Certain statements, contained in this section and elsewhere in this Form 10-K,
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, and integration of any other assets it acquires from third parties
into its operations, and other risks detailed in the this report 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, 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.
During 2019 and 2018, the Company recorded lower of cost or net realizable value
adjustments of $9.2 million and $35.9 million, respectively, to its inventory
resulting from a challenging pricing environment affecting the refrigerant gas
industry. Further declines in refrigerant gas prices could result in additional
inventory net realizable value adjustments.
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.
15
Beginning in 2017, the Company adopted, on a prospective basis, ASU No. 2017-04,
which simplifies the accounting for goodwill impairment by eliminating Step 2 of
the prior goodwill impairment test that required a hypothetical purchase price
allocation to measure goodwill impairment. Under the new standard, a company
records an impairment charge based on the excess of a reporting unit's carrying
amount over its fair value. An impairment charge would be recognized when the
carrying amount exceeds the estimated fair value of a reporting unit. These
impairment evaluations use many assumptions and estimates in determining an
impairment loss, including certain assumptions and estimates related to future
earnings. If the Company does not achieve its earnings objectives, the
assumptions and estimates underlying these impairment evaluations could be
adversely affected, which could result in an asset impairment charge that would
negatively impact operating results.
In 2018 and 2019, due to two significant selling price corrections 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.
The Company's performance continued to be negatively impacted by the challenging
pricing environment affecting the industry and the market during 2018 and 2019
resulting in an increase in net realizable value adjustments for certain gases;
however, the Company's sales volume has increased in 2019 when compared to 2018.
The Company determined as of September 30, 2019, that the year-to-date decline
in revenue and operating loss, along with the decrease in the Company's stock
price during 2019 represented a triggering event which required a goodwill
impairment test. Based on these indicators, the Company quantitatively evaluated
its goodwill for impairment as of September 30, 2019 and determined that
goodwill was not impaired.
There were no goodwill impairment losses recognized in any of the three years
ended December 31, 2019, 2018 and 2017.
Other Intangibles
Intangibles with determinable lives are amortized over the estimated useful
lives of the assets currently ranging from 2 to 13 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 December 31, 2019, the Company had NOLs of approximately $46.4 million, of
which $41.0 million have no expiration date (subject to annual limitations of
80% of tax earnings) and $5.4 million expire through 2023 (subject to annual
limitations of approximately $1.3 million). As of December 31, 2019, the Company
had state tax NOLs of approximately $23.7 million expiring in various years.
Concluding that a valuation allowance is not required is difficult when there is
significant negative evidence that is objective and verifiable, such as
cumulative losses in recent years. We utilize a rolling twelve quarters of
pre-tax income or loss adjusted for significant permanent book to tax
differences, as well as non-recurring items, as a measure of our cumulative
results in recent years. Based on the operating loss experienced as of December
31, 2018 and 2019, our analysis indicated that we had cumulative three year
historical losses on this basis, which represented significant negative evidence
that is objective and verifiable and, therefore, difficult to overcome. Based on
our assessment as of December 31, 2018 and 2019, we concluded that due to the
uncertainty that the deferred tax assets will not be fully realized in the
future, we recorded a valuation allowance of approximately $11.3 million during
the year ended December 31, 2018 and increased the valuation allowance to $18.9
million as of December 31, 2019 due to additional losses.
16
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 was phased out on December 31, 2019, and production of all
virgin HCFC refrigerants is scheduled to be phased out by 2030.
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.
Results of Operations
Year ended December 31, 2019 as compared to the year ended December 31, 2018
Revenues for the year ended December 31, 2019 were $162.1 million, a reduction
of $4.4 million or 2.6% from the $166.5 million reported during the comparable
2018 period. Refrigerant average selling prices declined and were partially
offset by an increase in refrigerant volume and increased revenues from the DLA
contract.
Cost of sales for the year ended December 31, 2019 was $144.9 million or 89% of
sales. Cost of sales for the year ended December 31, 2018 was $173.9 million or
104% of sales. The Company recorded lower of cost or net realizable value
adjustments to its inventory of $9.2 million and $35.9 million during 2019 and
2018, respectively. The Company's performance has been negatively impacted by
the challenging pricing environment affecting the refrigerant gas industry
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 2019 when compared to 2018, as described above. In
addition, the Company has been selling down its higher cost inventory during
2019, which has reduced the cost of sales as a percentage of sales in 2019.
