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Proc-Type: 2001,MIC-CLEAR
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November 29, 2005 Mr. Rufus Decker Accounting Branch Chief Division of Corporation Finance United States Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: Hudson Technologies, Inc. (the "Registrant" or "Company") Form 10-KSB for the Fiscal Year Ended December 31, 2004 Form 10-QSB for the Fiscal Quarters Ended March 31, 2005 and June 30, 2005 File No. 1- 13412 Dear Mr. Decker: The Registrant is responding to the comments contained in your letter dated November 7, 2005 regarding the Company's filings on Form 10-KSB for the fiscal year ended December 31, 2004 and Form 10-QSB for the quarters ended March 31, 2005 and June 30, 2005. Item No. Response
For the year ended December 31, 2004, the Company's gross margin increased by $694,000. The increase in gross margin was due to a reduction in the cost of refrigerants sold and to a lesser extent a reduction in the cost of payroll associated with the Company's RefrigerantSideâ Services. Where applicable, in future filings the Company will provide additional information regarding material fluctuations in gross margin.
CFC based refrigerants and equipment that utilize these types of refrigerants ceased to be manufactured after 1995. Prior to 1995, non-CFC based refrigerants and equipment that utilize these types of refrigerants have been and continue to be manufactured. The Company has been disclosing this industry-wide trend and the potential effect on the Company. All of the Company's revenues are treated as one group due to the fact that the Company's direct and indirect expenses are the same pool of expenses for all revenues. The Company acquires used (dirty) refrigerant and reclaims (recycles) these refrigerants. The process, procedures and cost structure for reclamation is the same for all types of refrigerants. The Company reclaims both CFC based and non-CFC based refrigerants and sells those refrigerants to the same customers, typically contractors who service refrigeration systems. Therefore, revenues from the sale of all refrigerants are considered a single group of products and are discl osed as such.
The fair value of the convertible notes was deemed to be its face value. The fair value of the note warrants, utilizing Black-Scholes, was calculated to be approximately $157,000. The value of the conversion feature of the notes, in accordance with EITF 98-05 intrinsic value, was calculated to be approximately $157,000. The aggregate of the two amounts of $315,000 was recorded as debt discount cost and such amount was amortized and presented as a component of interest expense.
Initially, all of the convertible notes issued in December 2002 had a conversion rate of $.79 and, as previously stated, the value of the conversion feature of the convertible notes was calculated utilizing the $.79 conversion rate. Subsequently, the holders of a certain amount of convertible notes, which did not constitute all of the outstanding convertible notes, voluntarily agreed to increase the conversion rate of their notes to $1.13. Upon completion of the Rights Offering, the conversion rate of all convertible notes, except those notes that retained the conversion rate of $.79, was adjusted downward to $1.10. The holders of the convertible notes whose conversion rate was adjusted downward to $1.10 would have received approximately 981,000 shares of the Company's common stock if the conversion was made utilizing the initial conversion rate. Based on the final conversion rate of $1.10, the holders of these notes did receive approximately 905,000 shares of the Company's common sto ck. The Company did not recognize any adjustments to the OID calculations based on the changes in conversion rates due to the fact that the revisions in the conversion rate resulted in the note holders receiving fewer shares of common stock than originally included in the OID calculation.
Upon the issuance of the convertible notes in December 2002, the holders of the Series A Preferred Stock had the right to have the conversion rate of the Series A Preferred Stock adjusted downward to the conversion rate of the convertible notes. In December 2002, the holders of the Series A Preferred Stock waived their right to the downward adjustment in the conversion rate of the Series A Preferred Stock until such time that the convertible notes converted to common stock. In December 2003, the convertible notes converted into shares of common stock at the conversion rates of $.79 and $1.10 and, accordingly, the conversion rate of the Series A Preferred Stock decreased from $2.375 to $.79. The Company disclosed these events and the number of additional shares to be issued to the holders of the Series A Preferred Stock upon the occurrence of these events in its proxy statement dated November 21, 2002, its registration statement on Form SB-2, which was declared effective on September 23, 2003, and in its filings on Form 10-KSB for the years ended December 31, 2002 and 2003. In retrospect, however, the Company notes that it did not reflect in its loss per common share presentation the reduction in conversion rate of the Series A Preferred Stock and the resulting increase of 10,566,807 common shares upon conversion of the Series A Preferred Stock as a deemed dividend to the holders of the Series A Preferred Stock in accordance with EITF 98-5.
The Company respectfully submits, for the reasons set forth below, that no amendment to its Form 10-KSB for the years ended December 31, 2003 and 2004 resulting from its current understanding of EITF 98-5 should be required. The only impact to the Company's financial statements for the year ended December 31, 2003, following the guidance of EITF 98-5, would be to the presentation of the Company's loss per common share ("EPS"), which would reflect the value of the additional 10,566,807 common shares as a deemed dividend of approximately $9,500,000. It should be noted that the fair value of the additional 10,566,807 common shares is in excess of $9,500,000 but is capped at that amount due to the fact that the proceeds received from the sales of the Series A Preferred Stock was $9,500,000. At December 31, 2003, the Company had a substantial accumulated deficit, which was the result of its continued losses. Consequently, utilizing the guidance of EITF 98-5 would have resulted in a debit an d credit to the Company's Additional Paid-In Capital, which would have no impact in either the components of or Total Stockholders' Equity. Except for the Company's presentation of loss per common share, there would be no other impact to the Company's financial position or any other financial presentation resulting from the guidance of EITF 98-5. A reader of the Company's financial information, including the Statement of Operations, contained in the Company's filings on Form 10-KSB for the year ended December 31, 2003 was aware of the downward adjustment to the conversion rate of the Series A Preferred Stock, including the effect on the number of shares that the Series A Preferred Stock holders were to receive upon the change in the conversion rate, and that the Company sustained a substantial net loss, which net loss would not be affected by the application of EITF 98-5. In addition, on March 31, 2004, the Series A Preferred Stock holders converted all of their shares of Series A Preferred Stock and, as of that date, there are no shares of Preferred Stock outstanding. Upon the conversion of the Series A Preferred Stock, the preferred holders received common stock in the aggregate of 75% of the total outstanding shares of the Company's common stock. The adoption of EITF 98-5 does not change the Company's operating loss or net loss nor would the adoption change the readers understanding of the Company's financial results. The deemed dividend would have been reflected as a non-cash charge in the calculation of EPS. In addition, the Company believes that its EPS is not a significant measurement utilized by the readers of the Company's financial statements due to the substantial continuing losses recognized by the Company. At this time, any changes to the 2003 EPS presentation would not be material to a reader of the Company's financial statements, may result in confusion to a reader and not provide relevant trend guidance to the Company's financial performance subsequent to December 31, 2003 due to the fac t that such change would dramatically increase the loss per common share for the year ended December 31, 2003, and such information would not be disclosed beyond the Company's filings for the year ended December 31, 2004.
The Registrant acknowledges its responsibility for the adequacy and accuracy of the disclosure in the periodic reports that it files with the Commission. The Registrant also acknowledges that Staff comments or changes to disclosure in response to Staff comments pursuant to the Act do not foreclose the Commission from taking any action with respect to the filing. The Registrant also acknowledges that it may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We hope that these responses are satisfactory. If you have any questions, please call me at (845) 735-6000 ext. 6015.
Sincerely,
James R. Buscemi
Chief Financial Officer