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 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.
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.
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
income (loss) as its comprehensive income (loss) is the same as its net income (loss).
Fair Value of Financial Instruments
The carrying values of financial
instruments including cash, trade accounts receivable and accounts payable approximate fair value at December 31, 2019 and
December 31, 2018, 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 December 31, 2019 and December 31, 2018. Please see Note 2 for
further details.
Credit Risk
Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade accounts receivable.
The Company maintains its temporary cash investments in highly-rated financial institutions and, at times, the balances exceed
FDIC insurance coverage. The Company's trade accounts receivable are primarily due from companies throughout the United States.
The Company reviews each customer's credit history before extending credit.
The Company establishes an allowance for
doubtful accounts based on factors associated with the credit risk of specific accounts, historical trends, and other information.
The carrying value of the Company’s accounts receivable is reduced by the established allowance for doubtful accounts. The
allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a
general reserve for the remaining accounts receivable balances. The Company adjusts its reserves based on factors that affect the
collectability of the accounts receivable balances.
For the year ended December 31, 2019, one
customer accounted for 14% of the Company’s revenues and at December 31, 2019, there were $1.8 million of outstanding receivables
from this customer.
For the year ended December 31, 2018, one
customer accounted for 11% of the Company’s revenues and at December 31, 2018, there were $2.9 million of outstanding receivables
from this customer.
The loss of a principal customer or a decline
in the economic prospects of and/or a reduction in purchases of the Company's products or services by any such customer could have
a material adverse effect on the Company's operating results and financial position.
Cash and Cash Equivalents
Temporary investments with original maturities
of ninety days or less are included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of refrigerant
products available for sale, are stated at the lower of cost, on a first-in first-out basis, or net realizable value. Where the
market price of inventory is less than the related cost, the Company may be required to write down its inventory through a lower
of cost or net realizable value adjustment, the impact of which would be reflected in cost of sales on the Consolidated Statements
of Operations. Any such adjustment would be based on management’s judgment regarding future demand and market conditions
and analysis of historical experience.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost, including internally manufactured equipment. The cost to complete equipment that is under construction is not considered
to be material to the Company's financial position. Provision for depreciation is recorded (for financial reporting purposes) using
the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized on a straight-line
basis over the shorter of economic life or terms of the respective leases. Costs of maintenance and repairs are charged to expense
when incurred.
Due to the specialized nature of the Company's
business, it is possible that the Company's estimates of equipment useful life periods may change in the future.
Goodwill
The Company has made acquisitions that
included a significant amount of goodwill and other intangible assets. The Company applies the purchase method of accounting for
acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price
of the acquisition over the fair value of the net assets acquired and identified intangible assets). We test our goodwill for impairment
on an annual basis (the first day of the fourth quarter) and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of an asset below its carrying value. Other intangible assets that meet certain
criteria are amortized over their estimated useful lives.
Beginning in 2017, the Company adopted,
on a prospective basis, ASU No. 2017-04, which simplifies the accounting for goodwill impairment by eliminating Step 2 of the prior
goodwill impairment test that required a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard,
a company records an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. An
impairment charge would be recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment
evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related
to future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these impairment
evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact operating
results.
In 2018, due to a significant selling price
correction leading to unfavorable market conditions, the Company performed a quantitative test by weighing the results of an income-based
valuation technique, the discounted cash flows method, and a market-based valuation technique to determine its fair value. The
market approach was used as a test of reasonableness of the conclusions reached in the income approach. Under the income approach
assumptions critical to the fair value estimates are: (i) discount rates used to derive the present value factors used in determining
the fair value; (ii) projected revenue growth rates; and (iii) projected long-term growth rates used in the derivation of terminal
year values. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry
grouping.
The Company’s performance continued
to be negatively impacted by the challenging pricing environment affecting the industry and the market during 2019 resulting in
an increase in net realizable value adjustments for certain gases; however, the Company’s sales volume has increased in 2019
when compared to 2018. The Company determined as of September 30, 2019, that the year-to-date decline in revenue and operating
loss, along with the decrease in the Company’s stock price during 2019 represented a triggering event which required a goodwill
impairment test. Based on these indicators, the Company quantitatively evaluated its goodwill for impairment as of September 30,
2019 and determined that goodwill was not impaired.
There were no goodwill impairment losses
recognized in any of the three years ended December 31, 2019, 2018 and 2017.
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 and the balance was $9.5 million and $11.7 million at December 31, 2019 and 2018, 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 United States.
The Company applies the FASB’s guidance
on revenue recognition, which requires the Company to recognize revenue in an amount that reflects the consideration to which the
Company expects to be entitled in exchange for goods or services transferred to its customers. In most instances, the Company’s
contract with a customer is the customer’s purchase order and the sales price to the customer is fixed. For certain customers,
the Company may also enter into a sales agreement outlining a framework of terms and conditions applicable to future purchase orders
received from that customer. Because the Company’s contracts with customers are typically for a single customer purchase
order, the duration of the contract is usually less than one year. The Company’s performance obligations related to product
sales are satisfied at a point in time, which may occur upon shipment of the product or receipt by the customer, depending on the
terms of the arrangement. The Company’s performance obligations related to reclamation and RefrigerantSide® services
are generally satisfied at a point in time when the service is performed. Accordingly, revenues are recorded upon the shipment
of the product, or in certain instances upon receipt by the customer, or the completion of the service.
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 $2.3 million for each of the 12 months
ended December 31, 2019 and 2018.
Cost
of sales is recorded based on the cost of products shipped or services performed and related direct operating costs of the Company’s
facilities. In general, the Company performs shipping and handling services for its customers
in connection with the delivery of refrigerant and other products. The Company elected to implement ASC 606-10-25-18B, whereby
the Company accounts for such shipping and handling as activities to fulfill the promise to transfer the good. To the extent
that the Company charges its customers shipping fees, such amounts are included as a component of revenue and the corresponding
costs are included as a component of cost of sales.
