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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-13412

Hudson Technologies, Inc.

(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization)

13-3641539
(I.R.S. Employer
Identification No.)

300 Tice Boulevard

 

Suite 290
Woodcliff Lake, New Jersey
(Address of principal executive offices)

07677
(Zip Code)

 

 

Registrant’s telephone number, including area code               (845) 735-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol(s)

    

Name of each exchange on which registered

 

 

 

Common stock, $0.01 par value

HDSN

NASDAQ Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common stock, $0.01 par value

    

45,395,085 shares

Class

 

Outstanding at August 8, 2023

Hudson Technologies, Inc.

Index

Part

    

Item

    

Page

Part I.

Financial Information

3

Item 1

- Financial Statements (unaudited)

3

- Consolidated Balance Sheets

3

- Consolidated Statements of Income

4

- Consolidated Statements of Stockholders’ Equity

5

- Consolidated Statements of Cash Flows

6

- Notes to the Consolidated Financial Statements

7

Item 2

- Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3

- Quantitative and Qualitative Disclosures About Market Risk

28

Item 4

- Controls and Procedures

29

Part II.

Other Information

30

Item 1A

- Risk Factors

30

Item 5

-Other Information

30

Item 6

- Exhibits

30

Signatures

31

2

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

Hudson Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

(Amounts in thousands, except for share and par value amounts)

    

June 30, 

    

December 31, 

2023

2022

(unaudited)

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

11,415

$

5,295

Trade accounts receivable – net

 

49,057

 

20,872

Inventories

 

134,444

 

145,377

Prepaid expenses and other current assets

 

10,377

 

5,289

Total current assets

 

205,293

 

176,833

Property, plant and equipment, less accumulated depreciation

 

19,909

 

20,568

Goodwill

 

47,803

 

47,803

Intangible assets, less accumulated amortization

 

16,167

 

17,564

Right of use asset

 

7,497

 

7,339

Other assets

 

2,386

 

2,386

Total Assets

$

299,055

$

272,493

Liabilities and Stockholders’ Equity

 

 

Current liabilities:

 

 

Trade accounts payable

$

17,579

$

14,165

Accrued expenses and other current liabilities

 

28,334

 

27,908

Accrued payroll

 

3,423

 

6,303

Current maturities of long-term debt

 

4,250

 

4,250

Total current liabilities

 

53,586

 

52,626

Deferred tax liability

 

3,161

 

244

Long-term lease liabilities

 

5,773

 

5,763

Long-term debt, less current maturities, net of deferred financing costs

 

25,085

 

38,985

Total Liabilities

 

87,605

 

97,618

Commitments and contingencies

 

 

Stockholders’ equity:

 

 

Preferred stock, shares authorized 5,000,000: Series A Convertible preferred stock, $0.01 par value ($100 liquidation preference value); shares authorized 150,000; none issued or outstanding

 

 

Common stock, $0.01 par value; shares authorized 100,000,000; issued and outstanding 45,375,598 and 45,287,619, respectively

 

454

 

453

Additional paid-in capital

 

118,296

 

116,442

Accumulated retained earnings

 

92,700

 

57,980

Total Stockholders’ Equity

 

211,450

 

174,875

Total Liabilities and Stockholders’ Equity

$

299,055

$

272,493

See Accompanying Notes to the Consolidated Financial Statements.

3

Hudson Technologies, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

(Amounts in thousands, except for share and per share amounts)

    

Three months

    

Six months

ended June 30, 

ended June 30, 

    

2023

    

2022

    

2023

    

2022

Revenues

$

90,474

$

103,941

$

167,673

$

188,279

Cost of sales

 

53,847

46,444

100,716

84,962

Gross profit

 

36,627

57,497

66,957

103,317

Operating expenses:

 

Selling, general and administrative

 

8,273

7,014

15,250

13,838

Amortization

 

699

699

1,397

1,397

Total operating expenses

 

8,972

7,713

16,647

15,235

Operating income

 

27,655

49,784

50,310

88,082

Other expense:

Net interest expense

 

1,899

2,623

3,748

9,928

Income before income taxes

 

25,756

47,161

46,562

78,154

Income tax expense

 

6,567

7,351

11,842

8,789

Net income

$

19,189

$

39,810

$

34,720

$

69,365

Net income per common share – Basic

$

0.42

$

0.89

$

0.77

$

1.55

Net income per common share – Diluted

$

0.41

$

0.84

$

0.73

$

1.48

Weighted average number of shares outstanding – Basic

 

45,339,570

44,960,464

45,319,155

44,870,642

Weighted average number of shares outstanding – Diluted

 

47,297,419

47,152,257

47,305,196

46,974,441

See Accompanying Notes to the Consolidated Financial Statements.

