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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13412
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Hudson Technologies, Inc.
(Name of small business issuer as specified in its charter)
New York 13-3641539
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 North Middletown Road
Pearl River, New York 10965
(address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (845) 735-6000
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Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.01 par value 5,161,020 shares
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Class Outstanding at April 22, 2002
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Hudson Technologies, Inc.
Index
Part I. Financial Information Page Number
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Item 1 - Consolidated Balance Sheets 3
- Consolidated Statements of Operations 4
- Consolidated Statements of Cash Flows 5
- Notes to the Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Part II. Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 16
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I - FINANCIAL INFORMATION
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share and par value amounts)
March 31, December 31,
2002 2001
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 1,081 $ 1,382
Trade accounts receivable - net of allowance for doubtful
accounts of $187 and $149 3,778 2,745
Inventories 2,371 2,387
Prepaid expenses and other current assets 78 150
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Total current assets 7,308 6,664
Property, plant and equipment, less accumulated depreciation 3,318 3,581
Other assets 122 123
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Total Assets $ 10,748 $ 10,368
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 4,538 $ 3,287
Short-term debt 2,183 2,450
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Total current liabilities 6,721 5,737
Long-term debt, less current maturities 675 841
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Total Liabilities 7,396 6,578
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Commitments and contingencies
Stockholders' equity:
Preferred Stock, shares authorized 5,000,000:
Series A Convertible Preferred Stock, $0.01 par value
($100 liquidation preference value); shares authorized
150,000; issued and outstanding 112,618 and 108,745 11,261 10,875
Common Stock, $0.01 par value; shares authorized
20,000,000; issued outstanding 5,161,020 and 5,156,520 52 52
Additional paid-in capital 20,191 20,567
Accumulated deficit (28,152) (27,704)
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Total Stockholders' Equity 3,352 3,790
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Total Liabilities and Stockholders' Equity $ 10,748 $ 10,368
======== ========
See accompanying Notes to the Consolidated Financial Statements.
3
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Operations
(unaudited)
(Amounts in thousands, except for share and per share amounts)
Three month period
ended March 31,
---------------
2002 2001
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Revenues $ 6,111 $ 5,030
Cost of Sales 4,681 3,868
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Gross Profit 1,430 1,162
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Operating expenses:
Selling and marketing 672 558
General and administrative 1,065 1,040
Depreciation and amortization 285 307
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Total operating expenses 2,022 1,905
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Operating loss (592) (743)
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Other income (expense):
Interest expense (97) (125)
Other income 241 83
Gain on sale of assets -- 14
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Total other income (expense) 144 (28)
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Loss before income taxes (448) (771)
Income taxes -- --
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Net loss (448) (771)
Preferred stock dividends (197) (159)
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Available for common shareholders $ (645) $ (930)
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Net loss per common share - basic and diluted $ (0.13) $ (0.18)
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Weighted average number of shares outstanding 5,156,895 5,088,820
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
4
Hudson Technologies, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
(Amounts in thousands)
Three month period
ended March 31,
---------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (448) $ (771)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 285 307
Allowance for doubtful accounts 36 7
Gain on sale of assets -- (14)
Changes in assets and liabilities:
Trade accounts receivable (1,069) (1,011)
Inventories 16 (59)
Prepaid expenses and other current assets 72 (13)
Other assets 1 3
Accounts payable and accrued expenses 1,251 (604)
Deferred income -- (3)
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Cash provided (used) by operating activities 144 (2,158)
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Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 203 938
Additions to property, plant, and equipment (225) (144)
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Cash provided (used) by investing activities (22) 794
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Cash flows from financing activities:
Proceeds from issuance of preferred stock - net -- 2,940
Proceeds from issuance of common stock - net 10 --
Proceeds from (repayment of) short-term debt - net (285) 921
Proceeds from long-term debt 151 --
Repayment of long-term debt (299) (743)
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Cash provided (used) by financing activities (423) 3,118
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Increase (decrease) in cash and cash equivalents (301) 1,754
Cash and cash equivalents at beginning of period 1,382 863
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Cash and cash equivalents at end of period $ 1,081 $ 2,617
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 97 $ 125
Supplemental schedule of non-cash investing and financing
activities:
In-kind payment of preferred stock dividends $ 387 $ 257
See accompanying Notes to the Consolidated Financial Statements
5
Hudson Technologies, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
General
Hudson Technologies, Inc., incorporated under the laws of New York on January
11, 1991, together with its subsidiaries (collectively, "Hudson" or the
"Company"), is a refrigerant services company providing innovative solutions to
recurring problems within the refrigeration industry. The Company's products and
services are primarily used in commercial air conditioning, industrial
processing and refrigeration systems, including (i) refrigerant sales, (ii)
RefrigerantSide(R) Services performed at a customer's site, consisting of system
decontamination to remove moisture, oils and other contaminants and (iii)
reclamation of refrigerants. The Company operates through its wholly owned
subsidiary Hudson Technologies Company.