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 2019 were $30.0 million, a reduction of $2.3 million from the $32.3
million reported during the comparable 2018 period. Most of the reduction
relates to reduced professional fees pertaining to integration and related
services relating to the acquisition of ARI.
Amortization expense was $2.9 million and $3.0 million during 2019 and 2018,
respectively.
Other expense for 2019 was $9.5 million, compared to the $14.8 million of other
expense reported during the comparable 2018 period. In August 2019, the Company
recorded and received $8.9 million of cash pursuant to the settlement of a
working capital adjustment dispute arising from the acquisition of Aspen
Refrigerants, Inc. in October 2017. Interest expense was $18.9 million and $14.8
million during 2019 and 2018, respectively; approximately $2.2 million of the
variance relates to third party costs incurred as a result of the term loan
amendment and the writeoff of deferred financing costs relating to the
extinguishment of the prior asset-based revolving loan with PNC Bank. The
remaining increase in interest expense mainly relates to an increase in interest
rate margin (spread) as a result of the amendment of our credit facilities in
November 2018.
Income tax expense for 2019 was $0.7 million compared to income tax benefit of
$1.7 million for 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
December 31, 2019. The two main drivers of the December 31, 2018 income tax
benefit of $1.7 million are as follows: (1) approximately $12.4 million of
establishment of the deferred tax asset valuation allowance and (2)
approximately ($1.0) million related to the deferred tax asset valuation
allowance, for the establishment of the deferred tax liability "naked credit".
The net loss for the year ended December 31, 2019 was $25.9 million, compared to
$55.7 million of net loss reported during the comparable 2018 period. The
reduction in net loss is primarily due to a reduced lower of cost or net
realizable value adjustment in 2019 when compared to 2018, higher sales volume
of refrigerants sold, higher sales from the DLA contract, reduced cost of sales
as we sold off higher cost layers of inventory, lower SG&A expenses, offset by
increased interest expense, and a decrease in the selling price of certain
refrigerants sold.
17
Liquidity and Capital Resources
At December 31, 2019, the Company had working capital, which represents current
assets less current liabilities, of $28.3 million, a decrease of $34.9 million
from the working capital of $63.2 million at December 31, 2018. The decrease in
working capital is primarily attributable to reduced inventory and accounts
receivable levels, and also a $15 million paydown of revolving loans.
Inventory and trade receivables are principal components of current assets. At
December 31, 2019, the Company had inventory of $59.2 million, a decrease of
$42.8 million from $102.0 million at December 31, 2018. Inventory declined as a
result of the sell down of higher priced layers and improved inventory
management. In addition, as described above, the Company recorded lower of cost
or net realizable value adjustments to its inventory of $9.2 million during
2019. 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 December 31, 2019, the Company had trade receivables, net of
allowance for doubtful accounts, of $8.1 million a decrease of $6.0 million from
$14.1 million at December 31, 2018, mainly due to increased collections and
timing. 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 provided by operating activities for the year ended December 31, 2019
was $33.8 million, a reduction of $2.5 million compared to the net cash provided
by operating activities of $36.3 million for the comparable 2018 period. The
reduction is largely due to higher cash interest expense in 2019 when compared
to 2018, as described above in Results of Operations. The remaining variance
relates to timing of accounts receivable and inventory.
Net cash used in investing activities for 2019 and 2018 was $1.0 million and
$1.1 million for 2019 and 2018, respectively. The net cash used in investing
activities was primarily related to investment in general purpose equipment for
the Company's facilities.
Net cash used in financing activities for 2019 and 2018 was $32.5 million and
$38.0 million, respectively. The Company repaid approximately $31.1 million and
$36.9 million of debt in 2019 and 2018, respectively. In addition, the Company
incurred higher deferred financing costs relating to the December 2019 amendment
of the term loan and establishment of the new asset-based lending facility with
Wells Fargo, as described below.
At December 31, 2019, cash and cash equivalents were $2.6 million, or
approximately $0.3 million higher than the $2.3 million of cash and cash
equivalents at December 31, 2018.
New Revolving Credit Facility
On December 19, 2019, Hudson Technologies Company ("HTC"), Hudson Holdings, Inc.
("Holdings") and Aspen Refrigerants, Inc. ("ARI"), as borrowers (collectively,
the "Borrowers"), and Hudson Technologies, Inc (the "Company") as a guarantor,
became obligated under a Credit Agreement (the "Wells Fargo Facility") with
Wells Fargo Bank, as administrative agent and lender ("Agent" or "Wells Fargo")
and such other lenders as may thereafter become a party to the Wells Fargo
Facility.
