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 trade accounts receivable and accounts payable approximate fair value at December 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 December 31, 2018 and December 31, 2017. Please see Note 2 for further details on fair value description
and hierarchy of the Company’s deferred acquisition cost.
Credit Risk
Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade accounts receivable.
The Company maintains its temporary cash investments in highly-rated financial institutions and, at times, the balances exceed
FDIC insurance coverage. The Company's trade accounts receivable are primarily due from companies throughout the United States.
The Company reviews each customer's credit history before extending credit.
The Company establishes an allowance for
doubtful accounts based on factors associated with the credit risk of specific accounts, historical trends, and other information.
The carrying value of the Company’s accounts receivable is reduced by the established allowance for doubtful accounts. The
allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with
a general reserve for the remaining accounts receivable balances. The Company adjusts its reserves based on factors that affect
the collectability of the accounts receivable balances.
For the year ended December 31, 2018,
one customer accounted for 11% of the Company’s revenues; no other customer accounted for greater than 10% of the Company’s
revenues. At December 31, 2018, there were $2.9 million of outstanding receivables from this customer.
For the year ended December 31, 2017,
two customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted
for 33% of the Company’s revenues. At December 31, 2017, there were $2.7 million of outstanding receivables from these customers.
For the year ended December 31, 2016,
two customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted
for 30% of the Company’s revenues. At December 31, 2016, there were no outstanding receivables from these customers.
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
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. 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 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. 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 Company initially established
a forecast of the estimated future net cash flows, which were then discounted to their present value using a market rate of return.
There were no impairment losses recognized in any of the three years ended December 31, 2018, 2017 and 2016.
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 $11.7 million and $9.8 million at December 31, 2018 and 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 $2.3 million
for each of the 12 months ended December 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
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,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Product and related sales
|
|
$
|
162,229
|
|
|
$
|
136,016
|
|
|
$
|
101,344
|
|
RefrigerantSide
®
Services
|
|
|
4,296
|
|
|
|
4,364
|
|
|
|
4,137
|
|
Total
|
|
$
|
166,525
|
|
|
$
|
140,380
|
|
|
$
|
105,481
|
|
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 December 31, 2018, the
Company had NOLs of approximately $38.3 million: $32.9 million have no expiration date and are subject to annual limitations
of 80% of earnings, $5.4 million expiring through 2023, which are subject to annual limitations of approximately $1.3
million. As of December 31, 2018, the company had state tax NOLs of approximately $21.9 million expiring in various years.
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, 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 net valuation allowance of approximately $11.3 million during the year ended December 31,
2018.
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 December 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 December
31, 2018 and 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 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(55,659
|
)
|
|
$
|
11,157
|
|
|
$
|
10,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares – basic
|
|
|
42,484,972
|
|
|
|
41,764,230
|
|
|
|
34,104,476
|
|
Shares underlying options
|
|
|
—
|
|
|
|
1,002,613
|
|
|
|
1,312,434
|
|
Weighted average number of shares outstanding – diluted
|
|
|
42,484,972
|
|
|
|
42,766,843
|
|
|
|
35,416,910
|
|
During the years ended December 31, 2018,
2017 and 2016, certain options aggregating 4,415,397, none and 73,034 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, and valuation allowance for the deferred tax assets relating
to its NOLs and commitments and contingencies. With respect to accounts receivable, the Company estimates the necessary allowance
for doubtful accounts based on both historical and anticipated trends of payment history and the ability of the customer to fulfill
its obligations. For inventory, the Company evaluates both current and anticipated sales prices of its products to determine if
a write down of inventory to net realizable value is necessary. In determining the Company’s valuation allowance for its
deferred tax assets, the Company assesses its ability to generate taxable income in the future.
The Company participates in an industry
that is highly regulated, and changes in the regulations affecting our business could affect our operating results. Currently
the Company purchases virgin hydrochlorofluorocarbon (“HCFC”) and hydrofluorocarbon (“HFC”) refrigerants
and reclaimable, primarily HCFC, HFC and chlorofluorocarbon (“CFC”), refrigerants from suppliers and its customers.
Effective January 1, 1996, the Clean Air Act (the “Act”) prohibited the production of virgin CFC refrigerants and
limited the production of virgin HCFC refrigerants. Effective January 2004, the Act further limited the production of virgin HCFC
refrigerants and federal regulations were enacted which established production and consumption allowances for HCFC refrigerants
which imposed limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin
HCFC refrigerants is scheduled to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants
is scheduled to be phased out by 2030. In 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 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
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 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 operations 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 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. We will use the modified retrospective transition
approach in ASU No. 2018-11 and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption.
We will elect the package of practical expedients permitted under the transition guidance, which allows us to carryforward our
historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for
any leases that exist prior to adoption of the new standard. We will also elect 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. We estimate approximately $8.7 million would
be recognized as total right-of-use assets and total lease liabilities on our consolidated balance sheet as of January 1, 2019.