Note 1- Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions of Regulation S-B. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial information included
in the quarterly report should be read in conjunction with the Company's audited
financial statements and related notes thereto for the year ended December 31,
2001. Operating results for the three month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2002.
In the opinion of management, all estimates and adjustments considered necessary
for a fair presentation have been included and all such adjustments were normal
and recurring.
Consolidation
The consolidated financial statements represent all companies of which Hudson
directly or indirectly has majority ownership or otherwise controls. Significant
intercompany accounts and transactions have been eliminated. The Company's
consolidated financial statements include the accounts of wholly-owned
subsidiaries Hudson Holdings, Inc. and Hudson Technologies Company.
Fair value of financial instruments
The carrying values of financial instruments including trade accounts
receivable, and accounts payable approximate fair value at March 31, 2002 and
December 31, 2001, because of the relatively short maturity of these
instruments. The carrying value of short-and long-term debt approximates fair
value, based upon quoted market rates of similar debt issues, as of March 31,
2002 and December 31, 2001.
Credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of temporary cash investments and trade
accounts receivable. The Company maintains its temporary cash investments in
highly-rated financial institutions. The Company's trade accounts receivables
are due from companies throughout the U.S. The Company reviews each customer's
credit history before extending credit.
The Company establishes an allowance for doubtful accounts based on factors
associated with the credit risk of specific accounts, historical trends, and
other information.
During the quarter ended March 31, 2002, one customer accounted for 14% of the
Company's revenues. During the quarter ended March 31, 2001, three customers
accounted for 18%, 13% and 12% of the Company's revenues. The loss of a
principal customer or a decline in the economic prospects and purchases of the
Company's products or services by any such customer would have an adverse effect
on the Company's financial position and results of operations.
Cash and cash equivalents
Temporary investments with original maturities of ninety days or less are
included in cash and cash equivalents.
6
Inventories
Inventories, consisting primarily of reclaimed refrigerant products available
for sale, are stated at the lower of cost, on a first-in first-out basis, or
market.
Property, plant, and equipment
Property, plant, and equipment are stated at cost; including internally
manufactured equipment. The cost to complete equipment that is under
construction is not considered to be material to the Company's financial
position. Provision for depreciation is recorded (for financial reporting
purposes) using the straight-line method over the useful lives of the respective
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of economic life or terms of the respective leases. Costs of maintenance
and repairs are charged to expense when incurred.
Due to the specialized nature of the Company's business, it is possible that the
Company's estimates of equipment useful life periods may change in the future.
Revenues and cost of sales
Revenues are recorded upon completion of service or product shipment or passage
of title to customers in accordance with contractual terms. Cost of sales is
recorded based on the cost of products shipped or services performed and related
direct operating costs of the Company's facilities. To the extent that the
Company charges shipping fees such amounts are included as a component of
revenue and the corresponding costs are included as a component of cost of
sales.
Income taxes
The Company utilizes the assets and liability method for recording deferred
income taxes, which provides for the establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
The Company recognized a reserve allowance against the deferred tax benefit for
the current and prior period losses. The tax benefit associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognized net income in future periods.
Loss per common and equivalent shares
Loss per common share, Basic, is calculated based on the net loss for the period
less dividends on the outstanding Series A Preferred Stock of $197,000 and
$159,000 for the three month periods ended March 31, 2002 and 2001,
respectively, divided by the weighted average number of shares outstanding. If
dilutive, common equivalent shares (common shares assuming exercise of options
and warrants or conversion of Preferred Stock), utilizing the treasury stock
method, are considered in the presentation of dilutive earnings per share. The
effect of equivalent shares was not dilutive in either 2002 or 2001.