4

Hudson Technologies, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(unaudited)

(Amounts in thousands, except for share amounts)

Three Months Ended June 30,

Retained

Additional

Earnings

Common Stock

Paid-in

(Accumulated

    

Shares

    

Amount

    

Capital

    

Deficit)

    

Total

Balance at April 1, 2022

 

44,909,704

$

449

$

116,713

$

(16,266)

$

100,896

Issuance of common stock upon exercise of stock options

110,383

1

51

52

Excess tax benefits from exercise of stock options

(1)

(1)

Stock compensation expense

 

 

 

180

 

 

180

Net income

 

39,810

39,810

Balance at June 30, 2022

 

45,020,087

$

450

$

116,943

$

23,544

$

140,937

Balance at April 1, 2023

45,328,892

$

453

$

117,535

$

73,511

$

191,499

Issuance of common stock upon exercise of stock options

46,706

1

1

Excess tax benefits from exercise of stock options

(1)

(1)

Stock compensation expense

 

 

 

762

 

 

762

Net income

 

 

 

 

19,189

19,189

Balance at June 30, 2023

 

45,375,598

$

454

$

118,296

$

92,700

$

211,450

Six Months Ended June 30,

Retained

Additional

Earnings

Common Stock

Paid-in

(Accumulated

    

Shares

    

Amount

    

Capital

    

Deficit)

    

Total

Balance at January 1, 2022

 

44,758,925

$

448

$

116,312

$

(45,821)

$

70,939

Issuance of common stock upon exercise of stock options

 

261,162

2

121

123

Excess tax benefits from exercise of stock options

(73)

(73)

Stock compensation expense

583

583

Net income

 

69,365

69,365

Balance at June 30, 2022

 

45,020,087

$

450

$

116,943

$

23,544

$

140,937

Balance at January 1, 2023

45,287,619

$

453

$

116,442

$

57,980

$

174,875

Issuance of common stock upon exercise of stock options

87,979

1

38

39

Excess tax benefits from exercise of stock options

(3)

(3)

Stock compensation expense

 

 

 

1,819

 

 

1,819

Net income

 

 

 

 

34,720

34,720

Balance at June 30, 2023

 

45,375,598

$

454

$

118,296

$

92,700

$

211,450

See Accompanying Notes to the Consolidated Financial Statements

5

Hudson Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

(Amounts in thousands)

    

Six months

ended June 30, 

    

2023

    

2022

Cash flows from operating activities:

Net income

$

34,720

$

69,365

Adjustments to reconcile net income to cash provided by operating activities:

 

 

Depreciation

 

1,495

 

1,726

Amortization of intangible assets

 

1,397

 

1,397

Lower of cost or net realizable value reserve

 

(1,104)

(1,155)

Allowance for doubtful accounts

 

851

1,207

Stock compensation expense

1,819

583

Amortization of deferred finance costs

 

538

2,004

Loss on extinguishment of debt

4,665

Deferred tax expense (benefit)

 

2,917

(1,602)

Changes in assets and liabilities:

 

Trade accounts receivable

 

(29,037)

(30,727)

Inventories

 

12,037

(23,366)

Prepaid and other assets

 

(5,200)

1,677

Lease obligations

2

15

Income taxes receivable

(1,741)

Accounts payable and accrued expenses

 

2,552

8,078

Cash provided by operating activities

 

21,246

33,867

Cash flows from investing activities:

 

 

Additions to property, plant, and equipment

(837)

(820)

Cash used in investing activities

 

(837)

(820)

Cash flows from financing activities:

 

 

Proceeds from issuance of common stock

 

39

123

Excess tax benefits from exercise of stock options

(3)

(73)

Payment of deferred financing cost

(8,512)

Borrowing of short-term debt – net

(15,000)

Proceeds from long-term debt

100,000

Repayment of long-term debt

 

