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EX-32.2 - EXHIBIT 32.2 - HUDSON TECHNOLOGIES INC /NYv472458_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - HUDSON TECHNOLOGIES INC /NYv472458_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - HUDSON TECHNOLOGIES INC /NYv472458_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - HUDSON TECHNOLOGIES INC /NYv472458_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

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.)

 

1 Blue Hill Plaza  

P.O. Box 1541

Pearl River, New York

(Address of principal executive offices)

 

10965

(Zip Code )

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

 

 

 

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. x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files.)

x 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 x
  Non-accelerated filer (do not check if a smaller reporting company) ¨ 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 x No

 

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

 

Common stock, $0.01 par value   41,637,681 shares
Class   Outstanding at August 9, 2017

 

 

 

 

  

Hudson Technologies, Inc.

 

Index

 

Part   Item   Page
         
Part I.   Financial Information    
         
    Item 1 - Financial Statements    
      - Consolidated Balance Sheets   3
      - Consolidated Income Statements   4
      - Consolidated Statements of Cash Flows   5
      - Notes to the Consolidated Financial Statements   6
    Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   17
    Item 3 - Quantitative and Qualitative Disclosures About Market Risk   24
    Item 4 - Controls and Procedures   24
         
Part II.   Other Information    
         
    Item 1 - Legal Proceedings   25
    Item 6 - Exhibits   25
         
    Signatures   26

 

 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, 
   2017   2016 
   (unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $33,673   $33,931 
Trade accounts receivable – net   24,522    4,797 
Inventories   64,612    68,601 
Prepaid expenses and other current assets   6,331    847 
Total current assets   129,138    108,176 
           
Property, plant and equipment, less accumulated depreciation   7,203    7,532 
Deferred tax asset   2,036    2,532 
Intangible assets, less accumulated amortization   3,056    3,299 
Goodwill   856    856 
Other assets   88    75 
Total Assets  $142,377   $122,470 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Trade accounts payable  $9,746   $5,110 
Accrued expenses and other current liabilities   2,681    2,888 
Accrued payroll   968    1,782 
Income taxes payable   2,155    322 
Short-term debt and current maturities of long-term debt   90    199 
Total current liabilities   15,640    10,301 
Long-term debt, less current maturities   107    152 
Total Liabilities   15,747    10,453 
           
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 41,625,181 and 41,465,820   416    415 
Additional paid-in capital   114,385    114,032 
Retained earnings (accumulated deficit)   11,829    (2,430)
Total Stockholders' Equity   126,630    112,017 
           
Total Liabilities and Stockholders' Equity  $142,377   $122,470 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

 3 

 

  

Hudson Technologies, Inc. and Subsidiaries

Consolidated Income Statements

(unaudited)

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

 

   Three months
ended June 30,
  

Six months

ended June 30,

 
   2017   2016   2017   2016 
                 
Revenues  $52,231   $34,605   $91,061   $62,772 
Cost of sales   34,811    24,114    61,174    44,759 
Gross profit   17,420    10,491    29,887    18,013 
                     
Operating expenses:                    
Selling and marketing   1,110    1,019    2,149    2,136 
General and administrative   2,410    1,328    4,445    2,714 
Total operating expenses   3,520    2,347    6,594    4,850 
                     
Operating income   13,900    8,144    23,293    13,163 
                     
Interest expense   61    352    146    623 
                     
Income before income taxes   13,839    7,792    23,147    12,540 
                     
Income tax expense   5,314    2,962    8,888    4,766 
                     
Net income  $8,525   $4,830   $14,259   $7,774 
                     
Net income per common share - Basic  $0.21   $0.15   $0.34   $0.24 
Net income per common share - Diluted  $0.20   $0.14   $0.33   $0.23 
Weighted average number of shares outstanding - Basic   41,567,848    33,128,518    41,537,894    33,008,588 
Weighted average number of shares outstanding - Diluted   43,550,226    34,270,337    43,490,914    34,045,125 

  

See Accompanying Notes to the Consolidated Financial Statements.

 

 4 

 

 

Hudson Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Decrease) Increase in Cash and Cash Equivalents

(unaudited)

(Amounts in thousands)

 

   Six months
ended June 30,
 
   2017   2016 
         
Cash flows from operating activities:          
Net income  $14,259   $7,774 
Adjustments to reconcile net income to cash provided by (used in) operating activities:          
Depreciation and amortization   1,209    1,143 
Allowance for doubtful accounts   60    76 
Value of share-based payment arrangements       34 
Amortization of deferred finance costs   33    72 
Deferred tax asset utilization   496    1,344 
Changes in assets and liabilities:          
Trade accounts receivable   (19,785)   (17,593)
Inventories   3,988    4,123 
Prepaid and other assets   (5,529)   (907)
Income taxes payable    1,833    1,665 
Accounts payable and accrued expenses   4,143    (1,879)
Cash provided by (used in) operating activities   707    (4,148)
           
Cash flows from investing activities:          
Additions to property, plant, and equipment   (637)   (517)
Cash used in investing activities   (637)   (517)
           
Cash flows from financing activities:          
Payment of deferred acquisition costs   (528)   (833)
Proceeds from issuance of common stock   355    593 
Proceeds from short-term debt – net       5,369 
Repayment of long-term debt   (155)   (178)
Cash (used in) provided by financing activities   (328)   4,951 
           
(Decrease) increase in cash and cash equivalents   (258)   286 
Cash and cash equivalents at beginning of period   33,931    1,258 
Cash and cash equivalents at end of period  $33,673   $1,544 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during period for interest  $142   $551 
           
Cash paid for income taxes  $6,559   $1,757 

 

See Accompanying Notes to the Consolidated Financial Statements.

 

 5 

 

  

Hudson Technologies, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

(unaudited) 

 

Note 1 - Summary of Significant Accounting Policies

 

Business

 

Hudson Technologies, Inc., incorporated under the laws of New York on January 11, 1991, is a refrigerant services company providing innovative solutions to recurring problems within the refrigeration industry. The Company’s operations consist of one reportable segment. The Company's products and services are primarily used in commercial air conditioning, industrial processing and refrigeration systems, and include refrigerant and industrial gas sales, refrigerant management services consisting primarily of reclamation of refrigerants and RefrigerantSide® Services performed at a customer's site, consisting of system decontamination to remove moisture, oils and other contaminants. In addition, the Company’s SmartEnergy OPS TM service is a web-based real time continuous monitoring service applicable to a facility’s refrigeration systems and other energy systems. The Company’s Chiller Chemistry® and Chill Smart® services are also predictive and diagnostic service offerings. As a component of the Company’s products and services, the Company also participates in the generation of carbon offset projects. The Company operates principally through its wholly-owned subsidiary, Hudson Technologies Company. Unless the context requires otherwise, references to the “Company”, “Hudson”, “we", “us”, “our”, or similar pronouns refer to Hudson Technologies, Inc. and its subsidiaries.