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,
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Product and related sales
|
|
$
|
157,512
|
|
|
$
|
162,229
|
|
|
RefrigerantSide ® Services
|
|
|
4,547
|
|
|
|
4,296
|
|
|
Total
|
|
$
|
162,059
|
|
|
$
|
166,525
|
|
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 “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 December 31, 2019, the Company had
NOLs of approximately $46.4 million, of which $41.0 million have no expiration date (subject to annual limitations of 80% of tax
earnings) and $5.4 million expire through 2023 (subject to annual limitations of approximately $1.3 million). As of December 31,
2019, the Company had state tax NOLs of approximately $23.7 million expiring in various years.
Concluding that a valuation allowance is
not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses
in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax
differences, as well as non-recurring items, as a measure of our cumulative results in recent years. Based on the operating loss
experienced as of December 31, 2018, our analysis indicated that we had cumulative three year historical losses on this basis,
which represented significant negative evidence that is objective and verifiable and, therefore, difficult to overcome. Based on
our assessment as of December 31, 2018, we concluded that due to the uncertainty that the deferred tax assets will not be fully
realized in the future, we recorded a valuation allowance of approximately $11.3 million during the year ended December 31, 2018
and increased the valuation allowance to $18.9 million as of December 31, 2019 due to additional losses.
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, 2019 and 2018, 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
Net income (loss)
|
|
$
|
(25,940
|
)
|
|
$
|
(55,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares – basic
|
|
|
42,613,478
|
|
|
|
42,484,972
|
|
|
Shares underlying options
|
|
|
---
|
|
|
|
—
|
|
|
Weighted average number of shares outstanding – diluted
|
|
|
42,613,478
|
|
|
|
42,484,972
|
|
During the years ended December 31,
2019 and 2018, certain options aggregating 7,042,377 and 4,415,397 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 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, goodwill 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 its business could affect its operating results. Currently the
Company purchases virgin hydrochlorofluorocarbon (“HCFC”) and hydrofluorocarbon (“HFC”) refrigerants and
reclaimable, primarily HCFC, HFC and chlorofluorocarbon (“CFC”), refrigerants from suppliers and its customers. 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
was phased by 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 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 ended 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
Accounting Standards Update ("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 prior goodwill impairment test which required 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, Measurement
of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments
within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued
ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which amended the standard. The new standard introduces an approach,
based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model
for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit
losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other
receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU
is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early
adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the
impact of this ASU.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize
operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU
No. 2018-11, Leases – Targeted Improvements, as an update to the previously-issued guidance. This update added a transition
option which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period
of adoption without recasting the financial statements in periods prior to adoption. The Company has used the modified retrospective
transition approach in ASU No. 2018-11 and applied the new lease requirements through a cumulative-effect adjustment in the period
of adoption. The Company has elected the package of practical expedients permitted under the transition guidance, which allows
it to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease, and its initial
direct costs for any leases that existed prior to adoption of the new standard. The Company has also elected to combine lease and
non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated
lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company has recorded
approximately $8.1 million as total right-of-use assets and total lease liabilities on its consolidated balance sheet
as of January 1, 2019. The Company’s accounting for finance leases remained substantially unchanged. Disclosures relating
to the amount, timing and uncertainty of cash flows arising from leases are included in Note 6.
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 - Trade accounts receivable –
net
At December 31, 2019 and 2018, trade
accounts receivable are net of reserves for doubtful accounts of $0.7 million and $1.2 million, respectively. The following
table represents the activity occurring in the reserves for doubtful accounts in 2019 and 2018.
|
(in thousands)
|
|
Beginning
Balance
at January 1
|
|
|
Net additions
charged to
Operations
|
|
|
Deductions
and Other
|
|
|
Ending Balance
at December 31
|
|
|
2019
|
|
$
|
1,178
|
|
|
$
|
(76
|
)
|
|
$
|
(392
|
)
|
|
$
|
710
|
|
|
2018
|
|
$
|
722
|
|
|
$
|
479
|
|
|
$
|
(23
|
)
|
|
$
|
1,178
|
|
Note 4- Inventories
Inventories consist of the following:
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Refrigerants and cylinders
|
|
$
|
72,088
|
|
|
$
|
115,348
|
|
|
Less: net realizable value adjustments
|
|
|
(12,850
|
)
|
|
|
(13,386
|
)
|
|
Total
|
|
$
|
59,238
|
|
|
$
|
101,962
|
|
Note 5 - Property, plant and equipment
Elements of property, plant and equipment
are as follows:
|
December 31 ,
|
|
2019
|
|
|
2018
|
|
|
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
|
|
|
13,273
|
|
|
|
13,369
|
|
|
15-30 years
|
|
- Equipment
|
|
|
24,953
|
|
|
|
24,078
|
|
|
3-10 years
|
|
- Equipment under capital lease
|
|
|
315
|
|
|
|
315
|
|
|
5-7 years
|
|
- Vehicles
|
|
|
1,574
|
|
|
|
1,535
|
|
|
3-5 years
|
|
- Lab and computer equipment, software
|
|
|
3,077
|
|
|
|
3,090
|
|
|
2-8 years
|
|
- Furniture & fixtures
|
|
|
679
|
|
|
|
684
|
|
|
5-10 years
|
|
- Leasehold improvements
|
|
|
842
|
|
|
|
873
|
|
|
3-5 years
|
|
- Equipment under construction
|
|
|
73
|
|
|
|
464
|
|
|
|
|
Subtotal
|
|
|
50,851
|
|
|
|
50,473
|
|
|
|
|
Accumulated depreciation
|
|
|
27,177
|
|
|
|
23,078
|
|
|
|
|
Total
|
|
$
|
23,674
|
|
|
$
|
27,395
|
|
|
|
Depreciation expense for the years
ended December 31, 2019 and 2018 was $4.2 million and $4.2 million, respectively, of which $2.7
million and $2.4 million, respectively, were included as cost of sales in the Company’s Consolidated
Statements of Operations.
