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
subsidiaries, Hudson Technologies Company and Aspen Refrigerants, Inc., which was formerly known as Airgas-Refrigerants, Inc. prior
to the recent acquisition described below. Unless the context requires otherwise, references to the “Company”, “Hudson”,
“we”, “us”, “our”, or similar pronouns refer to Hudson Technologies, Inc. and its subsidiaries.
On October 10, 2017, the Company and its
wholly-owned subsidiary, Hudson Holdings, Inc. (“Holdings”) completed the acquisition (the “Acquisition”)
from Airgas, Inc. (“Airgas”) of all of the outstanding stock of Airgas-Refrigerants, Inc., a Delaware corporation (“ARI”),
and effective October 11, 2017, ARI’s name was changed to Aspen Refrigerants, Inc. At closing, Holdings paid net cash consideration
to Airgas of approximately $209 million, which includes preliminary post-closing adjustments relating to: (i) changes in the net
working capital of ARI as of the closing relative to a net working capital target, (ii) the actual amount of specified types of
R-22 refrigerant inventory on hand at closing relative to a target amount thereof, and (iii) other consideration pursuant to the
stock purchase agreement.
The cash consideration paid by Holdings
at closing was financed with available cash balances, plus $80 million of borrowings under an enhanced asset-based lending facility
of $150 million from PNC Bank and a new term loan of $105 million from funds advised by FS Investments and sub-advised by GSO Capital
Partners LP.
In preparing the accompanying consolidated
financial statements, and in accordance with Accounting Standards Codification (ASC) 855-10 “Subsequent Events”, the
Company’s management has evaluated subsequent events through the date that the financial statements were filed.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements
and with the instructions of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial information included in this quarterly report should
be read in conjunction with the Company’s audited financial statements and related notes thereto for the year ended December
31, 2017. Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2018.
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., Hudson Technologies Company and Aspen Refrigerants, Inc. The Company does not present a statement of comprehensive
(loss) income as its comprehensive (loss) income is the same as its net (loss) income.
Fair Value of Financial Instruments
The carrying values of financial instruments
including trade accounts receivable and accounts payable approximate fair value at March 31, 2018 and December 31, 2017, because
of the relatively short maturity of these instruments. The carrying value of debt approximates fair value, due to the variable
rate nature of the debt, as of March 31, 2018 and December 31, 2017.
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 three-month period ended March
31, 2018, there was one customer accounting for 11% of the Company’s revenues. At March 31, 2018 there was $4.0
million of accounts receivable from this customer.
For the three-month period ended March
31, 2017, two customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers
accounted for 39% of the Company’s revenues. At March 31, 2017, there were $7.1 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 net realizable value. Where the
market price of inventory is less than the related cost, the Company may be required to write down its inventory through a lower
of cost or 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
The Company applies the purchase method of accounting for
acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price
of the acquisition over the fair value of the net assets acquired and identified intangible assets). Goodwill is subject to an
annual impairment test (or more frequently, if events or circumstances indicate an impairment may be present) based on its estimated
fair value. Other intangible assets that meet certain criteria are amortized over their estimated useful lives.
Beginning in 2017, the Company adopted,
on a prospective basis, Accounting Standards Update (ASU) No. 2017-04, which simplified the method used to perform the annual,
or interim, goodwill impairment testing. For the year ended December 31, 2017, 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, the Company identified and considered the significance of relevant
key factors, events, and circumstances that affect the fair value of its goodwill. These factors include external factors such
as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as 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.
An impairment charge would be
recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment evaluations use
many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to
future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these
impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively
impact operating results. There were no indicators of impairment during the first quarter of 2018.
Cylinder Deposit Liability
The cylinder deposit liability, which is
included in Accrued expenses and other current liabilities on the Company’s Balance Sheet, represents the amount due to customers
for the return of refillable cylinders. ARI charges its customers cylinder deposits upon the shipment of refrigerant gases
that are contained in refillable cylinders. The amount charged to the customer by ARI approximates the cost of a new cylinder
of the same size. Upon return of a cylinder, this liability is reduced. The cylinder deposit liability was assumed as
part of the ARI acquisition. The balance was $10.3 million and $9.8 million at March 31, 2018 and December 31, 2017, respectively.
Revenues
and Cost of Sales
Beginning on January 1, 2018, the Company
adopted, on a modified retrospective basis, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers,
which provides accounting guidance related to the recognition of revenue from contracts with customers. Based on the evaluation
performed, the Company concluded that the adoption of this standard had no impact on its financial position, results of operations
or cash flows and will not have a significant impact on its internal controls over financial reporting.