 

In preparing the accompanying consolidated financial statements, and in accordance with 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, 2016. Operating results for the six month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

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

 

Consolidation

 

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

 

Fair Value of Financial Instruments

 

The carrying values of financial instruments including trade accounts receivable and accounts payable approximate fair value at June 30, 2017 and December 31, 2016, because of the relatively short maturity of these instruments. The carrying value of short and long-term debt approximates fair value, due to the variable rate nature of the debt, as of June 30, 2017 and December 31, 2016. 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.

 

 6 

 

  

For the six month period ended June 30, 2017, two customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for 41% of the Company’s revenues. At June 30, 2017, there were $6.5 million in outstanding receivables from these customers.

 

For the six month period ended June 30, 2016, one customer accounted for 25% of the Company’s revenues. At June 30, 2016, there were $2.1 million in outstanding receivables from this customer.

 

The loss of a principal customer or a decline in the economic prospects of and/or a reduction in purchases of the Company's products or services by any such customer could have a material adverse effect on the Company's operating results and financial position.

 

Cash and Cash Equivalents

 

Temporary investments with original maturities of ninety days or less are included in cash and cash equivalents.

 

Inventories

 

Inventories, consisting primarily of refrigerant products available for sale, are stated at the lower of cost, on a first-in first-out basis, or market. Where the market price of inventory is less than the related cost, the Company may be required to write down its inventory through a lower of cost or market adjustment, the impact of which would be reflected in cost of sales on the Consolidated Statements of Operations. Any such adjustment would be based on management’s judgment regarding future demand and market conditions and analysis of historical experience.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, including internally manufactured equipment. The cost to complete equipment that is under construction is not considered to be material to the Company's financial position. Provision for depreciation is recorded (for financial reporting purposes) using the straight-line method over the useful lives of the respective assets. Leasehold improvements are amortized on a straight-line basis over the shorter of economic life or terms of the respective leases. Costs of maintenance and repairs are charged to expense when incurred.

 

Due to the specialized nature of the Company's business, it is possible that the Company's estimates of equipment useful life periods may change in the future.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method of accounting. For the year ended December 31, 2016 the Company performed the annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. In performing the qualitative assessment, we identify and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our goodwill. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. If the results of the qualitative assessment conclude that it is not more likely than not that the fair value of goodwill exceeds its carrying value, additional quantitative impairment testing is performed. There were no indicators of impairment during the second quarter of 2017.

 

Revenues and Cost of Sales

 

Revenues are recorded upon completion of service or product shipment and passage of title to customers in accordance with contractual terms. The Company evaluates each sale to ensure collectability. In addition, each sale is based on an arrangement with the customer and the sales price to the customer is fixed. In July 2016 the Company was awarded, as prime contractor, a five-year contract, including a five-year renewal option, by the United States Defense Logistics Agency (“DLA”) for the management, supply, and sale of refrigerants, compressed gases, cylinders and related terms. Due to the contract containing multiple elements, the Company assessed the arrangement in accordance with Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition: Multiple-Element Arrangements. ASC 605-25 addresses when and how a company that is providing more than one revenue generating activity or deliverable should separate and account for a multiple element arrangement. The Company determined that the sale of refrigerants and the management services provided under the contract each have stand-alone value, and accordingly revenue related to the sale of product is recognized at the time of product shipment, and service revenue is recognized on a straight-line basis over the term of the arrangement.

 

Cost of sales is recorded based on the cost of products shipped or services performed and related direct operating costs of the Company's facilities. To the extent that the Company charges its customers shipping fees, such amounts are included as a component of revenue and the corresponding costs are included as a component of cost of sales.

 

 7 

 

  

Income Taxes

 

The Company utilizes the asset and liability method for recording deferred income taxes, which provides for the establishment of deferred tax asset or liability accounts based on the difference between tax and financial reporting bases of certain assets and liabilities. The tax benefit associated with the Company's net operating loss carry forwards (“NOLs”) is recognized to the extent that the Company is expected to recognize future taxable income. The Company assesses the recoverability of its deferred tax assets based on its expectation that it will recognize future taxable income and adjusts its valuation allowance accordingly. As of June 30, 2017, and December 31, 2016, the net deferred tax asset was $2.0 million and $2.5 million respectively.

 

Certain states either do not allow or limit NOLs and as such the Company will be liable for certain state taxes. To the extent that the Company utilizes its NOLs, it will not pay tax on such income but may be subject to the federal alternative minimum tax. In addition, to the extent that the Company’s net income, if any, exceeds the annual NOL limitation it will pay income taxes based on existing statutory rates. Moreover, as a result of a “change in control”, as defined by the Internal Revenue Service, the Company’s ability to utilize its existing NOLs is subject to certain annual limitations. All the Company’s remaining NOLs of approximately $4.1 million are subject to annual limitations of $1.3 million.

 

As a result of an Internal Revenue Service audit, the 2013 and prior federal tax years have been closed. The Company operates in many states throughout the United States and, as of June 30, 2017, the various states’ statutes of limitations remain open for tax years subsequent to 2009. The Company recognizes interest and penalties, if any, relating to income taxes as a component of the provision for income taxes.

 

The Company evaluates uncertain tax positions, if any, by determining if it is more likely than not to be sustained upon examination by the taxing authorities. As of June 30, 2017, and December 31, 2016, 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):

 

  

Three Months

ended June 30,

  

Six Months

ended June 30,

 
   2017   2016   2017   2016 
                 
Net income  $8,525   $4,830   $14,259   $7,774 
                     
Weighted average number of shares - basic   41,567,848    33,128,518    41,537,894    33,008,588 
                     
Shares underlying warrants   -    156,244    -    129,351 
Shares underlying options   1,982,378    985,575    1,953,020    907,186 
Weighted average number of shares outstanding – diluted   43,550,226    34,270,337    43,490,914    34,045,125 

 

During the three month periods ended June 30, 2017 and 2016, certain options and warrants aggregating none and 106,000 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, 2017 and 2016, certain options and warrants aggregating none and 187,000 shares, respectively, have been excluded from the calculation of diluted shares, due to the fact that their effect would be anti-dilutive.

 

Estimates and Risks

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect reported amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities, and the results of operations during the reporting period. Actual results could differ from these estimates.

 

 8 

 

 

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 has established a linear draw down for the production or importation of virgin HCFC-22 that started at approximately 22 million pounds in 2015 and reduces by approximately 4.5 million pounds each year and ends at zero in 2020. In October 2016, more than 200 countries, including the United States, agreed to amend the Montreal Protocol to phase down production of HFCs by 85% between now and 2047. The amendment establishes timetables for all developed and developing countries to freeze and then reduce production levels and use of HFCs, with the first reductions by developed countries starting in 2019.

