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United States
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, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-13412
Hudson Technologies, Inc.
(Exact Name of 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)
(845) 735-6000
(Issuer's Telephone Number, Including Area Code)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common stock, $0.01 par value 5,165,020 shares
Class Outstanding at April 15, 2003
Traditional Small Business Disclosure Format (check one): Yes |_| No |X|.
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Hudson Technologies, Inc.
Index
Part I. Financial Information Page Number
Item 1 - Financial Statements
- 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 10
Condition and Results of Operations
Item 3 - Controls and Procedures 16
Part II. Other Information
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
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,
2003 2002
-------- --------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 353 $ 545
Trade accounts receivable - net of allowance for doubtful
accounts of $292 and $262 3,082 1,971
Inventories 2,985 2,967
Prepaid expenses and other current assets 246 249
-------- --------
Total current assets 6,666 5,732
Property, plant and equipment, less accumulated depreciation 2,360 2,551
Other assets 145 139
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Total Assets $ 9,171 $ 8,422
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,777 $ 3,278
Short-term debt 3,278 2,582
-------- --------
Total current liabilities 7,055 5,860
Long-term debt, less current maturities 70 124
Long-term debt - related parties 960 930
-------- --------
Total Liabilities 8,085 6,914
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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
120,782 and 116,629 12,078 11,663
Common Stock, $0.01 par value; shares authorized
50,000,000; issued outstanding 5,165,020 52 52
Additional paid-in capital 19,604 20,019
Accumulated deficit (30,648) (30,226)
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Total Stockholders' Equity 1,086 1,508
-------- --------
Total Liabilities and Stockholders' Equity $ 9,171 $ 8,422
======== ========
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,
--------------------------
2003 2002
----------- -----------
Revenues $ 5,677 $ 6,111
Cost of Sales 4,037 4,681
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Gross Profit 1,640 1,430
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Operating expenses:
Selling and marketing 539 672
General and administrative 1,092 1,065
Depreciation and amortization 243 285
----------- -----------
Total operating expenses 1,874 2,022
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Operating loss (234) (592)
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Other income (expense):
Interest expense (188) (97)
Other income -- 241
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Total other income (expense) (188) 144
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Loss before income taxes (422) (448)
Income taxes -- --
----------- -----------
Net loss (422) (448)
Preferred stock dividends (218) (197)
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Available for common shareholders $ (640) $ (645)
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---------------------------------------------
Net loss per common share - basic and diluted $ (0.12) $ (0.13)
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Weighted average number of shares outstanding 5,165,020 5,156,895
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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,
------------------
2003 2002
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Cash flows from operating activities:
Net loss $ (422) $ (448)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation and amortization 243 285
Allowance for doubtful accounts 30 36
Amortization of original issue discount 30 --
Changes in assets and liabilities:
Trade accounts receivable (1,142) (1,069)
Inventories (18) 16
Prepaid expenses and other current assets 3 72
Other assets 5 1
Accounts payable and accrued expenses 499 1,251
------- -------
Cash provided (used) by operating activities (772) 144
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment -- 203
Additions to patents (14) --
Additions to property, plant, and equipment (49) (225)
------- -------
Cash used by investing activities (63) (22)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock - net -- 10
Proceeds from (repayment of) short-term debt - net 754 (285)
Proceeds from long-term debt -- 151
Repayment of long-term debt (111) (299)
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Cash provided (used) by financing activities 643 (423)
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Decrease in cash and cash equivalents (192) (301)
Cash and cash equivalents at beginning of period 545 1,382
------- -------
Cash and cash equivalents at end of period $ 353 $ 1,081
======= =======
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Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 188 $ 97
Supplemental schedule of non-cash investing and financing activities:
In-kind payment of preferred stock dividends $ 415 $ 387
See accompanying Notes to the Consolidated Financial Statements
5
Hudson Technologies, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
Note 1- Summary of significant accounting policies
Business
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.
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,
2002. Operating results for the three month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2003.
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, 2003,
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, 2003 and December 31, 2002.