Note 6 - Leases
The Company has various lease agreements
with terms up to 11 years, including leases of buildings and various equipment. Some leases include options to purchase,
terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the
option will be exercised.
At inception, the Company determines
if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease.
Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components
(e.g. common area maintenance, charges, utilities and property taxes). The Company elected the package of practical
expedients permitted under the transition guidance, which allows it to carry forward its historical lease classification, its
assessment on whether a contract contains a lease, and its initial direct costs for any leases that existed prior to the
adoption of the new standard. The Company also elected to combine lease and non-lease components and to keep leases with an
initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated
statements of operations on a straight line basis over the lease term. The Company’s lease agreements do not contain
any material residual value, guarantees or material restrictive covenants.
Operating leases are included in Right
of use asset, Accrued expenses and other current liabilities, and Long-term lease liabilities on the consolidated balance sheets.
These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over
the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term
operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet. Lease expense for operating
leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which
the obligation for those payments is incurred.
Lease expense is included in selling,
general and administrative expenses on the consolidated statements of operations.
The following table presents information
about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of December 31, 2019.
|
Maturity of Lease Payments
|
|
|
December
31, 2019
|
|
|
(in thousands)
|
|
|
|
|
|
-2020
|
|
|
2,611
|
|
|
-2021
|
|
|
1,997
|
|
|
-2022
|
|
|
1,096
|
|
|
-2023
|
|
|
949
|
|
|
-Thereafter
|
|
|
3,851
|
|
|
Total undiscounted operating lease payments
|
|
|
10,504
|
|
|
Less imputed interest
|
|
|
(2,398
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
8,106
|
|
Balance Sheet Classification
|
Current lease liabilities (recorded in Accrued expenses and other current liabilities)
|
|
$
|
2,364
|
|
|
Long-term lease liabilities
|
|
|
5,742
|
|
|
Total operating lease liabilities
|
|
$
|
8,106
|
|
Other Information
|
Weighted-average remaining term for operating leases
|
|
5.77 years
|
|
|
Weighted-average discount rate for operating leases
|
|
|
8.74
|
%
|
Cash Flows
An initial right-of-use asset of $8.1 million was
recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Cash paid for amounts included
in the present value of operating lease liabilities was $2.8 million during the year ended December 31, 2019 and
is included in operating cash flows.
As previously disclosed in our December 31, 2018 Form 10-K
and under the previous lease accounting standard, future commitments under operating leases are summarized as follows:
|
Years
ended December 31,
|
|
Amount
|
|
|
(in thousands)
|
|
|
|
|
|
-2019
|
|
$
|
2,952
|
|
|
-2020
|
|
|
2,055
|
|
|
-2021
|
|
|
1,619
|
|
|
-2022
|
|
|
684
|
|
|
-2023
|
|
|
498
|
|
|
Thereafter
|
|
|
3,422
|
|
|
Total
|
|
$
|
11,230
|
|
Note 7 - Income taxes
Loss before income taxes for the years
ended December 31, 2019 and 2018 was $25.3 million and $57.4 million, respectively. Income tax expense (benefit) for the years
ended December 31, 2019 and 2018 was $0.7 million and ($1.7 million), respectively. The income tax expense for each of the years
ended December 31, 2019 and 2018 was for federal and state income tax at statutory rates applied to the adjusted pre-tax income
for each of the periods.
The following summarizes the (benefit)
/ provision for income taxes:
|
Years Ended December 31,
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(124)
|
|
|
$
|
(507)
|
|
|
State and local
|
|
|
31
|
|
|
|
(167
|
)
|
|
|
|
|
(93)
|
|
|
|
(674)
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
366
|
|
|
|
(693
|
)
|
|
State and local
|
|
|
383
|
|
|
|
(337
|
)
|
|
|
|
|
749
|
|
|
|
(1,030
|
)
|
|
(Benefit) expense for income taxes
|
|
$
|
656
|
|
|
$
|
(1,704
|
)
|
Reconciliation of the Company's actual
tax rate to the U.S. Federal statutory rate is as follows:
|
Years ended December 31,
|
|
2019
|
|
|
2018
|
|
|
|
Income tax rates
|
|
|
|
|
|
|
|
|
|
|
- Statutory U.S. federal rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
- State income taxes, net of federal benefit
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
- Excess tax benefits related to stock compensation
|
|
|
0
|
%
|
|
|
--
|
%
|
|
|
- AMT credit
|
|
|
1
|
%
|
|
|
--
|
%
|
|
|
- Effect of 2017 Tax Act
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
-
Change in valuation allowance
|
|
|
(25
|
)%
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(3
|
)%
|
|
|
3
|
%
|
|
As of December 31, 2019, the Company
had NOLs of approximately $46.4 million, of which $41.0 million have no expiration date (subject to annual limitations of 80%
of tax earnings) and $5.4 million expire through 2023 (subject to annual limitations of approximately $1.3 million). As of
December 31, 2019, the Company had state tax NOLs of approximately $23.7 million expiring in various years.
