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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, 2000
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: (914) 735-6000
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 5,088,820 shares
- ----------------------------- ----------------
Class Outstanding at April 7, 2000
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Hudson Technologies, Inc.
Index
Page
Part I. Financial Information Number
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 Financial 9
Condition and Results of Operations
Part II. Other information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities and Use of Proceeds 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
2
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Part I - FINANCIAL INFORMATION
Hudson Technologies, Inc. and subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except for share and par value amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,112 $ 2,483
Trade accounts receivable - net of allowance for doubtful
accounts of $173 and $158 1,620 1,916
Inventories 2,262 2,480
Prepaid expenses and other current assets 228 203
-------- --------
Total current assets 6,222 7,082
Property, plant and equipment, less accumulated depreciation 5,689 5,785
Other assets 84 112
-------- --------
Total Assets $ 11,995 $ 12,979
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,266 $ 3,375
Short-term debt 2,102 2,030
-------- --------
Total current liabilities 5,368 5,405
Deferred income 18 22
Long-term debt, less current maturities 1,967 2,065
-------- --------
Total Liabilities 7,353 7,492
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock shares authorized 5,000,000: Series A Convertible
Preferred stock, $.01 par value ($100 liquidation preference value);
shares authorized
75,000; issued and outstanding 69,712 and 67,314 6,971 6,731
Common stock, $0.01 par value; shares authorized
20,000,000; issued outstanding 5,088,820 and 5,085,820 51 51
Additional paid-in capital 21,381 21,614
Accumulated deficit (23,761) (22,909)
-------- --------
Total Stockholders' Equity 4,642 5,487
-------- --------
Total Liabilities and Stockholders' Equity $ 11,995 $ 12,979
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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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,
2000 1999
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Revenues $ 3,084 $ 5,031
Cost of Sales 2,106 3,837
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Gross Profit 978 1,194
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Operating expenses:
Selling and marketing 511 383
General and administrative 959 1,253
Depreciation and amortization 326 336
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Total operating expenses 1,796 1,972
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Operating loss (818) (778)
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Other income (expense):
Interest expense (117) (102)
Other income 83 24
----------- -----------
Total other income (expense) (34) (78)
----------- -----------
Loss before income taxes (852) (856)
Income taxes -- --
----------- -----------
Net loss (852) (856)
Preferred stock dividends (122) --
----------- -----------
Available for common shareholders $ (974) $ (856)
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Net loss per common share - basic and diluted $ (0.19) $ (0.17)
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Weighted average number of shares outstanding 5,087,820 5,085,820
=========== ===========
See accompanying Notes to the Consolidated Financial Statements.
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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,
--------------------
2000 1999
------- -------
Cash flows from operating activities:
Net loss $ (852) $ (856)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 326 336
Allowance for doubtful accounts 15 32
Common stock issued for services 7 --
Changes in assets and liabilities:
Trade accounts receivable 282 (566)
Inventories 218 841
Prepaid and other current assets (25) (16)
Other assets 5 77
Accounts payable and accrued expenses (109) 808
Deferred income (4) (8)
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Cash provided (used) by operating activities (137) 648
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Cash flows from investing activities:
Additions to property, plant, and equipment (207) (257)
------- -------
Cash used by investing activities (207) (257)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - net -- 5,798
Proceeds (repayments) from short-term debt - net 60 (364)
Proceeds from loans to stockholders -- 365
Proceeds from long-term debt 100 --
Repayment of long-term debt (187) (111)
------- -------
Cash provided (used) by financing activities (27) 5,688
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Increase (decrease) in cash and cash equivalents (371) 6,079
Cash and equivalents at beginning of period 2,483 776
------- -------
Cash and equivalents at end of period $ 2,112 $ 6,855
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 117 $ 102
See accompanying Notes to the Consolidated Financial Statements
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Hudson Technologies, Inc. and subsidiaries
Notes to 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"), primarily sells refrigerants and provides RefrigerantSide(TM)
Services performed at a customer's site, consisting of system decontamination to
remove moisture, oils and other contaminants and recovery and reclamation of the
refrigerants used in commercial air conditioning and refrigeration systems. 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,
1999. Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2000.