 

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 which 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 will apply its guidance on future impairment assessments.

 

 9 

 

  

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This ASU addresses eight specific cash flow issues with the objective of eliminating the existing diversity in practice. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods therein, with early adoption permitted. We elected to early adopt ASU 2016-15 as of December 31, 2016, and the adoption did not have a material impact on the presentation of the statement of cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods therein. The Company does not expect the amended standard to have a material impact on the Company’s results of operations.

 

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” Excess tax benefits and deficiencies will be recognized in the consolidated statement of earnings rather than capital in excess of par value of stock on a prospective basis. A policy election will be available to account for forfeitures as they occur, with the cumulative effect of the change recognized as an adjustment to retained earnings at the date of adoption. Excess tax benefits within the consolidated statement of cash flows will be presented as an operating activity (prospective or retrospective application) and cash payments to tax authorities in connection with shares withheld for statutory tax withholding requirements will be presented as a financing activity (retrospective application). The guidance is effective beginning in 2017. Adoption of ASU No. 2016-09 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. At a minimum, adoption of ASU 2016-02 will require recording a ROU asset and a lease liability on the Company's consolidated balance sheet; however, the Company is still currently evaluating the impact on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected. For public business entities, the amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2016. As a result, all deferred tax assets and liabilities have been presented as noncurrent on the consolidated balance sheet as of December 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17.

 

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, or ASU 2015-16. This amendment requires the acquirer in a business combination to recognize in the reporting period in which adjustment amounts are determined, any adjustments to provisional amounts that are identified during the measurement period, calculated as if the accounting had been completed at the acquisition date. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. The amendments in ASU 2015-16 are to be applied prospectively upon adoption. The Company adopted ASU 2015-16 in the fourth quarter of 2016. The adoption of the provisions of ASU 2015-16 did not have a material impact on its results of operations or financial position.

 

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09.  

 

Note 2- Fair Value

 

ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy.

 

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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 an input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The valuation methodologies used for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below.

 

The following is a roll forward of deferred acquisition costs through June 30, 2017. 

 

(in thousands) unaudited 

Total Deferred

Acquisition Cost

Payable (1)

 
Balance at December 31, 2016  $789 
Payments   (789)
Balance at June 30, 2017   - 

 

(1)Represents deferred acquisition costs related to the acquisition of a supplier of refrigerants and compressed gases in January 2015. See Note 8 for further details.

 

(in thousands)  As of December 31, 2016   Fair Value Measurements 
   Carrying Amount   Fair Value   Level 1   Level 2   Level 3 
Liabilities:                    
Deferred acquisition cost  $789   $789           $789 

 

Note 3- Inventories

 

Inventories, net of reserve, consist of the following:

 

   June 30,
2017
   December 31,
2016
 
(in thousands)        
Refrigerant and cylinders  $22,803   $11,168 
Packaged refrigerants   41,809    57,433 
Total  $64,612   $68,601 

 

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Note 4 - Property, plant and equipment

 

Elements of property, plant and equipment are as follows:

 

   June 30,
2017
   December 31, 2016   Estimated
Lives
(in thousands)           
Property, plant and equipment             
 - Land  $535   $535    
 - Buildings   830    830   39 years
 - Building improvements   873    873   39 years
 - Equipment   15,293    13,423   3-7years
 - Equipment under capital lease   226    248   5-7 years
 - Vehicles   1,337    1,360   5 years
 - Lab and computer equipment, software   2,747    2,652   3-5 years
 - Furniture & fixtures   288    289   7-8 years
 - Leasehold improvements   119    119   3 years
 - Equipment under construction   351    1,654    
Subtotal   22,599    21,983    
Accumulated depreciation   15,396    14,451    
 Total  $7,203   $7,532    

 

Depreciation expense for the six months ended June 30, 2017 and 2016 was $0.9 million and $0.9 million, respectively.

 

Note 5 – Goodwill and intangible assets

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method of accounting. The Company performed the annual goodwill impairment assessment using a qualitative approach to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. In performing the qualitative assessment, we identify and consider the significance of relevant key factors, events, and circumstances that affect the fair value of our goodwill. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. If the results of the qualitative assessment conclude that it is not more likely than not that the fair value of goodwill exceeds its carrying value, additional quantitative impairment testing is performed.

 

The impairment test was performed at the operating segment level as the acquired businesses have been fully integrated into our existing structure. Based on the results of the impairment assessment performed, we concluded that it is more likely than not that the fair value of our goodwill significantly exceeds the carrying value.

 

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

 

 

       June 30,   December 31, 
       2017   2016 
(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   $371   $15   $386   $366   $20 
Covenant Not to Compete   6 – 10    1,270    399    871    1,270    322    948 
Customer Relationships   3 – 10    2,000    564    1,436    2,000    452    1,548 
Trade Name   2    30    30        30    30     
Licenses   10    1,000    266    734    1,000    217    783 
Totals identifiable intangible assets       $4,686   $1,630   $3,056   $4,686   $1,387   $3,299 

 

Amortization expense for the six months ended June 30, 2017 and 2016 was $0.2 million and $0.2 million, respectively. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. No impairment charges were recognized for the period ended June 30, 2017 and for the year ended December 31, 2016.

 

Note 6 - Share-based compensation

 

Share-based compensation represents the cost related to share-based awards, typically stock options or stock grants, granted to employees, non-employees, officers and directors. Share-based compensation is measured at grant date, based on the estimated aggregate fair value of the award on the grant date, and such amount is charged to compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. For the six month periods ended June 30, 2017 and 2016, the share-based compensation expense of none and $34,000, respectively, is reflected in general and administrative expenses in the consolidated Statements of Income.

 

Share-based awards have historically been made as stock options, and recently during the third quarter 2015 as stock grants, issued pursuant to the terms of the Company’s stock option and stock incentive plans, (collectively, the “Plans”), described below. The Plans may be administered by the Board of Directors or the Compensation Committee of the Board or by another committee appointed by the Board from among its members as provided in the Plans. Presently, the Plans are administered by the Company’s Compensation Committee of the Board of Directors. As of June 30, 2017, the Plans authorized the issuance of 6,000,000 shares of the Company’s common stock and, as of June 30, 2017 there were 3,251,340 shares of the Company’s common stock available for issuance for future stock option grants or other stock based awards.

 

Stock option awards, which allow the recipient to purchase shares of the Company’s common stock at a fixed price, are typically granted at an exercise price equal to the Company’s stock price at the date of grant. Typically, the Company’s stock option awards have vested from immediately to two years from the grant date and have had a contractual term ranging from three to ten years.