Other than as disclosed, we do not expect the new standard to have a material impact on our remaining consolidated financial statements.
In September 2015, the FASB issued Accounting
Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”,
or ASU 2015-16. This amendment requires the acquirer in a business combination to recognize in the reporting period in which adjustment
amounts are determined, any adjustments to provisional amounts that are identified during the measurement period, calculated as
if the accounting had been completed at the acquisition date. Prior to the issuance of ASU 2015-16, an acquirer was required to
restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. The amendments in
ASU 2015-16 are to be applied prospectively upon adoption. The Company adopted ASU 2015-16 in the fourth quarter of 2016. The
adoption of the provisions of ASU 2015-16 did not have a material impact on its results of operations or financial position.
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 judgement and considers factors specific to the asset or liability. The valuation methodologies used
for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such
instruments pursuant to the valuation hierarchy, is set forth in the tables below.
The following is a rollforward of deferred
acquisition costs in 2017 and 2018.
(in thousands)
|
|
2015
Acquisition
|
|
|
Total Deferred
Acquisition
Cost
Payable
|
|
Balance at January 1, 2016
|
|
$
|
789
|
|
|
$
|
789
|
|
Payments
|
|
|
(789
|
)
|
|
|
(789
|
)
|
Total adjustments included in earnings
|
|
|
—
|
|
|
|
—
|
|
Balance at December 31, 2018, 2017 and 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
See Note 12 for determination of fair
value relative to acquisitions.
Note 3 - Trade accounts receivable
– net
At December 31, 2018, 2017, and 2016 trade
accounts receivable are net of reserves for doubtful accounts of $1.2 million, $0.7 million and $0.4 million, respectively. The
following table represents the activity occurring in the reserves for doubtful accounts in 2018, 2017 and 2016.
(in thousands)
|
|
Beginning
Balance
at January 1
|
|
|
Net additions
charged
to
Operations
|
|
|
Deductions
and Other
|
|
|
Ending Balance
at
December 31
|
|
2018
|
|
$
|
722
|
|
|
$
|
479
|
|
|
$
|
(23
|
)
|
|
$
|
1,178
|
|
2017
|
|
$
|
365
|
|
|
$
|
136
|
|
|
$
|
221
|
|
|
$
|
722
|
|
2016
|
|
$
|
335
|
|
|
$
|
21
|
|
|
$
|
9
|
|
|
$
|
365
|
|
Note 4- Inventories
Inventories consist of the following:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Refrigerants and cylinders
|
|
$
|
115,348
|
|
|
$
|
174,262
|
|
Less: net realizable value adjustments
|
|
|
(13,386
|
)
|
|
|
(1,777
|
)
|
Total
|
|
$
|
101,962
|
|
|
$
|
172,485
|
|
During 2018, the Company recorded a $35.9 million lower of cost or net realizable value adjustment to
its inventory due to deteriorating market conditions. The $35.9 million adjustment included a $17.6 million write-down of a previously
recorded step-up in inventory basis associated with the acquisition of ARI and a $18.3 million write-down for a lower of cost or
net realizable value adjustment. The Company’s performance has been negatively impacted by the challenging pricing environment
affecting the industry and the market during 2018.
Note 5 - Property, plant and equipment
Elements of property, plant and equipment
are as follows:
December
31
,
|
|
2018
|
|
|
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
|
|
|
13,369
|
|
|
|
13,390
|
|
|
15-30 years
|
- Equipment
|
|
|
24,078
|
|
|
|
23,524
|
|
|
3-10 years
|
- Equipment under capital lease
|
|
|
315
|
|
|
|
315
|
|
|
5-7 years
|
- Vehicles
|
|
|
1,535
|
|
|
|
1,612
|
|
|
3-5 years
|
- Lab and computer equipment, software
|
|
|
3,090
|
|
|
|
3,056
|
|
|
2-8 years
|
- Furniture & fixtures
|
|
|
684
|
|
|
|
656
|
|
|
5-10 years
|
- Leasehold improvements
|
|
|
873
|
|
|
|
711
|
|
|
3-5 years
|
- Equipment under construction
|
|
|
464
|
|
|
|
385
|
|
|
|
Subtotal
|
|
|
50,473
|
|
|
|
49,714
|
|
|
|
Accumulated depreciation
|
|
|
23,078
|
|
|
|
19,253
|
|
|
|
Total
|
|
$
|
27,395
|
|
|
$
|
30,461
|
|
|
|
Depreciation expense for the years ended
December 31, 2018, 2017 and 2016 was $4.2 million, $2.3 million, and $1.7 million, respectively, of which $2.4 million, $2.0 million,
and $1.7 million, respectively, were included as cost of sales in the Company’s Consolidated Statements of Operations.