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 that exceed FDIC insurance coverage. 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 and the carrying value of its accounts receivable are reduced
by the established allowance. The allowance for doubtful accounts includes any
accounts receivable balances that are determined to be uncollectable, along with
a general reserve for the remaining accounts receivable balances. The Company
may adjust its general or specific reserves based on factors that affect the
collectibility of the accounts receivable balances.
During the quarter ended March 31, 2003, two customers accounted for 17% and 11%
of the Company's revenues and as of March 31, 2003 there was $483,000 and
$10,000, respectively, of accounts receivable balances from these customers.
During the quarter ended March 31, 2002, one customer accounted for 14% of the
Company's revenues and as of March 31, 2002 there was an $11,000 accounts
receivable balance from this customer. 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 could 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.
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.
6
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 and passage
of title to customers in accordance with contractual terms. The Company
evaluates each sale to ensure collectibility. In addition, each sale is based on
an arrangement with the customer and the sales price to the buyer is fixed. 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 asset and liability method for recording deferred
income taxes, which provides for the establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
The 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
plus dividends on the outstanding Series A Preferred Stock, $218,000 and
$197,000 for the quarters ended March 31, 2003 and 2002, 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 2003 or 2002.
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.
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.
7
Impairment of long-lived assets and long-lived assets to be disposed of
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell.
Stock options
The Company has historically used the intrinsic value method of accounting for
employee stock options as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, compensation cost for stock options has been
measured as the excess, if any, of the quoted market price of Company stock at
the date of the grant over the amount the employee must pay to acquire the
stock. The compensation cost is recognized over the vesting period of the
options.
Both the stock-based employee compensation cost included in the determination of
the net income as reported and the stock-based employee compensation cost that
would have been included in the determination of net income if the fair value
based method had been applied to all awards, as well as the resulting pro-forma
net income and earning per share using the fair value approach, are presented in
the following table. These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period, and additional options may be granted in future
years.
The three months ended March 31, 2003 2002
---- ----
Pro forma results
(In thousands, except per share amounts)
Net loss available for common shareholders:
As reported $(640) $(645)
Total stock based employee compensation
expense determined under fair value based
method 74 97
----- -----
Pro forma $(714) $(742)
Loss per common share basic and diluted:
As reported $(.12) $(.13)
Pro forma $(.14) $(.14)
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 fiscal years beginning after June 15, 2002.
In April 2002, the FASB issued FASB statement No. 145 ("SFAS 145"), which
rescinds FASB statements No. 4, 44 and 64 and amends FASB statement No. 13. SFAS
145 is effective for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued FASB statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities. SFAS 146 is effective for fiscal years beginning after December 31,
2002.
In December 2002, the FASB issued FASB statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), an amendment
of SFAS No. 123. SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company plans to continue to use the intrinsic value
method for stock-based compensation. SFAS No. 148 is effective for fiscal years
beginning after December 15, 2002.
The Company has adopted each of the above pronouncements effective January 1,
2003, except that SFAS No. 148 was adopted as of December 31, 2002, and these
adoptions did not have a material impact on the Company's financial position and
results of operations.
Note 2 - Liquidity and going concern
The Company has been substantially dependent on loans from The CIT
Group/Business Credit, Inc. ("CIT"), the Company's primary lender, its principal
stockholders, and proceeds from the sale of its securities. The credit facility
between CIT and the Company was scheduled to expire on April 29, 2003 and the
Company has secured an extension of its credit facility through May 30, 2003.
During the extension period of April 30, to May 30, 2003 the interest rate is
the prime rate plus 3.5%. The Company has not obtained a renewal of this credit
facility. Although the Company believes it can obtain replacement financing
should CIT decide not to continue its lending relationship with the Company
there can be no assurance that it can obtain such financing.
Even if the Company is able to replace its current credit facility with CIT the
Company anticipates that it will need to raise additional capital in 2003. No
assurances can be made that the Company will be successful in the sales of its
securities or in obtaining an extension or renewal of its credit facility to
meet the Company's working capital needs. The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. As
discussed above, the Company is dependent on outside sources of financing to
fund its working capital needs. This condition gives rise to substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from this
uncertainty.