Under the terms of the Wells Fargo Facility, the Borrowers may borrow, from time
to time, up to $60 million at any time consisting of revolving loans in a
maximum amount up to the lesser of $60 million and a borrowing base that is
calculated based on the outstanding amount of the Borrowers' eligible
receivables and eligible inventory, as described in the Wells Fargo Facility.
The Wells Fargo Facility also contains a sublimit of $5 million for swing line
loans and $2 million for letters of credit.
Amounts borrowed under the Wells Fargo Facility were used by the Borrowers to
repay existing revolving indebtedness under its Prior Revolving Credit Facility
(as defined below), repay certain principal amounts under the Term Loan Facility
(as defined below), and may be used for working capital needs, certain permitted
acquisitions, and to reimburse drawings under letters of credit.
18
Interest on loans under the Wells Fargo Facility is payable in arrears on the
first day of each month. Interest charges with respect to loans are computed on
the actual principal amount of loans outstanding during the month at a rate per
annum equal to (A) with respect to Base Rate loans, the sum of (i) a rate per
annum equal to the higher of (1) the federal funds rate plus 0.5%, (2) one month
LIBOR plus 1.0%, and (3) the prime commercial lending rate of Wells Fargo, plus
(ii) between 1.25% and 1.75% depending on average monthly undrawn availability
and (B) with respect to LIBOR rate loans, the sum of the LIBOR rate plus between
2.25% and 2.75% depending on average monthly undrawn availability.
In connection with the closing of the Wells Fargo Facility, the Company also
entered into a Guaranty and Security Agreement, dated as of December 19, 2019
(the "Revolver Guaranty and Security Agreement"), pursuant to which the Company
and certain subsidiaries unconditionally guaranteed the payment and performance
of all obligations owing by Borrowers to Wells Fargo, as Agent for the benefit
of the revolving lenders. Pursuant to the Revolver Guaranty and Security
Agreement, Borrowers, the Company and ten other subsidiaries granted to the
Agent, for the benefit of the Wells Fargo Facility lenders, a security interest
in substantially all of their respective assets, including receivables,
equipment, general intangibles (including intellectual property), inventory,
subsidiary stock, real property, and certain other assets. The Revolver Guaranty
and Security Agreement also provides that the Agent shall receive the right to
dominion over certain of the Borrowers' bank accounts in the event of an Event
of Default under the Wells Fargo Facility, or if undrawn availability under the
Wells Fargo Facility falls below $9 million at any time.
The Wells Fargo Facility contains a financial covenant requiring the Company to
maintain at all times minimum liquidity (defined as availability under the Wells
Fargo Facility plus unrestricted cash) of at least $5 million, of which at least
$3 million must be derived from availability. The Wells Fargo Facility also
contains a springing covenant, which takes effect only upon a failure to
maintain undrawn availability of at least $7.5 million, requiring the Company to
maintain a Fixed Charge Coverage Ratio (FCCR) of not less than 1.00 to 1.00, as
of the end of each trailing period of twelve consecutive fiscal months
commencing with the month prior to the triggering of the covenant. The FCCR (as
defined in the Wells Fargo Facility) is the ratio of (a) EBITDA for such period,
minus unfinanced capital expenditures made during such period, to (b) the
aggregate amount of (i) interest expense required to be paid (other than
interest paid-in-kind, amortization of financing fees, and other non-cash
interest expense) during such period, (ii) scheduled principal payments (but
excluding principal payments relating to outstanding revolving loans under the
Wells Fargo Facility), (iii) all net federal, state, and local income taxes
required to be paid during such period (provided, that any tax refunds received
shall be applied to the period in which the cash outlay for such taxes was
made), (iv) all restricted payments paid (as defined in the Wells Fargo
Facility) during such period, and (v) to the extent not otherwise deducted from
EBITDA for such period, all payments required to be made during such period in
respect of any funding deficiency or funding shortfall with respect to any
pension plan. The FCCR covenant ceases after the Borrowers have been in
compliance therewith for two consecutive months.