Estimates and Risks
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect reported amounts of certain assets and liabilities,
the disclosure of contingent assets and liabilities, and the results of
operations during the reporting period. Actual results could differ from these
estimates.
The Company participates in an industry that is highly regulated, changes in
which could affect operating results. Currently the Company purchases virgin and
reclaimable refrigerants from domestic suppliers and its customers. To the
extent that the Company is unable to obtain refrigerants on commercially
reasonable terms or experiences a decline in demand for refrigerants, the
Company could realize reductions in refrigerant processing and possible loss of
revenues, which would have a material adverse affect on operating results.
7
The Company is subject to various legal proceedings. The Company assesses the
merit and potential liability associated with each of these proceedings. In
addition, the Company estimates potential liability, if any, related to these
matters. To the extent that these estimates are not accurate, or circumstances
change in the future, the Company could realize liabilities which would have a
material adverse affect on operating results and its financial position.
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews for impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell.
Recent accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued FASB
statement No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS
143 addresses financial reporting for obligations associated with retirement of
tangible long-lived assets and the associated retirement costs. SFAS 143 is
effective for the fiscal years beginning after June 15, 2002. The Company will
adopt SFAS 143 effective January 1, 2003. Currently, the Company does not
believe that the adoption of SFAS 143 will have a material impact on its
financial position and results of operations.
Note 2 -Stockholders Equity
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock converts to Common Stock at a rate of $2.375 per
share, which was 27% above the closing market price of Common Stock on March 29,
1999.
On February 16, 2001, the Company completed the sale of 30,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $3,000,000.
The Series A Preferred Stock converts to Common Stock at a rate of $2.375 per
share, which was 23% above the closing market price of Common Stock on February
15, 2001.
The Series A Preferred Stock has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of Common Stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and the Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding on or after March 31, 2004. The conversion rate may be subject to
certain antidilution provisions. The Company has used and will use the net
proceeds from the issuance of the Series A Preferred Stock to expand its
RefrigerantSide(R) Services business and for working capital purposes.
The Company pays dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option. On March
30, 2002, the Company declared and paid, in-kind, the dividends outstanding on
the Series A Preferred Stock and issued a total of 3,873 additional shares of
its Series A Preferred Stock in satisfaction of the dividends due. The Company
may redeem the Series A Preferred Stock on March 31, 2004 either in cash or
shares of Common Stock valued at 90% of the average trading price of the Common
Stock for the 30 days preceding March 31, 2004. In addition, the Company may
call the Series A Preferred Stock if the market price of its Common Stock is
equal to or greater than 250% of the conversion price and the Common Stock has
traded with an average daily volume in excess of 20,000 shares for a period of
thirty consecutive days.
Note 3 - Dispositions
Effective March 19, 1999, the Company sold 75% of its stock ownership in
Environmental Support Solutions, Inc. ("ESS") to one of ESS's founders. The
consideration for the Company's sale of its interest was $100,000 in cash and a
six-year 6% interest bearing note in the amount of $380,000. The Company has
recognized as income the portion of the proceeds associated with the note
receivable upon the receipt of cash. The Company recognized a valuation
allowance for
8
100% of the note receivable. Subsequent to March 19, 1999, in two separate
transactions, ESS redeemed the balance of the Company's stock ownership in ESS
and the proceeds from the redemptions, were included in other income. Pursuant
to an agreement dated January 22, 2002, ESS and the Company agreed to a 16%
discount of the outstanding balance on the note receivable. On January 25, 2002,
as part of a capital financing completed by ESS, ESS paid the Company $231,951,
representing the discounted balance as of that date, as full satisfaction of the
note receivable and as of that date, the Company recognized the proceeds as
other income.
Note 4 - Other Income
For the three months ended March 31, 2002, other income of $241,000 consisted
primarily of the prepayment of the remaining balance of the note receivable from
ESS and, to a lesser extent interest income. For the three months ended March
31, 2001, other income of $83,000 consisted primarily of interest income, lease
rental income from the Company's Ft. Lauderdale facility, which was sold on
March 22, 2001, and payments received from the note receivable from ESS.