8
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 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, 2003, other expense of $188,000 consisted
of interest expense of approximately $88,000, finance charges associated with
the Company credit facility of $70,000 and amortization of the original issue
discount associated with the Company's Convertible Notes with related parties.
For the three months ended March 31, 2002, other income of $144,000 consisted
primarily of the prepayment of the remaining balance of the note receivable from
ESS and, to a lesser extent, interest income offset by interest expense of
$97,000.
9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
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 filings
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. Several of the Company's accounting policies involve
significant judgements, uncertainties and estimations. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. To the extent that actual results differ from management's
judgements and estimations, there could be a material adverse effect on the
Company. 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 and commitments and contingencies. With respect to
accounts receivable, the Company estimates the necessary allowance for doubtful
accounts based on both historical and anticipated trends of payment history and
the ability of the customer to fulfill its obligations. For inventory, the
Company evaluates both current and anticipated sales prices of its products to
determine if a write down of inventory to net realizable value is necessary. The
Company utilizes both internal and external sources to evaluate potential
current and future liabilities for various commitments and contingencies. In the
event that the assumptions or conditions change in the future, the estimated
liabilities could differ from the original estimates.
Overview
Over the past few years, the Company has been attempting to grow its 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. The
Company has created a network of service depots that provide a full range of the
Company's RefrigerantSide(R) Services to facilitate the growth and development
of its service offerings.
During 1999 and 2001, the Company completed sales of its Series A Preferred
Stock. The net proceeds of these sales were used to expand the Company's service
offering through a network of service depots and to provide working capital.
Management believes that its RefrigerantSide(R) Services represent the Company's
long term growth potential. However, in recent periods the Company has not been
successful in growing its RefrigerantSide(R) Services revenue. As part of the
Company's goal to grow its RefrigerantSide(R) Services business, in 2002, the
Company commenced a restructuring of its sales and marketing efforts including
hiring a new Vice President of Sales and Marketing. In addition, the Company has
been evaluating its sales and marketing strategy and is in the process of
focusing on vertical markets rather than geographic markets that had been the
strategy with our network of service depots. In the near term, the Company
expects that it will incur additional expenses and losses related to the
development of its RefrigerantSide(R) Services. In addition,
10
to the extent that the network of service depots does not develop to expected
operating levels, or it is not necessary to fulfill the vertical market
strategy, the Company may terminate the operations of certain of its service
depots.
Sales of refrigerants continue to represent a majority of the Company's
revenues. Most of the Company's refrigerant sales are chlorofluorocarbon, or CFC
based refrigerants, which are no longer manufactured. In addition, the Company
expects that, over time, the demand for CFC based refrigerants will decrease as
equipment that utilizes other chemical based refrigerants replaces those units
that utilize CFC based refrigerants. To the extent that the Company is unable to
source CFC based refrigerants on commercially reasonable terms or at all, or the
demand for CFC based refrigerants decreases, the Company's financial condition
and results of operations would be materially adversely affected. In addition,
the Company's long-term strategy of growth in revenues generated from
RefrigerantSide(R) Services may cause reductions in revenues derived from the
sale of refrigerants.
The Company believes that, for the foreseeable future in the refrigeration
industry overall, there will be a trend towards lower sales prices, volumes and
gross profit margins on refrigerant sales, which may result in an adverse effect
on the Company's operating results. 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, 2003 as compared to the three months ended March
31, 2002
Revenues for the three months ended March 31, 2003 were $5,677,000, a decrease
of $434,000 or 7% from the $6,111,000 reported during the comparable 2002
period. The decrease in revenues was primarily attributable to a decrease in
refrigerant revenues and a decrease in RefrigerantSide(R) Services revenues. The
decrease in refrigerant revenues is related to a reduction in the sales prices
per pound for certain refrigerants. The decrease in RefrigerantSide(R) Services
was primarily a reduction in the number of jobs sold.
