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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Hudson Technologies, Inc.    HDSN

HUDSON TECHNOLOGIES, INC.

(HDSN)
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HUDSON TECHNOLOGIES : NY Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 04:35pm EDT

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 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, the ability to meet financial covenants under our financing facilities, 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 ARI and any other 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, 2018, 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 inventory reserves, and valuation allowance for the deferred tax assets relating to its net operating loss carry forwards ("NOLs") and goodwill and intangible assets.



Inventory


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. Net realizable value represents the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. The determination if a write-down to net realizable value is necessary is primarily affected by the market prices for the refrigerant gases we sell. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, seasonality, the availability and adequacy of supply, government regulation and policies and general political and economic conditions. At any time, our inventory levels may be substantial.



Goodwill

The Company has made acquisitions that included a significant amount of goodwill and other intangible assets. The Company applies the purchase method of accounting for acquisitions, which among other things, requires the recognition of goodwill (which represents the excess of the purchase price of the acquisition over the fair value of the net assets acquired and identified intangible assets). We test our goodwill for impairment on an annual basis (the first day of the fourth quarter) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an asset below its carrying value. Other intangible assets that meet certain criteria are amortized over their estimated useful lives.

Beginning in 2017, the Company adopted, on a prospective basis, ASU No. 2017-04, which simplifies the accounting for goodwill impairment by eliminating Step 2 of the prior goodwill impairment test that required a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard, a company will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. An impairment charge would be recognized when the carrying amount exceeds the estimated fair value of a reporting unit. These impairment evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings. If the Company does not achieve its earnings objectives, the assumptions and estimates underlying these impairment evaluations could be adversely affected, which could result in an asset impairment charge that would negatively impact operating results.



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In 2018, due to a significant selling price correction leading to unfavorable market conditions, the Company performed a quantitative test by weighing the results of an income-based valuation technique, the discounted cash flows method, and a market-based valuation technique to determine its fair value. The market approach was used as a test of reasonableness of the conclusions reached in the income approach. Under the income approach assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value; (ii) projected revenue growth rates; and (iii) projected long-term growth rates used in the derivation of terminal year values. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. No impairment charges were recognized for the six month period ended June 30, 2019 and for the year ended December 31, 2018.

During the second quarter of 2019, the Company's performance has been negatively impacted by the challenging pricing environment affecting the industry and the market, leading to an increase in inventory reserves for certain gases. However, the Company has also experienced higher volumes of refrigerant inventory sold during the second quarter of 2019 when compared to the second quarter of 2018. While the Company does not believe that its goodwill is impaired at June 30, 2019, it will further assess the impact of lower prices and higher volume through the nine month selling season, which culminates in September 2019 and coincides with its October 1 annual impairment testing date.



Other Intangibles


Intangibles with determinable lives are amortized over the estimated useful lives of the assets currently ranging from 5 to 12 years. The Company reviews these useful lives annually to determine that they reflect future realizable value.




Income Taxes



The Company is taxed at statutory corporate income tax rates after adjusting income reported for financial statement purposes for certain items. Current income tax expense (benefit) reflects the tax results of revenues and expenses currently taxable or deductible. The Company utilizes the asset and liability method of accounting for deferred income taxes, which provides for the recognition of deferred tax assets or liabilities, based on enacted tax rates and laws, for the differences between the financial and income tax reporting bases of assets and liabilities.

The tax benefit associated with the Company's net operating loss carry forwards ("NOLs") is recognized to the extent that the Company expects to realize future taxable income. As a result of a prior "change in control", as defined by the Internal Revenue Service, the Company's ability to utilize its existing NOLs is subject to certain annual limitations. To the extent that the Company utilizes its NOLs, it will not pay tax on such income. However, to the extent that the Company's net income, if any, exceeds the annual NOL limitation, it will pay income taxes based on the then existing statutory rates. In addition, certain states either do not allow or limit NOLs and as such the Company will be liable for certain state income taxes.

As of June 30, 2019, the Company had NOLs of approximately $45.9 million, of which $40.5 million have no expiration date (subject to annual limitations of 80% of tax earnings) and $5.4 million expire through 2023 (subject to annual limitations of approximately $1.3 million). As of June 30, 2019, the Company had state tax NOLs of approximately $23.5 million expiring in various years. We review the likelihood that we will realize the benefit of our deferred tax assets, and therefore the need for valuation allowances, on an annual basis in the fourth quarter of the year, and more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results are considered, along with all other available positive and negative evidence.

Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling twelve quarters of pre-tax income or loss adjusted for significant permanent book to tax differences, as well as non-recurring items, as a measure of our cumulative results in recent years. Based on the cumulative operating loss experienced through December 31, 2018, our analysis indicated that we had cumulative three year historical losses on this basis, which represented significant negative evidence that is objective and verifiable and, therefore, difficult to overcome. Based on our assessment as of December 31, 2018, we concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, we recorded a net valuation allowance of approximately $11.3 million during the period ended December 31, 2018 and increased it to $17.3 million as of June 30, 2019 due to additional losses.



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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.

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.

In July 2016 the Company was awarded, as prime contractor, a five-year contract, including a five-year renewal option, by the DLA for the management, supply, and sale of refrigerants, compressed gases, cylinders and related services.



Going Concern


The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern and contemplate the realization of assets and satisfaction of liabilities in the normal course of business. The Company's ability to continue as a going concern is contingent upon its ability to comply with the financial covenants within its credit agreements, referred to in Note 8. The Company's level of indebtedness has adversely impacted, and continues to adversely impact, the Company's financial condition, including operating results and liquidity position. As of June 30, 2019, the Company was not in compliance with the financial covenants in the Term Loan Facility and the PNC Facility, thus raising substantial doubt as to the ability to continue as a going concern. The Company has satisfied all of its debt payment obligations on a timely basis and had over $21 million of availability pursuant to the borrowing base formula in the PNC Facility as of June 30, 2019; as such, the Company does not believe that the covenant default relates to a liquidity issue, but a leverage issue with its current covenant structure and is working with its lenders to obtain a waiver and amendment of its credit facilities.

The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classifications of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.



Results of Operations


Three-month period ended June 30, 2019 as compared to the three-month period ended June 30, 2018

Revenues for the three-month period ended June 30, 2019 were $56.0 million, decrease of $1.8 million or 3% from the $57.8 million reported during the comparable 2018 period. Refrigerant average selling prices declined by approximately 19%, offset by a 12% increase in volume. Revenue from the DLA also increased by approximately $2.3 million.

Cost of sales for the three-month period ended June 30, 2019 was $58.4 million or 104% of sales. The cost of sales for the three-month period ended June 30, 2018 was $83.9 million or 145% of sales. The Company recorded lower of cost or net realizable value adjustments to its inventory of $9.2 million and $34.7 million during the second quarter of 2019 and 2018, respectively. The $34.7 million adjustment recorded during the second quarter of 2018 included a $17.6 million write-down of a previously recorded step-up in inventory basis associated with the acquisition of ARI and $17.1 million write-down for a lower of cost or net realizable value adjustment. The Company's performance has been negatively impacted by the challenging pricing environment affecting the industry and the market during 2018 and 2019, leading to an increase in inventory reserves for certain gases. However, the Company has experienced higher volumes of refrigerant inventory sold during the second quarter of 2019 when compared to the second quarter of 2018, as mentioned above.



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Selling, general and administrative ("SG&A") expenses for the three-month period ended June 30, 2019 were $6.8 million, a decrease of $3.8 million from the $10.6 million reported during the comparable 2018 period. Professional fees pertaining to integration and services relating to the acquisition of ARI declined by approximately $2.5 million. The remaining decrease in SG&A is primarily due to reduced payroll-related expenses, advertising and other professional fees in 2019.

Amortization expense for the three-month periods ended June 30, 2019 and 2018 were $0.8 million and $0.7 million, respectively.

Other expense for the three-month period ended June 30, 2019 was $3.8 million, compared to the $3.3 million reported during the comparable 2018 period. The difference is mainly due to the increase in interest expense relating to an increase in interest rate margin (spread) as a result of the amendment of our credit facilities in November 2018.