9
Hudson Technologies, Inc. and subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this Form 10-QSB
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 markets for refrigerants (including
unfavorable market conditions adversely affecting the demand for, and the price
of refrigerants), regulatory and economic factors, seasonality, competition,
litigation, the nature of supplier or customer arrangements which 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 and other risks detailed in the Company's other periodic
reports filed with the Securities and Exchange Commission. 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 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. On an on-going basis, the Company evaluates its
estimates, including, but not limited to, those estimates related to its
allowance for doubtful accounts, inventories, asset impairments, income taxes,
commitments and contingencies. 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. The
Company believes the accounting policies set forth in Note 1 to the Notes to the
Consolidated Financial Statements are those policies that are most important to
the presentation of its financial statements and such policies may require
subjective and complex judgments on the part of management (see Note 1 to the
Notes to the Consolidated Financial Statements).
Overview
Over the past few years, the Company has changed its business focus from sales
of refrigerants towards service revenues through the development of a service
offering known as RefrigerantSide(R) Services. RefrigerantSide(R) Services are
sold to contractors and end-users associated with refrigeration systems in
commercial air conditioning and industrial processing industries. These services
are offered in addition to refrigerant sales and the Company's traditional
refrigerant management services, which consist primarily of reclamation of
refrigerants. Pursuant to this change in business focus, the Company has created
a network of service depots and has exited certain operations which may not
support the growth of service revenues.
During 1999 and 2001 the Company completed sales of its Series A Preferred
Stock. The net proceeds of these sales were and are being used to expand the
Company's service offering through a network of service depots that provide a
full range of the Company's RefrigerantSide(R) Services and to provide working
capital. Management believes that its RefrigerantSide(R) Services represent the
Company's long term growth potential. However, while the Company believes it
will experience an increase in revenues from its RefrigerantSide(R) Services, in
the short term, such an increase may not be sufficient to offset reductions in
refrigerant revenue which may occur as a result of the Company's shift in its
business focus toward RefrigerantSide(R) Services. The Company expects that it
will incur additional expenses and losses during the year ended December 31,
2002 related to the continued development of its depot network.
Sales of refrigerants continue to represent a significant portion of the
Company's revenues and, in the short term, the Company has experienced an
increase in refrigerant sales. Most of the Company's refrigerant sales are
Chlorofluorocarbon ("CFC") based refrigerants, which are no longer manufactured.
To the extent that the Company is
10
unable to source CFC based refrigerants the Company's financial condition and
results of operations would be materially adversely affected. The Company
believes that, in the refrigeration industry overall, there will be a trend
towards lower sales prices, volumes and gross profit margins on refrigerant
sales in the foreseeable future, which will result in an adverse effect on the
Company's operating results.
The change in the Company's business focus towards revenues generated from
RefrigerantSide(R) Services may cause a material reduction in revenues derived
from the sale of refrigerants. In addition, to the extent that the Company is
unable to obtain refrigerants on commercially reasonable terms or experiences a
decline in demand for refrigerants, the Company could realize reductions in
refrigerant processing, and possible loss of revenues which would have a
material adverse effect on its operating results.
Results of Operations
Three months ended March 31, 2002 as compared to the three months ended March
31, 2001
Revenues for the three months ended March 31, 2002 were $6,111,000, an increase
of $1,081,000 or 21% from the $5,030,000 reported during the comparable 2001
period. The increase in revenues was primarily attributable to an increase in
refrigerant revenues offset by a reduction in RefrigerantSide(R) Services
revenues. The increase in refrigerant revenues is related to an increase in the
volume of refrigerants sold as compared to the 2001 period. The reduction in
RefrigerantSide(R) Service revenues was primarily due to a reduction in revenues
generated from the marine market as a result of the September 11, 2001 terrorist
attacks. The Company expects that the trend of lower revenues from this market
will continue for the foreseeable future.
Cost of sales for the three months ended March 31, 2002 were $4,681,000, an
increase of $813,000 or 21% from the $3,868,000 reported during the comparable
2001 period. The increase in cost of sales was primarily due to a higher volume
of refrigerant sales. As a percentage of sales, cost of sales were 77% of
revenues for the three month period ended March 31, 2002, as compared to the 77%
reported for the comparable 2001 period. Cost of sales as a percentage of
revenues remained constant primarily as a result of a reduction in payroll and
supplies cost associated with the RefrigerantSide(R) Service revenues offset by
the increase in refrigerant costs due to an increase in the volume of
refrigerant sales.
