UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

Form 10-Q

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the quarterly period ended September 30, 2017

 

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 No.      111596

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction

of incorporation or organization)

 

58-1954497

(IRS Employer

Identification Number)

 

8302 Dunwoody Place, Suite 250, Atlanta, GA   30350
(Address of principal executive offices)   (Zip Code)

 

(770) 587-9898

(Registrant’s telephone number)

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated Filer [  ] Non-accelerated Filer [  ] Smaller reporting company [X] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the close of the latest practical date.

 

Class    Outstanding at November 3, 2017 
Common Stock, $.001 Par Value    11,730,981 shares 

 

 

 

 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

 

INDEX

 

      Page No.
PART I FINANCIAL INFORMATION  
       
  Item 1. Consolidated Condensed Financial Statements  
       
    Consolidated Balance Sheets - September 30, 2017 and December 31, 2016 3
       
    Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2017 and 2016 5
       
    Consolidated Statements of Comprehensive Loss - Three and Nine Months Ended September 30, 2017 and 2016 6
       
    Consolidated Statement of Stockholders’ Equity - Nine Months Ended September 30, 2017 7
       
    Consolidated Statements of Cash Flows -Nine Months Ended September 30, 2017 and 2016 8
       
    Notes to Consolidated Financial Statements 9
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
       
  Item 4. Controls and Procedures 36
       
PART II OTHER INFORMATION  
       
  Item 1. Legal Proceedings 37
       
  Item 1A. Risk Factors 37
       
  Item 6. Exhibits 37

 

2

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. – Financial Statements

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets

 

   September 30,   December 31, 
   2017   2016 
(Amounts in Thousands, Except for Share and per Share Amounts)  (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $1,055   $163 
Accounts receivable, net of allowance for doubtful accounts of $356 and $272, respectively   8,791    8,705 
Unbilled receivables - current   4,529    2,926 
Inventories   328    370 
Prepaid and other assets   3,340    2,358 
Current assets related to discontinued operations   96    85 
Total current assets   18,139    14,607 
           
Property and equipment:          
Buildings and land   22,550    22,544 
Equipment   33,427    33,454 
Vehicles   398    409 
Leasehold improvements   11,549    11,626 
Office furniture and equipment   1,736    1,738 
Construction-in-progress   246    667 
Total property and equipment   69,906    70,438 
Less accumulated depreciation   (56,399)   (53,323)
Net property and equipment   13,507    17,115 
           
Property and equipment related to discontinued operations   81    81 
           
Intangibles and other long term assets:          
Permits   8,434    8,474 
Other intangible assets - net   1,546    1,721 
Accounts receivable - non-current       212 
Unbilled receivables - non-current   167    216 
Finite risk sinking fund   15,642    21,487 
Other assets   974    1,154 
Other assets related to discontinued operations   214    268 
Total assets  $58,704   $65,335 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

3

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets, Continued

 

   September 30,   December 31, 
   2017   2016 
(Amounts in Thousands, Except for Share and per Share Amounts)  (Unaudited)   (Audited) 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $3,638   $4,244 
Accrued expenses   5,350    4,094 
Disposal/transportation accrual   2,113    1,390 
Deferred revenue   3,353    2,691 
Accrued closure costs - current   2,927    2,177 
Current portion of long-term debt   1,184    1,184 
Current liabilities related to discontinued operations   594    958 
Total current liabilities   19,159    16,738 
           
Accrued closure costs, net of current portion   4,297    5,138 
Other long-term liabilities   979    931 
Deferred tax liabilities   2,467    2,362 
Long-term debt, less current portion   2,959    7,649 
Long-term liabilities related to discontinued operations   705    361 
Total long-term liabilities   11,407    16,441 
           
Total liabilities   30,566    33,179 
           
Commitments and Contingencies (Note 8)          
           
Series B Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares authorized, 1,284,730 shares issued and outstanding, liquidation value $1.00 per share plus accrued and unpaid dividends of $979 and $931, respectively   1,285    1,285 
           
Stockholders’ Equity:          
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding        
Common Stock, $.001 par value; 30,000,000 shares authorized; 11,721,570 and 11,677,025 shares issued, respectively; 11,713,928 and 11,669,383 shares outstanding, respectively   11    11 
Additional paid-in capital   106,305    106,048 
Accumulated deficit   (78,153)   (74,213)
Accumulated other comprehensive loss   (123)   (162)
Less Common Stock held in treasury, at cost; 7,642 shares   (88)   (88)
Total Perma-Fix Environmental Services, Inc. stockholders’ equity   27,952    31,596 
Non-controlling interest in subsidiary   (1,099)   (725)
Total stockholders’ equity   26,853    30,871 
           