(14,325)

(92,395)

Cash used in financing activities

 

(14,289)

(15,857)

Increase in cash and cash equivalents

 

6,120

17,190

Cash and cash equivalents at beginning of period

 

5,295

3,492

Cash and cash equivalents at end of period

$

11,415

$

20,682

Supplemental Disclosure of Cash Flow Information:

 

Cash paid during period for interest

$

2,952

$

7,911

Cash paid for income taxes – net

$

10,665

$

5,908

See Accompanying Notes to the Consolidated Financial Statements

6

Hudson Technologies, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

Business

Hudson Technologies, Inc. (“Hudson” or the “Company”), incorporated under the laws of New York on January 11, 1991, is a refrigerant services company providing innovative solutions to recurring problems within the refrigeration industry. Hudson has proven, reliable programs that meet customer refrigerant needs by providing environmentally sustainable solutions from initial sale of refrigerant gas through recovery, reclamation and reuse, peak operating performance of equipment through energy efficiency and emergency air conditioning and refrigeration system repair, to final refrigerant disposal and carbon credit trading.

The Company’s operations consist of 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. RefrigerantSide® Services consist of system decontamination to remove moisture, oils and other contaminants intended to restore systems to designed capacity. In addition, the Company’s SmartEnergy OPS® service is a web-based real time continuous monitoring service applicable to a facility’s refrigeration systems and other energy systems. The Company’s Chiller Chemistry® and Chill Smart® services are also predictive and diagnostic service offerings. As a component of the Company’s products and services, the Company also participates in the generation of carbon offset projects. The Company operates principally through its wholly-owned subsidiary, Hudson Technologies Company. Unless the context requires otherwise, references to the “Company”, “Hudson”, “we”, “us”, “our”, or similar pronouns refer to Hudson Technologies, Inc. and its subsidiaries.

In preparing the accompanying consolidated financial statements, and in accordance with Accounting Standards Codification (“ASC”) 855-10 “Subsequent Events”, the Company’s management has evaluated subsequent events through the date that the financial statements were filed.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information included in this quarterly report should be read in conjunction with the Company’s audited financial statements and related notes thereto for the year ended December 31, 2022. Operating results for the six-month period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

In the opinion of management, all estimates and adjustments considered necessary for a fair presentation have been included and all such adjustments were normal and recurring.

AIM Act

On September 23, 2021, the United States Environmental Protection Agency (“EPA”) issued the final rule establishing the framework to allocate allowances for virgin production and consumption of hydrofluorocarbon refrigerants (“HFCs”). The EPA is responsible for the administration of the HFC phase down enacted by Congress under the AIM Act.

The AIM Act directs the EPA to address the reduction in virgin HFCs and provides authority to do so in three respects:

1)phase down the production and consumption of listed HFCs,
2)manage these HFCs and their substitutes including reclamation of refrigerants, and
3)facilitate the transition to next-generation technologies.

Congress required that the EPA consider ways to promote reclamation in all phases of its implementation of the AIM Act. The AIM Act introduces a stepdown of 10% from baseline levels in 2022 and 2023, and establishes a cumulative 40% reduction in the baseline for 2024. Hudson received allocation allowances for calendar years 2022 and 2023 equal to approximately 3 million Metric Tons Exchange Value Equivalents per year, or approximately 1% of the total HFC consumption, with allowances for future periods to be determined at a later date. Reclamation will be critical to maintaining necessary HFC supply levels to ensure an orderly phasedown.

7

Consolidation

The consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, represent all companies of which Hudson directly or indirectly has majority ownership or otherwise controls. Significant intercompany accounts and transactions have been eliminated. The Company’s consolidated financial statements include the accounts of wholly-owned subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company. The Company does not present a statement of comprehensive income as its comprehensive income is the same as its net income.

Fair Value of Financial Instruments

The carrying values of financial instruments including cash, trade accounts receivable and accounts payable approximate fair value at June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022. See Note 2 for further details.

Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade accounts receivable. The Company maintains its temporary cash investments in highly-rated financial institutions and, at times, the balances exceed FDIC insurance coverage. The Company’s trade accounts receivable are primarily due from companies throughout the United States. The Company reviews each customer’s credit history before extending credit.