The Wells Fargo Facility also contains customary non-financial covenants
relating to the Company and the Borrowers, including limitations on Borrowers'
ability to pay dividends on common stock or preferred stock, and also includes
certain events of default, including payment defaults, breaches of
representations and warranties, covenant defaults, cross-defaults to other
obligations, events of bankruptcy and insolvency, certain ERISA events,
judgments in excess of specified amounts, impairments to guarantees and a change
of control. The Wells Fargo Facility also contains certain covenants contained
in the Fourth Amendment to the Term Loan Facility described below.
The commitments under the Wells Fargo Facility will expire and the full
outstanding principal amount of the loans, together with accrued and unpaid
interest, are due and payable in full on December 19, 2022, unless the
commitments are terminated and the outstanding principal amount of the loans are
accelerated sooner following an event of default.
Termination of Prior Revolving Credit Facility
In conjunction with entry into the Wells Fargo Credit Facility as described
above, on December 19, 2019 the Company's existing secured revolving loan set
forth in the Amended and Restated Revolving Credit and Security Agreement, as
amended (the "Prior Revolving Credit Facility"), with PNC Bank, National
Association, as administrative agent, collateral agent and lender ("PNC") and
the lenders thereunder, which had a principal balance of approximately $6.7
million, was repaid in full and the Prior Revolving Credit Facility was
terminated. During 2019, the Company repaid $22.3 million of the revolving
credit facility with PNC Bank prior to the $6.7 million principal paydown in
December 2019. On December 19, 2019, the Company borrowed $15.3 million under
the Wells Fargo Credit Facility and repaid $1.3 million on December 30, 2019.
Term Loan Facility
On October 10, 2017, HTC, Holdings, and ARI, as borrowers, and the Company, as
guarantor, became obligated under a Term Loan Credit and Security Agreement (the
"Term Loan Facility") with U.S. Bank National Association, as administrative
agent and collateral agent ("Term Loan Agent") and funds advised by FS
Investments and such other lenders as may thereafter become a party to the Term
Loan Facility (the "Term Loan Lenders").
19
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 Loan matures on October 10, 2023. Interest on the Term Loan is
generally payable on the earlier of the last day of the interest period
applicable to such Eurodollar rate loan and the last day of the Term Loan
Facility, as applicable. Interest was originally payable at the rate per annum
of the Eurodollar Rate (as defined in the Term Loan Facility) plus 7.25%. The
Borrowers have the option of paying 3.00% interest per annum in kind by adding
such amount to the principal of the Term Loans during no more than five fiscal
quarters during the term of the Term Loan Facility.
Borrowers and the Company granted to the Term Loan Agent, for the benefit of the
Term Loan Lenders, a security interest in substantially all of their respective
assets, including receivables, equipment, general intangibles (including
intellectual property), inventory, subsidiary stock, real property, and certain
other assets.
The Term Loan Facility originally contained a financial covenant requiring the
Company to maintain a TLR of not greater than 4.75 to 1.00, tested as of the
last day of the fiscal quarter. The Term Loan Facility was amended on August 14,
2018, including a waiver of the TLR covenant at June 30, 2018, as described
below. The TLR (as defined in the Term Loan Facility) is the ratio of (a) funded
debt as of such day to (b) EBITDA for the four consecutive fiscal quarters
ending on the last day of such fiscal quarter. Funded debt (as defined in the
Term Loan Facility) includes amounts borrowed under the Wells Fargo Facility and
the Term Loan Facility as well as capitalized lease obligations and other
indebtedness for borrowed money maturing more than one year from the date of
creation thereof. As of December 31, 2019 and 2018, the TLR was approximately
11.22 to 1 and 11.82 to 1, respectively.
The Term Loan Facility also contains customary non-financial covenants relating
to the Company and the Borrowers, including limitations on their ability to pay
dividends on common stock or preferred stock, and also includes certain events
of default, including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to other obligations, events of
bankruptcy and insolvency, certain ERISA events, judgments in excess of
specified amounts, impairments to guarantees and a change of control.
In connection with the closing of the Term Loan Facility, the Company also
entered into a Guaranty and Suretyship Agreement, dated as of October 10, 2017
(the "Term Loan Guarantee"), pursuant to which the Company affirmed its
unconditional guarantee of the payment and performance of all obligations owing
by Borrowers to Term Loan Agent, as agent for the benefit of the Term Loan
Lenders.