The income tax expense for the three-month period ended June 30, 2019 was $0.1 million compared to income tax benefit of $10.2 million for the three month period ended June 30, 2018. For 2019 and 2018, income tax expense for federal and state income tax purposes was determined by applying statutory income tax rates to pre-tax income after adjusting for certain items. As discussed previously, we concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, we have recorded a full valuation allowance as of June 30, 2019; as such, the income tax expense recorded during the three-month period ended June 30, 2019 consists of a timing difference between book and tax reporting. For the three-month period ended June 30, 2018, as a result of the enactment of the 2017 Tax Act, the effective tax rate was 25%.

The net loss for the three-month period ended June 30, 2019 was $13.8 million, a decrease of $16.8 million from the $30.6 million of net loss reported during the comparable 2018 period, primarily due to reduced inventory reserve adjustments and reduced SG&A, offset by lower tax benefits and higher interest expense.

Six month period ended June 30, 2019 as compared to the six month period ended June 30, 2018

Revenues for the six month period ended June 30, 2019 were $90.7 million, a decrease of $9.6 million or 10% from the $100.3 million reported during the comparable 2018 period. Refrigerant average selling prices declined by 19%, partially offset by a 3% increase in refrigerant volume. Revenue from the DLA also increased by approximately $4.1 million.

Cost of sales for the six-month period ended June 30, 2019 was $86.1 million or 95% of sales. The cost of sales for the six-month period ended June 30, 2018 was $118.4 million or 118% of sales. The Company recorded lower of cost or net realizable value adjustments to its inventory of $9.2 million and $34.7 million during the second quarter of 2019 and 2018, respectively. The $34.7 million adjustment recorded during the second quarter of 2018 included a $17.6 million write-down of a previously recorded step-up in inventory basis associated with the acquisition of ARI and a $17.1 million write-down for a lower of cost or net realizable value adjustment. The Company's performance has been negatively impacted by the challenging pricing environment affecting the industry and the market during 2018 and 2019, leading to an increase in inventory reserves for certain gases. However, the Company has experienced higher volumes of refrigerant inventory sold during the second quarter of 2019 when compared to the second quarter of 2018, as mentioned above, which partially offset weaker demand during the first quarter of 2019.

Selling, general and administrative ("SG&A") expenses for the six-month period ended June 30, 2019 were $12.9 million, a decrease of $5.8 million from the $18.7 million reported during the comparable 2018 period. Professional fees pertaining to integration and related services relating to the acquisition of ARI declined by approximately $3.4 million. The remaining decrease in SG&A is primarily due to reduced payroll-related expenses, advertising and other professional fees in 2019.

Amortization expense for both the six-month period ended June 30, 2019 and 2018 was $1.5 million.

Other expense for the six-month period ended June 30, 2019 was $8.0 million, compared to the $6.6 million reported during the comparable 2018 period. The difference is mainly due to the increase in interest expense relating to an increase in interest rate margin (spread) as a result of the amendment of our credit facilities in November 2018.

The income tax expense for the six-month period ended June 30, 2019 was $0.14 million compared to income tax benefit of $11.2 million for the six month period ended June 30, 2018. For 2019 and 2018, income tax expense for federal and state income tax purposes was determined by applying statutory income tax rates to pre-tax income after adjusting for certain items. As discussed previously, we concluded that due to the uncertainty that the deferred tax assets will not be fully realized in the future, we have recorded a full valuation allowance as of June 30, 2019; as such, the income tax expense recorded during the six-month period ended June 30, 2019 consists of a timing difference between book and tax reporting. For the six-month period ended June 30, 2018, as a result of the enactment of the 2017 Tax Act, the effective tax rate was 25%.



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The net loss for the six-month period ended June 30, 2019 was $17.8 million, a decrease of $15.9 million from the $33.7 million of net loss reported during the comparable 2018 period, primarily due to reduced inventory reserve adjustments and reduced SG&A, offset by lower tax benefits and higher interest expense.