Cost of sales for the three months ended March 31, 2003 was $4,037,000, a
decrease of $644,000 or 14% from the $4,681,000 reported during the comparable
2002 period. The decrease in cost of sales was primarily due to a reduction in
materials cost of refrigerants sold and payroll associated with the Company's
RefrigerantSide(R) Services. As a percentage of sales, cost of sales were 71% of
revenues for 2003, a decrease from the 77% reported for the comparable 2002
period. The decrease in cost of sales as a percentage of revenues was primarily
attributable to a reduction in material costs of refrigerants sold.
Operating expenses for the three months ended March 31, 2003 were $1,874,000 a
decrease of $148,000 or 7% from the $2,022,000 reported during the comparable
2002 period. The decrease was primarily attributable to a reduction in sales
payroll costs associated with the Company's RefrigerantSide(R) Service offering.
Other income (expense) for the three months ended March 31, 2003 was $(188,000),
compared to the $144,000 reported during the comparable 2002 period. Other
income (expense) includes interest expense of $188,000 and $97,000 for the
comparable three month periods ended March 31, 2003 and 2002, respectively,
offset by other income of $241,000 for 2002. The increase in interest expense is
primarily attributed to additional CIT charges in connection with the Company's
credit facility, interest on the Notes and amortization of the original issue
discount associated with the Company's convertible notes. Other income during
the 2002 quarterly period primarily relates to interest income and proceeds from
the prepayment of the note receivable from ESS.
No income taxes for the three months ended March 31, 2003 and 2002 were
recognized. The Company recognized a reserve allowance against the deferred tax
benefit for the 2003 and 2002 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, 2003 was $422,000 a decrease of
$26,000 or 6% from the $448,000 net loss reported during the comparable 2002
period. The decrease in net loss was primarily attributable to an increase in
gross profit, attributable to a reduction in materials cost of refrigerant
sales; and a decrease in sales payroll costs, offset by the non-recurring gain
of $232,000 from the prepayment of the note receivable from ESS in 2002.
11
Liquidity and Capital Resources
At March 31, 2003, the Company had a working capital deficit, which represents
current assets less current liabilities, of approximately $389,000, an increase
of $261,000 from working capital deficit of $128,000 at December 31, 2002. The
increase in the working capital deficit is primarily attributable to the net
loss incurred during the quarter ended March 31, 2003.
Principal components of current assets are inventory and trade receivables. At
March 31, 2003, the Company had inventories of $2,985,000, an increase of
$18,000 or 1% from the $2,967,000 at December 31, 2002. The Company's ability to
sell and replace its inventory on a timely basis and the prices at which it can
be sold are subject, among other things, to current market conditions and the
nature of supplier or customer arrangements. At March 31, 2003, the Company had
net trade accounts receivable of $3,082,000, an increase of $1,111,000 or 56%
from the $1,971,000 at December 31, 2002. The Company's trade accounts
receivable are concentrated with various wholesalers, brokers, contractors and
end-users within the refrigeration industry that are primarily located in the
continental United States, and the increase is related to seasonal revenue
fluctuations.
The Company has historically financed its working capital requirements through
cash flows from operations, the issuance of debt and equity securities, bank and
related party 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 lowering its operating losses, in which case the
Company will be required 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.
Furthermore, the inability of the Company to renew or replace its existing
credit facility with CIT at the expiration of the term of the current facility
on May 30, 2003 would have a material adverse effect on the Company's operations
and financial condition.
Net cash used by operating activities for the quarter ended March 31, 2003, was
$772,000 compared with net cash provided by operating activities of $144,000 for
the comparable 2002 period. Net cash used by operating activities was primarily
attributable to the net loss for the 2003 period and an increase in trade
receivables offset by an increase in trade payables.
Net cash used by investing activities for the quarter ended March 31, 2003, was
$63,000 compared with net cash used by investing activities of $22,000 for the
prior comparable 2002 period. The net cash used by investing activities was due
to equipment additions primarily associated with the Company's depot network, as
well as additions to patents.
Net cash provided by financing activities for the quarter ended March 31, 2003,
was $643,000 compared with net cash used by financing activities of $423,000 for
the comparable 2002 period. The net cash provided by financing activities for
the 2003 period primarily consisted of $754,000 of advances from the Company's
credit facility with CIT, offset by the repayment of long term debt of $111,000.
