-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ae/FpCcp9kL2WlUQPPZICsaBgClRPO7U3CuKB8q73y5rhRX4/1mNyV/do5cYRHSm Vjp2v+0iQTYD6eQnpPzbKQ== 0001169232-03-006580.txt : 20031113 0001169232-03-006580.hdr.sgml : 20031113 20031113102253 ACCESSION NUMBER: 0001169232-03-006580 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON TECHNOLOGIES INC /NY CENTRAL INDEX KEY: 0000925528 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 133641539 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13412 FILM NUMBER: 03996090 BUSINESS ADDRESS: STREET 1: 275 N MIDDLETOWN RD CITY: PEARL RIVER STATE: NY ZIP: 10965 BUSINESS PHONE: 8457356000 MAIL ADDRESS: STREET 1: 275 N MIDDLETOWN RD CITY: PEARL RIVER STATE: NY ZIP: 10965 FORMER COMPANY: FORMER CONFORMED NAME: REFRIGERANT RECLAMATION INDUSTRIES INC DATE OF NAME CHANGE: 19940617 10QSB 1 d57415_10-qsb.txt FORM 10QSB ================================================================================ 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 September 30, 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) 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|_|. 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 5,166,320 shares ----------------------------- ---------------- Class Outstanding at October 30, 2003 Transitional Small Business Disclosure Format (check one): Yes |_| No |X|. ================================================================================ 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 Condition and Results of Operations 10 Item 3 - Controls and Procedures 18 Part II. Other Information Item 1 - Legal Proceedings 19 Item 5 - Other Information 20 Item 6 - Exhibits and Reports on Form 8-K 20 Signatures 21 2 Part I - FINANCIAL INFORMATION Hudson Technologies, Inc. and subsidiaries Consolidated Balance Sheets (Amounts in thousands, except for share and par value amounts)
September 30, December 31, 2003 2002 ---- ---- Assets (unaudited) Current assets: Cash and cash equivalents $ 450 $ 545 Trade accounts receivable - net of allowance for doubtful accounts of $228 and $262 2,707 1,971 Inventories 2,025 2,967 Prepaid expenses and other current assets 332 249 -------- -------- Total current assets 5,514 5,732 Property, plant and equipment, less accumulated depreciation 2,103 2,551 Deferred equity costs 267 -- Other assets 141 139 -------- -------- Total Assets $ 8,025 $ 8,422 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 3,598 $ 3,278 Short-term debt 1,973 2,465 -------- -------- Total current liabilities 5,571 5,743 Long-term debt, less current maturities 370 241 Long-term debt - related parties 2,009 930 -------- -------- Total Liabilities 7,950 6,914 -------- -------- 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 125,085 and 116,629 12,509 11,663 Common Stock, $0.01 par value; shares authorized 50,000,000; issued outstanding 5,166,320 and 5,165,020 52 52 Additional paid-in capital 19,270 20,019 Accumulated deficit (31,756) (30,226) -------- -------- Total Stockholders' Equity 75 1,508 -------- -------- Total Liabilities and Stockholders' Equity $ 8,025 $ 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 Nine month period ended September 30, ended September 30, ------------------------------ ------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Revenues $ 3,988 $ 3,880 $ 14,729 $ 16,760 Cost of Sales 2,971 2,791 10,566 12,230 ----------- ----------- ----------- ----------- Gross Profit 1,017 1,089 4,163 4,530 ----------- ----------- ----------- ----------- Operating expenses: Selling and marketing 312 661 1,330 2,062 General and administrative 907 919 2,804 2,789 Reorganization cost -- -- 350 -- Depreciation and amortization 213 285 668 856 ----------- ----------- ----------- ----------- Total operating expenses 1,432 1,865 5,152 5,707 ----------- ----------- ----------- ----------- Operating loss (415) (776) (989) (1,177) ----------- ----------- ----------- ----------- Other income (expense): Interest expense (182) (83) (467) (268) Other income (expense) 8 4 (74) 250 Gain on sale of assets -- -- -- 25 ----------- ----------- ----------- ----------- Total other income (expense) (174) (79) (541) 7 ----------- ----------- ----------- ----------- Loss before income taxes (589) (855) (1,530) (1,170) Income taxes -- -- -- -- ----------- ----------- ----------- ----------- Net loss (589) (855) (1,530) (1,170) Preferred stock dividends (219) (204) (648) (599) ----------- ----------- ----------- ----------- Available for common shareholders $ (808) $ (1,059) $ (2,178) $ (1,769) =========== =========== =========== =========== - --------------------------------------------- Net loss per common share - basic and diluted $ (0.16) $ (0.20) $ (0.42) $ (0.34) =========== =========== =========== =========== Weighted average number of shares outstanding 5,166,320 5,165,020 5,165,353 5,151,187 =========== =========== =========== ===========
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)
Nine month period ended September 30, ----------------------------- 2003 2002 ---- ---- Cash flows from operating activities: Net loss $(1,530) $(1,170) Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization 668 857 Allowance for doubtful accounts 90 108 Amortization of original issue discount 90 -- Gain on sale of assets -- (25) Changes in assets and liabilities: Trade accounts receivable (826) 279 Inventories 942 119 Prepaid expenses and other current assets (83) (260) Deferred equity costs and other assets (263) -- Accounts payable and accrued expenses 320 (132) ------- ------- Cash used by operating activities (592) (224) ------- ------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment -- 245 Additions to patents (14) -- Additions to property, plant, and equipment (212) (277) ------- ------- Cash used by investing activities (226) (32) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock - net 2 20 Repayment of short-term debt - net (316) (167) Proceeds from long-term debt 1,538 175 Repayment of long-term debt (501) (522) ------- ------- Cash provided (used) by financing activities 723 (494) ------- ------- Decrease in cash and cash equivalents (95) (750) Cash and cash equivalents at beginning of period 545 1,382 ------- ------- Cash and cash equivalents at end of period $ 450 $ 632 ======= ======= - ------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during period for interest $ 377 $ 268 Supplemental schedule of non-cash investing and financing activities: In-kind payment of preferred stock dividends $ 648 $ 599