 

Effective September 10, 2004, the Company adopted its 2004 Stock Incentive Plan (“2004 Plan”) pursuant to which 2,500,000 shares of common stock were reserved for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock, deferred stock or other stock-based awards. ISOs could be granted under the 2004 Plan to employees and officers of the Company. Non-qualified options, stock, deferred stock or other stock-based awards could be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights could also be issued in tandem with stock options. Effective September 10, 2014, the Company’s ability to grant options or other awards under the 2004 Plan expired.

 

Effective August 27, 2008, the Company adopted its 2008 Stock Incentive Plan (“2008 Plan”) pursuant to which 3,000,000 shares of common stock were reserved for issuance (i) upon the exercise of options, designated as either ISOs under the Code or nonqualified options, or (ii) as stock, deferred stock or other stock-based awards. ISOs may be granted under the 2008 Plan to employees and officers of the Company. Non-qualified options, stock, deferred stock or other stock-based awards may be granted to consultants, directors (whether or not they are employees), employees or officers of the Company. Stock appreciation rights may also be issued in tandem with stock options. Unless the 2008 Plan is sooner terminated, the ability to grant options or other awards under the 2008 Plan will expire on August 27, 2018.

 

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ISOs granted under the 2008 Plan may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). Nonqualified options granted under the 2008 Plan may not be granted at a price less than the fair market value of the common stock. Options granted under the 2008 Plan expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company). 

 

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

 

ISOs granted under the 2014 Plan may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more of the voting stock of the Company). Nonqualified options granted under the 2014 Plan may not be granted at a price less than the fair market value of the common stock. Options granted under the 2014 Plan expire not more than ten years from the date of grant (five years in the case of ISOs granted to persons holding 10% or more of the voting stock of the Company).

 

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

 

The Company determines the fair value of share based awards at the grant date by using the Black-Scholes option-pricing model, and is incorporating the simplified method to compute expected lives of share-based awards. There were no grants during the six months periods ended June 30, 2017 and 2016.

 

A summary of the activity for stock options issued under 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   (159,361)  $2.23 
Outstanding at June 30, 2017, (unaudited)   3,055,037   $2.70 

 

The following is the weighted average contractual life in years and the weighted average exercise price at June 30, 2017 of:

 

       Weighted
Average
Remaining
  Weighted
Average
 
   Number of
Options
   Contractual
Life
  Exercise
Price
 
Options outstanding and vested   3,055,037   2.2 years  $2.70 

 

The intrinsic values of options outstanding at June 30, 2017 and December 31, 2016 are $17.6 million and $17.1 million, respectively.

 

The intrinsic value of options exercised during the six months ended June 30, 2017 and 2016 were $916,787 and $306,000, respectively.

 

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Note 7 - Debt

 

Bank Credit Line

 

On June 22, 2012, a subsidiary of Hudson entered into a Revolving Credit, Term Loan and Security Agreement (the “PNC Facility”) with PNC Bank, National Association, as agent (“Agent” or “PNC”), and such other lenders as may thereafter become a party to the PNC Facility. The Maximum Loan Amount (as defined in the PNC Facility) is currently $50,000,000, and the Maximum Revolving Advance Amount (as defined in the PNC Facility) is $46,000,000. In December 2016, the Company repaid all of its debt under the current PNC Facility, with approximately $50 million of availability under the revolving line of credit at June 30, 2017. In addition, there is a $130,000 outstanding letter of credit under the PNC Facility at June 30, 2017. The Termination Date of the Facility (as defined in the PNC Facility) is June 30, 2020.

 

Under the terms of the original PNC Facility, as amended by the First Amendment to the PNC Facility, dated February 15, 2013, Hudson could initially borrow up to a maximum of $40,000,000 consisting of a term loan in the principal amount of $4,000,000 and revolving loans in a maximum amount up to $36,000,000. Amounts borrowed under the PNC Facility may be used by Hudson for working capital needs and to reimburse drawings under letters of credit. 

 

Interest on loans under the PNC Facility is payable in arrears on the first day of each month with respect to loans bearing interest at the domestic rate (as set forth in the PNC Facility) and at the end of each interest period with respect to loans bearing interest at the Eurodollar Rate (as defined in the PNC Facility) or, for Eurodollar Rate Loans (as defined in the PNC Facility) with an interest period in excess of three months, at the earlier of (a) each three months from the commencement of such Eurodollar Rate Loan or (b) the end of the interest period. Interest charges with respect to loans are computed on the actual principal amount of loans outstanding during the month at a rate per annum equal to (A) with respect to Domestic Rate Loans (as defined in the PNC Facility), the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) and (B) with respect to Eurodollar Rate Loans, the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%).

 

Hudson granted to PNC, for itself, and as agent for such other lenders as may thereafter become a lender under the PNC Facility, a security interest in Hudson’s receivables, intellectual property, general intangibles, inventory and certain other assets.

 

The PNC Facility contains certain financial and non-financial covenants relating to Hudson, including limitations on Hudson’s ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control. The PNC Facility contains a financial covenant to maintain at all times a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00, tested quarterly on a rolling twelve-month basis. Fixed Charge Coverage Ratio is defined in the PNC Facility, with respect to any fiscal period, as the ratio of (a) EBITDA of Hudson for such period, minus unfinanced capital expenditures (as defined in the PNC Facility) made by Hudson during such period, minus the aggregate amount of cash taxes paid by Hudson during such period, minus the aggregate amount of dividends and distributions made by Hudson during such period, minus the aggregate amount of payments made with cash by Hudson to satisfy soil sampling and reclamation related to environmental cleanup at the Company’s former Hillburn, NY facility during such period (to the extent not already included in the calculation of EBITDA as determined by the Agent) to (b) the aggregate amount of all principal payments due and/or made, except principal payments related to outstanding revolving advances with regard to all funded debt (as defined in the PNC Facility) of Hudson during such period, plus the aggregate interest expense of Hudson during such period. EBITDA as defined in the PNC Facility shall mean for any period the sum of (i) earnings before interest and taxes for such period plus (ii) depreciation expenses for such period, plus (iii) amortization expenses for such period, plus (iv) non-cash charges.

  

On July 1, 2015, the Company entered into an amendment to the PNC Facility (the “2015 PNC Amendment”). The 2015 PNC Amendment redefined the “Revolving Interest Rate” as well as the “Term Loan Rate” (as defined in the PNC Facility) as follows:

 

“Revolving Interest Rate” shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%) with respect to the Eurodollar Rate Loans.

 

“Term Loan Rate” shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one half of one percent (.50%) with respect to the Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%) with respect to Eurodollar Rate Loans.