Liquidity and Capital Resources

As described above, there is uncertainty around the Company's ability to comply with current and future financial covenants under its credit agreements. Therefore, in accordance with ASC 470, the Company reclassified its term loan debt as a current liability as of June 30, 2019. The Company's level of indebtedness has adversely impacted, and continues to adversely impact, the Company's financial condition, including operating results and liquidity position. As of June 30, 2019, the Company was not in compliance with the financial covenants in the Term Loan Facility and the PNC Facility, thus raising substantial doubt as to the ability to continue as a going concern. The Company has satisfied all of its debt payment obligations on a timely basis and had over $21 million of availability pursuant to the borrowing base formula in the PNC Facility as of June 30, 2019; as such, the Company does not believe that the covenant default relates to a liquidity issue, but a leverage issue with its current covenant structure and is working with its lenders to obtain a waiver and amendment of its credit facilities. At June 30, 2019, the Company had working capital, which represents current assets less current liabilities, of negative $50.2 million when compared to a positive $63.2 million at December 31, 2018. Excluding the reclassification of its term loan debt to short-term, the decrease in working capital is primarily attributable to timing factors related to the inventory and trade receivables as described below.

Inventory and trade receivables are principal components of current assets. At June 30, 2019, the Company had inventories of $75.2 million, a decrease of $26.8 million from $102.0 million at December 31, 2018. 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, 2019, the Company had trade receivables, net of allowance for doubtful accounts, of $28.1 million, an increase of $14.0 million from $14.1 million at December 31, 2018. 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.

Net cash used by operating activities for the six month period ended June 30, 2019 was $3.1 million, when compared to net cash provided by operating activities of $8.7 million for the comparable 2018 period. Net cash provided by operating activities in the 2019 period decreased due to the net loss reported in the period and timing of certain inventory and receivables during the quarter.

Net cash used in investing activities for the six month period ended June 30, 2019 was $0.3 million compared with net cash used in investing activities of $0.8 million for the comparable 2018 period. The net cash used in investing activities for the 2019 and 2018 periods was primarily related to investment in general purpose equipment for the Company's facilities.

Net cash provided by financing activities for the six month period ended June 30, 2019 was $2.4 million compared with net cash used in financing activities of $10.6 million for the comparable 2018 period. During the first half of 2019, the Company increased its borrowing under the PNC Facility by $4 million and reduced the Term Loan Facility by $1.6 million while in the comparable 2018 period, the Company reduced its borrowing under the PNC facility by $10 million and reduced the Term Loan Facility by $0.6 million. The Company's net cash income tax refund received during the six months ended June 30, 2018 was $6.3 million, which was utilized to pay down the PNC facility.

At June 30, 2019, cash and cash equivalents were $1.3 million, or approximately $1.0 million lower than the $2.3 million of cash and cash equivalents at December 31, 2018. All excess cash has been utilized to pay down debt.



Credit Facilities


The Company was not in compliance with the Total Leverage Ratio and the minimum liquidity covenants, calculated as of June 30, 2019, set forth in its Term Loan Facility. At June 30, 2019, the Company's Total Leverage Ratio was 14.20:1.00 (versus a required Total Leverage Ratio of 8.25:1.00) and the Company's Liquidity (as defined in the Term Loan Facility) was $21.2 million (versus a required level of $28 million). The Company was also not in compliance with the minimum EBITDA covenant for the four quarters ended June 30, 2019 set forth in the PNC Facility. At June 30, 2019, the Company's trailing twelve-month EBITDA (as defined in the PNC Facility) was $9.6 million (versus a required level of $14,195,000).

Each of the foregoing represent an Event of Default, as defined in the respective loan agreements. The occurrence of an Event of Default under both the Term Loan Facility and the PNC Facility provide the respective lenders with the right to declare all amounts under the respective agreements to be immediately due and payable and the respective lenders have the right to terminate the obligation to make loans thereunder, and furthermore allows the respective lenders to exercise any and all other remedies under the applicable agreements.



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The Company has satisfied all of its debt payment obligations on a timely basis and had over $21 million of availability pursuant to the borrowing base formula in the PNC Facility as of June 30, 2019; as such, the Company does not believe that the covenant default relates to a liquidity issue, but a leverage issue with its current covenant structure. The Company is currently seeking a waiver and amendment from its lenders to waive prior defaults and reset the financial covenants under both the Term Loan Facility and the PNC Facility. However, there can be no assurance that the Company will be able to conclude any such waivers or amendments on acceptable terms or at all.



Bank Credit Line

On October 10, 2017, Hudson Technologies Company ("HTC"), Hudson Holdings, Inc. ("Holdings") and Aspen Refrigerants, Inc. ("ARI"), as borrowers (collectively, the "Borrowers"), and the Company as a guarantor, became obligated under an Amended and Restated Revolving Credit and Security Agreement (the "PNC Facility") with PNC Bank, National Association, as administrative agent, collateral agent and lender ("Agent" or "PNC"), PNC Capital Markets LLC as lead arranger and sole bookrunner, and such other lenders as may thereafter become a party to the PNC Facility.