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 nine month period ended September 30, 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. Reclassification Certain account balances have been reclassified for comparative purposes. Fair value of financial instruments The carrying values of financial instruments including trade accounts receivable, and accounts payable approximate fair value at September 30, 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 September 30, 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 nine months ended September 30, 2003 and 2002, there was no one customer that accounted for 10% of the Company's revenues. 6 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. 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, $648,000 and $599,000 for the nine month periods September 30, 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. 7 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. 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 nine months ended September 30, 2003 2002 ---- ---- Pro forma results (In thousands, except per share amounts) Net loss available for common shareholders: As reported $(2,178) $(1,769) Total stock based employee compensation expense determined under fair value based method 221 290 ------- ------- Pro forma $(2,399) $(2,059) ======= ======= Loss per common share-basic and diluted: As reported $ (.42) $ (.34) Pro forma $ (.46) $ (.40) 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. 8 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. In April 2003, the FASB issued FASB statement No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material effect on the Company's financial statements. In May 2003, the FASB issued FASB statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity ("SFAS 150"), which is effective for the interim period beginning after June 15, 2003. SFAS 150 establishes standards for the Company's classification of liabilities in the financial statements that have characteristics of both liabilities and equity. The adoption of SFAS 150 did not have a material effect on the Company's financial statements. Note 2 - 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 3 - Indebtedness On April 15, 2003 the Company issued an additional $500,000 principal amount of Convertible Notes, defined below to the Fleming Funds holders of the Company's Series A Preferred Stock. The April 15, 2003 note issuance is identical to the Convertible Notes issued by the Company in December 2002, except that the conversion rate of these Convertible Notes which was initially $1.41 per share is currently $1.10 per share subject to further adjustment as described below. The Convertible Notes issued in April 2003 are included in the term "Notes" as used herein. On May 30, 2003, Hudson entered into a credit facility with Keltic Financial Partners, LLP ("Keltic") which provides for borrowings of up to $5,000,000. The facility consists of a revolving line of credit and a term loan. Advances under the revolving line of credit may not exceed $4,600,000 and are limited to (i) 85% of eligible trade accounts receivable and (ii) 50% of eligible inventory. Advances available to Hudson under the term loan may not exceed $400,000. The facility bears interest at a rate equal to the greater of the prime rate plus 2.0 %, or 6.5%. Substantially all of Hudson's assets are pledged as collateral for its obligations to Keltic under the credit facility. In addition, among other things, the agreements restrict Hudson's ability to declare or pay any cash dividends on its capital stock. As of September 30, 2003, Hudson had in the aggregate $1,718,000 outstanding under the Keltic credit facility and $426,000 available for borrowing under the credit facility. In addition, the Company had $380,000 outstanding under its term loan with Keltic described below. In connection with the Keltic credit facility, Hudson also entered into a loan arrangement with the Flemings Funds for the principal amount of $575,000. The loan is unsecured, is for a term of three years, and accrues interest at an annual rate equal to the greater of the prime rate plus 2.0%, or 6.5%. In accordance with the terms of the Keltic credit facility, the amount of principal and interest outstanding under this loan arrangement reduces Hudson's aggregate borrowing 9 availability by a like amount under its credit facility with Keltic. This loan is expected to be retired in conjunction with the completion of the Company's ongoing Rights Offering described below. Note 4 - Reorganization costs During the first and second quarters of 2003, the Company engaged a consulting firm to help it perform an in-depth strategic business analysis that resulted in a revised business plan and marketing focus. During the second quarter, the Company reorganized much of its operations particularly its activities associated with its RefrigerantSide(R) Service business. The fees associated with the consulting engagement were $350,000 and such amount has been charged to operations during the three months ended June 30, 2003. Note 5 - Other expenses For the nine months ended September 30, 2003, other expense of $541,000 consisted of interest expense of approximately $467,000, finance charges associated with the Company's prior credit facility of $99,000, offset by $25,000 in sub-lease income. For the nine months ended September 30, 2002, other income of $7,000 consisted primarily of the prepayment of the remaining balance of the note receivable from ESS in the amount of $231,951, interest income of $11,000, gain on disposition of fixed assets of $25,000 and other income of $7,000 offset by interest expense of $268,000. 