At March 31, 2003, the Company had cash and cash equivalents of $353,000. 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 and
consolidation of its reclamation facilities. The Company estimates that capital
expenditures during 2003 may range from approximately $500,000 to $700,000.
The Company has entered into a credit facility with 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 term loan. 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, 2003, the Company had availability
under its revolving line of credit of approximately $265,000. Advances available
to the Company under the term loan are based on existing fixed asset valuations
and future advances under the term loan of up to an additional $1,000,000 are
based on future capital expenditures. As of March 31, 2003, the Company had
approximately $256,000 outstanding under its term loans and $2,788,000
outstanding under its revolving line of credit, and due to the expiration of the
credit facility in May 2003, all such amounts are reflected on the Company's
March 31, 2003 Balance Sheet as current liabilities. The facility bore interest
at the prime rate plus 1.5%, 5.75% at March 31, 2003, 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
12
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. The credit facility was initially scheduled to expire on April 29, 2003.
The Company has secured an extension of the credit facility with CIT through May
30, 2003, bearing interest during the extension period of prime plus 3.5%.
The Company is currently in negotiations with CIT regarding a possible
additional extension of the term of the credit facility or the entering into of
a new credit facility, and is also seeking alternate sources of financing. While
the Company believes that it will be able to obtain replacement financing, there
can be no assurance that CIT will continue to lend funds to the Company after
the expiration of the current credit facility or that the Company will be able
to obtain financing from another source should CIT decide not to continue
providing financing to the Company. However, even if the Company is able to
obtain replacement financing it may be on terms that are less favorable to the
Company than the current CIT facility. A failure of the Company to obtain
adequate financing from CIT or an alternate source after the expiration of the
current CIT credit facility would have a material adverse effect on the
Company's operations and financial condition. As a result of this uncertainty,
the Company's independent auditors added an explanatory paragraph to their
independent auditors' report included in the Company's filing on Form 10-KSB
regarding the Company's ability to continue as a going concern.
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.
In November 2002, the Company consummated the private sale of unsecured 12%
subordinated promissory notes ("Bridge Notes") to a limited number of
purchasers, for which it received gross proceeds of $655,000. The Bridge Notes
were for a term of one year and were subordinate in payment to the Company's
obligations under its credit facility with CIT. In accordance with the terms of
the Bridge Notes, each of the purchasers, at their option, elected to defer
quarterly interest payments which were to be added to the principal amount of
the Bridge Notes as of each interest payment date and interest would accrue on
the principle and any unpaid interest at 12% per annum. The Bridge Notes
automatically exchanged for unsecured 10% subordinated promissory notes
("Exchange Notes"), upon approval of such exchange by the Company's
shareholders, which approval was obtained at the annual meeting on December 20,
2002.
Effective December 2002, the Company consummated the private sale of unsecured
10% subordinated promissory notes ("Convertible Notes") to a limited number of
purchasers, for which it received gross proceeds of $495,000. At or about the
same time, the Bridge Notes were cancelled and exchanged for the Exchange Notes
in a principal amount equal to the outstanding principal amount of the Bridge
Notes immediately prior to the exchange together with accrued and unpaid
interest thereon. As of December 20, 2002, the Exchange Notes and the
Convertible Notes were identical in terms and together are referred herein as
the ("Notes"). The Notes have a term of two years and earn interest at an annual
rate of 10% payable quarterly in arrears. Holders of the Notes had the one time
option to elect to either receive payments of interest on a quarterly basis,
subject to limitations described below, or defer quarterly interest payments, in
which case, interest would be added to the outstanding amount of the Notes on
each quarterly payment date and accrue interest at the then effective interest
rate of the Notes. The Notes are unsecured and subordinate in payment to the
Company's obligations under its credit facility with CIT. The Notes may not be
prepaid in cash by the Company without the prior consent of CIT and payment of
interest, if any, in cash on any scheduled quarterly interest payment date is
limited to an aggregate of $20,000 per calendar year. Holders of the Notes have
the right to convert all or a portion of the outstanding principal balance, and
any accrued interest thereon, to Common Stock of the Company, upon, but not
prior to, the first anniversary of the issuance of the Notes at the conversion
rate of $.79 per share.