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. Effective
March 19, 1999, the Company sold 75% of its ownership interest in Environmental
Support Solutions, Inc. ("ESS") and as of that date, no longer includes the
results of that operation in the consolidated results of the 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, 2000 and
December 31, 1999, 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,
2000 and December 31, 1999.
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, 2000, no customer accounted for more than 10%
of revenues. During the quarter ended March 31, 1999, one customer accounted for
23% and another customer accounted for 14%. 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, as occurred in 2000, 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.
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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.
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.
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, $122,000 for 2000,
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. Diluted loss
per share was not presented since the effect was not dilutive.
Estimates and Risks
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
The Company is subject to various legal proceedings. The Company assesses the
merits and potential liability associated with each of these proceedings. 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.
7
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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.
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 was $6,500,000. 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 Preferred Stock carries a
dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding, on the fifth anniversary date, and 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. The conversion rate is subject to certain antidilution
provisions. The Company is using the net proceeds from the issuance of the
Series A Preferred Stock to expand its RefrigerantSide(TM) Services 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, during
the first two years after which the dividends will be paid in cash. On March 30,
2000, the Company declared and paid, in-kind, the dividends of outstanding on
the Series A Preferred Stock. The Company issued a total of 2,398 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, after March
30, 2001, the Company may call the Series A Preferred Stock if the market price
of the Common Stock is equal 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 - Sale of ESS
Effective March 19, 1999, the Company sold 75% of its stock ownership in ESS to
one of its founders. The consideration for the Company's sale of its interest
was $100,000 in cash and a six year note in the amount of $380,000. The Company
recognized a valuation allowance for 100% of the note receivable. The Company
will recognize 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' employees an additional 5.4%
ownership in ESS. The Company received $37,940 from the sale of the additional
ESS stock. Effective April 18, 2000, the Company sold the balance of its stock
ownership to one of ESS' founders. The Company received cash in the amount of
$188,000 from the sale.
8
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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 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", 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.
Overview
Sales of refrigerants continue to represent a significant portion of the
Company's revenues. The Company believes that, in the industry overall, there
will be a trend towards lower sales prices, volume and gross profit margins on
refrigerant sales in the foreseeable future, which will continue to have an
adverse effect on the Company's operating results.
Historically, the Company has derived a majority of its revenues from the sale
of refrigerants. The Company has changed its business focus towards service
revenues through the development of a service offering known as
RefrigerantSide(TM) Services. These services are offered in addition to the
Company's traditional refrigerant management services, consisting principally of
recovery and reclamation of refrigerants used in commercial air conditioning,
industrial processing and refrigeration systems. Pursuant to this change in
business focus, the Company has developed, and is currently implementing, a
strategic business plan which provides for the creation of a network of service
depots and the exiting of certain operations which may not support the growth of
service sales. Consistent with its plan, the Company anticipates a reduction in
refrigerant sales which were primarily targeted to the automotive aftermarket
industry.
In March 1999, the Company completed the sale of its Series A Preferred Stock
and received net proceeds of $5,800,000. The net proceeds of the sale of the
Company's Series A Preferred Stock 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 on site RefrigerantSide(TM) Services and to provide working
capital. Management believes that its RefrigerantSide(TM) Services represent the
Company's long term growth potential. However, while the Company believes it
will experience an increase in revenues from its RefrigerantSide(TM) Services,
in the short term, such an increase will not be sufficient to offset a
substantial reduction in refrigerant revenue. The Company expects that it will
incur additional expenses and losses during the year related to the continued
development of its depot network.
The change in business focus towards revenues generated from service 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, 2000 as compared to the three months ended March
31, 1999
Revenues for the three months ended March 31, 2000 were $3,084,000, a decrease
of $1,947,000 or 39% from the $5,031,000 reported during the comparable 1999
period. The decrease was attributable to a lower volume of refrigerant revenues
and the lack of revenues from the Company's former subsidiary Environmental
Support Solutions, Inc. ("ESS") which was sold during the first quarter of 1999,
offset, in part, by an increase in RefrigerantSide(TM) Service revenues. The
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reduction in refrigerant revenues related to a reduction of refrigerant sales to
principal customers in the automotive aftermarket industry. The increase in
RefrigerantSide(TM) Service revenues reflects growth through the development of
the Company's depot network.