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995 Certain statements contained in this section and elsewhere in this Form 10-QSB constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, changes in the markets for refrigerants (including unfavorable market conditions adversely affecting the demand for, and the price of refrigerants), regulatory and economic factors, seasonality, competition, litigation, the nature of supplier or customer arrangements which become available to the Company in the future, adverse weather conditions, possible technological obsolescence of existing products and services, possible reduction in the carrying value of long-lived assets, estimates of the useful life of its assets, potential environmental liability, customer concentration, the ability to obtain financing, and other risks detailed in the Company's other 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 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 culminating in the reorganization of the Company in May 2003. As a result of the reorganization, the Company has determined to focus its sales and marketing efforts on vertical markets; rather than geographic markets that had been the focus associated with its network of service depots. In pursuing its vertical strategy, the Company expects to focus its RefrigerantSide(R) Services on specific industries, including petrochemical, pharmaceutical, industrial power, manufacturing, commercial facility and property management and maritime. Moreover, to maintain its current ability to quickly respond to customer service requests throughout the United States, the Company intends to create strategic alliances with companies that will allow it to co-locate its equipment and to utilize these partners' sales and marketing resources to offer their customers the Company's RefrigerantSide(R) Services. In addition, as 11 a result of the Company's new market strategy, the Company has closed six of its service depots. The territories served by the depots will continue to be served by the Company's remaining 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. 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, particularly in the automotive aftermarket segment of the refrigerant sales industry. 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. 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 September 30, 2003 as compared to the three months ended September 30, 2002 Revenues for the three months ended September 30, 2003 were $3,988,000, an increase of $108,000 or 3% from the $3,880,000 reported during the comparable 2002 period. The increase in revenues was primarily attributable to an increase in its RefrigerantSide(R) Services revenues. Cost of sales for the three months ended September 30, 2003 were $2,971,000, an increase of $180,000 or 6% from the $2,791,000 reported during the comparable 2002 period. The increase in cost of sales was primarily due to an increase in costs associated with the Company's refrigerant reclamation production facilities, including $80,000 as a consequence of the Company's efforts to consolidate its refrigerant reclamation operations into one facility. As a percentage of sales, cost of sales were 75% of revenues for the three month period ended September 30, 2003, as compared to the 72% reported for the comparable 2002 period. Cost of sales as a percentage of revenues increased primarily as a result of consolidation costs associated with the Company's production facility. Operating expenses for the three months ended September 30, 2003 were $1,432,000, a decrease of $433,000 or 23% from the $1,865,000 reported during the comparable 2002 period. The decrease was primarily attributable to a decrease in selling expenses associated with the Company's RefrigerantSide(R) Service offering as a consequence of the reorganization of the Company's sales and marketing efforts pursuant to changes in its RefrigerantSide(R) Services strategy in May 2003. Other income (expense) for the three months ended September 30, 2003 was ($174,000) as compared to the ($79,000) reported during the comparable 2002 period. Other income (expense) includes interest expense of $182,000 and $83,000 for the 2003 and 2002 periods, respectively, offset by other income of $8,000 and $4,000 for the 2003 and 2002 periods, respectively. The increase in interest expense is primarily attributed to the original issue discount and accrued interest on the Convertible Notes. No income taxes for the three months ended September 30, 2003 and September 30, 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 limitation. Net loss for the three months ended September 30, 2003 was ($589,000), a reduction of $266,000 from the net loss of ($855,000) reported during the comparable 2002 period. The reduction in the net loss for the 2003 period as compared to 2002 was primarily attributable to the reduction in selling expenses associated with the Company's RefrigerantSide(R) Service offering as a result of the reorganization of the Company's sales efforts that occurred during May of 2003. Nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002 Revenues for the nine months ended September 30, 2003 were $14,729,000, a decrease of $2,031,000 or 12% from the $16,760,000 reported during the comparable 2002 period. The decrease in revenues was primarily attributable to a 12 decrease in refrigerant revenues