On April 15, 2003, the Company issued an additional $500,000 principal amount of
Convertible Notes to the holders of the Series A Preferred Stock. The April 15,
2003 note issuance is identical to the December 2002 issuance, except that the
conversion rate of these Convertible Notes is $1.41 per share. The Convertible
Notes issued in April 2003 are included in the term "Notes" as used herein.
The conversion rate of the Notes is subject to adjustment on a full ratchet
basis (i.e., if the Company issues any stock at a price less than the conversion
rate, the conversion rate for all shares issuable upon conversion of the Notes
will be adjusted downward to such price) in certain events including the
Company's issuance of Common Stock, warrants or rights to purchase Common Stock
(except for shares subject to stock options under or reserved for option grants
under any shareholder approved Stock Option Plan or upon exercise or conversion
of options, warrants or other exercisable or exchangeable equity or debt
securities outstanding immediately prior to the issuance of the Notes) or
securities convertible into Common Stock in each case for a consideration per
share which is less than the then-effective conversion
13
rate. In addition, the conversion rate is subject to an appropriate adjustment
in the event of: (i) any subdivisions, combinations and reclassifications of the
Company's Common Stock; (ii) any payment, issuance or distribution by the
Company to its stockholders of a stock dividend; (iii) the consolidation or
merger of the Company with or into another corporation whereby the Company is
not the surviving entity; or (iv) the sale by the Company of substantially all
of its assets.
The Notes provide that in the event of an equity offering by the Company at any
time prior to the first anniversary of the issuance of the Notes, for gross
proceeds of not less than $2 million (inclusive of the application of all
outstanding principal and interest of the Notes) (the "Equity Offering"), all
outstanding principal and interest, if any, on the Notes shall be either (i)
applied to the purchase of equity securities in the Equity Offering at the
public offering purchase price, or (ii) converted into restricted shares of
Common Stock at the then effective conversion rate. Holders of the Notes have
the right to determine, to the extent that securities are legally available for
purchase in the Equity Offering, whether to apply the Notes to acquire such
equity securities sold in the Equity Offering or convert the Notes into Common
Stock; provided, however, that in the event that all or a portion of outstanding
principal and interest, if any, of the Notes exceeds the number of equity
securities available in the Equity Offering, the balance of the Notes not
applied to the purchase of equity securities will be converted into restricted
shares of Common Stock at the then-effective conversion rate.
In April 2003, holders of the Convertible Notes issued in December 2002 holding
an aggregate principal amount of $495,000 entered into agreements with the
Company whereby the holders agreed to modify the conversion rate of their
Convertible Notes to the modified conversion rate of $1.13 (the average closing
sale price of the Company's Common Stock as reported on the NASDAQ Small Cap
Market for the five business days immediately preceding the execution of the
modification agreements); provided further, that, in the event of an Equity
Offering by the Company prior to the first anniversary of the issuance of the
Convertible Notes, at a public offering price (which includes the exercise price
of stock purchase rights offered in the Equity Offering) below the $1.13
modified conversion rate but in excess of $.79, the conversion rate of the
Convertible Notes will be adjusted to not less than the public offering price.
The Company is obligated to issue to the holders of the Notes, on the earlier of
(a) the first anniversary of their respective date of issuance, or (b) the
consummation by the Company of an Equity Offering, warrants to purchase an
aggregate number of shares of Common Stock equal to 10% of the number of shares
of Common Stock into which the Notes were convertible at their respective date
of issuance. Each warrant will be exercisable to purchase one share of Common
Stock for a period of five years from issuance at an exercise price equal to
110% of the lesser of (i) the conversion rate of the Notes as of their
respective date of issuance, or (ii) the conversion rate of the Notes on the
date of issuance of the warrants. The exercise price of the warrants will be
subject to the anti-dilution adjustment on terms substantially similar to
anti-dilution adjustment of the conversion rate of the Notes. As of December 20,
2002, the Company has recognized an original issue discount of $220,000, in
connection with the obligation to issue the warrants.