Under the terms of the PNC Facility, the Borrowers may borrow, from time to time, up to $150 million at any time consisting of revolving loans in a maximum amount up to the lesser of $150 million and a borrowing base that is calculated based on the outstanding amount of the Borrowers' eligible receivables and eligible inventory, as described in the PNC Facility. The PNC Facility also contains a sublimit of $15 million for swing line loans and $5 million for letters of credit.

Amounts borrowed under the PNC Facility were used by the Borrowers to consummate the acquisition of ARI and for working capital needs, certain permitted future acquisitions, and to reimburse drawings under letters of credit. At June 30, 2019, total borrowings under the PNC Facility were $33.0 million, and total additional availability was approximately $21.2 million. In addition, there was a $130,000 outstanding letter of credit at June 30, 2019.

Interest on loans under the PNC Facility is payable in arrears on the first day of each month with respect to loans bearing interest at the domestic rate (as set forth in the PNC Facility) and at the end of each interest period with respect to loans bearing interest at the Eurodollar rate (as set forth in the PNC Facility) or, for Eurodollar rate loans with an interest period in excess of three months, at the earlier of (a) each three months from the commencement of such Eurodollar rate loan or (b) the end of the interest period. Interest charges with respect to loans were initially computed on the actual principal amount of loans outstanding during the month at a rate per annum equal to (A) with respect to domestic rate loans, the sum of (i) a rate per annum equal to the higher of (1) the base commercial lending rate of PNC, (2) the federal funds open rate plus 0.5% and (3) the daily LIBOR plus 1.0%, plus (ii) between 0.50% and 1.00% depending on average quarterly undrawn availability and (B) with respect to Eurodollar rate loans, the sum of the Eurodollar rate plus between 1.50% and 2.00% depending on average quarterly undrawn availability.

Borrowers and the Company granted to the Agent, for the benefit of the lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.

The PNC Facility contains a financial covenant requiring the Company to maintain at all times a Fixed Charge Coverage Ratio (FCCR) of not less than 1.00 to 1.00, as of the end of each trailing period of four consecutive quarters. The FCCR (as defined in the PNC Facility) is the ratio of (a) EBITDA for such period, minus unfinanced capital expenditures made during such period, minus the aggregate amount of cash taxes paid during such period, to (b) the aggregate amount of all scheduled payments of principal (excluding principal payments relating to outstanding revolving loans under the PNC Facility) and all cash payments of interest, plus cash dividends and distributions made during such period, plus payments in respect of capital lease obligations made during such period.

On December 6, 2017, the Borrowers and the Company as a guarantor, entered into a First Amendment to Amended and Restated Revolving Credit and Security Agreement (the "First Revolver Amendment") with PNC. The First Revolver Amendment, which was entered into in connection with the syndication of the credit facility, amended the PNC Facility to allow syndicate lenders to provide certain cash management and hedging products and services to the Borrowers, and made amendments to the PNC Facility with respect to lender approval requirements of specified matters and other administrative matters.

On November 30, 2018, the Borrowers and the Company as a guarantor, entered into a Second Amendment to Amended and Restated Revolving Credit and Security Agreement, Consent and Waiver (the "Second Revolver Amendment") with PNC Bank, National Association, as administrative agent, collateral agent and lender and the lenders thereunder.

The Second Revolver Amendment amended the Amended and Restated Revolving Credit and Security Agreement dated October 10, 2017 (as amended to date, the "PNC Facility"), to replace the existing fixed charge coverage ratio until September 30, 2019 with an EBITDA covenant requiring minimum EBITDA for the four fiscal quarters ended on the following dates: September 30, 2018 - $9,240,000; December 31, 2018 - $9,428,000; June 30, 2019 - $9,270,000; June 30, 2019 - $14,195,000. The minimum fixed charge coverage ratio of 1.00:1.00 shall recommence for the quarter ending September 30, 2019.