The Company establishes an allowance for doubtful accounts based on factors associated with the credit risk of specific accounts, historical trends, and other information. The carrying value of the Company’s accounts receivable is reduced by the established allowance for doubtful accounts. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve for the remaining accounts receivable balances. The Company adjusts its reserves based on factors that affect the collectability of the accounts receivable balances.

For the six month period ended June 30, 2023 there was one customer accounting for greater than 10% of the Company’s revenues and at June 30, 2023 there were $14.6 million of accounts receivable from this customer. For the six-month period ended June 30, 2022 there was no customer accounting for 10% of the Company’s revenues.

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.

8

Goodwill

The Company has made acquisitions that included a significant amount of goodwill and other intangible assets. The Company applies the purchase method of accounting for acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price of the acquisition over the fair value of the net assets acquired and identified intangible assets). The Company tests its goodwill for impairment annually on a qualitative or quantitative basis (on the first day of the fourth quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. Goodwill is tested for impairment at the reporting unit level. When performing the annual impairment test, the Company has the option of first performing a qualitative assessment, which requires management to make assumptions affecting a reporting unit, to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, the Company is then required to perform a quantitative impairment assessment of goodwill. The Company has one reporting unit at June 30, 2023. Other intangible assets that meet certain criteria are amortized over their estimated useful lives.

An impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value. An impairment charge would be recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact operating results. During the fourth quarter of 2022, the Company completed its annual impairment test as of October 1 and determined in its qualitative assessment it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, resulting in no goodwill impairment. There can be no assurances that future sustained declines in macroeconomic or business conditions affecting our industry will not occur, which could result in goodwill impairment charges in future periods.

There were no goodwill impairment losses recognized in 2022 or the six months ended June 30, 2023.

Leases

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. The Company accounts for operating leases in accordance with ASU 2016-02. The Company’s accounting for finance leases remained substantially unchanged. See Note 5 for further details and current balances.

Cylinder Deposit Liability

The cylinder deposit liability, which is included in accrued expenses and other current liabilities on the Company’s Balance Sheet, represents the amount due to customers for the return of refillable cylinders. The Company’s Aspen Refrigerants division (“ARI”) charges its customers cylinder deposits upon the shipment of refrigerant gases that are contained in refillable cylinders. The amount charged to the customer by ARI approximates the cost of a new cylinder of the same size. Upon return of a cylinder, this liability is reduced. The cylinder deposit liability balance was $15.9 million and $13.6 million at June 30, 2023 and December 31, 2022, respectively.

Revenues and Cost of Sales

The Company’s products and services are primarily used in commercial air conditioning, industrial processing and refrigeration systems. Most of the Company’s revenues are realized from the sale of refrigerant and industrial gases and related products. The Company also generates revenue from refrigerant management services performed at a customer’s site and in-house. The Company conducts its business primarily within the US.

9

The Company applies the FASB’s guidance on revenue recognition, which requires the Company to recognize revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services transferred to its customers. In most instances, the Company’s contract with a customer is the customer’s purchase order and the sales price to the customer is fixed. For certain customers, the Company may also enter into a sales agreement outlining a framework of terms and conditions applicable to future purchase orders received from that customer. Because the Company’s contracts with customers are typically for a single customer purchase order, the duration of the contract is usually less than one year. The Company’s performance obligations related to product sales are satisfied at a point in time, which may occur upon shipment of the product or receipt by the customer, depending on the terms of the arrangement. The Company’s performance obligations related to reclamation and RefrigerantSide® services are generally satisfied at a point in time when the service is performed. Accordingly, revenues are recorded upon the shipment of the product, or in certain instances upon receipt by the customer, or the completion of the service.

In July 2016 the Company was awarded, as prime contractor, a five-year contract, including a five-year renewal option, which has been exercised through July 2026, by the United States Defense Logistics Agency (“DLA”) for the management, supply, and sale of refrigerants, compressed gases, cylinders, and related services. Due to the contract containing multiple performance obligations, the Company assessed the arrangement in accordance with ASC 606-10-25-14. The Company determined that the sale of refrigerants and the management services provided under the contract each have stand-alone value. Accordingly, the performance obligation related to the sale of refrigerants is satisfied at a point in time, mainly when the customer receives and obtains control of the product. The performance obligation related to management service revenue is satisfied over time and revenue is recognized on a straight-line basis over the term of the arrangement as the management services are provided.