Cost of sales for the three months ended March 31, 2000 were $2,106,000, a
decrease of $1,731,000 or 45% from the $3,837,000 reported during the comparable
1999 period primarily due mainly to a lower volume of refrigerant revenues. As a
percentage of sales, cost of sales were 68% of revenues for the three month
period ended March 31, 2000, a decrease from the 76% reported for the comparable
1999 period. The decrease in cost of sales as a percentage of revenues was
primarily attributable to the reduction of refrigerant revenues which were at
lower gross profit margins.
Operating expenses for the three months ended March 31, 2000 were $1,796,000, a
decrease of $176,000 or 9% from the $1,972,000 reported during the comparable
1999 period. The decrease was primarily attributable to a decrease in
professional fees, rental expense and the lack of operating expenses from ESS
offset by an increase in selling costs.
Other income (expense) for the three months ended March 31, 2000 was ($34,000),
a decrease of $44,000 or 56% from the ($78,000) reported during the comparable
1999 period. Other income (expense) includes interest expense of $117,000 and
$102,000 for 2000 and 1999, respectively, offset by other income of $83,000 and
$24,000 for 2000 and 1999, respectively. The increase in interest expense is
primarily attributed to an increase in borrowings during 2000 as compared to
1999. Other income primarily relates to lease rental income, interest income and
proceeds from the sale of ESS.
No income taxes for the three months ended March 31, 2000 and 1999 were
recognized. The Company recognized a reserve allowance against the deferred tax
benefit for the 2000 and 1999 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.
Net loss for the three months ended March 31, 2000 was $852,000, as compared to
net loss of $856,000 reported during the comparable 1999 period. The net change
in the net loss for the 2000 period as compared to 1999 was primarily
attributable to a lower volume of refrigerant sales offset by a reduction in
operating expenses.
Liquidity and Capital Resources
At March 31, 2000, the Company had working capital of approximately $854,000, a
decrease of $823,000 from the $1,677,000 at December 31, 1999. The reduction in
working capital is primarily attributable to the net loss incurred during the
quarter ended March 31, 2000. A principal component of current assets is
inventory. At March 31, 2000, the Company had inventories of $2,262,000, a
decrease of $218,000 or 9% from the $2,480,000 at December 31, 1999. The
Company's ability to sell and replace its inventory and the prices at which it
can be sold are subject, among other things, to current market conditions (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, bank borrowings and loans from
officers.
Net cash used by operating activities for the three months ended March 31, 2000,
was $137,000 compared with net cash provided by operating activities of $648,000
for the comparable 1999 period. Net cash used by operating activities was
attributable mainly to the net loss for the 2000 period and a reduction in
accounts payable and accrued expenses offset by the reduction of accounts
receivable and inventories.
Net cash used by investing activities for the three months ended March 31, 2000,
was $207,000 compared with net cash used by investing activities of $257,000 for
the prior comparable 1999 period. The net cash usage consisted of equipment
additions associated with the expansion of the depot network.
Net cash used by financing activities for the three months ended March 31, 2000,
was $27,000 compared with net cash provided by financing activities of
$5,688,000 for the comparable 1999 period. The net cash used by financing
activities primarily consisted of repayment of long term debt for the 2000
period.
At March 31, 2000, the Company had cash and equivalents of $2,112,000.
During 1996, the Company mortgaged its property and building located in Ft.
Lauderdale with Turnberry Savings Bank, NA. The mortgage of $656,000, at March
31, 2000, bears interest rate of 9.5% and is repayable over 20 years through
January 2017. The Company has principally ceased its operations at this facility
and has entered into a three year lease of
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the entire facility at the current level of $13,125 per month to an unaffiliated
third party. The Company intends to sell this property in the foreseeable
future.
