
|
|
$
|
3.94
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Number of
|
|
|
Remaining
|
|
Weighted Average
|
|
2015
|
|
Options
|
|
|
Contractual Life
|
|
Exercise Price
|
|
Options outstanding
|
|
|
2,633,589
|
|
|
2.8 years
|
|
$
|
2.06
|
|
Options vested
|
|
|
2,612,755
|
|
|
2.8 years
|
|
$
|
2.05
|
|
The intrinsic values of options outstanding
at December 31, 2016 and 2015 are $17.1 million and $2.8 million respectively.
The intrinsic values of options vested and
exercised during the years ended 2016, 2015 and 2014 were as follows
:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Intrinsic value of options vested
|
|
$
|
4,843,774
|
|
|
$
|
5,000
|
|
|
$
|
535,000
|
|
Intrinsic value of options exercised
|
|
$
|
1,777,476
|
|
|
$
|
1,309,000
|
|
|
$
|
793,000
|
|
Note 12 - Acquisitions
On November 5, 2014 the Company purchased
certain assets from Polar Technologies, LLC (“Polar”) related to its refrigerant reclamation business and facilities
in Nashville, Tennessee; Ontario, California, and San Juan, Puerto Rico; hiring approximately thirty-two Polar employees associated
with the business. The purchase price for this acquisition was $8.0 million. A portion of the purchase price was to be paid in
the future pursuant to the purchase agreement. The preliminary asset allocation reflected in the December 31, 2014 financial statements
was approximately $5.4 million of tangible assets, approximately $2.3 million of intangible assets, and approximately $0.3 million
of goodwill. The intangible assets are being amortized over a period of 2 to 10 years. The goodwill recognized as part of the
acquisition, is deductible for tax purposes.
As of December 31, 2015 the valuation and
allocation of the purchase price for Polar was finalized resulting in an increase in tangible assets of $0.2 million, as well
as an increase in goodwill of $0.2 million and a decrease in intangible assets of $0.3 million. This final valuation was reflected
in the December 31, 2015 financial statements.
The results of the Polar operations are included
in the Company’s consolidated statement of operations from the date of acquisition and are not material to the Company’s
financial position or results of operations.
On January 16, 2015, the Company acquired
certain assets of a supplier of refrigerants and compressed gases, and also hired three employees associated with the business.
The purchase price for this acquisition was $2.4 million cash paid at closing and the assumption of a liability of $20,000, and
a maximum of an additional $3.0 million of deferred acquisition cost, or earn-out. The preliminary asset allocation was approximately
$1.6 million of tangible assets, approximately $1.5 million of intangible assets, and approximately $2.3 million of goodwill.
As of December 31, 2015 the valuation and
allocation of the purchase price for this acquisition was finalized. As part of that process it was determined that the deferred
acquisition cost payable that had been previously recorded at the maximum earn out of $3.0 million per the purchase agreement
was overstated by approximately $1.0 million. This adjustment to the deferred acquisition cost payable resulted in lowering the
purchase price from approximately $5.4 million to approximately $4.4 million. The final valuation resulted in a reduction in goodwill
by approximately $1.9 million, and increase in intangible assets of approximately $0.8 million and an increase in current assets
of approximately $0.1 million. This final valuation, as well as the respective changes in the amortization of intangibles, was
reflected in the December 31, 2015 financial statements.
Please see table in Note 2 for a rollforward
of the deferred acquisition cost. During the year ended December 31, 2015, approximately $0.4 million of the 2015 deferred acquisition
cost liability was paid. During the year ended December 31, 2015, as a result of reduced earnings, the Company reduced the deferred
acquisition cost liability by approximately $0.3 million, which was reflected in the December 31, 2015 Consolidated Statements
of Operations as Other Income (Expense).
The deferred acquisition cost liability
balance at December 31, 2015, which was included in Accrued expenses and other current liabilities, was $1.9 million. During
the year ended December 31, 2016, the Company paid approximately $1.7 million in deferred acquisition cost. During the year
ended December 31, 2016, as a result of improved performance, the Company increased this deferred acquisition cost liability
by approximately $0.6 million and recorded the amount as Other Income (Expense) in 2016. The remaining liability of $0.8
million was subsequently paid in January 2017.
The intangible assets are being amortized
over a period ranging from two to ten years. The goodwill recognized as part of the acquisition will be deductible for tax purposes.
The transaction also provides for additional employee compensation for years 2017 through 2019, based on certain revenue performance.
The total additional employee compensation, if any, cannot exceed $3,000,000.
The results of the acquired business operations
are included in the Company’s consolidated Statements of Operations from the date of acquisition, and are not material to
the Company’s financial position or results of operations.