Total liabilities and stockholders’ equity  $58,704   $65,335 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Operations

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Amounts in Thousands, Except for Per Share Amounts)  2017   2016   2017   2016 
                 
Net revenues  $11,758   $12,921   $37,179   $37,768 
Cost of goods sold   10,013    11,114    30,362    34,111 
Gross profit   1,745    1,807    6,817    3,657 
                     
Selling, general and administrative expenses   2,653    2,732    8,337    8,162 
Research and development   293    441    1,300    1,570 
Loss (gain) on disposal of property and equipment       12    (1)   16 
Impairment loss on tangible assets   672        672    1,816 
Impairment loss on intangible assets               8,288 
Loss from operations   (1,873)   (1,378)   (3,491)   (16,195)
                     
Other income (expense):                    
Interest income   34    31    105    78 
Interest expense   (59)   (101)   (249)   (377)
Interest expense-financing fees   (9)   (14)   (27)   (99)
Other   1    (1)   2    20 
Loss from continuing operations before taxes   (1,906)   (1,463)   (3,660)   (16,573)
Income tax expense (benefit)   71    37    218    (3,093)
Loss from continuing operations, net of taxes   (1,977)   (1,500)   (3,878)   (13,480)
                     
Loss from discontinued operations, net of taxes of $0   (145)   (191)   (436)   (622)
Net loss   (2,122)   (1,691)   (4,314)   (14,102)
                     
Net loss attributable to non-controlling interest   (78)   (135)   (374)   (472)
                     
Net loss attributable to Perma-Fix Environmental Services, Inc. common stockholders  $(2,044)  $(1,556)  $(3,940)  $(13,630)
                     
Net loss per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic and diluted:                    
Continuing operations  $(.16)  $(.12)  $(.30)  $(1.12)
Discontinued operations   (.01)   (.01)   (.04)   (.06)
Net loss per common share  $(.17)  $(.13)  $(.34)  $(1.18)
                     
Number of common shares used in computing net loss per share:                    
Basic   11,714    11,632    11,698    11,588 
Diluted   11,714    11,632    11,698    11,588 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Comprehensive Loss

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Amounts in Thousands)  2017   2016   2017   2016 
                 
Net loss  $(2,122)  $(1,691)  $(4,314)  $(14,102)
Other comprehensive income (loss):                    
Foreign currency translation income (loss)   12    5    39    (12)
                     
Comprehensive loss   (2,110)   (1,686)   (4,275)   (14,114)
Comprehensive loss attributable to non-controlling interest   (78)   (135)   (374)   (472)
                    
Comprehensive loss attributable to Perma-Fix Environmental Services, Inc. stockholders  $(2,032)  $(1,551)  $(3,901)  $(13,642)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2017

 

(Amounts in thousands, except for share   Common Stock     Additional Paid-In     Common Stock Held In     Accumulated Other Comprehensive     Non-controlling Interest in     Accumulated     Total
Stockholders’
 
amounts)   Shares     Amount     Capital     Treasury     Loss     Subsidiary     Deficit     Equity  
                                                 
Balance at December 31, 2016 (Audited)     11,677,025     $ 11     $ 106,048     $ (88 )   $ (162 )   $ (725 )   $ (74,213 )   $ 30,871  
Net loss                                   (374 )     (3,940 )     (4,314 )
Foreign currency translation                             39                   39  
Issuance of Common Stock for services     44,545             161                               161  
Stock-Based Compensation                 96                               96  
Balance at September 30, 2017 (Unaudited)     11,721,570     $ 11     $ 106,305     $ (88 )   $ (123 )   $ (1,099)     $ (78,153 )   $ 26,853  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   September 30, 
(Amounts in Thousands)  2017   2016 
Cash flows from operating activities:          
Net loss  $(4,314)  $(14,102)
Less: loss from discontinued operations, net of taxes of $0   (436)   (622)
           