 

On April 8, 2016, the Company entered into an amendment to the PNC Facility (the “2016 PNC Amendment”). Pursuant to the 2016 PNC Amendment, the Maximum Loan Amount (as defined in the PNC Facility) increased from $40,000,000 to $50,000,000, and the Maximum Revolving Advance Amount (as defined in the PNC Facility) has been increased from $36,000,000 to $46,000,000. Additionally, pursuant to the 2016 PNC Amendment the Termination Date of the Facility (as defined in the PNC Facility) has been extended to June 30, 2020.

 

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The Company was in compliance with all covenants, under the PNC Facility as of June 30, 2017. The Company’s ability to comply with these covenants in future quarters may be affected by events beyond the Company’s control, including general economic conditions, weather conditions, regulations and refrigerant pricing. Although we expect to remain in compliance with all covenants in the PNC Facility, as amended, depending on our future operating performance and general economic conditions, we cannot make any assurance that we will continue to be in compliance.

 

The commitments under the PNC Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on June 30, 2020, unless the commitments are terminated for any reason or the outstanding principal amount of the loans are accelerated sooner following an event of default.

 

Note 8 - Acquisitions

 

On January 16, 2015, the Company acquired certain assets of a supplier of refrigerants and compressed gases, and also hired three employees associated with the business. The purchase price for this acquisition was $2.4 million cash paid at closing and the assumption of a liability of $20,000, and a maximum of an additional $3.0 million earn-out. The preliminary asset allocation was approximately $1.6 million of tangible assets, approximately $1.6 million of intangible assets, and approximately $2.3 million of goodwill.

 

As of December 31, 2015, the valuation and allocation of the purchase price for this acquisition was finalized. As part of that process it was determined that the deferred acquisition cost payable that had been previously recorded at the maximum earn out of $3.0 million per the purchase agreement was overstated by approximately $1.0 million. This adjustment to the deferred acquisition cost payable resulted in lowering the purchase price from approximately $5.4 million to approximately $4.4 million. The final valuation resulted in a reduction in goodwill by approximately $1.9 million, and increase in intangible assets of approximately $0.8 million and an increase in current assets of approximately $0.1 million. This final valuation, as well as the respective changes in the amortization of intangibles, was reflected in the December 31, 2015 financial statements. Please see table in Note 2 for a roll forward of the deferred acquisition cost. The final earnout payment was made during the first quarter of 2017.

 

The intangible assets are being amortized over a period ranging from two to ten years. The goodwill recognized as part of the acquisition will be deductible for tax purposes. The transaction also provides for additional employee compensation for years 2017 through 2019, based on certain revenue performance. The total additional employee compensation, if any, cannot exceed $3,000,000.

 

The results of the acquired business operations are included in the Company’s consolidated Statements of Operations from the date of acquisition, and are not material to the Company’s financial position or results of operations.

 

Note 9- Subsequent Event 


On August 9, 2017, the Company entered into a definitive agreement to acquire Airgas Refrigerants, Inc. (“ARI”), a subsidiary of Airgas, Inc., a leading US supplier of industrial gases, in a transaction valued on a gross basis at approximately $220 million, subject to closing and post-closing adjustments.  ARI is a leading refrigerant distributor and EPA certified reclaimer in the U.S.  ARI distributes, reclaims and packages refrigerant gases for a variety of end uses. 

 

The acquisition will be financed with available cash balances plus borrowings under an enhanced asset based lending facility from PNC Bank of up to $150 million and a new term loan from GSO Capital Partners LP of between $95 million and $110 million. No additional Hudson equity will be issued to finance this transaction.

 

The acquisition of ARI is subject to customary closing conditions, including the consummation of the contemplated debt financing, and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, and is currently expected to close during 2017.

 

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements, contained in this section and elsewhere in this Form 10-Q, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the laws and regulations affecting the refrigerant industry, changes in the demand and price for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants), the Company's ability to source refrigerants, regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements that become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration, the ability to obtain financing, any delays or interruptions in bringing products and services to market, the timely availability of any requisite permits and authorizations from governmental entities and third parties as well as factors relating to doing business outside the United States, including changes in the laws, regulations, policies, and political, financial and economic conditions, including inflation, interest and currency exchange rates, of countries in which the Company may seek to conduct business, the Company’s ability to successfully integrate any assets it acquires from third parties into its operations, and other risks detailed in the Company’s Form 10-K for the year ended December 31, 2016 and in the Company’s other subsequent filings with the Securities and Exchange Commission (“SEC”). The words “believe”, “expect”, “anticipate”, “may”, “plan”, “should” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

 

Critical Accounting Policies

 

The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. 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 net operating loss carry forwards (“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. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations accounted for under the purchase method of accounting. The Company tests for any impairment of goodwill annually unless indicators arise. Intangibles with determinable lives are amortized over the estimated useful lives of the assets currently ranging from 2 to 10 years. The Company reviews these useful lives annually to determine that they reflect future realizable value. 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.

 

Overview

 

Sales of refrigerants continue to represent a significant majority of the Company’s revenues. The Company’s refrigerant sales are primarily HCFC and HFC based refrigerants and to a lesser extent CFC based refrigerants that are no longer manufactured. Currently the Company purchases virgin HCFC and HFC refrigerants and reclaimable HCFC, HFC and 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, which production was further limited in January 2004. Federal regulations enacted in January 2004 established production and consumption allowances for HCFCs and imposed limitations on the importation of certain virgin HCFC refrigerants. Under the Act, production of certain virgin HCFC refrigerants is scheduled to be phased out during the period 2010 through 2020, and production of all virgin HCFC refrigerants is scheduled to be phased out by 2030. In October 2014, the EPA published the Final Rule providing further reductions in the production and consumption allowances for virgin HCFC refrigerants for the years 2015 through 2019. In the Final Rule, the EPA has established a linear annual phase down schedule for the production or importation of virgin HCFC-22 that started at approximately 22 million pounds in 2015 and is being reduced by approximately 4.5 million pounds each year and ends at zero in 2020. In October 2016, more than 200 countries, including the United States, agreed to amend the Montreal Protocol to phase down production of HFCs by 85% between now and 2047. The amendment establishes timetables for all developed and developing countries to freeze and then reduce production levels and use of HFCs, with the first reductions by developed countries starting in 2019.

 

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The Company has created and developed a service offering known as RefrigerantSide® Services. RefrigerantSide® Services are sold to contractors and end-users whose refrigeration systems are used in commercial air conditioning and industrial processing. These services are offered in addition to refrigerant sales and the Company's traditional refrigerant management services, which consist primarily of reclamation of refrigerants. The Company has created a network of service depots that provide a full range of the Company's RefrigerantSide® Services to facilitate the growth and development of its service offerings.