The Company’s products and services are
primarily used in commercial air conditioning, industrial processing and refrigeration systems. Most of the Company’s revenues
are realized from the sale of refrigerant and industrial gases and related products. The Company also generates revenue from refrigerant
management services performed at a customer’s site and in-house. The Company conducts its business primarily within the US.
The Company applies the FASB’s guidance
on revenue recognition, which requires the Company to recognize revenue in an amount that reflects the consideration the Company
expects to be entitled in exchange for goods or services transferred to its customers. In most instances, the Company’s contract
with a customer is the customer’s purchase order and the sales price to the customer is fixed. For certain customers, the
Company may also enter into a sales agreement outlining a framework of terms and conditions applicable to future purchase orders
received from that customer. Because the Company’s contracts with customers are typically for a single customer purchase
order, the duration of the contract is usually less than one year. The Company’s performance obligations related to product
sales are satisfied at a point in time, which may occur upon shipment of the product or receipt by the customer, depending on the
terms of the arrangement. The Company’s performance obligations related to reclamation and RefrigerantSide® services are generally
satisfied at a point in time when the service is performed. Accordingly revenues are recorded upon the shipment of the product,
or in certain instances upon receipt by the customer, or the completion of the service.
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
services. Due to the contract containing multiple performance obligations, the Company assessed the arrangement in accordance
with ASC 606. The Company determined that the sale of refrigerants and the management services provided under the contract
each have stand-alone value. Accordingly, the performance obligations related to the sale of refrigerants is satisfied at a
point in time, mainly when the customer receives and obtains control of the product. The performance obligation related to
management service revenue is satisfied over time and revenue is recognized on a straight-line basis over the term of the
arrangement as the management services are provided; such management fees are included in the below table as Product and
related sales and were approximately $0.6 million for each of the three months ended March 31, 2018 and 2017.
Cost of sales is recorded based on
the cost of products shipped or services performed and related direct operating costs of the Company’s facilities.
In
general, the Company performs shipping and handling services for its customers in connection with the delivery of
refrigerant and other products. In accordance with ASC 606-10-25-18B, the Company has elected to
account for such
shipping and handling as activities to fulfill the promise to transfer the good. To the extent that the Company charges its
customers shipping fees, such amounts are included as a component of revenue and the corresponding costs are included as a
component of cost of sales.
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
:
Periods Ended March 31,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Product and related sales
|
|
$
|
41,101
|
|
|
$
|
37,670
|
|
RefrigerantSide
®
Services
|
|
|
1,327
|
|
|
|
1,160
|
|
Total
|
|
$
|
42,428
|
|
|
$
|
38,830
|
|
Income Taxes
The Company is taxed at statutory corporate
income tax rates after adjusting income reported for financial statement purposes for certain items. Current income tax expense
(benefit) reflects the tax results of revenues and expenses currently taxable or deductible. The Company utilizes the asset and
liability method of accounting for deferred income taxes, which provides for the recognition of deferred tax assets or liabilities,
based on enacted tax rates and laws, for the differences between the financial and income tax reporting bases of assets and liabilities.
The tax benefit associated with the
Company’s net operating loss carry forwards (“NOLs”) is recognized to the extent that the Company expects
to realize future taxable income. As a result of a prior year “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. To the
extent that the Company utilizes its NOLs, it will not pay tax on such income. However, to the extent that the
Company’s net income, if any, exceeds the annual NOL limitation, it will pay income taxes based on the then existing
statutory rates. In addition, certain states either do not allow or limit NOLs and as such the Company will be liable for
certain state income taxes. As of March 31, 2018, the Company had NOLs of approximately $5.4 million expiring through 2024,
$4.1 million of which are subject to annual limitations of approximately $1.3 million. As of March 31, 2018, the company had
state tax NOLs of approximately $2.6 million expiring in various years.
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“2017 Tax Act”), which lowered the federal
statutory income tax rate from, generally, 35% to 21% for tax years beginning after December 31, 2017. Furthermore, the 2017
Tax Act contains a number of changes related to NOLs including the repeal of the two-year carryback period for NOLs arising
in taxable years ending after December 31, 2017. The 2017 Tax Act permits NOLs to be carried forward for an unlimited period
as opposed to 20 years under prior law and, with respect to NOLs arising in taxable years beginning after December 31, 2017,
the 2017 Tax Act imposes an annual limit of 80% on the amount of taxable income that such NOLs can offset (effectively
resulting in a minimum tax of 4.2%) but no such limitation is imposed on the use of NOLs that arose in earlier taxable years.