Cost of sales is recorded based on the cost of products shipped or services performed and related direct operating costs of the Company’s facilities. In general, the Company performs shipping and handling services for its customers in connection with the delivery of refrigerant and other products. The Company elected to implement ASC 606-10-25-18B, whereby the Company accounts for such shipping and handling as activities to fulfill the promise to transfer the good. To the extent that the Company charges its customers shipping fees, such amounts are included as a component of revenue and the corresponding costs are included as a component of cost of sales.

Income Taxes

The Company is taxed at statutory corporate income tax rates after adjusting income reported for financial statement purposes for certain items. Current income tax expense (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.

During the year ended December 31, 2022, the Company concluded that its deferred tax assets were more likely than not to become realizable. The Company fully reversed its existing valuation allowance of $15.1 million, with $11.6 million reversed during the first and second quarters of 2022, and the remaining $3.5 million through the third and fourth quarters of 2022. The conclusion that a valuation allowance was no longer needed was based on the achievement of three years of cumulative pre-tax income, the utilization of the Company’s $29.3 million federal NOLs, which comprised a majority of the Company’s deferred tax assets, combined with estimates of future years’ pre-tax income that were sufficient to realize the remaining deferred tax assets.

As of June 30, 2023, the Company had no federal NOLs, as the Company utilized all of its remaining federal NOLs during the year ended December 31, 2022. As of June 30, 2023, the Company had state tax NOLs of approximately $1.8 million, expiring in various years. We review the likelihood that we will realize the benefit of our deferred tax assets on a quarterly basis.

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 June 30, 2023 and December 31, 2022, the Company believes it had no uncertain tax positions.

10

Income per Common and Equivalent Shares

If dilutive, common equivalent shares (common shares assuming exercise of options) utilizing the treasury stock method are considered in the presentation of diluted income per share. The reconciliation of shares used to determine net income per share is as follows (dollars in thousands, unaudited):

    

Three Months

    

Six Months

ended June 30, 

ended June 30, 

    

2023

    

2022

    

2023

    

2022

Net income

$

19,189

$

39,810

$

34,720

$

69,365

Weighted average number of shares – basic

 

45,339,570

44,960,464

45,319,155

44,870,642

Shares underlying options

1,957,849

2,191,793

1,986,041

2,103,799

Weighted average number of shares – diluted

47,297,419

47,152,257

47,305,196

46,974,441

During the three month periods ended June 30, 2023 and 2022, certain options aggregating 602,321 and 752 shares, respectively, have been excluded from the calculation of diluted shares, due to the fact that their effect would be anti-dilutive.

During the six month periods ended June 30, 2023 and 2022, certain options aggregating 499,857 and 1,090 shares, respectively, have been excluded from the calculation of diluted shares, due to the fact that their effect would be anti-dilutive.

Estimates and Risks

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the use of estimates and assumptions that affect the amounts reported in these financial statements and footnotes. The Company considers these accounting estimates to be critical in the preparation of the accompanying consolidated financial statements. The Company uses information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used. Additionally, these estimates may not ultimately reflect the actual amounts of the final transactions that occur. The Company utilizes both internal and external sources to evaluate potential current and future liabilities for various commitments and contingencies. In the event that the assumptions or conditions change in the future, the estimates could differ from the original estimates.

Several of the Company’s accounting policies involve significant judgments, uncertainties, and estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. To the extent that actual results differ from management’s judgments and estimates, there could be a material adverse effect on the Company. On a continuous basis, the Company evaluates its estimates, including, but not limited to, those estimates related to its allowance for doubtful accounts, inventory reserves, goodwill and commitments and contingencies. With respect to trade accounts receivable, the Company estimates the necessary allowance for doubtful accounts based on both historical and anticipated trends of payment history and the ability of the customer to fulfill its obligations. For inventory, the Company evaluates both current and anticipated sales prices of its products to determine if a write down of inventory to net realizable value is necessary.