Operating expenses for the three months ended March 31, 2002 were $2,022,000, an
increase of $117,000 or 6% from the $1,905,000 reported during the comparable
2001 period. The increase was primarily attributable to an increase in selling
expenses associated with the expansion of the Company's RefrigerantSide(R)
Service offering.
Other income (expense) for the three months ended March 31, 2002 was $144,000,
as compared to the ($28,000) reported during the comparable 2001 period. Other
income (expense) includes interest expense of $97,000 and $125,000 for 2002 and
2001, respectively, offset by other income of $241,000 and $97,000 for 2002 and
2001, respectively. The decrease in interest expense is primarily attributed to
a decrease in outstanding indebtedness during 2002 as compared to 2001. Other
income primarily relates to proceeds from the prepayment of the note receivable
from Environmental Support Solutions, Inc. ("ESS").
No income taxes for the three months ended March 31, 2002 and 2001 were
recognized. The Company recognized a reserve allowance against the deferred tax
benefit for the 2002 and 2001 losses. The tax benefits associated with the
Company's net operating loss carry forwards would be recognized to the extent
that the Company recognizes net income in future periods. A portion of the
Company's net operating loss carry forwards are subject to annual limitations.
Net loss for the three months ended March 31, 2002 was $448,000, a reduction of
$323,000 or 42% from the net loss of $771,000 reported during the comparable
2001 period. The reduction in the net loss for the 2002 period as compared to
2001 was primarily attributable to a higher volume of refrigerant revenues, and
the corresponding increase in gross profit and the non-recurring gain from the
prepayment of the note receivable from ESS.
Liquidity and Capital Resources
At March 31, 2002, the Company had working capital of approximately $587,000, a
decrease of $340,000 from the working capital of $927,000 at December 31, 2001.
The decrease in working capital is primarily attributable to the net loss
incurred during the quarter ended March 31, 2002. A principal component of
current assets is inventory. At March 31, 2002, the Company had inventories of
$2,371,000, a decrease of $16,000 or 1% from the $2,387,000 at December 31,
2001. The changes in the inventory balance is 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
11
sold are subject, among other things, to current market conditions and the
nature of supplier or customer arrangements (see "Seasonality and Fluctuations
in Operating Results"). The Company has historically financed its working
capital requirements through cash flows from operations, the issuance of debt
and equity securities and bank borrowings. In recent years the Company has not
financed its working capital requirements through cash flows from operations but
rather from issuances of equity securities and bank borrowings. In order for the
Company to finance its working capital requirements through cash flows from
operations the Company must reduce its operating losses. There can be no
assurances that the Company will be successful in reducing its operating losses
in which case, the Company will be required to seek to fund its working capital
requirements from additional issuances of equity securities and/or additional
bank borrowings. Based on the current investment environment there can be no
assurances that the Company would be successful in raising additional capital.
The inability to raise additional capital could have a material adverse effect
on the Company.
Net cash provided by operating activities for the three months ended March 31,
2002, was $144,000 compared with net cash used by operating activities of
$2,158,000 for the comparable 2001 period. Net cash provided by operating
activities was primarily attributable to an increase in accounts payable and
accrued expenses offset by the net loss for the 2002 period and an increase in
trade receivables.
Net cash used by investing activities for the three months ended March 31, 2002,
was $22,000 compared with net cash provided by investing activities of $794,000
for the comparable 2001 period. The net cash used by investing activities was
due to equipment additions primarily associated with the expansion of the
Company's service depot network.
Net cash used by financing activities for the three months ended March 31, 2002,
was $423,000 compared with net cash provided by financing activities of
$3,118,000 for the comparable 2001 period. The net cash used by financing
activities for the 2002 period primarily consisted of the repayment of debt.
At March 31, 2002, the Company had cash and equivalents of $1,081,000. The
Company continues to assess its capital expenditure needs. The Company may, to
the extent necessary, continue to utilize its cash balances to purchase
equipment primarily associated with its RefrigerantSide(R) Service offering. The
Company estimates that its 2002 capital expenditures may range from $300,000 to
$700,000.
The Company had property and a building located in Ft. Lauderdale which was
leased at $13,781 per month to an unaffiliated third party. On March 22, 2001,
the Company completed the sale of the property to an unaffiliated third party.