In addition, the 2017 Tax Act limits the annual deductibility of net business interest by imposing a 30% cap computed based
on adjusted taxable income, effective for taxable years beginning after December 31, 2017. There is no grandfathering
provided for existing debt and no transition period. The 2017 Tax Act treats disallowed net interest expense as a separate
tax attribute, rather than merely an increase to that year’s NOLs. Disallowed net business interest is carried over
indefinitely, similar to NOLs generated in taxable years beginning after December 31, 2017. As a result of the enactment of
the 2017 Tax Act, the Company recorded a benefit of approximately $1.4 million during the fourth quarter of 2017 to reflect
the net impact of lower future federal income tax rates on the NOLs and the other cumulative differences in financial
reporting and tax bases of assets and liabilities, which were, primarily, fixed assets and
accumulated depreciation.
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 March 31, 2018, the various states’ statutes of limitations remain open
for tax years subsequent to 2010. 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 March 31,
2018, and December 31, 2017, the Company had no uncertain tax positions.
Income per Common and Equivalent Shares
If dilutive, common equivalent shares (common
shares assuming exercise of options) utilizing the treasury stock method are considered in the presentation of diluted
(loss) earnings per share. The reconciliation of shares used to determine net (loss) income per share is as follows (dollars in
thousands, unaudited):
|
|
Three Month Period
Ended March 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,056
|
)
|
|
$
|
5,734
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares - basic
|
|
|
42,403,029
|
|
|
|
41,507,941
|
|
Shares underlying options
|
|
|
-
|
|
|
|
1,995,948
|
|
Weighted average number of shares outstanding - diluted
|
|
|
42,403,029
|
|
|
|
43,503,889
|
|
During
the three-month periods ended March 31, 2018 and 2017, certain options aggregating 2,948,848 shares and none, 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 the use of estimates and assumptions
that affect the amounts reported in these financial statements and footnotes. The Company considers these accounting estimates
to be critical in the preparation of the accompanying consolidated financial statements. The Company uses information available
at the time the estimates are made. However, these estimates could change materially if different information or assumptions were
used. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur. The Company
utilizes both internal and external sources to evaluate potential current and future liabilities for various commitments and contingencies.
In the event that the assumptions or conditions change in the future, the estimates could differ from the original estimates.
Several of the Company’s accounting policies
involve significant judgments, uncertainties and estimates. The Company bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions
or conditions. To the extent that actual results differ from management’s judgments and estimates, there could be a material adverse
effect on the Company. On a continuous basis, the Company evaluates its estimates, including, but not limited to, those estimates
related to its allowance for doubtful accounts, inventory reserves, valuation allowances for deferred tax assets, 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 productionof 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 established a linear draw
down for the production or importation of virgin HCFC-22 that started at approximately 22 million pounds in 2015 and was reduced
by approximately 4.5 million pounds each year and ending 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 January 2017, the FASB issued “ASU
No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (ASU 2017-04)
which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test that requires
a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard, a company will record an impairment
charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-04 does not change the guidance
on completing Step 1 of the goodwill impairment test and still allows a company to perform the optional qualitative goodwill impairment
assessment before determining whether to proceed to Step 1. The standard is effective for annual and interim goodwill impairment
tests in fiscal years beginning after December 15, 2019 with early adoption permitted for any impairment test performed on testing
dates after January 1, 2017. The Company adopted this standard on January 1, 2017 and has applied its guidance in its impairment
assessments.
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.” This guidance involves several aspects of accounting
for employee share-based payments including: (a) income tax consequences; (b) classification of awards as either equity or liabilities;
and (c) classification on the statement of cash flows. The Company adopted this ASU on a prospective basis on January 1, 2017.
Excess tax benefits and deficiencies are recognized in the consolidated statement of earnings rather than capital in excess of
par value of stock. Excess tax benefits within the consolidated statement of cash flows are presented as an operating activity.
The impact of the adoption on the Company’s income tax expense or benefit and related cash flows during and after the period
of adoption are dependent in part upon grants and vesting of stock-based compensation awards and other factors that are not fully
controllable or predicable by the Company, such as the future market price of the Company’s common stock, the timing of employee
exercises of vested stock options, and the future achievement of performance criteria that affect performance-based awards. The
Company adopted this ASU at the beginning of 2017 and during 2017, the impact of this standard reduced the Company’s income
tax expense and increased net income by approximately $2.4 million.