The Company participates in an industry that is highly regulated, and changes in the regulations affecting its business could affect its operating results. Currently the Company purchases virgin hydrofluorocarbon (“HFC”) and hydrofluroolefin (‘HFO”) refrigerants and reclaimable, primarily hydrochlorofluorocarbons (“HCFC”), HFC and chlorofluorocarbon (“CFC”), refrigerants from suppliers and its customers. To the extent that the Company is unable to source sufficient quantities of refrigerants or is unable to obtain refrigerants on commercially reasonable terms or experiences a decline in demand and/or price for refrigerants sold by the Company, the Company could realize reductions in revenue from refrigerant sales, which could have a material adverse effect on its operating results and its financial position. The process of sourcing refrigerants includes various procurement costs, such as freight, processing, insurance, and other costs, relating to the delivery of refrigerants. As a result of the recently noted global supply chain issues, the Company determined it could be exposed to incremental costs related to these refrigerant purchases. These costs represent the Company’s initial estimate that are possibly subject to finalization in future periods and are recorded in accrued expenses and other current liabilities on the consolidated balance sheet as of June 30, 2023.

11

The Company is subject to various legal proceedings. The Company assesses the merit and potential liability associated with each of these proceedings. In addition, the Company estimates potential liability, if any, related to these matters. To the extent that these estimates are not accurate, or circumstances change in the future, the Company could realize liabilities, which could have a material adverse effect on its operating results and its financial position.

Impairment of Long-lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the cost to sell.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which each amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company adopted ASU No. 2016-13 on January 1, 2023. The adoption of ASU No. 2016-13 did not have a material impact on its results of operations or financial position.

In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which is intended to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2023. The adoption of ASU 2020-06 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.

12

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Note 3 - Inventories

Inventories consist of the following:

    

June 30, 

    

December 31, 

2023

2022

(unaudited)

(in thousands)

Refrigerants and cylinders

$

140,631

$

152,840

Less: net realizable value adjustments

 

(6,187)

(7,463)

Total

$

134,444

$

145,377

Note 4 - Property, plant and equipment

Elements of property, plant and equipment are as follows:

    

June 30, 

    

December 31, 

    

Estimated

2023

2022

Lives

(in thousands)

(unaudited)

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

 

3,422

 

3,396

 

25-39 years

- Cylinders

 

13,300

 

13,315

 

15-30 years

- Equipment

 

28,205

 

27,258

 

3-10 years

- Equipment under capital lease

 

315

 

315

 

5-7 years

- Vehicles

 

1,736

 

1,773

 

3-5 years

- Lab and computer equipment, software

 

3,233

 

3,103

 

2-8 years

- Furniture & fixtures

 

930

 

840

 

5-10 years

- Leasehold improvements

 

852

 

852

 

3-5 years

- Construction-in-progress

 

3,192

 

3,533

 

  

Subtotal

 

58,205

 

57,405

 

  

Less: Accumulated depreciation

 

(38,296)

 

(36,837)

 

  

Total

$

19,909

$

20,568

 

  

Depreciation expense for the six months ended June 30, 2023 and 2022 was $1.5 million and $1.7 million, respectively.

Note 5 - Leases

The Company has various lease agreements with terms up to 11 years, including leases of buildings and various equipment. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. common area maintenance, charges, utilities and property taxes). The Company elected the package of practical expedients permitted under the transition guidance, which allows it to carry forward its historical lease classification, its assessment on whether a contract contains a lease, and its initial direct costs for any leases that existed prior to the adoption of the new standard. The Company also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value, guarantees or material restrictive covenants.

13

Operating leases are included in Right of use asset, Accrued expenses and other current liabilities, and Long-term lease liabilities on the consolidated balance sheets. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable. Short-term operating leases, which have an initial term of 12 months or less, are not recorded on the balance sheet. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred.

Operating lease expense of $1.3 million, for both of the six months ended June 30, 2023 and 2022, is included in Selling, general and administrative expenses on the consolidated statements of operations.

The following table presents information about the amount, timing and uncertainty of cash flows arising from the Company’s operating leases as of June 30, 2023.

June 30, 

Maturity of Lease Payments

    

2023

(in thousands)

(unaudited)

2023 (remaining)

$

1,597

-2024

 

2,372

-2025

1,994

-2026

1,374

-Thereafter

 

1,929

Total undiscounted operating lease payments

 

9,266

Less imputed interest

 

(1,684)

Present value of operating lease liabilities

$

7,582

Balance Sheet Classification

June 30, 

    

2023

(in thousands)

(unaudited)

Current lease liabilities (recorded in Accrued expenses and other current liabilities)

$

1,809

Long-term lease liabilities

 

5,773

Total operating lease liabilities

$

7,582

Other Information

June 30, 

    

2023

Weighted-average remaining term for operating leases

3.21

years

Weighted-average discount rate for operating leases

 

8.22

%

Cash Flows

Cash paid for amounts included in the present value of operating lease liabilities was $1.3 million during the six months ended June 30, 2023 and is included in operating cash flows.