After payment of the then outstanding mortgage balance and transactional
expenses, the Company received net proceeds of approximately $300,000 and
recognized a $14,000 gain from the sale of this property.
The Company has entered into a credit facility with The CIT Group/Business
Credit, Inc. ("CIT") which provides for borrowings by the Company of up to
$6,500,000. The facility requires minimum borrowings of $1,250,000. The facility
provides for a revolving line of credit and a term loan and expires in April
2003. Advances under the revolving line of credit are limited to (i) 80% of
eligible trade accounts receivable and (ii) 50% of eligible inventory (which
inventory amount shall not exceed 200% of eligible trade accounts receivable or
$3,250,000). As of March 31, 2002, the Company had availability under its
revolving line of credit of approximately $1,031,000. Advances available to the
Company under the term loan are based on existing fixed asset valuations and
future advances under the term loan up to an additional $1,000,000 are based on
future capital expenditures. As of March 31, 2002, the Company has approximately
$442,000 outstanding under its term loans and $1,722,000 outstanding under its
revolving line of credit. The facility bears interest at the prime rate plus
1.5%, (6.5% at March 31, 2002), and substantially all of the Company's assets
are pledged as collateral for obligations to CIT. In addition, among other
things, the loan agreements restrict the Company's ability to declare or pay any
dividends on its capital stock. The Company has obtained a waiver from CIT to
permit the payment of dividends on its Series A Preferred Stock.
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of ESS's founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year 6% interest bearing note in the amount of
$380,000. The Company has recognized as income the portion of the proceeds
associated with the note receivable upon the receipt of cash. This sale did not
have a material effect on the Company's financial condition or results of
operations. Effective October 11, 1999, the Company sold to three of ESS's
employees an additional 5.4% ownership in ESS. The Company received $37,940 from
the sale of this additional ESS stock. Effective April 18, 2000, ESS redeemed
the balance of the Company's stock ownership in ESS. The Company received cash
in the amount of $188,000 from the redemption. Pursuant to an agreement dated
January 22, 2002, ESS and the Company agreed to a 16% discount of the
outstanding balance on the note receivable. On January 25, 2002, as part of a
capital financing completed by ESS, ESS paid the Company $231,951, representing
the discounted balance as of that date, as full satisfaction of the note
receivable and as of that date the Company recognized the proceeds as other
income.
12
The Company is continuing to evaluate opportunities to rationalize its operating
facilities based on its emphasis on the expansion of its service sales. As a
result, the Company may discontinue certain operations which it believes do not
support the growth of service sales and, in doing so, may incur future charges
to exit certain operations.
On March 30, 1999, the Company completed the sale of 65,000 shares of its Series
A Preferred Stock, with a liquidation value of $100 per share, to Fleming US
Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $6,500,000.
The Series A Preferred Stock converts to Common Stock at a rate of $2.375 per
share, which was 27% above the closing market price of Common Stock on March 29,
1999.
On February 16, 2001, the Company completed the sale of 30,000 shares of its
Series A Preferred Stock, with a liquidation value of $100 per share, to Fleming
US Discovery Fund III, L.P. and Fleming US Discovery Offshore Fund III, L.P. The
gross proceeds from the sale of the Series A Preferred Stock were $3,000,000.
The Series A Preferred Stock converts to Common Stock at a rate of $2.375 per
share, which was 23% above the closing market price of Common Stock on February
15, 2001.
The Series A Preferred Stock has voting rights on an as-if converted basis. The
number of votes applicable to the Series A Preferred Stock is equal to the
number of shares of Common Stock into which the Series A Preferred Stock is then
convertible. However, the holders of the Series A Preferred Stock will provide
the Chief Executive Officer and the Secretary of the Company a proxy to vote all
shares currently owned and subsequently acquired above 29% of the votes entitled
to be cast by all shareholders of the Company. The Series A Preferred Stock
carries a dividend rate of 7%, which increases to 16% if the stock is still
outstanding on March 31, 2004. The conversion rate of the Series A Preferred
Stock is subject to certain antidilution provisions. The Company has used and
will use the net proceeds from the issuance of the Series A Preferred Stock to
expand its RefrigerantSide(R) Services business and for working capital
purposes.