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 currently converts to Common Stock at a price 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 currently converts to Common Stock at a price 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 provides for anti-dilution adjustment of the
conversion price in the event of the subsequent offering by the Company of
securities for consideration per share less than the then effective conversion
price of the Series A Preferred Stock. At the direction of the NASDAQ Stock
Market, Inc., a minimum of $1.78 per share (the "Conversion Price Floor"), below
which the conversion price of the Series A Preferred Stock could not be
adjusted, had been instituted by the Company and the holders of the Series A
Preferred Stock by amendment to the designation of the Series A Preferred Stock,
and at the same time the Company agreed not to offer securities for
consideration per share less than the Conversion Price Floor without the consent
of the holders of the Series A Preferred Stock. Subsequently, in consideration
for the consent of the holders of the Series A Preferred Stock to the Company's
engagement in the private offering of the Notes at a conversion price below the
Conversion Price Floor, the stockholders of the Company, at the annual meeting
on December 20, 2002, voted in favor of a proposal to remove the Conversion
Price Floor and the designation of the Series A Preferred Stock was amended
accordingly. Although the holders of the Series A Preferred
14
Stock agreed to waive their rights to an immediate downward adjustment of the
current $2.375 conversion price of the Series A Preferred Stock in connection
with the issuance of the Notes, any subsequent conversion of the Notes will
result in a downward adjustment of the conversion price of the Series A
Preferred Stock to equal the conversion price of the Notes. Consequently, upon
conversion of the Exchange Notes at the $.79 per share conversion price the
anti-dilution provisions of the Series A Preferred Stock will cause the
conversion price of the Series A Preferred Stock to adjust downward to the $.79
per share. Assuming that the Series A Preferred Stock converts to common stock
at a conversion price of $.79 per share and based upon 120,782 shares of Series
A Preferred Stock issued as of March 31, 2003, the holders of the Series A
Preferred Stock would receive 15,288,860 shares of Common Stock. Similarly, the
conversion price of such Series A Preferred Stock may be subsequently adjusted
to equal the consideration received by the Company in connection with any
subsequent issuance of securities below the current $2.375 conversion price.
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. The designation of the Series A Preferred Stock provided for a
proxy granted by the holders of the Series A Preferred Stock in favor of certain
of the Company's officers to vote all shares of Common Stock into which the
Series A Preferred Stock converts (including any additional shares subsequently
acquired by such holders) in excess of 29% of the votes entitled to be cast by
the Series A Preferred Stock holders. As noted above, in consideration for
consent of the holders of the Series A Preferred Stock to the Company's
engagement in the private offering of the Notes at a conversion rate below the
Conversion Price Floor, the stockholders of the Company, at the annual meeting
on December 20, 2002, voted in favor of a proposal to remove the proxy from the
designation of the Series A Preferred Stock and the designation of the Series A
Preferred Stock was amended accordingly. 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 Company used 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, 2003 the Company declared and paid, in-kind, the dividends on the
outstanding Series A Preferred Stock and issued 4,153 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 is continuing to evaluate opportunities to rationalize its operating
facilities and its depot network based on ways to reduce costs or to increase
revenues. We expect that this evaluation will result in a consolidation of
certain of our facilities. The Company is also considering whether to reduce or
eliminate certain of its operations that have not performed to its expectations.
Moreover, as we begin to implement our sales and marketing strategy to focus on
industry rather than geographic markets we may discontinue certain operations,
eliminate depot and overhead costs and, in doing so, may incur future charges to
exit certain operations.
The Company believes that it will be able to satisfy its working capital
requirements for the immediate future from anticipated cash flow from operations
and available funds under its credit facility with CIT and any replacement
facility it enters into after the expiration of the current term of the CIT
facility. Although the Company believes it can obtain replacement financing for
the CIT facility there can be no assurance that it will do so. Moreover, even if
the Company obtains replacement financing for the CIT facility it believes that
it will need additional financing during 2003 to support its continuing
operations. In addition, any unanticipated expenses, including, but not limited
to, an increase in the cost of refrigerants purchased by the Company, an
increase in operating expenses or failure to achieve expected revenues from the
Company's depots and/or refrigerant sales or additional expansion or acquisition
costs that may arise in the future would adversely affect the Company's future
capital needs. There can be no 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.