Note 6 - Income taxes
Income tax expense (benefit) for the years
ended December 31, 2018, 2017 and 2016 was ($1.7 million), $0.8 million and $6.6 million, respectively. The income tax expense
for each of the years ended December 31, 2018, 2017 and 2016 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,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(507
|
)
|
|
$
|
(3,690
|
)
|
|
$
|
4,981
|
|
State and local
|
|
|
(167
|
)
|
|
|
532
|
|
|
|
567
|
|
|
|
|
(674
|
)
|
|
|
(3,158
|
)
|
|
|
5,548
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(693
|
)
|
|
|
4,293
|
|
|
|
949
|
|
State and local
|
|
|
(337
|
)
|
|
|
(288
|
)
|
|
|
131
|
|
|
|
|
(1,030
|
)
|
|
|
4,005
|
|
|
|
1,080
|
|
(Benefit) expense for income taxes
|
|
$
|
(1,704
|
)
|
|
$
|
847
|
|
|
$
|
6,628
|
|
Reconciliation of the Company's actual
tax rate to the U.S. Federal statutory rate is as follows:
Years ended December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income tax rates
|
|
|
|
|
|
|
|
|
|
|
|
|
- Statutory U.S. federal rate
|
|
|
21
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
- State income taxes, net of federal benefit
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
- Excess tax benefits related to stock compensation
|
|
|
--
|
%
|
|
|
(20
|
)%
|
|
|
--
|
|
- Effect of 2017 Tax Act
|
|
|
2
|
%
|
|
|
(12
|
)%
|
|
|
--
|
|
- Effect of 2018 net deferred tax asset valuation
|
|
|
(20
|
%)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
%
|
|
|
7
|
%
|
|
|
38
|
%
|
As of December 31, 2018, the Company
had NOLs of approximately $38.3 million: $32.9 million have no expiration date and are subject to annual limitations of 80% of
earnings, $5.4 million expiring through 2023, which are subject to annual limitations of approximately $1.3 million. As of December
31, 2018, the company had state tax NOLs of approximately $21.9 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
,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
- Depreciation & amortization
|
|
$
|
(5,865
|
)
|
|
$
|
(3,665
|
)
|
- Reserves for doubtful accounts
|
|
|
159
|
|
|
|
115
|
|
- Inventory reserve
|
|
|
2,503
|
|
|
|
218
|
|
- Non qualified stock options
|
|
|
778
|
|
|
|
409
|
|
- Net operating losses
|
|
|
9,574
|
|
|
|
1,450
|
|
- Amt credit
|
|
|
86
|
|
|
|
-
|
|
- Deferred interest
|
|
|
3,637
|
|
|
|
-
|
|
- Valuation allowance
|
|
|
(11,315
|
)
|
|
|
-
|
|
Total
|
|
|
(443
|
)
|
|
|
(1,473
|
)
|
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, 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.
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.
As a result of an Internal Revenue Service
audit, the 2013 and prior federal tax years have been closed. The Company operates in many states throughout the United States
and, as of December 31, 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 December
31, 2018 and 2017, the Company had no uncertain tax positions.
Note 7 – Goodwill and intangible
assets
Goodwill represents the excess of the
purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method
of accounting. In 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. 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 reporting units’ fair values.
There were no impairment losses recognized
in any of the three years ended December 31, 2018, 2017 or 2016.
Based on the results of the impairment
assessments of goodwill and intangible assets performed, we concluded that the fair value of our goodwill exceeds the carrying
value and that there are no impairment indicators related to intangible assets.
At December 31, 2018 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
and $0.4 million is attributable to the acquisition of Polar Technologies, LLC and $0.4 million is attributable to the acquisition
of a supplier of refrigerants and compressed gases.
The Company’s other intangible assets consist of the
following:
December 31,
|
|
|
|
|
2018
|
|
|
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
|
|
|
$
|
380
|
|
|
$
|
6
|
|
|
$
|
386
|
|
|
$
|
374
|
|
|
$
|
12
|
|
Covenant Not to Compete
|
|
|
6
– 10
|
|
|
|
1,270
|
|
|
|
629
|
|
|
|
641
|
|
|
|
1,270
|
|
|
|
475
|
|
|
|
795
|
|
Customer Relationships
|
|
|
3
– 12
|
|
|
|
31,660
|
|
|
|
3,952
|
|
|
|
27,708
|
|
|
|
31,660
|
|
|
|
1,288
|
|
|
|
30,372
|
|
Above Market Leases
|
|
|
13
|
|
|
|
567
|
|
|
|
54
|
|
|
|
513
|
|
|
|
567
|
|
|
|
10
|
|
|
|
557
|
|
Trade Name
|
|
|
2
|
|
|
|
30
|
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
|
|
30
|
|
|
|
—
|
|
Licenses
|
|
|
10
|
|
|
|
1,000
|
|
|
|
417
|
|
|
|
583
|
|
|
|
1,000
|
|
|
|
317
|
|
|
|
683
|
|
Totals identifiable intangible assets
|
|
|
|
|
|
$
|
34,913
|
|
|
$
|
5,462
|
|
|
$
|
29,451
|
|
|
$
|
34,913
|
|
|
$
|
2,494
|
|
|
$
|
32,419
|
|
Intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.