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.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 340): Simplifying the Measurement of Inventory.” Under ASU 2015-11, companies utilizing the first-in,
first-out or average cost method should measure inventory at the lower of cost or net realizable value, whereas net realizable
value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016.
The adoption of ASU 2015-11 did not have a material impact on the Company’s results of operations or financial position.
Note 2 - Fair Value
ASC Subtopic 820-10 defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The Company often utilizes certain assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs
can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that
maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation
techniques, the Company is required to provide information according to the fair value hierarchy.
The fair value hierarchy ranks the quality
and reliability of the information used to determine fair values into three broad levels as follows:
Level 1: Valuations for assets and liabilities
traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2: Valuations for assets and liabilities
traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical
or similar assets or liabilities.
Level 3: Valuations for assets and liabilities
include certain unobservable inputs in the assumptions and projections used in determining the fair value assigned to such assets
or liabilities.
In instances where the determination of
the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement
in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or liability.
Note 3 - Inventories
Inventories, net of reserve, consist of
the following:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Refrigerant and cylinders
|
|
$
|
26,556
|
|
|
$
|
22,322
|
|
Packaged refrigerants
|
|
|
144,377
|
|
|
|
150,163
|
|
Total
|
|
$
|
170,933
|
|
|
$
|
172,485
|
|
Note 4 - Property, plant and equipment
Elements of property, plant and equipment
are as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
|
Estimated
Lives
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
- Land
|
|
$
|
1,255
|
|
|
$
|
1,255
|
|
|
|
- Land improvements
|
|
|
319
|
|
|
|
319
|
|
|
6-10 years
|
- Buildings
|
|
|
1,446
|
|
|
|
1,446
|
|
|
25-39 years
|
- Building improvements
|
|
|
3,045
|
|
|
|
3,045
|
|
|
25-39 years
|
- Cylinders
|
|
|
13,398
|
|
|
|
13,390
|
|
|
15-30 years
|
- Equipment
|
|
|
23,559
|
|
|
|
23,524
|
|
|
3-10 years
|
- Equipment under capital lease
|
|
|
315
|
|
|
|
315
|
|
|
5-7 years
|
- Vehicles
|
|
|
1,612
|
|
|
|
1,612
|
|
|
3-5 years
|
- Lab and computer equipment, software
|
|
|
3,056
|
|
|
|
3,056
|
|
|
2-8 years
|
- Furniture & fixtures
|
|
|
684
|
|
|
|
656
|
|
|
5-10 years
|
- Leasehold improvements
|
|
|
711
|
|
|
|
711
|
|
|
3-5 years
|
- Equipment under construction
|
|
|
520
|
|
|
|
385
|
|
|
|
Subtotal
|
|
|
49,920
|
|
|
|
49,714
|
|
|
|
Accumulated depreciation
|
|
|
20,265
|
|
|
|
19,253
|
|
|
|
Total
|
|
$
|
29,655
|
|
|
$
|
30,461
|
|
|
|
Depreciation expense for the three months
ended March 31, 2018 and 2017 was $1.0 million and $0.5 million, respectively.
Note 5 - 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.
Based on the results of the impairment
assessments of goodwill and other intangible assets performed in 2017, we concluded that it is more likely than not that the fair
value of our goodwill significantly exceeds the carrying value and that there are no impairment indicators related to intangible
assets.
At March 31, 2018 the Company had $49.5
million of goodwill, of which $48.6 million is attributable to the acquisition of ARI on October 10, 2017.
The Company’s other intangible assets consist of the following:
|
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
(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
|
|
|
$
|
376
|
|
|
$
|
10
|
|
|
$
|
386
|
|
|
$
|
374
|
|
|
$
|
12
|
|
Covenant Not to Compete
|
|
6 - 10
|
|
|
1,270
|
|
|
|
514
|
|
|
|
756
|
|
|
|
1,270
|
|
|
|
475
|
|
|
|
795
|
|
Customer Relationships
|
|
10 - 12
|
|
|
31,660
|
|
|
|
1,953
|
|
|
|
29,707
|
|
|
|
31,660
|
|
|
|
1,288
|
|
|
|
30,372
|
|
Above Market Leases
|
|
13
|
|
|
567
|
|
|
|
21
|
|
|
|
546
|
|
|
|
567
|
|
|
|
10
|
|
|
|
557
|
|
Trade Name
|
|
2
|
|
|
30
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
|
|
30
|
|
|
|
-
|
|
Licenses
|
|
10
|
|
|
1,000
|
|
|
|
342
|
|
|
|
658
|
|
|
|
1,000
|
|
|
|
317
|
|
|
|
683
|
|
Totals identifiable intangible assets
|
|
|
|
$
|
34,913
|
|
|
$
|
3,236
|
|
|
$
|
31,677
|
|
|
$
|
34,913
|
|
|
$
|
2,494
|
|
|
$
|
32,419
|
|
Amortization expense for the three months
ended March 31, 2018 and 2017 was $742 and $122, respectively. 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 period ended March 31, 2018 and for the year ended December 31, 2017.