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The Second Revolver Amendment also increased the applicable interest rate margin to 3% for Eurodollar Rate Loans (as defined in the PNC Facility) and 2% for Domestic Rate Loans (as defined in the PNC Facility) through September 30, 2019, with applicable margins thereafter of between 2.5% and 3% for Eurodollar Rate Loans and 1.5% and 2% for Domestic Rate Loans based on the applicable fixed charge coverage ratio. In connection with the Second Revolver Amendment, the Borrowers also paid the Agent a waiver and amendment fee of $250,000.

On April 17, 2019, the Borrowers, the Company as a guarantor, and ten new subsidiaries of the Borrowers (the "New Subsidiaries"), entered into a Third Amendment and Joinder to Amended and Restated Revolving Credit and Security Agreement and Waiver (the "Third Revolver Amendment") with PNC Bank, National Association, as administrative agent, collateral agent and lender and the lenders thereunder. Pursuant to the Third Amendment, the New Subsidiaries were added as guarantors under the PNC Facility.

The Company evaluated the First, Second and Third Revolver Amendments in accordance with the provisions of ASC 470 to determine if the Amendments were a modification or an extinguishment of debt and concluded that amendments were a modification of the original term loan agreement for accounting purposes. As a result, in 2018 the Company capitalized an additional $250,000 of deferred financing costs in connection with the Second Revolver Amendment, which are being amortized over the remaining term.

The PNC Facility also contains customary non-financial covenants relating to the Company and the Borrowers, including limitations on Borrowers' ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.

The commitments under the PNC Facility will expire and the full outstanding principal amount of the loans, together with accrued and unpaid interest, are due and payable in full on October 10, 2022, unless the commitments are terminated and the outstanding principal amount of the loans are accelerated sooner following an event of default.

In connection with the closing of the PNC Facility, the Company also entered into an Amended and Restated Guaranty and Suretyship Agreement, dated as of October 10, 2017 (the "Revolver Guarantee"), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance of all obligations owing by Borrowers to PNC, as Agent for the benefit of the revolving lenders.




Term Loan Facility



On October 10, 2017, HTC, Holdings, and ARI, as borrowers, and the Company, as guarantor, became obligated under a Term Loan Credit and Security Agreement (the "Term Loan Facility") with U.S. Bank National Association, as administrative agent and collateral agent ("Term Loan Agent") and funds advised by FS Investments and such other lenders as may thereafter become a party to the Term Loan Facility (the "Term Loan Lenders").

Under the terms of the Term Loan Facility, the Borrowers immediately borrowed $105 million pursuant to a term loan (the "Initial Term Loan") and could borrow up to an additional $25 million for a period of eighteen months after closing to fund additional permitted acquisitions (the "Delayed Draw Commitment", and together with the Initial Term Loan, the "Term Loans").

On June 29, 2018, HTC, Holdings and ARI, as borrowers, and the Company as a guarantor, entered into a Limited Waiver and First Amendment to Term Loan Credit and Security Agreement and Other Documents (the "First Amendment") with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder. The First Amendment terminated the Delayed Draw Commitment and provided an interim waiver with respect to compliance with the existing total leverage ratio ("TLR") covenant at June 30, 2018.

The Term Loans mature on October 10, 2023. Principal payments on the Term Loans are required on a quarterly basis, commencing with the quarter ended March 31, 2018, in the amount of 1% per annum of the original principal of the outstanding Term Loans. Commencing with the fiscal year ending December 31, 2018, the Term Loan Facility also requires annual principal payments of up to 50% of Excess Cash Flow (as defined in the Term Loan Facility) if the Company's Total Leverage Ratio (as defined in the Term Loan Facility) for the applicable year is greater than 2.75 to 1.00. The Term Loan Facility also requires mandatory prepayments of the Term Loans in the event of certain asset dispositions, debt issuances, and casualty and condemnation events. The Term Loans may be prepaid at the option of the Borrowers at par in an amount up to $30 million. Additional prepayments are permitted after the first anniversary of the closing date and were originally subject to a prepayment premium of 3% in year two, 1% in year three and zero in year four and thereafter.



  28





Interest on the Term Loans is generally payable on the earlier of the last day of the interest period applicable to such Eurodollar rate loan and the last day of the Term Loan Facility, as applicable. Interest was originally payable at the rate per annum of the Eurodollar Rate (as defined in the Term Loan Facility) plus 7.25%. The Borrowers have the option of paying 3.00% interest per annum in kind by adding such amount to the principal of the Term Loans during no more than five fiscal quarters during the term of the Term Loan Facility.