The Term Loan Agent and the Agent have entered into an intercreditor agreement
governing the relative priority of their security interests granted by the
Borrowers and the Guarantor in the collateral, providing that the Agent shall
have a first priority security interest in the accounts receivable, inventory,
deposit accounts and certain other assets (the "Revolving Credit Priority
Collateral") and the Term Loan Agent shall have a first priority security
interest in the equipment, real property, capital stock of subsidiaries and
certain other assets (the "Term Loan Priority Collateral").
On August 14, 2018, HTC, Holdings and ARI, as borrowers, and the Company as a
guarantor, entered into a Waiver and Second Amendment to Term Loan Credit and
Security Agreement (the "Second Amendment") with U.S. Bank National Association,
as collateral agent and administrative agent, and the various lenders
thereunder. The Second Amendment superseded interim waivers and amended the Term
Loan Facility, to waive compliance with the existing TLR covenant at June 30,
2018.
In addition, the Second Amendment also: (i) increased the interest rate by 300
basis points effective July 1, 2018; (ii) waives the existing prepayment premium
in the Term Loan Facility in the event the term loan is repaid in full prior to
March 31, 2020; (iii) adds an exit fee equal to three percent (3.00%) of the
outstanding principal balance of the term loans on the date of the Second
Amendment (provided, that payment of the exit fee was waived in the event that
the term loan was repaid in full prior to January 1, 2020, and provided further
that the exit fee is reduced to one-and-one-half percent (1.50%) in the event
that the term loan is repaid in full on or after January 1, 2020 but prior to
March 31, 2020); (iv) restricted acquisitions and other equity investments prior
to September 30, 2018; and (v) required payment of a one-time waiver fee equal
to one percent (1.00%) of the outstanding term loans.
On November 30, 2018, the Borrowers, and the Company as a guarantor, entered
into a Waiver and Third Amendment to Term Loan Credit and Security Agreement
(the "Third Amendment") with U.S. Bank National Association, as collateral agent
and administrative agent, and the various lenders thereunder.
20
The Third Amendment superseded interim waivers and amended the Term Loan
Facility to reset the maximum Total Leverage Ratio covenant contained in the
Term Loan Facility at the indicated dates as follows: (i) June 30, 2018 -
10.15:1.00; (ii) September 30, 2018 - 12.45:1.00; (iii) December 31, 2018 -
12.75:1.00; (iv) March 31, 2019 - 12.95:1.00; (v) June 30, 2019 - 8.25:1.00;
September 30, 2019 - 6.40:1.00; (vi) December 31, 2019 - 5:70:1.00; and (vii)
March 31, 2020 and each fiscal quarter thereafter - 4:75:1.00.
The Third Amendment increased the scheduled quarterly principal repayments to
$525,000 effective December 31, 2018. In addition the Third Amendment required a
further repayment of principal on or before November 14, 2019 in an amount equal
to (x) 100% of Excess Cash Flow (as defined in the Term Loan Facility) for the
four fiscal quarter period ended September 30, 2019 if after giving effect to
the payment thereof, the Borrowers had minimum aggregate Undrawn Availability
(as defined in the Term Loan Facility) of at least $35,000,000, (y) 50% of
Excess Cash Flow for the four fiscal quarter period ended September 30, 2019 if
after giving effect to the payment thereof, the Borrowers had minimum aggregate
Undrawn Availability of at least $15,000,000 but less than $35,000,000, and (z)
0% of Excess Cash Flow for the four fiscal quarter period ended September 30,
2019 if after giving effect to the payment thereof, the Borrowers had minimum
aggregate Undrawn Availability less than $15,000,000, with any such payment
subject to reduction by the amount of any voluntary prepayments made following
the date of the Third Amendment. Any voluntary prepayments would not be subject
to the prepayment premium or make-whole provisions of the Term Loan Facility.
The Third Amendment also added a minimum liquidity requirement (consisting of
cash plus undrawn availability on the Borrowers' revolving loan facility) of $28
million, measured monthly.
The Third Amendment also amended the exit fee payable to the term loan lenders
to five percent (5.00%) of the outstanding principal balance of the term loans
on November 30, 2018 (the "Exit Fee"), which Exit Fee shall be payable in full
in cash upon the earlier to occur of (x) repayment in full of the term loans, or
(y) any acceleration of the term loans. The Exit Fee will be reduced by
one-tenth of one percent (0.10%) for every $1,000,000 in voluntary prepayments
made prior to January 1, 2020; provided, that, in no event shall the Exit Fee be
reduced below three percent (3.00%) as a result of any such prepayments, (ii)
payment of the Exit Fee would be waived in the event that repayment in full of
the term loans occurred prior to January 1, 2020, and (iii) the Exit Fee shall
be reduced by an amount equal to fifty percent (50%) of the amount that would
otherwise payable in the event that repayment in full occurs on or after January
1, 2020 but prior to March 31, 2020.