No impairments were recognized for the years ended December 31, 2018, 2017 and 2016.
The amortization of intangible assets
for the years ended December 31, 2018, 2017, and 2016 were $3.0 million, $1.1 million and $0.5 million respectively. Future estimated
amortization expense is as follows: 2019 - $3.0 million, 2020 - $3.0 million, 2021 - $2.9 million, 2022 - $2.9 million, 2023-
$2.9 million and thereafter - $14.8 million.
Note 8 - Short-term and long-term debt
Elements of short-term and long-term debt
are as follows:
December
31
,
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
|
|
|
|
|
Short-term & long-term debt
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
- Revolving credit line and other debt
|
|
$
|
29,000
|
|
|
$
|
65,152
|
|
- Long-term debt: current
|
|
|
2,672
|
|
|
|
1,050
|
|
Subtotal
|
|
|
31,672
|
|
|
|
66,202
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
- Term Loan Facility- net of current portion of long-term debt
|
|
|
101,588
|
|
|
|
103,950
|
|
- Vehicle and equipment loans
|
|
|
4
|
|
|
|
39
|
|
- Capital lease obligations
|
|
|
6
|
|
|
|
20
|
|
- Less: deferred financing costs on term loan
|
|
|
(3,325
|
)
|
|
|
(2,851
|
)
|
Subtotal
|
|
|
98,273
|
|
|
|
101,158
|
|
|
|
|
|
|
|
|
|
|
Total short-term & long-term debt
|
|
$
|
129,945
|
|
|
$
|
167,360
|
|
Bank Credit Line
On October 10, 2017, Hudson Technologies
Company (“HTC”), Hudson Holdings, Inc. (“Holdings”) and Aspen Refrigerants, Inc. (“ARI”),
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.
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 December 31, 2018, total borrowings under the PNC Facility were $29.0 million,
and total availability was approximately $34.4 million. In addition, there was a $130,000 outstanding letter of credit at December
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 were initially 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.
On December 6, 2017, the Borrowers and the Company as a guarantor, entered into a First Amendment to Amended
and Restated Revolving Credit and Security Agreement (the “First Amendment”) with PNC. The First Amendment, which was
entered into in connection with the syndication of the credit facility, amended the PNC Facility to allow syndicate lenders to
provide certain cash management and hedging products and services to the Borrowers, and made amendments to the PNC Facility with
respect to lender approval requirements of specified matters and other administrative matters.
On November 30, 2018, the Borrowers and
the Company as a guarantor, entered into a Second Amendment to Amended and Restated Revolving Credit and Security Agreement, Consent
and Waiver (the “Second Revolver Amendment”) with PNC Bank, National Association, as administrative agent, collateral
agent and lender (“Agent” or “PNC”) and the lenders thereunder.
The Second Revolver Amendment amends the
Amended and Restated Revolving Credit and Security Agreement dated October 10, 2017 (as amended to date, the “PNC Facility”),
to replace the existing fixed charge coverage ratio until September 30, 2019 with an EBITDA covenant requiring minimum EBITDA
for the four fiscal quarters ended on the following dates: September 30, 2018 - $9,240,000; December 31, 2018 - $9,428,000; March
31, 2019 - $9,270,000; June 30, 2019 - $14,195,000. The minimum fixed charge coverage ratio of 1.00:1.00 shall recommence for
the quarter ending September 30, 2019.
The Second Revolver Amendment also increases
the applicable interest rate margin to 3% for Eurodollar Rate Loans (as defined in the PNC Facility) and 2% for Domestic Rate
Loans (as defined in the PNC Facility) through September 30, 2019, with applicable margins thereafter of between 2.5% and 3% for
Eurodollar Rate Loans and 1.5% and 2% for Domestic Rate Loans based on the applicable fixed charge coverage ratio. In connection
with the Second Revolver Amendment, the Borrowers also paid the Agent a waiver and amendment fee of $250,000.
The Company evaluated the First and Second
Revolver Amendments in accordance with the provisions of ASC 470 to determine if the Amendments were a modification or an extinguishment
of debt and concluded that amendments were a modification of the original term loan agreement for accounting purposes. As a result,
the Company capitalized an additional $250,000 of deferred financing costs in connection with the Second Amendment, which are
being amortized over the remaining term.
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 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 Loans mature on October 10, 2023.
Principal payments on the Term Loans are required on a quarterly basis, commencing with the quarter ended 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 and
were originally 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 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 Total Leverage Ratio (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 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. As
of December 31, 2018 and 2017, the TLR was approximately 11.82 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”).