Borrowers and the Company granted to the Term Loan Agent, for the benefit of the Term Loan Lenders, a security interest in substantially all of their respective assets, including receivables, equipment, general intangibles (including intellectual property), inventory, subsidiary stock, real property, and certain other assets.

The Term Loan Facility originally contained a financial covenant requiring the Company to maintain a Total Leverage Ratio (TLR) of not greater than 4.75 to 1.00, tested as of the last day of the fiscal quarter. The Term Loan Facility was amended on August 14, 2018, including a waiver of the TLR covenant at June 30, 2018, as described below. The TLR (as defined in the Term Loan Facility) is the ratio of (a) funded debt as of such day to (b) EBITDA for the four consecutive fiscal quarters ending on the last day of such fiscal quarter. Funded debt (as defined in the Term Loan Facility) includes amounts borrowed under the PNC Facility and the Term Loan Facility as well as capitalized lease obligations and other indebtedness for borrowed money maturing more than one year from the date of creation thereof. As of June 30, 2019 and December 31, 2018, the TLR was approximately 14.20 to 1 and 11.82 to 1, respectively.

The Term Loan Facility also contains customary non-financial covenants relating to the Company and the Borrowers, including limitations on their ability to pay dividends on common stock or preferred stock, and also includes certain events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other obligations, events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, impairments to guarantees and a change of control.

In connection with the closing of the Term Loan Facility, the Company also entered into a Guaranty and Suretyship Agreement, dated as of October 10, 2017 (the "Term Loan Guarantee"), pursuant to which the Company affirmed its unconditional guarantee of the payment and performance of all obligations owing by Borrowers to Term Loan Agent, as agent for the benefit of the Term Loan Lenders.

The Term Loan Agent and the Agent have entered into an intercreditor agreement governing the relative priority of their security interests granted by the Borrowers and the Guarantor in the collateral, providing that the Agent shall have a first priority security interest in the accounts receivable, inventory, deposit accounts and certain other assets (the "Revolving Credit Priority Collateral") and the Term Loan Agent shall have a first priority security interest in the equipment, real property, capital stock of subsidiaries and certain other assets (the "Term Loan Priority Collateral").

On August 14, 2018, HTC, Holdings and ARI, as borrowers, and the Company as a guarantor, entered into a Waiver and Second Amendment to Term Loan Credit and Security Agreement (the "Second Amendment") with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder. The Second Amendment superseded interim waivers and amended the Term Loan Facility, to waive compliance with the existing TLR covenant at June 30, 2018.

In addition, the Second Amendment also: (i) increases the interest rate by 300 basis points effective July 1, 2018; (ii) waives the existing prepayment premium in the Term Loan Facility in the event the term loan is repaid in full prior to March 31, 2020; (iii) adds an exit fee equal to three percent (3.00%) of the outstanding principal balance of the term loans on the date of the Second Amendment (provided, that payment of the exit fee is waived in the event that the term loan is repaid in full prior to January 1, 2020, and provided further that the exit fee is reduced to one-and-one-half percent (1.50%) in the event that the term loan is repaid in full on or after January 1, 2020 but prior to March 31, 2020); (iv) restricted acquisitions and other equity investments prior to September 30, 2018; and (v) required payment of a one-time waiver fee equal to one percent (1.00%) of the outstanding term loans.

On November 30, 2018, the Borrowers, and the Company as a guarantor, entered into a Waiver and Third Amendment to Term Loan Credit and Security Agreement (the "Third Amendment") with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder.

The Third Amendment superseded interim waivers and amended the Term Loan Facility to reset the maximum Total Leverage Ratio covenant contained in the Term Loan Facility at the indicated dates as follows: (i) June 30, 2018 - 10.15:1.00; (ii) September 30, 2018 - 12.45:1.00; (iii) December 31, 2018 - 12.75:1.00; (iv) March 31, 2019 - 12.95:1.00; (v) June 30, 2019 - 8.25:1.00; September 30, 2019 - 6.40:1.00; (vi) December 31, 2019 - 5:70:1.00; and (vii) March 31, 2020 and each fiscal quarter thereafter - 4:75:1.00.