Deferred income tax represents the tax
effect of the differences between the book and tax bases of assets and liabilities. The net deferred income tax assets (liabilities)
consisted of the following at:
|
December 31,
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
- Depreciation & amortization
|
|
$
|
(4,899
|
)
|
|
$
|
(5,865
|
)
|
|
- Reserves for doubtful accounts
|
|
|
163
|
|
|
|
159
|
|
|
- Inventory reserve
|
|
|
2,083
|
|
|
|
2,503
|
|
|
- Non qualified stock options
|
|
|
965
|
|
|
|
778
|
|
|
- Net operating losses
|
|
|
11,016
|
|
|
|
9,574
|
|
|
- AMT credit
|
|
|
47
|
|
|
|
86
|
|
|
- Deferred interest
|
|
|
8,351
|
|
|
|
3,637
|
|
|
- Valuation allowance
|
|
|
(18,918
|
)
|
|
|
(11,315
|
)
|
|
Total
|
|
|
(1,192
|
)
|
|
|
(443
|
)
|
We review the likelihood that we will realize
the benefit of our deferred tax assets, and therefore the need for valuation allowances, on an annual basis in the fourth quarter
of the year, and more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance,
the historical and projected financial results are considered, along with all other available positive and negative evidence.
Concluding that a valuation allowance is
not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses
in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax
differences, as well as non-recurring items, as a measure of our cumulative results in recent years. Based on the operating loss
experienced as of December 31, 2018 and 2019, our analysis indicated that we had cumulative three year historical losses on this
basis, which represented significant negative evidence that is objective and verifiable and, therefore, difficult to overcome.
Based on our assessment as of December 31, 2018 and 2019, we concluded that due to the uncertainty that the deferred tax assets
will not be fully realized in the future, we recorded a valuation allowance of approximately $11.3 million during the year ended
December 31, 2018 and increased the valuation allowance to $18.9 million as of December 31, 2019 due to additional losses.
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. 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 assets and liabilities, which were,
primarily, fixed assets and accumulated depreciation.
The Company’s 2015 and prior
federal tax years have been closed. The Company operates in many states throughout the United States and, as of December 31,
2019, the various states’ statutes of limitations remain open for tax years subsequent to 2014. The Company recognizes
interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.
Note 8 – 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.
In both 2018 and 2019, due to a significant selling price correction leading to unfavorable market conditions, the Company performed
a quantitative test by weighing the results of an income-based valuation technique, the discounted cash flows method, and a market-based
valuation technique to determine its reporting units’ fair values.
There were no goodwill impairment
losses recognized for the years ended December 31, 2019 and 2018. Based on the results of the impairment assessments of goodwill
and intangible assets performed, management concluded that the fair value of the Company’s goodwill exceeds the carrying
value and that there are no impairment indicators related to intangible assets.
At December 31, 2019 the Company had $47.8
million of goodwill, of which $47.0 million is attributable to the acquisition of Airgas-Refrigerants, Inc. on October 10, 2017.
The Company’s other intangible assets consist of the following:
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Amortization
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
December 31,
|
|
Period
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
(in thousands)
|
|
(in
years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets with determinable lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
5
|
|
|
$
|
386
|
|
|
$
|
383
|
|
|
$
|
3
|
|
|
$
|
386
|
|
|
$
|
380
|
|
|
$
|
6
|
|
|
Covenant not to compete
|
|
|
6 – 10
|
|
|
|
1,270
|
|
|
|
783
|
|
|
|
487
|
|
|
|
1,270
|
|
|
|
629
|
|
|
|
641
|
|
|
Customer relationships
|
|
|
3 – 12
|
|
|
|
31,560
|
|
|
|
6,506
|
|
|
|
25,054
|
|
|
|
31,660
|
|
|
|
3,952
|
|
|
|
27,708
|
|
|
Above market leases
|
|
|
13
|
|
|
|
567
|
|
|
|
99
|
|
|
|
468
|
|
|
|
567
|
|
|
|
54
|
|
|
|
513
|
|
|
Licenses
|
|
|
10
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
—
|
|
|
|
1,000
|
|
|
|
417
|
|
|
|
583
|
|
|
Totals identifiable intangible assets
|
|
|
|
|
|
$
|
34,783
|
|
|
$
|
8,771
|
|
|
$
|
26,012
|
|
|
$
|
34,883
|
|
|
$
|
5,432
|
|
|
$
|
29,451
|
|
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.
During the third quarter of 2019, the Company recorded approximately $0.5 million of impairment charges associated with the shutdown
of its Nashville and Puerto Rico facilities. No other impairments were recognized for the years ended December 31, 2019 and 2018.
The amortization of intangible assets
for the years ended December 31, 2019 and 2018, were $2.9 million and $3.0 million respectively.
Future estimated amortization expense is as follows: 2020 - $2.9 million, 2021 - $2.8 million, 2022 - $2.8 million, 2023-
$2.8 million, 2024-$2.8 million and thereafter - $11.9 million.
Note 9 - Short-term and long-term debt
Elements of short-term and long-term debt
are as follows:
|
December 31,
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Short-term & long-term debt
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
- Revolving credit line and other debt
|
|
$
|
14,000
|
|
|
$
|
29,000
|
|
|
- Long-term debt: current
|
|
|
3,008
|
|
|
|
2,672
|
|
|
Subtotal
|
|
|
17,008
|
|
|
|
31,672
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
- Term Loan Facility- net of current portion of long-term debt
|
|
|
85,115
|
|
|
|
101,588
|
|
|
- Vehicle and equipment loans
|
|
|
|
|
|
|
4
|
|
|
- Capital lease obligations
|
|
|
3
|
|
|
|
6
|
|
|
- Less: deferred financing costs on term loan
|
|
|
(3,136
|
)
|
|
|
(3,325
|
)
|
|
Subtotal
|
|
|
81,982
|
|
|
|
98,273
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term & long-term debt
|
|
$
|
98,990
|
|
|
$
|
129,945
|
|
New Revolving Credit Facility
On December 19, 2019, Hudson Technologies
Company (“HTC”), Hudson Holdings, Inc. (“Holdings”) and Aspen Refrigerants, Inc. (“ARI”), as
borrowers (collectively, the “Borrowers”), and Hudson Technologies, Inc. (the “Company”) as a guarantor,
became obligated under a Credit Agreement (the “Wells Fargo Facility”) with Wells Fargo Bank, as administrative agent
and lender (“Agent” or “Wells Fargo”) and such other lenders as may thereafter become a party to the Wells
Fargo Facility.