Loss from continuing operations, net of taxes   (3,878)   (13,480)
Adjustments to reconcile loss from continuing operations to cash used in operating activities:          
Depreciation and amortization   3,394    2,986 
Amortization of debt issuance costs   27    164 
Deferred tax expense (benefit)   105    (3,095)
Provision for (recovery of) bad debt reserves   85    (336)
(Gain) loss on disposal of property and equipment   (1)   16 
Impairment loss on tangible assets   672    1,816 
Impairment loss on intangible assets       8,288 
Issuance of common stock for services   161    178 
Stock-based compensation   96    69 
Changes in operating assets and liabilities of continuing operations          
Restricted cash       35 
Accounts receivable   41    (140)
Unbilled receivables   (1,554)   1,808 
Prepaid expenses, inventories and other assets   293    2,225 
Accounts payable, accrued expenses and unearned revenue   914    (1,869)
Cash provided by (used in) continuing operations   355    (1,335)
Cash used in discontinued operations   (464)   (710)
Cash used in operating activities   (109)   (2,045)
           
Cash flows from investing activities:          
Purchases of property and equipment   (200)   (104)
Proceeds from sale of property and equipment   7    30 
Proceeds from/(payment to) finite risk sinking fund   5,845    (76)
Cash provided by (used in) investing activities of continuing operations   5,652    (150)
Cash provided by investing activities of discontinued operations   52    68 
Cash provided by (used in) investing activities   5,704    (82)
           
Cash flows from financing activities:          
Repayments of revolving credit borrowings   (34,979)   (41,223)
Borrowing on revolving credit   31,176    44,137 
Proceeds from issuance of common stock upon exercise of warrants/options       156 
Release of proceeds for stock subscription for Perma-Fix Medical S.A. previously held in escrow       64 
Payment of debt issuance costs       (97)
Principal repayments of long term debt   (914)   (1,199)
Principal repayments of long term debt-related party       (1,000)
Cash (used in) provided by financing activities of continuing operations   (4,717)   838 
           
Effect of exchange rate changes on cash   14    (1)
           
Increase (decrease) in cash   892    (1,290)
Cash at beginning of period   163    1,435 
Cash at end of period  $1,055   $145 
           
Supplemental disclosure:          
Interest paid  $252   $309 
Income taxes paid   17    41 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Notes to Consolidated Condensed Financial Statements

September 30, 2017

(Unaudited)

 

Reference is made herein to the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

1. Basis of Presentation

 

The consolidated condensed financial statements included herein have been prepared by the Company (which may be referred to as we, us or our), without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“the Commission”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the consolidated condensed financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2017.

 

The Company suggests that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Reclassification

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

2. Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 232) – Amendments to SEC Paragraphs Pursuant to staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” This amendment states that registrants should consider additional qualitative disclosures if the impact of an issued but not yet adopted ASU is unknown or cannot be reasonably estimated and to include a description of the effect of the accounting policies that the registrant expects to apply, if determined. Transition guidance included in certain issued but not yet adopted ASUs were also updated to reflect this update. This update is effective immediately. The adoption of ASU 2017-13 by the Company in the first quarter did not have a material impact on the Company’s financial position, results of operations and cash flows. The Company will revise its disclosures for the standards not yet adopted as required by ASU 2017-03 as the Company progresses through its impact assessments.

 

Recently Issued Accounting Standards – Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers followed by a series of related accounting standard updates (collectively referred to as “Topic 606”), which will supersede nearly all existing revenue recognition guidance. Topic 606 provides a single, comprehensive revenue recognition model for all contracts with customers. Under the new standard, a five-step process is utilized in order to determine revenue recognition, depicting the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Topic 606 also requires additional disclosure surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Topic 606 is effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted, as amended, to the original effective date of the period beginning after December 15, 2016 (including interim reporting periods within those periods). Topic 606 may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company has developed a project plan to guide the implementation. The Company is in the process of comparing its current revenue recognition policies to the requirements under Topic 606 while analyzing any subsequent impact on the Company’s contract portfolio, comparing historical accounting policies and practices to the requirements of the new guidance, reviewing the various revenue streams, and identifying potential differences from applying the requirements of the new guidance as outlined in the project plan. The Company has assigned internal and external resources to assist in this implementation project and believes that the project is progressing timely. The Company plans to adopt the standard in the first quarter of 2018 under the modified retrospective approach, resulting in a cumulative adjustment to retained earnings. The Company is still evaluating the impact of adopting Topic 600 on our financial statements.