Note 6 - Goodwill and intangible assets

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method of accounting.

There were no goodwill impairment losses recognized for the six-month period ended June 30, 2023, and year ended December 31, 2022. Based on the results of the impairment assessments of goodwill and intangible assets performed, management concluded that the fair value of the Company’s goodwill exceeds the carrying value and that there are no impairment indicators related to intangible assets.

At June 30, 2023 and December 31, 2022 the Company had $47.8 million of goodwill.

14

The Company’s other intangible assets consist of the following:

June 30, 2023

December 31, 2022

(unaudited)

Amortization

Gross

Gross

 

Period

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

(in thousands)

    

(in years)

    

Amount

    

Amortization

    

Net

    

Amount

    

Amortization

    

Net

Intangible assets with determinable lives

Covenant not to compete

 

610

 

870

 

754

 

116

870

710

160

Customer relationships

 

312

 

31,560

 

15,821

 

15,739

31,560

14,491

17,069

Above market leases

 

13

 

567

 

255

 

312

567

232

335

Total identifiable intangible assets

$

32,997

$

16,830

$

16,167

$

32,997

$

15,433

$

17,564

Amortization expense for the six months ended June 30, 2023 and 2022 was $1.4 million for both periods. 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.

Note 7 - Share-based compensation

Share-based compensation represents the cost related to share-based awards, typically stock options or stock grants, granted to employees, non-employees, officers and directors. Share-based compensation is measured at grant date, based on the estimated aggregate fair value of the award on the grant date, and such amount is charged to compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. For the six month periods ended June 30, 2023 and 2022, share-based compensation expense of $1.8 million and $0.6 million, respectively, is reflected in Selling, general and administrative expenses in the consolidated Income Statements.

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 June 30, 2023 there were an aggregate of 4,227,261 shares of the Company’s common stock available under the Plans 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. ISOs granted under the Plans 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 Plans may not be granted at a price less than the fair market value of the common stock. Options granted under the Plans expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company).

Effective September 17, 2014, the Company adopted its 2014 Stock Incentive Plan (“2014 Plan”) pursuant to which 3,000,000 shares of common stock were reserved for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock, deferred stock or other stock-based awards. ISOs may be granted under the 2014 Plan to employees and officers of the Company. Non-qualified options, stock, deferred stock or other stock-based awards may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless the 2014 Plan is sooner terminated, the ability to grant options or other awards under the 2014 Plan will expire on September 17, 2024.

Effective June 7, 2018, the Company adopted its 2018 Stock Incentive Plan (“2018 Plan”) pursuant to which 4,000,000 shares of common stock were reserved for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock, deferred stock or other stock-based awards. ISOs may be granted under the 2018 Plan to employees and officers of the Company. Non-qualified options, stock, deferred stock or other stock-based awards may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless the 2018 Plan is sooner terminated, the ability to grant options or other awards under the 2018 Plan will expire on June 7, 2028.

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Effective June 11, 2020, the Company adopted its 2020 Stock Incentive Plan (“2020 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 2020 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 2020 Plan is sooner terminated, the ability to grant options or other awards under the 2020 Plan will expire on June 11, 2030.

All stock options have been granted to employees and non-employees at exercise prices equal to or in excess of the market value on the date of the grant.

The Company determines the fair value of share-based awards at the grant date by using the Black-Scholes option-pricing model, and has utilized the simplified method to compute expected lives of share-based awards. There were options to purchase 585,054 and 354,838 shares of common stock granted during the six month periods ended June 30, 2023 and 2022, respectively.

A summary of the activity for stock options issued under the Company’s Plans for the indicated periods is presented below:

    

    

Weighted

Average

Exercise

Stock Option Plan Totals

Shares

Price

Outstanding at December 31, 2021

 

2,604,023

$

1.03

-Cancelled