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) increases 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 is waived in the event that the term loan is 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 requires 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 ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers have
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 ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers
have 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 ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers have
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 will not be subject to the prepayment
premium or make-whole provisions of the Term Loan Facility. The Third Amendment also adds 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 shall be waived in
the event that repayment in full of the term loans occurs 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.
The Company evaluated the First , Second
and Third Amendments in accordance with the provisions of ASC 470 to determine if the Amendments were a modification or an extinguishment
of debt and concluded that the 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 was in compliance with all
covenants, under the PNC Facility and the Term Loan Facility, as amended, as of December 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.
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 December 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:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
-2019
|
|
$
|
48
|
|
-2020
|
|
|
9
|
|
-2021
|
|
|
3
|
|
-2022
|
|
|
0
|
|
-2023
|
|
|
0
|
|
Subtotal
|
|
|
60
|
|
Less interest expense
|
|
|
(1
|
)
|
Total
|
|
$
|
59
|
|
Scheduled maturities of the Company's long-term debt and capital
lease obligations are as follows:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
-2019
|
|
$
|
2,672
|
|
-2020
|
|
|
2,109
|
|
-2021
|
|
|
2,103
|
|
-2022
|
|
|
2,100
|
|
-2023
|
|
|
2,100
|
|
Thereafter
|
|
|
93,186
|
|
|
|
|
|
|
Total
|
|
$
|
104,270
|
|
Note 9 - Stockholders' equity
On December 8, 2016 the Company entered
into an Underwriting Agreement with two investment banking firms for themselves and as representatives for two other investment
banking firms (collectively, the “Underwriters”), in connection with an underwritten offering (the “Offering”)
of 6,428,571 shares of the Company’s common stock, par value $0.01 per share (the “Firm Shares”). Pursuant to
the Underwriting Agreement, the Company agreed to sell to the Underwriters, and the Underwriters agreed to purchase from the Company,
an aggregate of 6,428,571 shares of common stock and also granted the Underwriters a 30 day option to purchase up to 964,285 additional
shares of its common stock to cover over-allotments, if any. The Company also agreed to reimburse certain expenses incurred by
the Underwriters in the Offering.
The closing of the Offering was held on
December 14, 2016, at which time the Company sold 7,392,856 shares of its common stock to the Underwriters (including 964,285
shares to cover over-allotments) at a price to the public of $7.00 per share, less underwriting discounts and commissions, and
received gross proceeds of $51.7 million. The Company incurred approximately $3.3 million of transaction fees in connection with
the Offering, resulting in net proceeds of $48.4 million.
Note 10 - Commitments and contingencies
Rents and operating leases
Hudson utilizes leased facilities and
operates equipment under non-cancelable operating leases through July 2030. Below is a table of key properties :
Properties
Location
|
|
Annual
Rent
|
|
|
Lease
Expiration
Date
|
Auburn, Washington
|
|
$
|
54,000
|
|
|
8/2019
|
Baton Rouge, Louisiana
|
|
$
|
24,000
|
|
|
5/2019
|
Champaign, Illinois
|
|
$
|
610,000
|
|
|
12/2019
|
Charlotte, North Carolina
|
|
$
|
26,000
|
|
|
5/2019
|
Escondido, California
|
|
$
|
163,000
|
|
|
6/2022
|
Hampstead, New Hampshire
|
|
$
|
52,000
|
|
|
8/2022
|
Nashville, Tennessee
|
|
$
|
164,000
|
|
|
3/2020
|
Long Beach, California
|
|
$
|
26,400
|
|
|
2/2020
|
Long Island City, New York
|
|
$
|
756,000
|
|
|
7/2021
|
Ontario, California
|
|
$
|
92,000
|
|
|
12/2021
|
Pearl River, New York
|
|
$
|
150,000
|
|
|
12/2021
|
Pottsboro, Texas
|
|
$
|
9,600
|
|
|
Month to
|
Riverside, California
|
|
$
|
27,000
|
|
|
Month
|
Smyrna, Georgia
|
|
$
|
465,000
|
|
|
7/2030
|
Stony Point, New York
|
|
$
|
101,000
|
|
|
6/2021
|
Tulsa, Oklahoma
|
|
$
|
27,000
|
|
|
Month to Month
|
The Company rents properties and various
equipment under operating leases. Rent expense for the years ended December 31, 2018, 2017 and 2016 totaled approximately $2.7
million, $1.7 million, and $1.4 million, respectively. In addition to the properties above, the Company does at times utilize
public warehouse space on a month to month basis. The Company typically enters into short-term leases for the facilities and wherever
possible extends the expiration date of such leases.