Under the terms of the Wells Fargo Facility,
the Borrowers may borrow, from time to time, up to $60 million at any time consisting of revolving loans in a maximum amount up
to the lesser of $60 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 Wells Fargo Facility. The Wells Fargo Facility also contains a sublimit
of $5 million for swing line loans and $2 million for letters of credit.
Amounts borrowed under the Wells Fargo
Facility were used by the Borrowers to repay existing revolving indebtedness under its Prior Revolving Credit Facility (as defined
below), repay certain principal amounts under the Term Loan Facility (as defined below), and may be used for working capital needs,
certain permitted acquisitions, and to reimburse drawings under letters of credit.
Interest on loans under the Wells Fargo
Facility is payable in arrears on the first day of each month. 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 Base Rate loans, the sum
of (i) a rate per annum equal to the higher of (1) the federal funds rate plus 0.5%, (2) one month LIBOR plus 1.0%, and (3) the
prime commercial lending rate of Wells Fargo, plus (ii) between 1.25% and 1.75% depending on average monthly undrawn availability
and (B) with respect to LIBOR rate loans, the sum of the LIBOR rate plus between 2.25% and 2.75% depending on average monthly undrawn
availability.
In connection with the closing of the
Wells Fargo Facility, the Company also entered into a Guaranty and Security Agreement, dated as of December 19, 2019 (the “Revolver
Guaranty and Security Agreement”), pursuant to which the Company and certain subsidiaries unconditionally guaranteed the
payment and performance of all obligations owing by Borrowers to Wells Fargo, as Agent for the benefit of the revolving lenders.
Pursuant to the Revolver Guaranty and Security Agreement, Borrowers, the Company and ten other subsidiaries granted to the Agent,
for the benefit of the Wells Fargo Facility lenders, a security interest in substantially all of their respective assets, including
receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and
certain other assets. The Revolver Guaranty and Security Agreement also provides that the Agent shall receive the right to dominion
over certain of the Borrowers’ bank accounts in the event of an Event of Default under the Wells Fargo Facility, or if undrawn
availability under the Wells Fargo Facility falls below $9 million at any time.
The Wells Fargo Facility contains a financial
covenant requiring the Company to maintain at all times minimum liquidity (defined as availability under the Wells Fargo Facility
plus unrestricted cash) of at least $5 million, of which at least $3 million must be derived from availability. The Wells Fargo
Facility also contains a springing covenant, which takes effect only upon a failure to maintain undrawn availability of at least
$7.5 million, requiring the Company to maintain a Fixed Charge Coverage Ratio (FCCR) of not less than 1.00 to 1.00, as of the end
of each trailing period of twelve consecutive fiscal months commencing with the month prior to the triggering of the covenant.
The FCCR (as defined in the Wells Fargo Facility) is the ratio of (a) EBITDA for such period, minus unfinanced capital expenditures
made during such period, to (b) the aggregate amount of (i) interest expense required to be paid (other than interest paid-in-kind,
amortization of financing fees, and other non-cash interest expense) during such period, (ii) scheduled principal payments (but
excluding principal payments relating to outstanding revolving loans under the Wells Fargo Facility), (iii) all net federal, state,
and local income taxes required to be paid during such period (provided, that any tax refunds received shall be applied to the
period in which the cash outlay for such taxes was made), (iv) all restricted payments paid (as defined in the Wells Fargo Facility)
during such period, and (v) to the extent not otherwise deducted from EBITDA for such period, all payments required to be made
during such period in respect of any funding deficiency or funding shortfall with respect to any pension plan. The FCCR covenant
ceases after the Borrowers have been in compliance therewith for two consecutive months.
The Wells Fargo Facility also contains
customary non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers’ ability
to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches
of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency,
certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control. The Wells Fargo
Facility also contains certain covenants contained in the Fourth Amendment to the Term Loan Facility described below.
The commitments under the Wells Fargo Facility
will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable
in full on December 19, 2022, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated
sooner following an event of default.
Termination of Prior Revolving Credit
Facility
In conjunction with entry into the
Wells Fargo Credit Facility as described above, on December 19, 2019 the Company's prior secured revolving loan set forth in
the Amended and Restated Revolving Credit and Security Agreement, as amended (the “Prior Revolving Credit
Facility”), with PNC Bank, National Association, as administrative agent, collateral agent and lender
(“PNC”) and the lenders thereunder, which had a principal balance of approximately $6.7 million, was repaid in
full and the Prior Revolving Credit Facility was terminated. During 2019, the Company repaid $22.3 million of the revolving credit facility with PNC Bank prior to the $6.7
million principal paydown in December 2019. On December 19, 2019, the Company borrowed $15.3 million under the Wells Fargo
Credit Facility and repaid $1.3 million on December 30, 2019.
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 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 could 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”).
On June 29, 2018, HTC, Holdings and ARI,
as borrowers, and the Company as a guarantor, entered into a Limited Waiver and First Amendment to Term Loan Credit and Security
Agreement and Other Documents (the “First Amendment”) with U.S. Bank National Association, as collateral agent and
administrative agent, and the various lenders thereunder. The First Amendment terminated the Delayed Draw Commitment and provided
an interim waiver with respect to compliance with the existing TLR covenant at June 30, 2018.
The Term Loan matures on October 10, 2023.
Interest on the Term Loan 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 was originally 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 originally
contained a financial covenant requiring the Company to maintain a TLR of not greater than 4.75 to 1.00, tested as of the
last day of the fiscal quarter. The Term Loan Facility was amended on August 14, 2018, including a waiver of the TLR covenant
at June 30, 2018, as described below. 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 Wells Fargo 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. As of December 31, 2019 and 2018, the TLR was approximately 11.22 to 1 and 11.82 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”).