On December 19, 2019, HTC, Holdings and ARI as borrowers and the Company as a
guarantor, entered into a Waiver and Fourth Amendment to Term Loan Credit and
Security Agreement (the "Fourth Amendment") with U.S. Bank National Association,
as collateral agent and administrative agent, and the various lenders
thereunder.
The Fourth Amendment waived financial covenant defaults at June 30, 2019 and
September 30, 2019 and amended the Term Loan Credit and Security Agreement dated
October 10, 2017 (as previously amended, the "Term Loan Facility") to reset the
maximum Total Leverage Ratio covenant contained in the Term Loan Facility at the
indicated dates as follows: (i) September 30, 2019 - 15.67:1.00; (ii) December
31, 2019 - 14.54:1.00; (iii) March 31, 2020 - 16.57:1.00; (iv) June 30, 2020 -
10.87:1.00; (v) September 30, 2020 - 8.89:1.00; (vi) December 31, 2020 -
8.89:1.00; (vii) March 31, 2021 - 7.75:1.00; (viii) June 30, 2021 - 7.03:1.00;
(ix) September 30, 2021 - 6.08:1.00; and (x) December 31, 2021 - 5:36:1.00. The
Fourth Amendment also reset the minimum liquidity requirement (consisting of
cash plus undrawn availability on the Borrowers' revolving loan facility) of $5
million, measured monthly. Furthermore, the Fourth Amendment added a minimum LTM
Adjusted EBITDA covenant as of the indicated dates as follows: (i) September 30,
2019 - $7.887 million; (ii) December 31, 2019 - $7.954 million; (iii) March 31,
2020 - $7.359 million; (iv) June 30, 2020 - $11.745 million; (v) September 30,
2020 - $12.021 million; (vi) December 31, 2020 - $12.300 million; (vii) March
31, 2021 -$14.295 million; (viii) June 30, 2021 - $14.566 million; (ix)
September 30, 2021 - $15.431 million; and (x) December 31, 2021 - $16.267
million.
The Fourth Amendment also (i) continues the limitation on acquisitions and
dividends, (ii) required a principal repayment of $14,000,000 upon execution of
the Fourth Amendment and (iii) increases the scheduled quarterly principal
repayments to $562,000 effective March 31, 2020 and $1,312,000 effective
December 31, 2020.
The Fourth Amendment also terminated the exit fee payable to the term loan
lenders, which would have been payable in full in cash upon the earlier to occur
of (x) repayment in full of the term loans, or (y) any acceleration of the term
loans. In lieu of the exit fee, the Fourth Amendment reinstated a prepayment
premium equal to the following percentages of the principal amount prepaid,
depending upon the date of prepayment: (i) through March 31, 2020 - 0.50%; (ii)
from April 1, 2020 through March 31, 2021 - 2.50%; and (iii) from April 1, 2021
and thereafter - 5.00%.
The Fourth Amendment also adds a new covenant providing that in the event of a
breach of a financial covenant contained in the Term Loan Facility or any
failure to make a required principal repayment (a "Trigger Event"), then on or
prior to six months after a Trigger Event, the Company shall commence a process
to (x) sell its businesses and/or assets, and/or (y) consummate a refinancing
transaction with respect to the Term Loan Facility (a "Transaction"), in each
case, subject to enumerated time milestones contained in the Fourth Amendment,
and which requires that Transaction shall, in any event, be consummated on or
prior to the eighteen (18) month anniversary of the Trigger Event.
21
As closing conditions to the execution and delivery of the Fourth Amendment, the
Company was required to: (i) amend its Bylaws in a manner acceptable to the Term
Loan Facility lenders; (ii) appoint two new independent directors to the board
of directors (the "Special Directors"); and (iii) pay an amendment fee of 0.50%
of the amount of the outstanding loans under the Term Loan Facility.