Future commitments under operating leases
are summarized as follows:
Years ended December 31,
|
|
Amount
|
|
(in thousands)
|
|
|
|
|
-2019
|
|
$
|
2,952
|
|
-2020
|
|
|
2,055
|
|
-2021
|
|
|
1,619
|
|
-2022
|
|
|
684
|
|
-2023
|
|
|
498
|
|
Thereafter
|
|
|
3,422
|
|
Total
|
|
$
|
11,230
|
|
Legal Proceedings
On April 1, 1999, the Company reported
a release of approximately 7,800 lbs. of R-11 refrigerant (the “1999 Release”), at its former leased facility in Hillburn,
NY (the “Hillburn Facility”), which the Company vacated in June 2006.
Since September 2000, last modified in
March 2013, the Company signed an Order on Consent with the New York State Department of Environmental Conservation (“DEC”)
whereby the Company agreed to operate a remediation system to reduce R-11 refrigerant levels in the groundwater under and around
the Hillburn Facility and agreed to perform periodic testing at the Hillburn Facility until remaining groundwater contamination
has been effectively abated. The Company accrued, as an expense in its consolidated financial statements, the costs that the Company
believes it will incur in connection with its compliance with the Order of Consent through December 31, 2018. There can be no
assurance that additional testing will not be required or that the Company will not incur additional costs and such costs in excess
of the Company’s estimate may have a material adverse effect on the Company financial condition or results of operations.
The Company has exhausted all insurance proceeds available for the 1999 Release under all applicable policies.
In May 2000, the Hillburn Facility as
a result of the 1999 Release, was nominated by EPA for listing on the National Priorities List (“NPL”) pursuant to
CERCLA. In September 2003, the EPA advised the Company that it had no current plans to finalize the process for listing of the
Hillburn Facility on the NPL.
The remaining liability on our Balance
Sheet as of December 31, 2018 with respect to the Hillburn Facility is approximately $144,000. There can be no assurance that
the ultimate outcome of the 1999 Release will not have a material adverse effect on the Company's financial condition and results
of operations. There can be no assurance that the EPA will not change its current plans and seek to finalize the process of listing
the Hillburn Facility on the NPL, or that the ultimate outcome of such a listing will not have a material adverse effect on the
Company's financial condition and results of operations.
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, 2018, 2017 and 2016, the share-based compensation expense of $1.4 million, $1.5 million and $0.6
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, 2018, 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, 2018 there were 3,143,009 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, 2018,
2017 and 2016, the Company issued options to purchase 3,864,197 shares, 1,400,203 shares, and 1,170,534 shares, respectively.
During the years ended December 31, 2018, 2017 and 2016, the Company issued stock grants of 199,291 shares, 6,236 shares, and
17,148 shares, respectively.
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 could also be issued in tandem with stock
options. Effective August 27, 2018, the Company’s ability to grant options or other awards under the 2008 Plan expired.
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 2016 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 is incorporating the simplified method
to compute expected lives of share based awards with the following weighted-average assumptions:
Years ended
December 31,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk free interest rate
|
|
|
2.51%-2.86
|
%
|
|
|
1.97%-2.08
|
%
|
|
|
0.%-1.0
|
%
|
Expected volatility
|
|
|
43%-65
|
%
|
|
|
44%-46
|
%
|
|
|
47%-53
|
%
|
Expected lives
|
|
|
3
years
|
|
|
|
3
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, 2015
|
|
|
2,633,589
|
|
|
$
|
2.06
|
|
-Exercised
|
|
|
(589,725
|
)
|
|
$
|
2.43
|
|
-Granted
|
|
|
1,170,534
|
|
|
$
|
3.95
|
|
Outstanding at December
31, 2016
|
|
|
3,214,398
|
|
|
$
|
2.68
|
|
-Exercised
|
|
|
(1,545,161
|
)
|
|
$
|
2.27
|
|
-Granted
|
|
|
1,400,203
|
|
|
$
|
5.72
|
|
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
|
|
Options to purchase approximately 3.8
million shares were granted in 2018, of which approximately 1.7 million options vested in 2018, and approximately 2.2 million
will vest in 2019.
In 2018, options to purchase approximately 2.5
million shares were cancelled, mainly relating to barrier options, which were cancelled once the stock price declined below a
predetermined barrier price for five consecutive trading day
s.
The following is the weighted average
contractual life in years and the weighted average exercise price at December 31, 2018 and 2017 of:
|
|
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
|
|
|
|
Number of
|
|
|
Weighted
Average
Remaining
Contractual
|
|
Weighted
Average
|
|
2017
|
|
Options
|
|
|
Life
|
|
Exercise Price
|
|
Options outstanding
|
|
|
3,069,440
|
|
|
2.4 years
|
|
$
|
4.28
|
|
Options vested
|
|
|
2,977,440
|
|
|
2.4 years
|
|
$
|
3.94
|
|
Options unvested
|
|
|
92,000
|
|
|
3.0 years
|
|
$
|
5.76
|
|
The intrinsic values of options outstanding
at December 31, 2018 and 2017 are $0 million and $5.5 million respectively.