 

The Company focuses its sales and marketing efforts for its RefrigerantSide® Services on customers who the Company believes most readily appreciate and understand the value that is provided by its RefrigerantSide® Services offering. In pursuing its sales and marketing strategy, the Company offers its RefrigerantSide® Services to customers in the following industries: petrochemical, pharmaceutical, industrial power, manufacturing, commercial facility and property management and maritime. The Company may incur additional expenses as it further develops and markets its RefrigerantSide® Services offering.

 

On August 9, 2017, the Company entered into a definitive agreement to acquire Airgas Refrigerants, Inc. (“ARI”), a subsidiary of Airgas, Inc., a leading US supplier of industrial gases, in a transaction valued on a gross basis at approximately $220 million, subject to closing and post-closing adjustments.  ARI is a leading refrigerant distributor and EPA certified reclaimer in the U.S.  ARI distributes, reclaims and packages refrigerant gases for a variety of end uses. 

 

The acquisition will be financed with available cash balances plus borrowings under an enhanced asset based lending facility from PNC Bank of up to $150 million and a new term loan from GSO Capital Partners LP of between $95 million and $110 million. No additional Hudson equity will be issued to finance this transaction.

 

The acquisition of ARI is subject to customary closing conditions, including the consummation of the contemplated debt financing, and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, and is currently expected to close during 2017.

  

Results of Operations

 

Three month period ended June 30, 2017 as compared to the three month period ended June 30, 2016

 

Revenues for the three month period ended June 30, 2017 were $52.2 million, an increase of $17.6 million or 50.9% from the $34.6 million reported during the comparable 2016 period primarily due to increased in refrigerant and related revenues. The increase in refrigerant and related revenues was mainly attributable to an increase in the selling price per pound of certain refrigerants sold, which accounted for an increase in revenues of $10.6 million, and an increase in the number pounds of certain refrigerants sold, which accounted for an increase in revenues of $6.0 million.

 

Cost of sales for the three month period ended June 30, 2017 was $34.8 million or 66.7% of sales. The cost of sales for the three month period ended June 30, 2016 was $24.1 million or 69.7% of sales. The decrease in the cost of sales percentage from 69.7% for the three month period ended June 30, 2016 to 66.7% for the three month period ended June 30, 2017 is primarily due to the increase in the selling price per pound of certain refrigerants sold for the three month period ended June 30, 2017 compared to the same period in 2016.

 

Operating expenses for the three month period ended June 30, 2017 were $3.5 million, an increase of $1.2 million from the $2.3 million reported during the comparable 2016 period. The increase in operating expenses is primarily due to an increase in nonrecurring fees relating to corporate development initiatives incurred during the second quarter of 2017, and a slight increase in marketing expenses.

 

Interest expense, for the three month period ended June 30, 2017 was $0.1 million, compared to the $0.4 million reported during the comparable 2016 period. As a result of the paydown of the PNC Facility and December 2016 public offering during the fourth quarter of 2016, the Company incurred lower interest expense in the second quarter of 2017 when compared to the same period in 2016.

 

Income tax expense for the three month period ended June 30, 2017 was $5.3 million compared to income tax expense for the three month period ended June 30, 2016 of $3.0 million due to higher income for the period.

 

Net income for the three month period ended June 30, 2017 was $8.5 million, an increase of $3.7 million from the $4.8 million net income reported during the comparable 2016 period, primarily due to the increase in revenues partially offset by an increase in operating expenses and income tax expense.

 

Six month period ended June 30, 2017 as compared to the six month period ended June 30, 2016

 

Revenues for the six month period ended June 30, 2017 were $91.1 million, an increase of $28.3 million or 45.1% from the $62.8 million reported during the comparable 2016 period. The increase in refrigerant and related revenues was mainly attributable to an increase in the selling price per pound of certain refrigerants sold, which accounted for an increase in revenues of $19.5 million, as well as an increase in the number of pounds of certain refrigerants sold, which accounted for an increase in revenues of $7.5 million.

 

Cost of sales for the six month period ended June 30, 2017 was $61.2 million or 67.2% of sales. The cost of sales for the six month period ended June 30, 2016 was $44.8 million or 71.3% of sales. The decrease in the cost of sales percentage from 71.3% for the six month period ended June 30, 2016 to 67.2% for the six month period ended June 30, 2017 is primarily due to the increase in the selling price per pound of certain refrigerants sold for the six month period ended June 30, 2017 compared to the same period in 2016.

 

 

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Operating expenses for the six month period ended June 30, 2017 were $6.6 million, an increase of $1.7 million from the $4.9 million during the comparable 2016 period. The increase in operating expenses is primarily due to an increase in nonrecurring fees relating to corporate development initiatives incurred during the first half of 2017.

 

Interest expense for the six month period ended June 30, 2017 was $0.1 million compared to the $0.6 million reported during the comparable 2016 period. As a result of the paydown of the PNC Facility and December 2016 public offering during the fourth quarter of 2016, the Company incurred lower interest expense during the first half of 2017 when compared to the same period in 2016

 

Income tax expense for the six month period ended June 30, 2017 was $8.9 million compared to income tax expense for the six month period ended June 30, 2016 of $4.8 million due to higher income for the period.

 

Net income for the six month period ended June 30, 2017 was $14.3 million, an increase of $6.5 million from the $7.8 million net income reported during the comparable 2016 period, primarily due to the increase in revenues partially offset by an increase in operating expenses and income tax expense.

 

Liquidity and Capital Resources

 

At June 30, 2017, the Company had working capital, which represents current assets less current liabilities, of $113.5 million, an increase of $15.6 million from the working capital of $97.9 million at December 31, 2016. The increase in working capital is primarily attributable to increased net income during the period.

 

Inventory and trade receivables are principal components of current assets. At June 30, 2017, the Company had inventories of $64.6 million, a decrease of $4.0 million from $68.6 million at December 31, 2016. The decrease in the inventory balance is primarily due to the timing and availability of inventory purchases and the sale of refrigerants. The Company's ability to sell and replace its inventory on a timely basis and the prices at which it can be sold are subject, among other things, to current market conditions and the nature of supplier or customer arrangements and the Company's ability to source CFC based refrigerants (which are no longer being produced), HCFC refrigerants (which are currently being phased down leading to a full phase out of virgin production), or non-CFC based refrigerants. At June 30, 2017, the Company had trade receivables, net of allowance for doubtful accounts, of $24.5 million, an increase of $19.7 million from $4.8 million at December 31, 2016. The Company's trade receivables are concentrated with various wholesalers, brokers, contractors and end-users within the refrigeration industry that are primarily located in the continental United States.