On August 14, 2018, HTC, Holdings and ARI,
as borrowers, and the Company as a guarantor, entered into a Waiver and Second Amendment to Term Loan Credit and Security Agreement
(the “Second Amendment”) with U.S. Bank National Association, as collateral agent and administrative agent, and the
various lenders thereunder. The Second Amendment superseded interim waivers and amended the Term Loan Facility, to waive compliance
with the existing TLR covenant at June 30, 2018.
In addition, the Second Amendment also:
(i) increased the interest rate by 300 basis points effective July 1, 2018; (ii) waives the existing prepayment premium in the
Term Loan Facility in the event the term loan is repaid in full prior to March 31, 2020; (iii) adds an exit fee equal to three
percent (3.00%) of the outstanding principal balance of the term loans on the date of the Second Amendment (provided, that payment
of the exit fee was waived in the event that the term loan was repaid in full prior to January 1, 2020, and provided further that
the exit fee is reduced to one-and-one-half percent (1.50%) in the event that the term loan is repaid in full on or after January
1, 2020 but prior to March 31, 2020); (iv) restricted acquisitions and other equity investments prior to September 30, 2018; and
(v) required payment of a one-time waiver fee equal to one percent (1.00%) of the outstanding term loans.
On November 30, 2018, the Borrowers, and
the Company as a guarantor, entered into a Waiver and Third Amendment to Term Loan Credit and Security Agreement (the “Third
Amendment”) with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder.
The Third Amendment superseded interim
waivers and amended the Term Loan Facility to reset the maximum Total Leverage Ratio covenant contained in the Term Loan Facility
at the indicated dates as follows: (i) June 30, 2018 - 10.15:1.00; (ii) September 30, 2018 - 12.45:1.00; (iii) December 31, 2018
– 12.75:1.00; (iv) March 31, 2019 – 12.95:1.00; (v) June 30, 2019 – 8.25:1.00; September 30, 2019 – 6.40:1.00;
(vi) December 31, 2019 – 5:70:1.00; and (vii) March 31, 2020 and each fiscal quarter thereafter – 4:75:1.00.
The Third Amendment increased the scheduled
quarterly principal repayments to $525,000 effective December 31, 2018. In addition the Third Amendment required a further repayment
of principal on or before November 14, 2019 in an amount equal to (x) 100% of Excess Cash Flow (as defined in the Term Loan Facility)
for the four fiscal quarter period ended September 30, 2019 if after giving effect to the payment thereof, the Borrowers had minimum
aggregate Undrawn Availability (as defined in the Term Loan Facility) of at least $35,000,000, (y) 50% of Excess Cash Flow for
the four fiscal quarter period ended September 30, 2019 if after giving effect to the payment thereof, the Borrowers had minimum
aggregate Undrawn Availability of at least $15,000,000 but less than $35,000,000, and (z) 0% of Excess Cash Flow for the four fiscal
quarter period ended September 30, 2019 if after giving effect to the payment thereof, the Borrowers had minimum aggregate Undrawn
Availability less than $15,000,000, with any such payment subject to reduction by the amount of any voluntary prepayments made
following the date of the Third Amendment. Any voluntary prepayments would not be subject to the prepayment premium or make-whole
provisions of the Term Loan Facility. The Third Amendment also added a minimum liquidity requirement (consisting of cash plus undrawn
availability on the Borrowers’ revolving loan facility) of $28 million, measured monthly.
The Third Amendment also amended the exit
fee payable to the term loan lenders to five percent (5.00%) of the outstanding principal balance of the term loans on November
30, 2018 (the “Exit Fee”), which Exit Fee shall be payable in full in cash upon the earlier to occur of (x) repayment
in full of the term loans, or (y) any acceleration of the term loans. The Exit Fee will be reduced by one-tenth of one percent
(0.10%) for every $1,000,000 in voluntary prepayments made prior to January 1, 2020; provided, that, in no event shall the Exit
Fee be reduced below three percent (3.00%) as a result of any such prepayments, (ii) payment of the Exit Fee would be waived in
the event that repayment in full of the term loans occurred prior to January 1, 2020, and (iii) the Exit Fee shall be reduced by
an amount equal to fifty percent (50%) of the amount that would otherwise payable in the event that repayment in full occurs on
or after January 1, 2020 but prior to March 31, 2020.
On December 19, 2019, HTC, Holdings and
ARI as borrowers and the Company as a guarantor, entered into a Waiver and Fourth Amendment to Term Loan Credit and Security Agreement
(the “Fourth Amendment”) with U.S. Bank National Association, as collateral agent and administrative agent, and the
various lenders thereunder.
The Fourth Amendment waived financial
covenant defaults at June 30, 2019 and September 30, 2019 and amended the Term Loan Credit and Security Agreement dated
October 10, 2017 (as previously amended, the “Term Loan Facility”) to reset the maximum Total Leverage Ratio
covenant contained in the Term Loan Facility at the indicated dates as follows: (i) September 30, 2019 - 15.67:1.00; (ii)
December 31, 2019 – 14.54:1.00; (iii) March 31, 2020 – 16.57:1.00; (iv) June 30, 2020 – 10.87:1.00; (v)
September 30, 2020 – 8.89:1.00; (vi) December 31, 2020 – 8.89:1.00; (vii) March 31, 2021 – 7.75:1.00;
(viii) June 30, 2021 – 7.03:1.00; (ix) September 30, 2021 – 6.08:1.00; and (x) December 31, 2021 –
5:36:1.00. The Fourth Amendment also reset the minimum liquidity requirement (consisting of cash plus undrawn availability on
the Borrowers’ revolving loan facility) of $5 million, measured monthly. Furthermore, the Fourth Amendment added a
minimum LTM Adjusted EBITDA covenant as of the indicated dates as follows: (i) September 30, 2019 - $7.887 million; (ii)
December 31, 2019 – $7.954 million; (iii) March 31, 2020 – $7.359 million; (iv) June 30, 2020 – $11.745
million; (v) September 30, 2020 – $12.021 million; (vi) December 31, 2020 – $12.300 million; (vii) March 31, 2021
–$14.295 million; (viii) June 30, 2021 – $14.566 million; (ix) September 30, 2021 – $15.431 million; and
(x) December 31, 2021 – $16.267 million.