The intrinsic value of options unvested
at December 31, 2018 and 2017 are approximately $0 for both periods.
The intrinsic values of options vested
and exercised during the years ended 2018, 2017 and 2016 were as follows
:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Intrinsic value of options vested
|
|
$
|
0
|
|
|
$
|
462,369
|
|
|
$
|
4,843,774
|
|
Intrinsic value of options exercised
|
|
$
|
13,950
|
|
|
$
|
8,025,527
|
|
|
$
|
1,777,476
|
|
Note 12 - 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.
The fair values of the assets that we acquired and the liabilities
that we assumed were finalized in 2018. Any future changes to the acquired assets and liabilities will be recorded in the Company’s
Consolidated Statement of Operations. The Company is currently engaged with Airgas with respect to finalizing the post-closing
adjustment, as defined in the Stock Purchase Agreement.
The following table summarizes the Company’s estimates
of the fair values of the assets acquired and the liabilities assumed on the date the Company completed the Acquisition of ARI,
as previously reported as of December 31, 2017 and December 31, 2018:
|
|
Amortization
|
|
|
As
|
|
|
|
|
|
|
|
|
|
life
|
|
|
previously
|
|
|
Adjustments
|
|
|
As finalized
|
|
|
|
(in months)
|
|
|
reported
|
|
|
(1)
|
|
|
(in thousands)
|
|
Accounts receivable
|
|
|
|
|
|
$
|
14,668
|
|
|
$
|
|
|
|
$
|
14,668
|
|
Other assets
|
|
|
|
|
|
|
734
|
|
|
|
|
|
|
|
734
|
|
Inventories
|
|
|
|
|
|
|
103,876
|
|
|
|
1,661
|
|
|
|
105,537
|
|
Property and equipment
|
|
|
|
|
|
|
24,179
|
|
|
|
|
|
|
|
24,179
|
|
Customer relationships
|
|
|
144
|
|
|
|
29,660
|
|
|
|
|
|
|
|
29,660
|
|
Above-market leases
|
|
|
153
|
|
|
|
567
|
|
|
|
|
|
|
|
567
|
|
Goodwill
|
|
|
|
|
|
|
48,609
|
|
|
|
(
1,661
|
)
|
|
|
46,948
|
|
Total assets acquired
|
|
|
|
|
|
$
|
222,293
|
|
|
$
|
-
|
|
|
$
|
222,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
|
|
|
$
|
3,210
|
|
|
$
|
|
|
|
$
|
3,210
|
|
Other current liabilities
|
|
|
|
|
|
|
10,114
|
|
|
|
|
|
|
|
10,114
|
|
Total liabilities assumed
|
|
|
|
|
|
$
|
13,324
|
|
|
$
|
-
|
|
|
$
|
13,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
208,969
|
|
|
$
|
-
|
|
|
$
|
208,969
|
|
(1)
The Company obtained further information regarding
the fair value of acquired inventory based on information that existed as of the acquisition date.
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 $46.9 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.
The following table provides unaudited
pro forma total revenues and results of operations for the 12 months ended December 31, 2017 and 2016 as if ARI had been acquired
on January 1, 2016. The unaudited pro forma results reflect certain adjustments related to the acquisition, such as a step-up
in basis in inventory, amortization expense on intangible assets arising from the acquisition, and interest on the acquisition
financing. The pro forma results do not include any anticipated cost synergies or other effects of any planned integration. Accordingly,
such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been
completed at the beginning of 2016, nor are they indicative of the future operating results of the combined companies.
|
|
12 Months Ended
December
31,
|
|
(unaudited, in thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
255,701
|
|
|
$
|
239,626
|
|
Net income
|
|
$
|
23,405
|
|
|
$
|
17,109
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.56
|
|
|
$
|
0.50
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.48
|
|
The unaudited pro forma earnings for the
12 months ended December 31, 2017 were also adjusted to exclude $6.3 million of acquisition-related expenses incurred in 2017.
Also included in the operating results for the year ended December 31, 2017 are $14.8 million of revenue from ARI and $1.5 million
in pretax losses since the acquisition date, which includes the amortization of newly acquired intangible assets and amortization
of step-up in the basis of inventories.
Note 13- Quarterly Financial Data (Unaudited)
The Company’s operating results
vary from period to period as a result of weather conditions, requirements of potential customers, non-recurring refrigerant and
service sales, availability and price of refrigerant products (virgin or reclaimable), changes in reclamation technology and regulations,
timing in introduction and/or retrofit or replacement of refrigeration equipment, the rate of expansion of the Company's operations,
and by other factors.
