After close on Friday, Hudson filed a late filing notification with the following statement:

Hudson Technologies, Inc. (the “Company”) was not in compliance with (i) the total leverage ratio covenant, calculated as of June 30, 2019, set forth in its Term Loan Credit and Security Agreement, as amended, with U.S. Bank National Association, as agent, and the term loan lenders (the “Term Loan”) and (ii) the minimum liquidity covenant under the Term Loan at July 31, 2019. The Company was also not in compliance with the minimum EBITDA covenant for the four quarters ended June 30, 2019 set forth in its Amended and Restated Revolving Credit and Security Agreement, as amended (the “Revolving Facility”), with PNC Bank, National Association, as administrative agent, collateral agent and lender, PNC Capital Markets LLC as lead arranger and sole bookrunner, and such other lenders thereunder.

 

The Company is currently seeking a waiver and/or amendment from its lenders under both the Term Loan and the Revolving Facility, which the Company is working to complete on or before August 14, 2019. As a result of the impact of foregoing discussions, the Company is not in a position to file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (the “10-Q”) on a timely basis. The Company is working diligently to resolve these matters and management currently believes that the Company will be in a position to file the aforementioned 10-Q not later than August 14, 2019.

This should be relatively in line with market expectations, given Hudson is trading at ~$0.50 which implies the market is expecting bankruptcy.

Although Hudson will not comply with its covenants, I think it is relatively positive language that was posted. Clearly, PNC is negotiating with the company. This makes sense. Does PNC really want to take this tiny company to bankruptcy? If it did, it probably would only recover some of its par amount of debt and would own the re-org equity of the company, which would be highly illiquid. Alternatively, PNC can give some leeway, allow the company to continue operations, and hopefully realize a full recovery.

I take it as a positive that they’ll have an answer by Wednesday, August 14th. My base case is PNC will require some debt paydown or higher rate in exchange for relief, but we shall see. Net, net – I “PNC” the light…

Hudson also noted:

For the quarter ended June 30, 2019, the Company’s revenues were $56.0 million, a decrease of 3% compared to $57.8 million in the comparable 2018 period. The Company recorded lower of cost or net realizable value adjustments to its inventory of $9.2 million and $34.7 million during the second quarter of 2019 and 2018, respectively. Due in part to the impact of the inventory adjustments referenced above, the Company’s preliminary net loss for the second quarter of 2019 was $13.7 million, or ($0.32) per basic and diluted share, compared to a net loss of $30.6 million or ($0.72) per basic and diluted share in the second quarter of 2018.

The sales line is relatively in-line with my expectations. I was expecting ~flat sales, driven by 5% lower sales pricing, offset by higher volumes, but my guess is temperate weather reduced demand.

We know net loss is $13.7MM.  From this, we can bridge to what EBITDA likely was:

This seems less than ideal, but remember that PY was negative $2mm so all things considered, I guess we’ll call that improvement. It’s lower than my $5mm estimate, though. Hopefully the company drew down on inventory, which it still has $100mm in value of, to generate some cash and pay down debt. Recall the company repaid $30MM of debt in Q4 of last year, mainly driven by a release in W/C.

What will really matter is Q3 outlook. I presume pricing has not improved for refrigerants, but I also think Q2 was impacted negatively by weather (which was called out by Watsco and Lennox, among other building products names). If Hudson’s Q3 looks more favorable, perhaps PNC will be more lenient.