The Fourth Amendment also (i) continues
the limitation on acquisitions and dividends, (ii) required a principal repayment of $14,000,000 upon execution of the Fourth Amendment
and (iii) increases the scheduled quarterly principal repayments to $562,000 effective March 31, 2020 and $1,312,000 effective
December 31, 2020.
The Fourth Amendment also terminated the
exit fee payable to the term loan lenders, which would have been payable in full in cash upon the earlier to occur of (x) repayment
in full of the term loans, or (y) any acceleration of the term loans. In lieu of the exit fee, the Fourth Amendment reinstated
a prepayment premium equal to the following percentages of the principal amount prepaid, depending upon the date of prepayment:
(i) through March 31, 2020 – 0.50%; (ii) from April 1, 2020 through March 31, 2021 – 2.50%; and (iii) from April 1,
2021 and thereafter – 5.00%.
The Fourth Amendment also adds a new covenant
providing that in the event of a breach of a financial covenant contained in the Term Loan Facility or any failure to make a required
principal repayment (a “Trigger Event”), then on or prior to six months after a Trigger Event, the Company shall commence
a process to (x) sell its businesses and/or assets, and/or (y) consummate a refinancing transaction with respect to the Term Loan
Facility (a “Transaction”), in each case, subject to enumerated time milestones contained in the Fourth Amendment,
and which requires that Transaction shall, in any event, be consummated on or prior to the eighteen (18) month anniversary of the
Trigger Event.
As closing conditions to the execution
and delivery of the Fourth Amendment, the Company was required to: (i) amend its Bylaws in a manner acceptable to the Term Loan
Facility lenders; (ii) appoint two new independent directors to the board of directors (the “Special Directors”); and
(iii) pay an amendment fee of 0.50% of the amount of the outstanding loans under the Term Loan Facility.
The Company evaluated the First, Second,
Third and Fourth Amendments in accordance with the provisions of Accounting Standards Codification (“ASC”) 470, Debt,
to determine if the Amendments were (1) a troubled debt restructuring, and if not, (2) a modification or an extinguishment of debt.
The Company concluded that the first three amendments were a modification of the original term loan agreement for accounting purposes.
As a result, the Company capitalized an additional $1.0 million of deferred financing costs in connection with the Second Amendment,
which are being amortized over the remaining term. The Company concluded that the Fourth Amendment was a troubled debt restructuring
for accounting purposes due to the removal of the exit fee; as such, the Company capitalized an additional $0.5 million of deferred
financing costs, which are being amortized over the remaining term. The future undiscounted cash flows of the term loan, as amended,
exceeded the carrying value, and accordingly, no gain was recognized and no adjustment was made to the carrying value of the debt.
The Company was in compliance with all
covenants, under the Wells Fargo Facility and the Term Loan Facility, as amended, as of December 31, 2019.
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 million at December 31, 2019 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)
|
|
|
|
|
-2020
|
|
$
|
10
|
|
|
-2021
|
|
|
3
|
|
|
-2022 and thereafter
|
|
|
0
|
|
|
Subtotal
|
|
|
13
|
|
|
Less interest expense
|
|
|
–
|
|
|
Total
|
|
$
|
13
|
|
Scheduled maturities of the Company's long-term debt and capital
lease obligations are as follows:
|
Years ended December 31,
|
|
Amount
|
|
|
(in thousands)
|
|
|
|
|
-2020
|
|
$
|
3,008
|
|
|
-2021
|
|
|
5,251
|
|
|
-2022
|
|
|
5,248
|
|
|
-2023
|
|
|
74,619
|
|
|
-2024
|
|
|
--
|
|
|
Thereafter
|
|
|
--
|
|
|
Total
|
|
$
|
88,126
|
|
Note 10 - Commitments and contingencies
Rents and operating leases
Hudson utilizes leased facilities and operates
equipment under non-cancelable operating leases through July 2030. Below is a table of key properties :
Properties
|
Location
|
|
Annual
Rent
|
|
|
Lease
Expiration
Date
|
|
Auburn, Washington
|
|
$
|
60,000
|
|
|
Month
to Month
|
|
Baton Rouge, Louisiana
|
|
$
|
24,000
|
|
|
Month
to Month
|
|
Champaign, Illinois
|
|
$
|
637,000
|
|
|
12/2024
|
|
Charlotte, North Carolina
|
|
$
|
30,000
|
|
|
5/2020
|
|
Escondido, California
|
|
$
|
208,000
|
|
|
6/2022
|
|
Hampstead, New Hampshire
|
|
$
|
33,000
|
|
|
8/2022
|
|
Long Beach, California
|
|
$
|
26,400
|
|
|
2/2022
|
|
Long Island City, New York
|
|
$
|
792,000
|
|
|
7/2021
|
|
Ontario, California
|
|
$
|
98,400
|
|
|
12/2021
|
|
Pearl River, New York
|
|
$
|
150,000
|
|
|
12/2021
|
|
Pottsboro, Texas
|
|
$
|
9,600
|
|
|
Month
to Month
|
|
Riverside, California
|
|
$
|
27,000
|
|
|
Month
to Month
|
|
Smyrna, Georgia
|
|
$
|
465,000
|
|
|
7/2030
|
|
Stony Point, New York
|
|
$
|
105,000
|
|
|
6/2021
|
|
Tulsa, Oklahoma
|
|
$
|
27,000
|
|
|
Month
to Month
|
The Company rents properties and various
equipment under operating leases. Operating lease expense for the years ended December 31, 2019 and 2018 totaled approximately
$2.8 million and $2.9 million. 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.