 

The Company has historically financed its working capital requirements through cash flows from operations, the issuance of debt and equity securities, and bank borrowings.

 

At June 30, 2017, cash and cash equivalents was $33.7 million, or approximately $0.2 million lower than the $33.9 million of cash and cash equivalents at December 31, 2016.

 

Net cash provided by operating activities for the six month period ended June 30, 2017, was $0.7 million compared with net cash used in operating activities of $4.1 million for the comparable 2016 period. Net cash provided by operating activities in the 2017 period was primarily attributable to an increase in net income as well as timing in the Company’s accounts receivable and inventory.

 

Net cash used in investing activities for the six month period ended June 30, 2017, was $0.6 million compared with net cash used by investing activities of $0.5 million for the comparable 2016 period. The net cash used by investing activities for the 2017 and 2016 periods was primarily related to investment in general purpose equipment for the Company’s Champaign, Illinois facility.

 

Net cash used in financing activities for the six month period ended June 30, 2017, was $0.3 million compared with net cash provided by financing activities of $5.0 million for the comparable 2016 period. During the fourth quarter of 2016, the Company raised capital in a public offering and paid off the PNC Facility resulting in lower interest when compared to the same period in 2016. No additional borrowings were drawn during the first half of 2017. During the first half of 2017, the Company also paid its final earnout relating to the 2015 acquisition of a supplier of refrigerants and compressed gases.

 

The Company continues to assess its capital expenditure needs. The Company may, to the extent necessary, continue to utilize its cash balances to purchase equipment primarily for its operations.

 

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The following is a summary of the Company's significant contractual cash obligations for the periods indicated that existed as of June 30, 2017 (in 000’s):

 

   Twelve Months Ending June 30, 
   2018   2019   2020   2021   2022   Thereafter   Total 
Long and short term debt and capital lease obligations:                                   
                                    
Principal  $90   $83   $18   $6           $197 
Estimated interest (1)   8    3                    11 
Operating leases   1,522    975    636    568    320    9    4,030 
                                    
Total contractual cash obligations  $1,620   $1,061   $654   $574   $320   $9   $4,238 

 

 

 

(1)The estimated future interest payments on all debt other than revolving debt are based on the respective interest rates applied to the declining principal balances on each of the notes.

 

On June 22, 2012, a subsidiary of Hudson entered into a Revolving Credit, Term Loan and Security Agreement (the “PNC Facility”) with PNC Bank, National Association, as agent (“Agent” or “PNC”), and such other lenders as may thereafter become a party to the PNC Facility. The Maximum Loan Amount (as defined in the PNC Facility) is currently $50,000,000, and the Maximum Revolving Advance Amount (as defined in the PNC Facility) is $46,000,000. In December 2016, the Company repaid all of its debt under the current PNC Facility, with approximately $50 million of availability under the revolving line of credit at June 30, 2017. In addition, there is a $130,000 outstanding letter of credit under the PNC Facility at June 30, 2017. The Termination Date of the Facility (as defined in the PNC Facility) is June 30, 2020.

 

Under the terms of the original PNC Facility, as amended by the First Amendment to the PNC Facility, dated February 15, 2013, Hudson could initially borrow up to a maximum of $40,000,000 consisting of a term loan in the principal amount of $4,000,000 and revolving loans in a maximum amount up to $36,000,000. Amounts borrowed under the PNC Facility may be used by Hudson for working capital needs and to reimburse drawings under letters of credit.

 

Interest on loans under the PNC Facility is payable in arrears on the first day of each month with respect to loans bearing interest at the domestic rate (as set forth in the PNC Facility) and at the end of each interest period with respect to loans bearing interest at the Eurodollar Rate (as defined in the PNC Facility) or, for Eurodollar Rate Loans (as defined in the PNC Facility) with an interest period in excess of three months, at the earlier of (a) each three months from the commencement of such Eurodollar Rate Loan or (b) the end of the interest period. Interest charges with respect to loans are computed on the actual principal amount of loans outstanding during the month at a rate per annum equal to (A) with respect to Domestic Rate Loans (as defined in the PNC Facility), the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) and (B) with respect to Eurodollar Rate Loans, the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%).

 

Hudson granted to PNC, for itself, and as agent for such other lenders as may thereafter become a lender under the PNC Facility, a security interest in Hudson’s receivables, intellectual property, general intangibles, inventory and certain other assets.

 

The PNC Facility contains certain financial and non-financial covenants relating to Hudson, including limitations on Hudson’s ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control. The PNC Facility contains a financial covenant to maintain at all times a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00, tested quarterly on a rolling twelve-month basis. Fixed Charge Coverage Ratio is defined in the PNC Facility, with respect to any fiscal period, as the ratio of (a) EBITDA of Hudson for such period, minus unfinanced capital expenditures (as defined in the PNC Facility) made by Hudson during such period, minus the aggregate amount of cash taxes paid by Hudson during such period, minus the aggregate amount of dividends and distributions made by Hudson during such period, minus the aggregate amount of payments made with cash by Hudson to satisfy soil sampling and reclamation related to environmental cleanup at the Company’s former Hillburn, NY facility during such period (to the extent not already included in the calculation of EBITDA as determined by the Agent) to (b) the aggregate amount of all principal payments due and/or made, except principal payments related to outstanding revolving advances with regard to all funded debt (as defined in the PNC Facility) of Hudson during such period, plus the aggregate interest expense of Hudson during such period. EBITDA as defined in the PNC Facility shall mean for any period the sum of (i) earnings before interest and taxes for such period plus (ii) depreciation expenses for such period, plus (iii) amortization expenses for such period, plus (iv) non-cash charges.

 

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On July 1, 2015, the Company entered into an amendment to the PNC Facility (the “2015 PNC Amendment”). The 2015 PNC Amendment redefined the “Revolving Interest Rate” as well as the “Term Loan Rate” (as defined in the PNC Facility) as follows:

 

“Revolving Interest Rate” shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) with respect to Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%) with respect to the Eurodollar Rate Loans.

 

“Term Loan Rate” shall mean an interest rate per annum equal to (a) the sum of the Alternate Base Rate plus one half of one percent (.50%) with respect to the Domestic Rate Loans and (b) the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%) with respect to Eurodollar Rate Loans.

 

On April 8, 2016, the Company entered into an amendment to the PNC Facility (the “2016 PNC Amendment”). Pursuant to the 2016 PNC Amendment, the Maximum Loan Amount (as defined in the PNC Facility) has been increased from $40,000,000 to $50,000,000, and the Maximum Revolving Advance Amount (as defined in the PNC Facility) has been increased from $36,000,000 to $46,000,000. Additionally, pursuant to the 2016 PNC Amendment the Termination Date of the Facility (as defined in the PNC Facility) has been extended to June 30, 2020.