Note 6 - 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 three-month periods ended March 31, 2018 and 2017, share-based compensation expense of $27 and
none, respectively, are reflected in general and administrative expenses in the consolidated Statements of Operations.
Share-based awards have historically been
made as stock options, and recently also as stock grants, issued pursuant to the terms of the Company’s stock option and
stock incentive plans, (collectively, the “Plans”), described below. The Plans may be administered by the Board of
Directors or the Compensation Committee of the Board or by another committee appointed by the Board from among its members as provided
in the Plans. Presently, the Plans are administered by the Company’s Compensation Committee of the Board of Directors. As
of March 31, 2018, the Plans authorized the issuance of 6,000,000 shares of the Company’s common stock and, as of March 31,
2018 there were 2,374,722 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.
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 incentive stock options (“ISOs”) under the Internal
Revenue Code of 1986, as amended (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). Certain options granted may contain a barrier price whereby the options are cancelled once the stock price
declines below a predetermined barrier price for five consecutive trading days.
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). Certain options granted may contain a barrier price whereby the options are cancelled once the stock price declines
below a predetermined barrier price for five consecutive trading days.
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. There were 20,000 and 0 stock options granted during the three-month periods ended
March 31, 2018 and 2017, respectively.
A summary of the activity for stock options
issued under the Company’s Plans for the indicated periods is presented below:
Stock Option Totals
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2016
|
|
|
3,214,398
|
|
|
$
|
2.68
|
|
-Exercised
|
|
|
(1,545,161
|
)
|
|
$
|
2.27
|
|
-Granted
|
|
|
1,400,203
|
|
|
$
|
5.72
|
|
Outstanding at December 31, 2017
|
|
|
3,069,440
|
|
|
$
|
4.28
|
|
-Exercised
|
|
|
(5,000
|
)
|
|
$
|
3.43
|
|
-Granted
|
|
|
20,000
|
|
|
|
5.81
|
|
-Cancelled
|
|
|
(135,592
|
)
|
|
|
6.26
|
|
Outstanding at March 31, 2018
|
|
|
2,948,848
|
|
|
$
|
4.20
|
|
The following is the weighted average contractual
life in years and the weighted average exercise price at March 31, 2018 of:
|
|
|
|
|
Weighted
Average
Remaining
|
|
Weighted
Average
|
|
|
|
Number of
Options
|
|
|
Contractual
Life
|
|
Exercise
Price
|
|
Options outstanding and vested
|
|
|
2,840,848
|
|
|
2.14 years
|
|
$
|
4.14
|
|
The intrinsic values of options outstanding
at March 31, 2018 and December 31, 2017 are $3.2 million and $5.5 million, respectively.
The intrinsic value of options unvested
at March 31, 2018 and December 31, 2017 are approximately $0 and $0, respectively.
The intrinsic value of options vested
and exercised during the three months ended March 31, 2018 and 2017 were $13,950 and $260,747, respectively.
Note 7 - Short-term and long-term
debt
Elements of short-term and long-term debt
are as follows:
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Short-term & long-term debt
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
- Revolving credit line and other debt
|
|
$
|
52,098
|
|
|
$
|
65,152
|
|
- Long-term debt: current
|
|
|
1,050
|
|
|
|
1,050
|
|
Subtotal
|
|
|
53,148
|
|
|
|
66,202
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
- Term Loan Facility
|
|
|
103,688
|
|
|
|
103,950
|
|
- Vehicle and equipment loans
|
|
|
22
|
|
|
|
39
|
|
- Capital lease obligations
|
|
|
16
|
|
|
|
20
|
|
- Less: deferred financing costs on term loan
|
|
|
(2,730
|
)
|
|
|
(2,851
|
)
|
Subtotal
|
|
|
100,996
|
|
|
|
101,158
|
|
|
|
|
|
|
|
|
|
|
Total
short-term & long-term debt
(1)
|
|
$
|
154,144
|
|
|
$
|
167,360
|
|
(1)
Long-term debt
is net of deferred financing costs.