The Company pays dividends, in arrears, on the Series A Preferred Stock, semi
annually, either in cash or additional shares, at the Company's option. On March
30, 2002, the Company declared and paid, in-kind, the dividends outstanding on
the Series A Preferred Stock and issued a total of 3,873 additional shares of
its Series A Preferred Stock in satisfaction of the dividends due. The Company
may redeem the Series A Preferred Stock on March 31, 2004 either in cash or
shares of Common Stock valued at 90% of the average trading price of the Common
Stock for the 30 days preceding March 31, 2004. In addition, the Company may
call the Series A Preferred Stock if the market price of its Common Stock is
equal to or greater than 250% of the conversion price and the Common Stock has
traded with an average daily volume in excess of 20,000 shares for a period of
thirty consecutive days.
The Company has provided certain registration, preemptive and tag along rights
to the holders of the Series A Preferred Stock. The holders of the Series A
Preferred Stock, voting as a separate class, have the right to elect up to two
members to the Company's Board of Directors or at their option, to designate up
to two advisors to the Company's Board of Directors who will have the right to
attend and observe meetings of the Board of Directors. Currently, the holders
have elected one member to the Board of Directors.
The Company believes that its anticipated cash flow from operations, together
with the proceeds from the sale of its Preferred Stock, and the availability of
funds under its credit facility, will be sufficient to satisfy the Company's
working capital requirements and proposed expansion of its service business for
the foreseeable future. However, any unanticipated expenses including but not
limited to an increase in the cost of refrigerants purchased by the Company or
an unanticipated increase in operating expenses or failure to obtain revenues
expected to be generated from the Company's service depots and/or refrigerant
revenues or additional expansion or acquisition costs that may arise in the
future would affect the Company's future capital needs. There can be no
assurances that the Company's proposed or future plans will be successful, and
as such, the Company may need to significantly modify its plans or it may
require additional capital sooner than anticipated. There can be no assurances
that the Company can obtain any required capital and its ability to do so could
have a material adverse affect on the Company.
13
Reliance on Suppliers and Customers
The Company's financial performance is in part dependent on its ability to
obtain sufficient quantities of virgin and reclaimable refrigerants from
manufacturers, wholesalers, distributors, bulk gas brokers, and from other
sources within the air conditioning and refrigeration and automotive aftermarket
industries, and on corresponding demand for refrigerants. To the extent that the
Company is unable to obtain sufficient quantities of refrigerants in the future,
or resell reclaimed refrigerants at a profit, the Company's financial condition
and results of operations would be materially adversely affected.
During the quarter ended March 31, 2002, one customer accounted for 14% of the
Company's revenues. During the quarter ended March 31, 2001, three customers
accounted for 18%, 13% and 12% of the Company's revenues. The loss of a
principal customer or a decline in the economic prospects and purchases of the
Company's products or services by any such customer would have a material
adverse effect on the Company's financial position and results of operations.
Seasonality 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 CFC-based refrigeration
equipment by domestic users of refrigerants, the rate of expansion of the
Company's operations, and by other factors. The Company's business has
historically been seasonal in nature with peak sales of refrigerants occurring
in the first half of each year. During past years, the seasonal decrease in
sales of refrigerants have resulted in additional losses during the second half
of the year. Delays 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. With respect to the Company's RefrigerantSide(R) Services, to date, the
Company has not identified any seasonal pattern. However, the Company could
experience a seasonal element to this portion of its business in the future.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1998, United Water of New York Inc. ("United") commenced an action
against the Company in the Supreme Court of the State of New York, Rockland
County, seeking damages in the amount of $1.2 million allegedly sustained as a
result of the prior contamination of certain of United's wells within close
proximity to the Company's Hillburn, New York facility. The Company leases the
Hillburn facility from Ramapo Land Company pursuant to a lease that expires in
May 2004.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of approximately 7,800 lbs. of R-11, as a result of a failed hose
connection to one of the Company's outdoor storage tanks allowing liquid R-11 to
discharge from the tank into the concrete secondary containment area in which
the subject tank was located.
Between April 1999 and May 1999, with the approval of the New York State
Department of Environmental Conservation ("DEC"), the Company constructed and
put into operation a remediation system at the Company's facility to remove R-11
levels in the groundwater under and around the Company's facility. The cost of
this remediation system was $100,000.
In July 1999, United amended its complaint in the Rockland County action to
allege facts relating to, and to seek damages allegedly resulting from the April
1, 1999 R-11 release.