The Company evaluated the First, Second, Third and Fourth Amendments in
accordance with the provisions of Accounting Standards Codification ("ASC") 470,
Debt, to determine if the Amendments were (1) a troubled debt restructuring, and
if not, (2) a modification or an extinguishment of debt. The Company concluded
that the first three amendments were a modification of the original term loan
agreement for accounting purposes. As a result, the Company capitalized an
additional $1.0 million of deferred financing costs in connection with the
Second Amendment, which are being amortized over the remaining term. The Company
concluded that the Fourth Amendment was a troubled debt restructuring for
accounting purposes due to the removal of the exit fee; as such, the Company
capitalized an additional $0.5 million of deferred financing costs, which are
being amortized over the remaining term. The future undiscounted cash flows of
the term loan, as amended, exceeded the carrying value, and accordingly, no gain
was recognized and no adjustment was made to the carrying value of the debt.
The Company was in compliance with all covenants, under the Wells Fargo Facility
and the Term Loan Facility, as amended, as of December 31, 2019. The Company's
ability to comply with these covenants in future quarters may be affected by
events beyond the Company's control, including general economic conditions,
weather conditions, regulations and refrigerant pricing. Therefore, we cannot
make any assurance that we will continue to be in compliance during future
periods.
The Company believes that it will be able to satisfy its working capital
requirements for the foreseeable future from anticipated cash flows from
operations and available funds under the Wells Fargo Facility. Any unanticipated
expenses, including, but not limited to, an increase in the cost of refrigerants
purchased by the Company, an increase in operating expenses or failure to
achieve expected revenues from the Company's RefrigerantSide® Services and/or
refrigerant sales or additional expansion or acquisition costs that may arise in
the future would adversely affect the Company's future capital needs. There can
be no assurance that the Company's proposed or future plans will be successful,
and as such, the Company may require additional capital sooner than anticipated,
which capital may not be available on acceptable terms, or at all.
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 has been 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 year ended December 31, 2019, one customer accounted for 14% of the
Company's revenues; no other customer accounted for more than 10% of the
Company's revenues. At December 31, 2019, there were $1.8 million of outstanding
receivables from this customer.
For the year ended December 31, 2018, one customer accounted for 11% of the
Company's revenues; no other customer accounted for more than 10% of the
Company's revenues. At December 31, 2018, there were $2.9 million of outstanding
receivables from this customer.
The loss of a principal customer or a decline in the economic prospects of
and/or a reduction in purchases of the Company's products or services by any
such customer could have a material adverse effect on the Company's operating
results and financial position.
22
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 January 2017, the FASB issued Accounting Standards Update ("ASU") No.
2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment" (ASU 2017-04) which simplifies the accounting for goodwill
impairment by eliminating Step 2 of the prior goodwill impairment test which
required a hypothetical purchase price allocation to measure goodwill
impairment. Under the new standard, a company will record an impairment charge
based on the excess of a reporting unit's carrying amount over its fair value.
ASU 2017-04 does not change the guidance on completing Step 1 of the goodwill
impairment test and still allows a company to perform the optional qualitative
goodwill impairment assessment before determining whether to proceed to Step 1.
The standard is effective for annual and interim goodwill impairment tests in
fiscal years beginning after December 15, 2019 with early adoption permitted for
any impairment test performed on testing dates after January 1, 2017. The
Company adopted this standard on January 1, 2017 and has applied its guidance in
its impairment assessments.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on
Financial Instruments, which revises guidance for the accounting for credit
losses on financial instruments within its scope, and in November 2018, issued
ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019,
issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which
amended the standard. The new standard introduces an approach, based on expected
losses, to estimate credit losses on certain types of financial instruments and
modifies the impairment model for available-for-sale debt securities. The new
approach to estimating credit losses (referred to as the current expected credit
losses model) applies to most financial assets measured at amortized cost and
certain other instruments, including trade and other receivables, loans,
held-to-maturity debt securities, net investments in leases and
off-balance-sheet credit exposures. This ASU is effective for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal
years, with early adoption permitted. Entities are required to apply the
standard's provisions as a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the guidance is adopted.
The Company is still evaluating the impact of this ASU.
In February 2016, the FASB issued Accounting Standards Update No.
2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires
lessees to recognize operating and financing lease liabilities and corresponding
right-of-use assets on the balance sheet and to provide enhanced disclosures
surrounding the amount, timing and uncertainty of cash flows arising from
leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases -
Targeted Improvements, as an update to the previously-issued guidance. This
update added a transition option which allows for the recognition of a
cumulative effect adjustment to the opening balance of retained earnings in the
period of adoption without recasting the financial statements in periods prior
to adoption. 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.
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