Critical Accounting Estimates

The Company’s financial statements rely on several estimates and judgments related to inventory, goodwill, intangible assets, and other items. These estimates affect the reported amounts of various assets, liabilities, revenues, and expenses. If actual results differ significantly from these estimates, there could be a material impact on the financial statements.

Key estimates include:

• Inventory valuation, which depends on assumptions about current and future sales prices to determine if a write-down is necessary. Refrigerant pricing is a key factor.
• Goodwill impairment testing, which uses assumptions and estimates about future earnings. If earnings objectives are not achieved, impairment charges may be required. No impairment was deemed necessary in recent testing.

Company Overview

The Company is a leading provider of refrigerant products and services to the HVACR industry. For nearly 30 years, the Company has invested significantly in reclaiming refrigerants and restoring them to industry standards for reuse and resale as certified EMERALD RefrigerantsTM.

The Company’s offerings include refrigerant sales, refrigerant management services, and RefrigerantSide® Services. Sales of refrigerants continue to represent the majority of revenues. The Company also sells industrial gases, predominantly to military customers under a 5-year contract with the Defense Logistics Agency expiring in 2026.

First Quarter 2024 Results

• Revenues were $65.3 million, down 15% due to lower selling prices for certain refrigerants
• Gross margin declined from 39% to 33% due to selling higher cost inventory
• SG&A expenses rose by $0.9 million on increased personnel and professional costs
  
• Net income declined by $5.9 million to $9.6 million due to the revenue decline

Liquidity and Working Capital

• Working capital rose slightly to $156.1 million due to profitability and timing factors
• Inventories were $147.8 million, down $6.7 million on lower volumes
• Accounts receivable rose by $10.7 million on seasonal factors
• Cash used in operations was $0.9 million due to lower sales prices and timing factors
• Cash position declined slightly to $10.6 million after debt repayments

Financial Metric	December 31, 2023	March 31, 2024	Change
Working Capital	$146.4 million	$156.1 million	+$9.7 million
Inventories	$154.5 million	$147.8 million	-$6.7 million
Accounts Receivable	$25.2 million	$35.9 million	+$10.7 million
Cash	$12.4 million	$10.6 million	-$1.8 million

Debt and Credit Facility

• The Company refinanced its Wells Fargo revolving credit facility in March 2022
• The new 5-year facility includes a $75 million revolving credit line
• A separate $85 million term loan from 2022 was fully repaid in Q3 2023
• The Company was in compliance with all debt covenants as of March 31, 2024

Business Outlook

The Company believes operating cash flows and credit facility availability will satisfy working capital needs for the near future. However, unanticipated expenses could require additional capital, which may not be readily available.

The Company operates in a highly regulated industry and relies on adequate supplies of refrigerants at reasonable prices. Changes in regulations or the refrigerant supply chain could reduce revenue and profitability.

The largest customer accounted for over 10% of Q1 2024 revenues. The loss of a large customer could adversely affect results.

Results are subject to seasonality, weather, and other variability in refrigerant demand. Sales are typically highest in the first nine months of the year. The Company has historically incurred losses in the fourth quarter. Severe weather or an inability to meet peak demand could also negatively impact performance.

Recent Accounting Standards

No recent accounting pronouncements are expected to have a significant effect on the Company’s financial statements.