Bank Credit Line
On June 22, 2012, Hudson Technologies Company
(“HTC”), an indirect subsidiary of the Company, entered into a Revolving Credit, Term Loan and Security Agreement (the
“Original PNC Facility”) with PNC Bank, National Association, as agent (“Agent” or “PNC”),
and such other lenders as may thereafter become a party to the Original PNC Facility. Between June 2012 and April 2016, the Company
entered into six amendments to the Original PNC Facility. Under the terms of the Original PNC Facility, as amended, the Maximum
Loan Amount (as defined in the Original PNC Facility) was $40,000,000 to $50,000,000, and the Maximum Revolving Advance Amount
(as defined in the Original PNC Facility) was $46,000,000. In addition, there was a $130,000 outstanding letter of credit under
the Original PNC Facility at March 31, 2017. The Termination Date of the Original PNC Facility (as defined in the Original PNC
Facility) was June 30, 2020.
On October 10, 2017, HTC and HTC’s
affiliates Hudson Holdings, Inc. (“Holdings”) and Airgas-Refrigerants, Inc., as borrowers (collectively, the “Borrowers”),
and the Company as a guarantor, became obligated under an Amended and Restated Revolving Credit and Security Agreement (the “PNC
Facility”) with PNC Bank, National Association, as administrative agent, collateral agent and lender (“Agent”
or “PNC”), PNC Capital Markets LLC as lead arranger and sole bookrunner, and such other lenders as may thereafter become
a party to the PNC Facility. The PNC Facility amended and restated the Original PNC Facility.
Under the terms of the PNC Facility, the
Borrowers may borrow, from time to time, up to $150 million at any time consisting of revolving loans in a maximum amount up to
the lesser of $150 million and a borrowing base that is calculated based on the outstanding amount of the Borrowers’ eligible
receivables and eligible inventory, as described in the PNC Facility. The PNC Facility also contains a sublimit of $15 million
for swing line loans and $5 million for letters of credit.
Amounts borrowed under the PNC Facility
were used by the Borrowers to consummate the acquisition of ARI and for working capital needs, certain permitted future acquisitions,
and to reimburse drawings under letters of credit. At March 31, 2018, total borrowings under the PNC Facility were $52 million,
and total availability was $57 million. In addition, there was a $130,000 outstanding letter of credit at March 31, 2018.
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 set
forth in the PNC Facility) or, for Eurodollar rate loans 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, the sum of (i) a rate per annum equal to the higher of (1) the base commercial lending
rate of PNC, (2) the federal funds open rate plus 0.5% and (3) the daily LIBOR plus 1.0%, plus (ii) between 0.50% and 1.00% depending
on average quarterly undrawn availability and (B) with respect to Eurodollar rate loans, the sum of the Eurodollar rate plus between
1.50% and 2.00% depending on average quarterly undrawn availability.
Borrowers and the Company granted to the
Agent, for the benefit of the lenders, a security interest in substantially all of their respective assets, including receivables,
equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other
assets.
The PNC Facility contains a
financial covenant requiring the Company to maintain at all times a Fixed
Charge Coverage Ratio (FCCR) of not less than 1.00 to 1.00, as of the end of each trailing period of four consecutive
quarters. The FCCR (as defined in the PNC Facility) is the ratio of (a) EBITDA for such period, minus unfinanced capital
expenditures made during such period, minus the aggregate amount of cash taxes paid during such period, to (b) the aggregate
amount of all scheduled payments of principal (excluding principal payments relating to outstanding revolving loans under the
PNC Facility) and all cash payments of interest, plus cash dividends and distributions made during such period, plus payments
in respect of capital lease obligations made during such period. For the fiscal quarters ended on March 31, 2017 and June 30,
2017, EBITDA is deemed to be $21.9 million and $26.1 million, respectively, and for the fiscal quarters ended September 30,
2017 and December 31, 2017 includes EBITDA of ARI on a pro forma basis. As of March 31, 2018 and December 31, 2017, the FCCR
was approximately 3.31 to 1 and 6.47 to 1, respectively.
The PNC Facility also contains customary
non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers’ ability to pay dividends
on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations
and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events,
judgments in excess of specified amounts, impairments to guarantees and a change of control.
The 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 October 10, 2022, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated
sooner following an event of default.
In connection with the closing of the PNC
Facility, the Company also entered into an Amended and Restated Guaranty and Suretyship Agreement, dated as of October 10, 2017
(the “Revolver Guarantee”), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance
of all obligations owing by Borrowers to PNC, as Agent for the benefit of the revolving lenders.