Note 13- Quarterly Financial Data (Unaudited)
(in thousands, except share and per share data)
|
|
For the Year Ended 2016
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total (a)
|
|
Revenues
|
|
$
|
28,167
|
|
|
$
|
34,605
|
|
|
$
|
34,930
|
|
|
$
|
7,779
|
|
|
$
|
105,481
|
|
Gross profit
|
|
$
|
7,522
|
|
|
$
|
10,491
|
|
|
$
|
12,040
|
|
|
$
|
1,033
|
|
|
$
|
31,086
|
|
Operating expenses
|
|
$
|
2,503
|
|
|
$
|
2,347
|
|
|
$
|
4,022
|
|
|
$
|
3,267
|
|
|
$
|
12,139
|
|
Operating income (loss)
|
|
$
|
5,019
|
|
|
$
|
8,144
|
|
|
$
|
8,018
|
|
|
$
|
(2,234
|
)
|
|
$
|
18,947
|
|
Other (expense)
|
|
$
|
(271
|
)
|
|
$
|
(352
|
)
|
|
$
|
(296
|
)
|
|
$
|
(763
|
)
|
|
$
|
(1,682
|
)
|
Income (loss) before income taxes
|
|
$
|
4,748
|
|
|
$
|
7,792
|
|
|
$
|
7,722
|
|
|
$
|
(2,997
|
)
|
|
$
|
17,265
|
|
Income tax expense (benefit)
|
|
$
|
1,804
|
|
|
$
|
2,962
|
|
|
$
|
2,933
|
|
|
$
|
(1,071
|
)
|
|
$
|
6,628
|
|
Net income (loss)
|
|
$
|
2,944
|
|
|
$
|
4,830
|
|
|
$
|
4,789
|
|
|
$
|
(1,926
|
)
|
|
$
|
10,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share – Basic (a)
|
|
$
|
0.09
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.31
|
|
Net income (loss) per common share – Diluted (a)
|
|
$
|
0.09
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.30
|
|
Weighted average number of shares outstanding – Basic
|
|
|
32,888,659
|
|
|
|
33,128,518
|
|
|
|
33,873,479
|
|
|
|
36,527,250
|
|
|
|
34,104,476
|
|
Weighted average number of shares outstanding – Diluted
|
|
|
33,944,876
|
|
|
|
34,270,337
|
|
|
|
35,297,585
|
|
|
|
36,527,250
|
|
|
|
35,416,910
|
|
|
(a)
|
The sum of the net earnings per share
may not add up to the full year amount due to rounding and because the quarterly calculations
are based on varying numbers of shares outstanding.
|
|
|
For the Year Ended 2015
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total (a)
|
|
Revenues
|
|
$
|
22,103
|
|
|
$
|
28,637
|
|
|
$
|
21,682
|
|
|
$
|
7,300
|
|
|
$
|
79,722
|
|
Gross profit
|
|
$
|
5,525
|
|
|
$
|
7,212
|
|
|
$
|
4,384
|
|
|
$
|
1,368
|
|
|
$
|
18,489
|
|
Operating expenses
|
|
$
|
2,255
|
|
|
$
|
2,451
|
|
|
$
|
2,482
|
|
|
$
|
3,120
|
|
|
$
|
10,308
|
|
Operating income (loss)
|
|
$
|
3,270
|
|
|
$
|
4,761
|
|
|
$
|
1,902
|
|
|
$
|
(1,752
|
)
|
|
$
|
8,181
|
|
Other Income (expense)
|
|
$
|
(207
|
)
|
|
$
|
(236
|
)
|
|
$
|
(157
|
)
|
|
$
|
126
|
|
|
$
|
(474
|
)
|
Income (loss) before income taxes
|
|
$
|
3,063
|
|
|
$
|
4,525
|
|
|
$
|
1,745
|
|
|
$
|
(1,626
|
)
|
|
$
|
7,707
|
|
Income tax expense (benefit)
|
|
$
|
1,170
|
|
|
$
|
1,714
|
|
|
$
|
663
|
|
|
$
|
(603
|
)
|
|
$
|
2,944
|
|
Net income (loss)
|
|
$
|
1,893
|
|
|
$
|
2,811
|
|
|
$
|
1,082
|
|
|
$
|
(1,023
|
)
|
|
$
|
4,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share – Basic
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.15
|
|
Net income (loss) per common share – Diluted
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
Weighted average number of shares outstanding – Basic
|
|
|
32,333,443
|
|
|
|
32,542,672
|
|
|
|
32,639,429
|
|
|
|
32,715,802
|
|
|
|
32,546,840
|
|
Weighted average number of shares outstanding – Diluted
|
|
|
34,280,385
|
|
|
|
34,383,092
|
|
|
|
33,856,045
|
|
|
|
32,715,802
|
|
|
|
33,936,099
|
|
|
(a)
|
The sum of the net earnings per share
may not add up to the full year amount due to rounding and because the quarterly calculations
are based on varying numbers of shares outstanding.
|