(in thousands, except share
and per share data)
|
|
For the Year Ended 2018
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4 (b)
|
|
|
Total (a)
|
|
Revenues
|
|
$
|
42,428
|
|
|
$
|
57,831
|
|
|
$
|
40,545
|
|
|
$
|
25,721
|
|
|
$
|
166,525
|
|
Gross profit (loss)
|
|
$
|
7,905
|
|
|
$
|
(26,082
|
)
|
|
$
|
7,729
|
|
|
$
|
3,083
|
|
|
$
|
(7,365
|
)
|
Operating expenses
|
|
$
|
8,819
|
|
|
$
|
11,346
|
|
|
$
|
8,098
|
|
|
$
|
6,980
|
|
|
$
|
35,243
|
|
Operating income (loss)
|
|
$
|
(914
|
)
|
|
$
|
(37,428
|
)
|
|
$
|
(369
|
)
|
|
$
|
(3,897
|
)
|
|
$
|
(42,608
|
)
|
Other expense
|
|
$
|
(3,206
|
)
|
|
$
|
(3,346
|
)
|
|
$
|
(4,064
|
)
|
|
$
|
(4,139
|
)
|
|
$
|
(14,755
|
)
|
Income (loss) before income taxes
|
|
$
|
(4,120
|
)
|
|
$
|
(40,774
|
)
|
|
$
|
(4,433
|
)
|
|
$
|
(8,036
|
)
|
|
$
|
(57,363
|
)
|
Income tax expense (benefit)
|
|
$
|
(1,064
|
)
|
|
$
|
(10,158
|
)
|
|
$
|
9,447
|
|
|
$
|
71
|
|
|
$
|
(1,704
|
)
|
Net loss
|
|
$
|
(3,056
|
)
|
|
$
|
(30,616
|
)
|
|
$
|
(13,880
|
)
|
|
$
|
(8,107
|
)
|
|
$
|
(55,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share – Basic (a)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.31
|
)
|
Net loss per common share – Diluted (a)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.31
|
)
|
Weighted average number of shares outstanding – Basic
|
|
|
42,403,029
|
|
|
|
42,403,140
|
|
|
|
42,530,476
|
|
|
|
42,600,898
|
|
|
|
42,484,972
|
|
Weighted average number of shares outstanding – Diluted
|
|
|
42,403,029
|
|
|
|
42,403,140
|
|
|
|
42,530,476
|
|
|
|
42,600,898
|
|
|
|
42,484,972
|
|
|
|
For the Year Ended 2017
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4 (b)
|
|
|
Total (a)
|
|
Revenues
|
|
$
|
38,830
|
|
|
$
|
52,231
|
|
|
$
|
24,706
|
|
|
$
|
24,613
|
|
|
$
|
140,380
|
|
Gross profit
|
|
$
|
12,467
|
|
|
$
|
17,420
|
|
|
$
|
5,070
|
|
|
$
|
3,027
|
|
|
$
|
37,984
|
|
Operating expenses
|
|
$
|
3,074
|
|
|
$
|
3,520
|
|
|
$
|
3,594
|
|
|
$
|
12,664
|
|
|
$
|
22,852
|
|
Operating income (loss)
|
|
$
|
9,393
|
|
|
$
|
13,900
|
|
|
$
|
1,476
|
|
|
$
|
(9,637
|
)
|
|
$
|
15,132
|
|
Other (expense)
|
|
$
|
(85
|
)
|
|
$
|
(61
|
)
|
|
$
|
(24
|
)
|
|
$
|
(2,958
|
)
|
|
$
|
(3,128
|
)
|
Income (loss) before income taxes
|
|
$
|
9,308
|
|
|
$
|
13,839
|
|
|
$
|
1,452
|
|
|
$
|
(12,595
|
)
|
|
$
|
12,004
|
|
Income tax expense (benefit)
|
|
$
|
3,574
|
|
|
$
|
5,314
|
|
|
$
|
(652
|
)
|
|
$
|
(7,389
|
)
|
|
$
|
847
|
|
Net income (loss)
|
|
$
|
5,734
|
|
|
$
|
8,525
|
|
|
$
|
2,104
|
|
|
$
|
(5,206
|
)
|
|
$
|
11,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share – Basic (a)
|
|
$
|
0.14
|
|
|
$
|
0.21
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.27
|
|
Net income (loss) per common share – Diluted (a)
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
|
$
|
0.05
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.26
|
|
Weighted average number of shares outstanding – Basic
|
|
|
41,507,941
|
|
|
|
41,567,848
|
|
|
|
41,869,528
|
|
|
|
42,216,987
|
|
|
|
41,764,230
|
|
Weighted average number of shares outstanding – Diluted
|
|
|
43,503,889
|
|
|
|
43,550,226
|
|
|
|
43,463,982
|
|
|
|
42,216,987
|
|
|
|
42,766,843
|
|
(a)
|
The sum of the net
earnings per share may not add up to the full year amount due to rounding and because the quarterly calculations are based
on varying numbers of shares outstanding.
|
(b)
|
As discussed previously,
the fourth quarter 2017 results include the results of ARI subsequent to the acquisition on October 10, 2017.
|