Term Loan Facility
On October 10, 2017, HTC, Holdings, and
ARI, as borrowers, and the Company, as guarantor, became obligated under a Term Loan Credit and Security Agreement (the “Term
Loan Facility”) with U.S. Bank National Association, as administrative agent and collateral agent (“Term Loan Agent”)
and funds advised by FS Investments and sub-advised by GSO Capital Partners LP and such other lenders as may thereafter
become a party to the Term Loan Facility (the “Term Loan Lenders”).
Under the terms of the Term Loan Facility,
the Borrowers immediately borrowed $105 million pursuant to a term loan (the “Initial Term Loan”) and may borrow up
to an additional $25 million for a period of eighteen months after closing to fund additional permitted acquisitions (the “Delayed
Draw Commitment”, and together with the Initial Term Loan, the “Term Loans”).
The Term Loans mature on October 10, 2023.
Principal payments on the Term Loans are required on a quarterly basis, commencing with the quarter ending March 31, 2018, in the
amount of 1% per annum of the original principal of the outstanding Term Loans. Commencing with the fiscal year ending December
31, 2018, the Term Loan Facility also requires annual principal payments of up to 50% of Excess Cash Flow (as defined in the Term
Loan Facility) if the Company’s Total Leverage Ratio (as defined in the Term Loan Facility) for the applicable year is greater
than 2.75 to 1.00. The Term Loan Facility also requires mandatory prepayments of the Term Loans in the event of certain asset dispositions,
debt issuances, and casualty and condemnation events. The Term Loans may be prepaid at the option of the Borrowers at par in an
amount up to $30 million. Additional prepayments are permitted after the first anniversary of the closing date subject to a prepayment
premium of 3% in year two, 1% in year three and zero in year four and thereafter.
Interest on the Term Loans is generally
payable on the earlier of the last day of the interest period applicable to such Eurodollar rate loan and the last day of
the Term Loan Facility, as applicable. Interest is payable at the rate per annum of the Eurodollar Rate (as defined in the Term
Loan Facility) plus 7.25%. The Borrowers have the option of paying 3.00% interest per annum in kind by adding such amount
to the principal of the Term Loans during no more than five fiscal quarters during the term of the Term Loan Facility.
Borrowers and the Company granted to the
Term Loan Agent, for the benefit of the Term Loan Lenders, a security interest in substantially all of their respective assets,
including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property,
and certain other assets.
The Term Loan Facility contains a
financial covenant requiring the Company to maintain a Total Leverage Ratio (TLR) of not greater than 4.75 to 1.00, tested as
of the last day of the fiscal quarter. The TLR (as defined in the Term Loan Facility) is the ratio of (a) funded debt as of
such day to (b) EBITDA for the four consecutive fiscal quarters ending on the last day of such fiscal quarter. Funded debt
(as defined in the Term Loan Facility) includes amounts borrowed under the PNC Facility and the Term Loan Facility as well as
capitalized lease obligations and other indebtedness for borrowed money maturing more than one year from the date of creation
thereof. For the fiscal quarters ended on March 31, 2017 and June 30, 2017, EBITDA is deemed to be $21.9 million and $26.1
million, respectively, and for the fiscal quarters ended September 30, 2017 and December 31, 2017 includes EBITDA of ARI on a
pro forma basis. As of March 31, 2018 and December 31, 2017, the TLR was approximately 4.23 to 1 and 3.03 to 1,
respectively.
The Term Loan Facility also contains customary
non-financial covenants relating to the Company and the Borrowers, including limitations on their ability to pay dividends on common
stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations
and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events,
judgments in excess of specified amounts, impairments to guarantees and a change of control.
In connection with the closing of the Term
Loan Facility, the Company also entered into a Guaranty and Suretyship Agreement, dated as of October 10, 2017 (the “Term
Loan Guarantee”), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance of all
obligations owing by Borrowers to Term Loan Agent, as agent for the benefit of the Term Loan Lenders.
The Term Loan Agent and the Agent have
entered into an intercreditor agreement governing the relative priority of their security interests granted by the Borrowers and
the Guarantor in the collateral, providing that the Agent shall have a first priority security interest in the accounts receivable,
inventory, deposit accounts and certain other assets (the “Revolving Credit Priority Collateral”) and the Term Loan
Agent shall have a first priority security interest in the equipment, real property, capital stock of subsidiaries and certain
other assets (the “Term Loan Priority Collateral”).