  29





The Third Amendment increased the scheduled quarterly principal repayments to $525,000 effective December 31, 2018. In addition the Third Amendment requires a further repayment of principal on or before November 14, 2019 in an amount equal to (x) 100% of Excess Cash Flow (as defined in the Term Loan Facility) for the four fiscal quarter period ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers have minimum aggregate Undrawn Availability (as defined in the Term Loan Facility) of at least $35,000,000, (y) 50% of Excess Cash Flow for the four fiscal quarter period ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers have minimum aggregate Undrawn Availability of at least $15,000,000 but less than $35,000,000, and (z) 0% of Excess Cash Flow for the four fiscal quarter period ending September 30, 2019 if after giving effect to the payment thereof, the Borrowers have minimum aggregate Undrawn Availability less than $15,000,000, with any such payment subject to reduction by the amount of any voluntary prepayments made following the date of the Third Amendment. Any voluntary prepayments will not be subject to the prepayment premium or make-whole provisions of the Term Loan Facility. The Third Amendment also adds a minimum liquidity requirement (consisting of cash plus undrawn availability on the Borrowers' revolving loan facility) of $28 million, measured monthly.

The Third Amendment also amended the exit fee payable to the term loan lenders to five percent (5.00%) of the outstanding principal balance of the term loans on November 30, 2018 (the "Exit Fee"), which Exit Fee shall be payable in full in cash upon the earlier to occur of (x) repayment in full of the term loans, or (y) any acceleration of the term loans. The Exit Fee will be reduced by one-tenth of one percent (0.10%) for every $1,000,000 in voluntary prepayments made prior to January 1, 2020; provided, that, in no event shall the Exit Fee be reduced below three percent (3.00%) as a result of any such prepayments, (ii) payment of the Exit Fee shall be waived in the event that repayment in full of the term loans occurs prior to January 1, 2020, and (iii) the Exit Fee shall be reduced by an amount equal to fifty percent (50%) of the amount that would otherwise payable in the event that repayment in full occurs on or after January 1, 2020 but prior to March 31, 2020.

On April 17, 2019, the Borrowers and the Company as a guarantor, and ten new subsidiaries of the Borrowers (the "New Subsidiaries"), entered into a Joinder to Term Loan Credit and Security Agreement and Other Documents (the "Joinder") with U.S. Bank National Association, as collateral agent and administrative agent, and the various lenders thereunder. Pursuant to the Joinder, the New Subsidiaries were added as guarantors under the Term Loan Facility.

The Company evaluated the First , Second and Third Amendments in accordance with the provisions of ASC 470 to determine if the Amendments were a modification or an extinguishment of debt and concluded that the amendments were a modification of the original term loan agreement for accounting purposes. As a result, the Company capitalized an additional $1.0 million of deferred financing costs in connection with the Second Amendment, which are being amortized over the remaining term.



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, 2019, there was one customer accounting for 13% of the Company's revenues. At June 30, 2019 there were $2.8 million of accounts receivable from this customer.

For the six month period ended June 30, 2018, there were no customers that accounted for 10% or more of the Company's revenues.

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



  30





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 nine months 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.

Off-Balance Sheet Arrangements



None.


Recent Accounting Pronouncements

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 February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements, as an update to the previously-issued guidance. This update added a transition option which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without recasting the financial statements in periods prior to adoption. We have used the modified retrospective transition approach in ASU No. 2018-11 and applied the new lease requirements through a cumulative-effect adjustment in the period of adoption. We elected the package of practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to adoption of the new standard. We also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. We recorded approximately $8.1 million as total right-of-use assets and total lease liabilities on our consolidated balance sheet as of January 1, 2019. The Company's accounting for finance leases remained substantially unchanged. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 5 to the financial statements contained herein.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2019 163 M
EBIT 2019 -5,08 M
Net income 2019 -19,0 M
Debt 2019 -
Yield 2019 -
P/E ratio 2019 -0,84x
P/E ratio 2020 -18,6x
Capi. / Sales2019 0,10x
Capi. / Sales2020 0,09x
Capitalization 15,9 M
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Kevin J. Zugibe Chairman & Chief Executive Officer
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