and, to a lesser extent, a decrease in RefrigerantSide(R) Services revenues. The decrease in refrigerant revenues is related to a reduction in the sales prices per pound and volume of refrigerants to the automotive aftermarket. The decrease in RefrigerantSide(R) Services was primarily a reduction in the number of jobs sold. Cost of sales for the nine months ended September 30, 2003 was $10,566,000, a decrease of $1,664,000 or 14% from the $12,230,000 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 72% of revenues for 2003, a decrease from the 73% 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 and a reduction in payroll associated with the Company's RefrigerantSide(R) Services. Operating expenses for the nine months ended September 30, 2003 were $5,152,000 a decrease of $555,000 or 10% from the $5,707,000 reported during the comparable 2002 period. The decrease was primarily attributable to a reduction in selling expenses associated with the Company's RefrigerantSide(R) Service offering of $732,000 offset by a one-time charge for reorganization costs of $350,000. Other income (expense) for the nine months ended September 30, 2003 was ($541,000), compared to the $7,000 reported during the comparable 2002 period. Other income (expense) includes interest expense of $467,000 and $268,000 for the comparable nine month periods ended September 30, 2003 and 2002, respectively, offset by other income (expense) of ($74,000) and $275,000, respectively for the 2003 and 2002 periods. The increase in interest expense is primarily attributed to the original issue discount and accrued interest on the Convertible Notes. Other income (expense) during the 2003 period consisted of finance charges on the Company's prior credit facility of $99,000 offset by $25,000 of sub-lease income. Other income during the 2002 period primarily relates to interest income and the non-recurring proceeds from the prepayment of the note receivable from ESS of $232,000 and gain on sale of assets of $25,000. No income taxes for the nine months ended September 30, 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 nine months ended September 30, 2003 was $1,530,000 an increase of $360,000 from the $1,170,000 net loss reported during the comparable 2002 period. The increase in net loss was primarily attributable to the one-time charge for reorganization costs of $350,000, interest related to the Company's prior credit facility; and interest expense related to the amortization of the original issue discount on the Convertible Notes during the 2003 period; and the lack of the non-recurring gain of $232,000 from the prepayment of the note receivable from ESS in 2002, offset by a reduction in selling expenses associated with the Company's RefrigerantSide(R) Service offering. Liquidity and Capital Resources At September 30, 2003, the Company had a working capital deficit, which represents current assets less current liabilities, of approximately $57,000, an increase of $46,000 from the working capital deficit of $11,000 at December 31, 2002. The decrease in working capital is primarily attributable to new financing in 2003 offset by the net loss incurred during the nine months ended September 30, 2003. Principal components of current assets are inventory and trade receivables. At September 30, 2003, the Company had inventories of $2,025,000, a decrease of $942,000 or 32% 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 September 30, 2003, the Company had net trade accounts receivable of $2,707,000, an increase of $736,000 or 37% from the $1,971,000 at December 31, 2002. The increase in the accounts receivable balance relates to seasonal revenue fluctuations. The Company's trade accounts receivables are concentrated with various wholesalers, brokers, contractors and end-users within the refrigeration industry that are primarily located in the continental United States. The Company has historically financed its working capital requirements through cash flows from operations, the issuance of debt and equity securities, 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 13 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 Company's Registration Statement for 5,166,320 shares of its common stock to be offered for sale through the issuance of rights to its common stockholders and to members of the public with respect to shares not subscribed for in the rights offering was declared effective on September 23, 2003. Pursuant to this rights offering, holders of the Company's common stock on September 18, 2003, received one (1) non-transferable right to purchase one (1) share of common stock of the Company at a subscription price of $1.10 for each share of the Company's stock they hold. As provided for in the registration statement, any stockholder of record who receives rights and who fully exercises his or her rights was permitted to oversubscribe for additional shares of common stock at the subscription price. The registration statement provides that to the extent shares offered are not subscribed for by the stockholders in the rights offering by the expiration date, the Company will offer those shares to members of the public at the subscription price. As of November 7, 2003, the expiration date, the rights portion of the Company's common stock offering had ended and the Company sold 73,600 shares of common stock, receiving $80,960 in gross proceeds. As of November 8, 2003, the Company is offering the remaining 5,092,720 registered shares for sale to the public. Such offer will expire on November 20, 2003 unless the Company's board of directors decides to extend the date. Even though the Company has the right to sell the remaining unsubscribed shares to the public, there can be assurances that the Company will be able to sell any of these shares. The inability to raise additional capital could have a material