 

The Company was in compliance with all covenants, under the PNC Facility as of June 30, 2017. The Company’s ability to comply with these covenants in future quarters may be affected by events beyond the Company’s control, including general economic conditions, weather conditions, regulations and refrigerant pricing. Although we expect to remain in compliance with all covenants in the PNC Facility, as amended, depending on our future operating performance and general economic conditions, we cannot make any assurance that we will continue to be in compliance.

 

The commitments under the PNC Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on June 30, 2020, unless the commitments are terminated for any reason or the outstanding principal amount of the loans are accelerated sooner following an event of default.

 

December 2016 Public Offering

 

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.

 

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Inflation

 

Inflation has not historically had a material impact on the Company's operations.

 

Reliance on Suppliers and Customers

 

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 HCFC and HFC refrigerants and reclaimable, primarily HCFC and CFC, refrigerants from suppliers and its customers. Under the Act the phase-down of future production of certain virgin HCFC refrigerants commenced in 2010 and is scheduled to be fully phased out by the year 2020, and production of all virgin HCFC refrigerants is scheduled to be phased out by the year 2030. 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 it, the Company could realize reductions in revenue from refrigerant sales, which could have a material adverse effect on the Company’s operating results and financial position.

 

For the six month period ended June 30, 2017, two customers each accounted for 10% or more of the Company’s revenues and, in the aggregate these two customers accounted for 41% of the Company’s revenues. At June 30, 2017, there were $6.5 million in outstanding receivables from these customers.

 

For the six month period ended June 30, 2016, one customer accounted for 25% of the Company’s revenues. At June 30, 2016, there were $2.1 million in outstanding receivables from this customer.

 

The loss of a principal customer or a decline in the economic prospects of and/or a reduction in purchases of the Company's products or services by any such customer could have a material adverse effect on the Company's operating results and financial position.

 

Seasonality and Weather Conditions and Fluctuations in Operating Results

 

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. The Company's business is seasonal in nature with peak sales of refrigerants occurring in the first half of each year. During past years, the seasonal decrease in sales of refrigerants has resulted in losses particularly in the fourth quarter of the year. In addition, to the extent that there is unseasonably cool weather throughout the spring and summer months, which would adversely affect the demand for refrigerants, there would be a corresponding negative impact on the Company. Delays or inability in securing adequate supplies of refrigerants at peak demand periods, lack of refrigerant demand, increased expenses, declining refrigerant prices and a loss of a principal customer could result in significant losses. There can be no assurance that the foregoing factors will not occur and result in a material adverse effect on the Company's financial position and significant losses. The Company believes that to a lesser extent there is a similar seasonal element to RefrigerantSide® Service revenues as refrigerant sales.

 

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 which 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 will apply its guidance on future impairment assessments.

 

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This ASU addresses eight specific cash flow issues with the objective of eliminating the existing diversity in practice. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods therein, with early adoption permitted. We elected to early adopt ASU 2016-15 as of December 31, 2016, and the adoption did not have a material impact on the presentation of the statement of cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and for interim periods therein. The Company does not expect the amended standard to have a material impact on the Company’s results of operations.

 

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In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” Excess tax benefits and deficiencies will be recognized in the consolidated statement of earnings rather than capital in excess of par value of stock on a prospective basis. A policy election will be available to account for forfeitures as they occur, with the cumulative effect of the change recognized as an adjustment to retained earnings at the date of adoption. Excess tax benefits within the consolidated statement of cash flows will be presented as an operating activity (prospective or retrospective application) and cash payments to tax authorities in connection with shares withheld for statutory tax withholding requirements will be presented as a financing activity (retrospective application). The guidance is effective beginning in 2017. Adoption of ASU No. 2016-09 did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. At a minimum, adoption of ASU 2016-02 will require recording a ROU asset and a lease liability on the Company's consolidated balance sheet; however, the Company is still currently evaluating the impact on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in ASU 2015-17 apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected. For public business entities, the amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company elected to early adopt ASU 2015-17 prospectively in the fourth quarter of 2016. As a result, all deferred tax assets and liabilities have been presented as noncurrent on the consolidated balance sheet as of December 31, 2016. There was no impact on our results of operations as a result of the adoption of ASU 2015-17.

 

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, or ASU 2015-16. This amendment requires the acquirer in a business combination to recognize in the reporting period in which adjustment amounts are determined, any adjustments to provisional amounts that are identified during the measurement period, calculated as if the accounting had been completed at the acquisition date. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. The amendments in ASU 2015-16 are to be applied prospectively upon adoption. The Company adopted ASU 2015-16 in the fourth quarter of 2016. The adoption of the provisions of ASU 2015-16 did not have a material impact on its results of operations or financial position.

 

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)." The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09. 

 

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Item 3 - Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Sensitivity

 

We are exposed to market risk from fluctuations in interest rates on the PNC Facility. The PNC Facility is a $50,000,000 secured facility. 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. As of June 30, 2017, interest charges with respect to loans are computed on the actual principal amount of loans outstanding during the month at a rate per annum equal to (A) with respect to Domestic Rate Loans (as defined in the PNC Facility), the sum of the Alternate Base Rate (as defined in the PNC Facility) plus one half of one percent (.50%) and (B) with respect to Eurodollar Rate Loans, the sum of the Eurodollar Rate plus two and one quarter of one percent (2.25%). The outstanding balance on the PNC Facility as of June 30, 2017 was $0. Future interest rate changes on our borrowing under the PNC Facility may have an impact on our consolidated results of operations.

 

Refrigerant Market

 

We are also exposed to market risk from fluctuations in the demand, price and availability of refrigerants. 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, or inventory write-downs, which could have a material adverse effect on our consolidated results of operations.

 

Item 4 - Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, the Company’s controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control and misstatements due to error or fraud may occur and not be detected on a timely basis.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30, 2017 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

For information regarding pending legal matters, refer to the Legal Proceedings Section in Part I, Item 3 of the Company’s Form 10-K for the year ended December 31, 2016. There have been no material changes to such matters during the quarter ended June 30, 2017.

 

Item 6 - Exhibits

 

Exhibit
Number
  Description
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
101   Interactive Data Files Pursuant to Rule 405 of Regulation S-T

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    HUDSON TECHNOLOGIES, INC.
         
  By: /s/ Kevin J. Zugibe   August 9, 2017
    Kevin J. Zugibe   Date
    Chairman and    
    Chief Executive Officer    

 

  By: /s/ Nat Krishnamurti   August 9, 2017
    Nat Krishnamurti   Date
    Chief Financial Officer    

 

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Index to Exhibits

 

Exhibit
Number
  Description
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101   Interactive Data Files Pursuant to Rule 405 of Regulation S-T

 

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