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 over the requisite service period. For
the years ended December 31, 2019 and 2018, the share-based compensation expense of $1.8 million and $1.4 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 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 December 31, 2019, the Plans authorized the issuance of stock options to purchase 7,000,000 shares of the Company’s common
stock and, as of December 31, 2019 there were 77,400 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, 2019
and 2018, the Company issued options to purchase 3,164,800 shares and 3,874,200 shares, respectively. During the years ended December
31, 2019 and 2018, the Company issued stock grants of 16,129 shares and 199,291 shares, respectively.
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).
Effective June 7, 2018, the Company
adopted its 2018 Stock Incentive Plan (“2018 Plan”) pursuant to which 4,000,000 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 2018 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 2018 Plan is sooner terminated, the ability to grant options or other awards
under the 2018 Plan will expire on June 7, 2028.
ISOs granted under the 2018 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 2018 Plan may
not be granted at a price less than the fair market value of the common stock. Options granted under the 2018 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 has utilized the “simplified”
method, as prescribed by the SEC’s Staff Accounting Bulletin (“SAB”) No.110, Share-Based Payment, to compute
expected lives of share based awards with the following weighted-average assumptions:
Years ended
December 31,
|
|
2019
|
|
|
2018
|
|
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0
|
%
|
|
|
Risk free interest rate
|
|
|
1.43%-2.47
|
%
|
|
|
2.51%-2.86
|
%
|
|
|
Expected volatility
|
|
|
65%-76
|
%
|
|
|
43%-65
|
%
|
|
|
Expected lives
|
|
|
3-5 years
|
|
|
|
3 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, 2017
|
|
|
3,069,440
|
|
|
$
|
4.28
|
|
|
-Cancelled
|
|
|
(2,523,243
|
)
|
|
$
|
4.92
|
|
|
-Exercised
|
|
|
(5,000
|
)
|
|
$
|
3.43
|
|
|
-Granted
|
|
|
3,874,200
|
|
|
$
|
1.19
|
|
|
Outstanding at December 31, 2018
|
|
|
4,415,397
|
|
|
$
|
1.20
|
|
|
-Cancelled
|
|
|
(527,820
|
)
|
|
$
|
1.23
|
|
|
-Exercised
|
|
|
(10,000
|
)
|
|
$
|
0.89
|
|
|
-Granted
|
|
|
3,164,800
|
|
|
$
|
0.79
|
|
|
Outstanding at December 31, 2019
|
|
|
7,042,377
|
|
|
$
|
1.01
|
|
Options to purchase approximately 3.2 million
shares were granted in 2019, of which approximately 2.1 million vested in 2019, and approximately 1.1 million will vest in 2020.
In 2019, options to purchase approximately 0.5 million shares were cancelled, mainly relating to options expired or forfeited.
The following is the weighted average contractual
life in years and the weighted average exercise price at December 31, 2019 and 2018 of:
|
|
|
Number of
|
|
|
Weighted
Average
Remaining
Contractual
|
|
Weighted
Average
|
|
|
2019
|
|
Options
|
|
|
Life
|
|
Exercise Price
|
|
|
Options outstanding
|
|
|
7,042,377
|
|
|
5.0 years
|
|
$
|
1.01
|
|
|
Options vested
|
|
|
5,922,377
|
|
|
4.0 years
|
|
$
|
1.06
|
|
|
Options unvested
|
|
|
1,120,000
|
|
|
10.0 years
|
|
$
|
0.75
|
|
|
|
|
Number of
|
|
|
Weighted
Average
Remaining
Contractual
|
|
Weighted
Average
|
|
|
2018
|
|
Options
|
|
|
Life
|
|
Exercise Price
|
|
|
Options outstanding
|
|
|
4,415,397
|
|
|
2.7 years
|
|
$
|
1.20
|
|
|
Options vested
|
|
|
2,258,338
|
|
|
2.6 years
|
|
$
|
1.29
|
|
|
Options unvested
|
|
|
2,157,059
|
|
|
2.9 years
|
|
$
|
1.10
|
|
The intrinsic values of options outstanding
at December 31, 2019 and 2018 are $0.7 million and $0, respectively.
The intrinsic value of options unvested
at December 31, 2019 and 2018 are $0.3 million and $0, respectively.
The intrinsic values of options vested
and exercised during the years ended 2019 and 2018 were as follows:
|
|
|
2019
|
|
|
2018
|
|
|
Intrinsic value of options vested
|
|
$
|
436,000
|
|
|
$
|
0
|
|
|
Intrinsic value of options exercised
|
|
$
|
11,100
|
|
|
$
|
13,950
|
|
Note 12 – Other income
In August 2019, the Company recorded and
received $8.9 million of cash pursuant to the settlement of a working capital adjustment dispute arising from the acquisition
of Aspen Refrigerants, Inc. in October 2017.
Note 13 – Related Party Transactions
Stephen P. Mandracchia served as Vice President
– Legal and Regulatory and Secretary of the Company through May 3, 2019 and since that date has served the Company in a consulting
role. From May 6, 2019 through December 31, 2019, Mr. Mandracchia received a monthly consulting fee of $10,000 and such fee was
increased to $12,000 per month effective January 1, 2020. During the period January 1, 2019 through May 3, 2019, Mr. Mandracchia
was paid base salary of $94,656 and was issued a stock option to purchase 25,000 shares of Company common stock at an exercise
price of $1.70 per share. During 2018, Mr. Mandracchia was paid a base salary of $250,000 and was issued stock options to purchase
an aggregate of 342,794 shares of Company common stock at an exercise price of $1.09 per share. Mr. Mandracchia is the brother-in-law
of Kevin J. Zugibe, the Company’s Chairman of the Board and Chief Executive Officer.