The Company was in compliance with all
covenants, under the PNC Facility and the Term Loan Facility as of March 31, 2018. The Company’s ability to comply with these
covenants in future quarters may be affected by events beyond the Company’s control, including general economic conditions,
weather conditions, regulations and refrigerant pricing. Therefore, we cannot make any assurance that we will continue to be in
compliance during future periods.
Building and Land Mortgage
On June 1, 2012, the Company entered into
a mortgage note with Busey Bank for $855,000. The mortgage note was secured by the Company’s land and building located in
Champaign, Illinois. The mortgage note bore interest at the fixed rate of 4% per annum, amortizing over 60 months and matured on
June 1, 2017. On June 1, 2017, the Company paid to Busey Bank the sum of $15,815 in full and final satisfaction of mortgage and
mortgage note. At March 31, 2018 the principal balance of this mortgage note was $0.
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 $0.1 million at March 31, 2018 under leases which have been classified as capital leases. Scheduled
future minimum lease payments under capital leases, net of interest, are as follows:
Twelve Month Period Ending March 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2019
|
|
$
|
86
|
|
-2020
|
|
|
15
|
|
-2021
|
|
|
6
|
|
-2022
|
|
|
2
|
|
-2023
|
|
|
0
|
|
Subtotal
|
|
|
109
|
|
Less interest expense
|
|
|
(6
|
)
|
Total
|
|
$
|
103
|
|
Scheduled maturities of the Company’s
long-term debt and capital lease obligations are as follows:
Twelve Month Period Ending March 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2019
|
|
$
|
1,147
|
|
-2020
|
|
|
1,079
|
|
-2021
|
|
|
1,057
|
|
-2022
|
|
|
1,052
|
|
-2023
|
|
|
1,050
|
|
Thereafter
|
|
|
99,488
|
|
|
|
|
|
|
Total
|
|
$
|
104,873
|
|
Note 8 - Acquisitions
ARI Acquisition
On October 10, 2017, the Company completed
the Acquisition of ARI.
At closing, the Company paid net cash consideration
of approximately $209 million, which included preliminary post-closing adjustments relating to: (i) changes in the net working
capital of ARI as of the closing relative to a net working capital target, (ii) the actual amount of specified types of R-22 refrigerant
inventory on hand at closing relative to a target amount thereof, and (iii) other consideration pursuant to the Stock Purchase
Agreement.
Due to the timing of the ARI acquisition,
which closed during the fourth quarter of 2017, our estimates of fair values of the assets that we acquired and the liabilities
that we assumed are based on information that was available as of the acquisition date of ARI and are preliminary. We are continuing
to evaluate the underlying inputs and assumptions used in our valuations, particularly with respect to certain aspects of the acquired
inventory and property and equipment. In addition, in accordance with the stock purchase agreement, the purchase price remains
subject to further working capital adjustment. Accordingly, these preliminary estimates are subject to change during the measurement
period, which is the period subsequent to the acquisition date during which the acquiror may adjust the provisional amounts recognized
for a business combination, not to exceed one year from the acquisition date.
The following table summarizes the fair
values of the assets acquired and liabilities assumed from the ARI acquisition:
|
|
Amortization
life
(in months)
|
|
|
Fair value
(in thousands)
|
|
Accounts receivable
|
|
|
|
|
|
$
|
14,668
|
|
Other assets
|
|
|
|
|
|
|
734
|
|
Inventories
|
|
|
|
|
|
|
103,876
|
|
Property and equipment
|
|
|
|
|
|
|
24,179
|
|
Customer relationships
|
|
|
144
|
|
|
|
29,660
|
|
Above-market leases
|
|
|
153
|
|
|
|
567
|
|
Goodwill
|
|
|
|
|
|
|
48,609
|
|
Total assets acquired
|
|
|
|
|
|
$
|
222,293
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
|
|
|
$
|
3,210
|
|
Other current liabilities
|
|
|
|
|
|
|
10,114
|
|
Total liabilities assumed
|
|
|
|
|
|
$
|
13,324
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
208,969
|
|
The fair values of the acquired intangibles
were determined using discounted cash flow models using a discount factor based on an estimated risk-adjusted weighted average
cost of capital. The customer relationships were valued using the multi-period excess-earnings method, a form of the
income approach. The above-market leases were valued using the differential cash flow method of the income approach.
The acquisition resulted in the recognition
of $48.6 million of goodwill, which should be deductible for tax purposes. Goodwill largely consists of expected growth in
revenue from new customer acquisitions over time.
The cash consideration paid by the Company
at closing was financed with available cash balances, plus $80 million of borrowings under the PNC Facility and a new term
loan of $105 million from the Term Loan Facility.