In June 2000, the Rockland County Supreme Court approved a settlement of the
Rockland County action commenced by United. Under the Settlement, the Company
paid to United the sum of $1,000,000 upon Court approval of the settlement, and
has been making monthly payments in the amount of $5,000, which payments will
continue for up to a maximum of 42 months following the settlement. The proceeds
of the settlement were required to be used to fund the construction and
operation by United of a new remediation tower, as well as for the continuation
of temporary remedial measures implemented by United and that have successfully
contained the spread of R-11. The remediation tower was completed in March 2001
and is designed to treat all of United's impacted wells and restore the water to
New York State drinking water standards for supply to the public. The Company
carries $1,000,000 of pollution liability insurance per occurrence and in
connection with the settlement exhausted all insurance proceeds available under
all applicable policies.
In June 2000, the Company signed an Order on Consent with the DEC regarding all
past contamination of the United well field. Under the Order on Consent, the
Company agreed to continue operating the remediation system installed by the
Company at its Hillburn facility in May 1999 until remaining groundwater
contamination has been effectively abated. In May 2001, the Company signed an
amendment to the Order on Consent with the DEC, pursuant to which the Company
has installed one additional monitoring well and has modified the Company's
existing remediation system to incorporate a second recovery well. During the
year ended December 31, 2001, the Company incurred $260,000 in additional
remediation costs in connection with this matter.
In May 2000, the Company's Hillburn facility was nominated by the United States
Environmental Protection Agency ("EPA") for listing on the National Priorities
List ("NPL"), pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980. The Company believes that the agreements reached with
the DEC and United Water, together with the reduced levels of contamination
present in the United Water wells, make such listing unnecessary and
counterproductive. Hudson submitted opposition to the listing within the
sixty-day comment period. To date, no final decision has been made by the EPA
regarding the proposed listing.
In October 2001, the Company learned that trace levels of R-11 were detected in
one of United's wells that is closest to the Village of Suffern's well system.
In February 2002, the levels in that well peaked at 2.8 ppb, below the New York
State Drinking Water Standard of 5 ppb. During February 2002, the Village of
Suffern expressed concern over the possibility of R-11 reaching its well system
and has advised that it is investigating available options to protect its well
system, and will look to the Company to reimburse the Village for any costs it
may incur as a result. The Company is working with the Village of Suffern and
all applicable governmental agencies to prevent contamination of Suffern's wells
and its water supply.
In March 2002, the Company agreed to extend the statute of limitations
applicable to any claims that may be available to Ramapo Land Company arising
out of the April 1, 1999 incident for an additional one year. To date, no claims
against the Company have been asserted or threatened by Ramapo Land Company.
15
There can be no assurance that the R-11 will not spread beyond the United Water
well system and impact the Village of Suffern's wells or that the ultimate
outcome of such a spread of contamination will not have a material adverse
effect on the Company's financial condition and results of operations. There can
be no assurance that the Company's opposition to the EPA's listing of the
Company's Hillburn facility on the NPL will be successful, or that the ultimate
outcome of such a listing will not have a material adverse effect on the
Company's financial condition and results of operations. Furthermore, there can
be no assurance that Ramapo Land Company will not assert any claim against the
Company, or that any such claim will not have a material adverse effect on the
Company's financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 2002, the Company granted options to
purchase 40,000 shares of common stock to certain employees pursuant to its 1997
Stock Option Plan. On March 30, 2002, the Company issued a total of 3,873
additional shares of its Series A Preferred Stock to the holders thereof in
satisfaction of the dividends then due. With respect to these grants and
issuances, the Company relied on the exemption from registration provided by
Section 4(2) under the Securities Act of 1933, the ("Act") as transactions by an
issuer not involving a public offering and/or Section 2(a) (3) of the Act.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached to this report:
None
(b) No report on Form 8-K was filed during the quarter ended March 31,
2002.
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed in its behalf by the undersigned, thereunto duly
authorized.
HUDSON TECHNOLOGIES, INC.
By: /s/ Kevin J. Zugibe May 10, 2002
------------------------------------
Kevin J. Zugibe Date
Chairman and
Chief Executive Officer
By: /s/ Brian F. Coleman May 10, 2002
------------------------------------
Brian F. Coleman Date
President and
Chief Operating Officer
17