adverse effect on the Company. Net cash used by operating activities for the nine months ended September 30, 2003, was $592,000 compared with net cash used by operating activities of $224,000 for the comparable 2002 period. Net cash used by operating activities was primarily attributable to the net loss for the 2003 period, an increase in trade receivables and deferred equity costs and other assets, offset by an increase in trade payables and a decrease in inventories. Net cash used by investing activities for the nine months ended September 30, 2003, was $226,000 compared with net cash used by investing activities of $32,000 for the prior comparable 2002 period. The net cash used by investing activities was due to equipment additions primarily associated with the Company's new production facility in Champaign, IL, as well as additions to patents. Net cash provided by financing activities for the nine months ended September 30, 2003, was $723,000 compared with net cash used by financing activities of $494,000 for the comparable 2002 period. The net cash provided by financing activities for the 2003 period primarily consisted of proceeds from long-term debt of $1,538,000, offset to a lesser extent by a reduction of $316,000 of the amounts outstanding under the Company's revolving line of credit with Keltic Financial Partners, LLP ("Keltic"), and repayment of long term debt of $501,000. At September 30, 2003, the Company had cash and cash equivalents of $450,000. 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 the year ended December 31, 2003 may range from approximately $400,000 to $500,000. On May 30, 2003, Hudson entered into a credit facility with Keltic which provides for borrowings of up to $5,000,000. The facility consists of a revolving line of credit and a term loan. Advances under the revolving line of credit may not exceed $4,600,000 and are limited to (i) 85% of eligible trade accounts receivable and (ii) 50% of eligible inventory. Advances available to Hudson under the term loan may not exceed $400,000. The facility bears interest at a rate equal to the greater of the prime rate plus 2.0 %, or 6.5%. Substantially all of Hudson's assets are pledged as collateral for its obligations to Keltic under the credit facility. In addition, among other things, the agreements restrict Hudson's ability to declare or pay any cash dividends on its capital stock. As of September 30, 2003, Hudson had in the aggregate $1,718,000 outstanding under the Keltic credit facility and $426,000 available for borrowing under the credit facility. In addition, the Company had $380,000 outstanding under its term loan with Keltic. As of September 30, 2003, the Company was in violation of certain of its loan covenants with Keltic for which a waiver was obtained. In connection with the Keltic credit facility, Hudson also entered into a loan arrangement with the Flemings Funds for the principal amount of $575,000. The loan is unsecured, is for a term of three years, and accrues interest at an annual rate equal to the greater of the prime rate plus 2.0%, or 6.5%. In accordance with the terms of the Keltic credit facility, the amount of principal and interest outstanding under this loan arrangement reduces Hudson's aggregate borrowing availability by a like amount under its credit facility with Keltic. This loan is expected to be retired in conjunction with the completion of the Company's Rights Offering. 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 14 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 prior credit facility. 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 Keltic. The Notes may not be prepaid in cash by the Company without the prior consent of Keltic 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 was initially $1.41 and is currently $1.10 per share subject to further adjustment as described below. 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, this means that 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. This adjustment is applicable 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 rate of the Notes. 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. As a result of the Company's rights offering, the conversion rate of the $500,000 principal amount of Convertible Notes issued by the Company on April 15, 2003, and the conversion rate of $495,000 principal amount of the Convertible Notes issued by the Company on December 20, 2002 has been adjusted downward to the $1.10 rights offering subscription price. In connection with the Company's rights offering the Series A Preferred Stockholders voluntarily agreed to an upward adjustment of their conversion price of $400,000 principal amount of Convertible Notes owned by them to the $1.10 rights offerings price from the current conversion rate of $.79, provided that the Company raises an additional $1,000,000 in gross proceeds from sources other than the conversion of convertible debt or funds received from the Series A Preferred Stockholders. Based on the results of the rights offering 15 thus far, the Company does not expect to reach the $1,000,000 threshold. As a result, the Company does not anticipate that the voluntary upward adjustment in the conversion price of the Convertible Notes owned by the Series A Preferred Stockholders will occur. 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 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 June 30, 2003 the Company has recognized an original issue discount of $315,000, 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. 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 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 125,085 shares of Series A Preferred Stock issued as of September 30, 2003, the holders of the Series A Preferred Stock would receive 15,833,544 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. 