The Company is currently seeking to obtain additional financing through the
issuance of debt and/or equity securities, which may include a Rights offering
of Common Stock by the Company to its Stockholders. There can be no assurance,
however, that the Company will be able to obtain any
15
additional capital on commercially reasonable terms or at all, and its inability
to do so would have a material adverse affect on the Company.
Inflation
Inflation has not historically had a material impact on the Company's
operations.
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 virgin or reclaimable
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, 2003, two customers accounted for 17% and 11%
of the Company's revenues. During the quarter ended March 31, 2002, one customer
accounted for 14% 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 could 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 is seasonal
in nature with peak sales of refrigerants occurring in the first half of each
year. During past years, the seasonal decrease in sales of refrigerants 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 or 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
similar seasonal element to this portion of its business in the future.
Item 3 - Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
16
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 alleged contamination of certain of United's wells which are in close
proximity to the Company's Hillburn, New York facility.
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 Hillburn 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 and has been making additional monthly
payments in the amount of $5,000, which payments are expected to continue
through December 2003. 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 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 environmental
impairment insurance per occurrence and in connection with the settlement,
exhausted all insurance proceeds available for that occurrence 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, whereby, the Company agreed to
continue operating the remediation system it installed 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 installed one additional monitoring
well and modified the Company's existing remediation system to incorporate a
second recovery well. The Company is continuing to operate the remediation
system pursuant to that Order on Consent.
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. The Company 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. The Company has requested that the EPA remove
the Hillburn facility from nomination for the NPL due to the continued reduction
of contamination.
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 ("Village")
well system. During February 2002, the Village expressed concern over the
possibility of R-11 reaching its well system and has advised the Company that it
was investigating available options to protect its well system. No contamination
of R-11 has ever been detected in any of the Village's wells and, as of October
2002, the level of R-11 in the United well closest to the Village was below 1
ppb. In October 2002, the Village advised the Company it intends to proceed with
plans to protect its wells and could look to the Company to reimburse the
Village for any costs it may incur. To date, no detailed cost estimate, formal
demand or claim has been presented by the Village, however, to the extent the
Village proceeds with its plans, the Company may incur additional costs. The
Company has reimbursed the Village for approximately $10,000 of costs incurred
to date for additional sampling by the Village of its wells and for minor
preparatory work in connection with the Village's plan for protecting its wells.
17
In February 2003, the Company agreed to extend the statute of limitations
applicable to any claims that may be available to Ramapo Land Company, the
lessor of the Hillburn facility, arising out of the April 1, 1999 incident for
an additional two years. To date, no claims against the Company have been
asserted or threatened by Ramapo Land Company.
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
During the three months ended March 31, 2003, the Company granted options to
purchase an aggregate of 50,000 shares of Common Stock to an employee, board
members and holders of the Series A Preferred Stock pursuant to its 1997 Stock
Option Plan. On March 30, 2003, the Company issued a total of 4,153 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:
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) No report on Form 8-K was filed during the quarter ended March 31,
2003.
18
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 15, 2003
---------------------------------------
Kevin J. Zugibe Date
Chairman and
Chief Executive Officer
By: /s/ James R. Buscemi May 15, 2003
----------------------------------------
James R. Buscemi Date
Chief Financial Officer
19
Hudson Technologies, Inc.
Certification of Principal Executive Officer
I, Kevin J. Zugibe, Chief Executive Officer and Chairman of the Board, of Hudson
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Hudson
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Kevin J. Zugibe
---------------------------
Kevin J. Zugibe
Chief Executive Officer and
Chairman of the Board
Hudson Technologies, Inc.
Certification of Chief Financial Officer
I, James R. Buscemi, Chief Financial Officer, of Hudson Technologies, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Hudson
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
7. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
8. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
b) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
d) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
e) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
9. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
10. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ James R. Buscemi
-----------------------
James R. Buscemi
Chief Financial Officer