The Company has entered into a credit facility with the CIT Group/Credit
Finance, Inc. ("CIT") which provides for borrowings to 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 six-year term loan and expires in
April 2001. 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, 2000, the Company had availability under its
revolving line of credit of approximately $337,000. 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. During 1999, the Company received advances of
$166,000 based on capital expenditures. As of March 31, 2000, the Company had
approximately $814,000 outstanding under its term loans and $1,560,000
outstanding under its revolving line of credit. The facility bears interest at
the prime rate plus 1.5%, 10.5% at March 31, 2000, and substantially all of the
Company's assets are pledged as collateral for obligations to CIT. In addition,
among other things, the 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 its 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 will recognize 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'
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, the Company
sold the balance of its stock ownership to one of ESS' founders. The Company
received cash in the amount of $188,000 from the sale.
The Company is continuing to evaluate opportunities to rationalize its other
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 was $6,500,000. 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 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 Preferred Stock carries a
dividend rate of 7%, which will increase to 16%, if the stock remains
outstanding, on the fifth anniversary date, and 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. The conversion rate is subject to certain antidilution
provisions. The Company is using the net proceeds from the issuance of the
Series A Preferred Stock to expand its RefrigerantSide(TM) Services 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, during
the first two years after which the dividends will be paid in cash. On March 31,
2000, the Company declared and paid, in-kind, the dividends of outstanding on
the Series A Preferred Stock. The Company issued a total of 2,398 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, after March
30, 2001, the Company may call the Series A Preferred Stock if the market price
of its Common Stock is equal 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 two members to the Board of Directors.
11
<PAGE>
On March 30, 2000, the Company entered into an agreement with the New York State
Energy Research and Development Authority ("NYSERDA") to jointly fund a research
project designed to develop a system to improve the efficiency and performance
and to increase system capacity of existing air-conditioning and refrigeration
chiller systems. Pursuant to the agreement, NYSERDA will contribute up to
$250,000 to the project.
The Company currently believes that its anticipated cash flow from operations,
together with the proceeds from the sale of its Preferred Stock, and its credit
facility, will be sufficient to satisfy the Company's working capital
requirements and proposed expansion and development of its service business for
approximately the next twelve months. However, any unanticipated expenses or
lack of expected revenues from the Company's depots 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 require additional
capital sooner than anticipated.
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. The loss of a
principal customer would have a material adverse effect on the Company.
During January 1997, the Company entered into agreements with DuPont to market
DuPont's SUVA(TM) refrigerants. Under the agreement, 100% of virgin refrigerants
provided to specified market segment customers must be purchased from DuPont.
During the quarter ended March 31, 2000, no customer accounted for more than 10%
of the Company's revenues. During the quarter ended March 31, 1999, two
customers accounted for an aggregate of 47% 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, as occurred in 2000,
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. Accordingly, the second half of the year results
of operations have reflected additional losses due to a decrease in revenues.
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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During June 1995, United Water of New York Inc. ("United") alleged that it
discovered that two of its wells within close proximity to the Company's
Hillburn, New York facility showed elevated levels of refrigerant contamination,
specifically Trichlorofluoromethane (R-11). During December 1997, United alleged
that it discovered levels of Dichlorodifluoromethane (R-12) in two of its wells
within close proximity to the Company's facility, and has alleged that the
Company is the source.
In January 1998, the Company agreed to install a remediation system at the
Company's facility to remove any remaining R-11 levels in the groundwater under
and around the Company's facility. In August 1998, the New York State Department
of Environmental Conservation ("DEC") accepted the Company's proposal and
requested that the Company proceed with the installation of the system. The cost
of this remediation system was $100,000.
In June 1998, 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 foregoing alleged
contamination. In December 1998, United served an amended complaint asserting a
claim pursuant to the Resource Conservation and Recovery Act, 42 U.S.C. ss.
6901, et. seq. ("RCRA") In January 1999, the Company filed a motion to dismiss
the RCRA cause of action.