16 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 and September 30, 2003 the Company declared and paid, in-kind, the dividends on the outstanding Series A Preferred Stock and issued 4,153 and 4,303, respectively, 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 two members 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. Recently, based on evaluations by management, the Company has consolidated certain of its facilities. The Company is also considering whether to reduce or eliminate certain of its operations that have not performed to its expectations. Moreover, as the Company begins to implement its sales and marketing strategy to focus on industry rather than geographic markets it 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 Keltic. The Company 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 includes a registered offering of Common Stock by the Company to, among others, its stockholders. There can be no assurance, however, that the Company will be able to obtain any additional capital on commercially reasonable terms or at all, and its inability to do so would have a material adverse effect 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, 17 or resell reclaimed refrigerants at a profit, the Company's financial condition and results of operations would be materially adversely affected. During the nine months ended, September 30, 2003 and 2002, no one customer accounted for 10% 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 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 as of the end of the quarter ended September 30, 2003. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance 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. During the quarter ended September 30, 2003, there were no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. 18 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, with final payment to be made in 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. In June 2003, the EPA has advised that it has no current plans to finalize the process for listing the Hillburn facility on the NPL. The EPA also advised that it will not at this time withdraw the proposal of the Hillburn facility on the NPL. 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. 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. 19 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 EPA will not change its current plans and seek to finalize the process of listing the Hillburn facility on the NPL, 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 5 - Other Information Based on the information that the Company submitted to a Nasdaq listing qualifications panel, among other information, the Company has been granted a temporary exception from the Nasdaq shareholders' equity continued listing standard subject to the Company meeting certain conditions, including a demonstration of its achieving shareholders' equity of at least $4 million by December 5, 2003 and the filing, by March 31, 2004, of its Form 10-K for the fiscal year ending December 31, 2003 evidencing that it had shareholders' equity of at least $2.5 million. Unless the Company is able to obtain a modification of the exception granted, of which there can be no assurance, the exception will expire and and the Company's common stock will be delisted from Nasdaq if the Company does not meet either of the two conditions stated above by the requisite time periods or if the Company does not satisfy any of the remaining criteria for continued listing. Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are attached to this report: 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 32.2 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 September 30, 2003. 20 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 November 13, 2003 ---------------------------------------- Kevin J. Zugibe Date Chairman and Chief Executive Officer By: /s/ James R. Buscemi November 13, 2003 ---------------------------------------- James R. Buscemi Date Chief Financial Officer 21 EX-31.1 3 d57415_ex31-1.txt SECTION 302 CERTIFICATION OF CEO Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and; 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: November 13, 2003 /s/ Kevin J. Zugibe ------------------- Kevin J. Zugibe Chief Executive Officer and Chairman of the Board EX-31.2 4 d57415_ex31-2.txt SECTION 302 CERTIFICATION OF CFO Exhibit 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and; 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal controls over financial reporting. Date: November 13, 2003 /s/ James R. Buscemi ----------------------- James R. Buscemi Chief Financial Officer EX-32.1 5 d57415_ex32-1.txt SECTION 906 CERTIFICATION OF CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hudson Technologies, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin J. Zugibe, as Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchanges Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kevin J. Zugibe ------------------- Kevin J. Zugibe Chief Executive Officer and Chairman of the Board November 13, 2003 A signed original of this written statement required by Section 906 has been provided to Hudson Technologies, Inc. and will be retained by Hudson Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 d57415_ex32-2.txt SECTION 906 CERTIFICATION OF CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Hudson Technologies, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James R. Buscemi, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchanges Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ James R. Buscemi -------------------- James R. Buscemi Chief Financial Officer November 13, 2003 A signed original of this written statement required by Section 906 has been provided to Hudson Technologies, Inc. and will be retained by Hudson Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----