On April 1, 1999, the Company reported a release at the Company's Hillburn, New
York facility of what was ultimately determined to be 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. An amount of
the R-11 escaped the secondary containment area through an open drain from the
secondary containment area for removing accumulated rainwater and entered the
ground. The Company immediately commenced excavation operations to remove
contaminated soil and has taken a number of other steps to mitigate and minimize
contamination, including acceleration of the installation of the planned
remediation system.
In April 1999, the Company was advised by United that one of its wells within
close proximity to the Company's facility showed elevated levels of R-11 in
excess of 200 ppb. and was taking certain steps and would be incurring costs in
an attempt to remediate any contamination. In response to the release, the
Company requested, and in May 1999, received permission from the DEC to operate
the planned remediation system pending negotiation and finalization of a Consent
Order covering the operation of the system. The remediation system was put into
operation on May 7, 1999. The level of R-11 in the affected United well, after
rising to a level of 785 ppb. in June 1999, have steadily decreased and on April
3, 2000 was 4.6 ppb. In December 1999, a second United well within close
proximity to the Company's facility began showing elevated levels of R-11 in
excess of 5 ppb. and increased to a high of 35 ppb. in March 2000. The Company
continues to work with the DEC, United and with the Company's experts to
determine the scope of any contamination, and to develop plans for the
construction of a separate remediation system to directly treat contaminated
water from United's well.
In July 1999, United filed a motion seeking permission to amend its complaint in
the action it commenced in June 1998 to allege facts relating to, and to seek
damages allegedly resulting from the April 1, 1999 R-11 release. In August 1999,
the Company entered into a stipulation accepting service of the amended
complaint subject to the Company's pending motion to dismiss. On August 26,
1999, the Court issued a decision which granted the Company's motion to dismiss
that portion of United's RCRA claims which seeks past cleanup costs, and held in
abeyance a ruling whether United can assert a claim for present/future cleanup
under RCRA until the date of trial. The Company continues to defend the claims
asserted by United.
The Company carries $1,000,000 of pollution liability insurance per occurrence
and has put the insurance carrier on notice of the release and possible claims
of United. There can be no assurance that this action, or any settlement
thereof, will be resolved in a manner favorable to the Company, or that the
ultimate outcome of any legal action or settlement, or the effects of the April
1, 1999 R-11 release, will not have a material adverse effect on the Company's
financial condition and results of operations.
The Company and its subsidiaries are subject to various other claims and/or
lawsuits from both private and governmental parties arising from the ordinary
course of business, none of which are material.
13
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 2000, the Company granted options to
purchase 10,000 shares of common stock to certain employees pursuant to its 1997
Stock Option Plan and issued 3,000 shares of its common stock to an officer for
services. On March 30, 2000, the Company issued a total of 2,398 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 as transactions by an issuer not involving a public
offering.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached to this report.
Exhibit 27: Financial Data Schedule (for SEC use only)
(b) No report on Form 8-K was filed during the quarter ended March
31, 2000.
14
<PAGE>
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 12, 2000
---------------------------------------
Kevin J. Zugibe Date
Chairman/President and
Chief Executive Officer
By: /s/ Brian F. Coleman May 12, 2000
---------------------------------------
Brian F. Coleman Date
Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-QSB AT MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,112,000
<SECURITIES> 0
<RECEIVABLES> 1,793,000
<ALLOWANCES> 173,000
<INVENTORY> 2,262,000
<CURRENT-ASSETS> 6,222,000
<PP&E> 5,689,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,995,000
<CURRENT-LIABILITIES> 5,368,000
<BONDS> 0
0
6,971,000
<COMMON> 51,000
<OTHER-SE> (2,380,000)
<TOTAL-LIABILITY-AND-EQUITY> 11,995,000
<SALES> 3,084,000
<TOTAL-REVENUES> 3,084,000
<CGS> 2,106,000
<TOTAL-COSTS> 2,106,000
<OTHER-EXPENSES> 326,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,000
<INCOME-PRETAX> (852,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (852,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (852,000)
<EPS-BASIC> (0.19)<F1>
<EPS-DILUTED> (0.19)<F1>
<FN>
<F1> Calculated after giving effect to Preferred Stock Dividends of $122,000
</FN>
</TABLE>