 

9

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is still evaluating the potential impact of adopting this guidance on our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. Subsequently, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash, a consensus of the FASB Emerging Issues Task Force,” which clarifies the guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU 2016-15 and ASU 2016-18 are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of these ASUs to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates the existing exception in U.S. GAAP prohibiting the recognition of the income tax consequences for intra-entity asset transfers. Under ASU 2016-16, entities will be required to recognize the income tax consequences of intra-entity asset transfers other than inventory when the transfer occurs. ASU 2016-16 is effective on a modified retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations, or cash flows.

 

10

 

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial position, results of operations and cash flows.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification and does not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact that this standard will have on its financial statements.

 

3. Intangible Assets

 

The following table summarizes information relating to the Company’s definite-lived intangible assets:

 

       September 30, 2017   December 31, 2016 
   Useful   Gross       Net   Gross       Net 
   Lives   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   (Years)   Amount   Amortization   Amount   Amount   Amortization   Amount 
Intangibles (amount in thousands)                            
Patent   3-17   $643    (298)  $345   $577   $(274)  $303 
Software   3    405    (396)   9    405    (383)   22 
Customer relationships   12    3,370    (2,178)   1,192    3,370    (1,974)   1,396 
Permit   10    545    (468)   77    545    (428)   117 
Total       $4,963   $(3,340)  $1,623   $4,897   $(3,059)  $1,838 

 

The intangible assets noted above are amortized on a straight-line basis over their useful lives with the exception of customer relationships which are being amortized using an accelerated method. The Company has only one definite-lived permit that is subject to amortization.

 

11

 

 

The following table summarizes the expected amortization over the next five years for our definite-lived intangible assets (including the one definite-lived permit):

 

   Amount 
Year  (In thousands) 
     
2017 (remaining)  $92 
2018   336 
2019   254 
2020   218 
2021   198 
Total  $1,098 

 

Amortization expense relating to the definite-lived intangible assets as discussed above was $93,000 and $281,000 for the three and nine months ended September 30, 2017, respectively, and $101,000 and $340,000 for the three and nine months ended September 30, 2016, respectively.

 

4. Capital Stock, Stock Plans and Stock-Based Compensation

 

Stock Plans

 

The Company adopted the 2017 Stock Option Plan (“2017 Plan”), which was approved by the Company’s stockholders at the Company’s Annual Meeting of Stockholders held on July 27, 2017 (the “Annual Meeting”). The 2017 Plan authorizes the grant of options to officers and employees of the Company, including any employee who is also a member of the Board of Directors (the “Board”), as well as to consultants of the Company. The 2017 Plan authorizes an aggregate grant of 540,000 non-qualified stock options (“NQSOs”) and incentive stock options (“ISOs”), which includes a rollover of 140,000 shares remaining available for issuance under the 2010 Stock Option Plan (the “2010 Plan”). As a result of the approval of the 2017 Plan, no further options will be granted under the 2010 Plan. In all other respects, the 2010 Plan will remain in full force and effect with respect to all outstanding options issued and unexercised under the 2010 Plan, which stands at 60,000. Consultants of the Company can only be granted NQSOs. The term of each stock option granted under the 2017 Plan shall be fixed by the Compensation and Stock Option Committee (the “Compensation Committee”), but no stock options will be exercisable more than ten years after the grant date, or in the case of an ISO granted to a 10% stockholder, five years after the grant date. The exercise price of any ISO granted under the 2017 Plan to an individual who is not a 10% stockholder at the time of the grant shall not be less than the fair market value of the shares at the time of the grant, and the exercise price of any incentive stock option granted to a 10% stockholder shall not be less than 110% of the fair market value at the time of grant. The exercise price of any NQSOs granted under the plan shall not be less than the fair market value of the shares at the time of grant.

 

At the Annual Meeting, the Company’s shareholders also approved an amendment to the 2003 Outside Directors Stock Plan (“2003 Plan”) which authorizes the issuance of an additional 300,000 shares of the Company’s common stock under the plan. Immediately prior to the approval of this amendment by the Company’s shareholders, the 2003 Plan had available for issuance approximately 99,868 shares.

 

Stock Options to Employees and Outside Directors

 

On January 13, 2017, the Company granted 6,000 NQSOs from the Company’s 2003 Plan to a new director elected by the Company’s Board to fill the vacancy left by Mr. Jack Lahav who retired from the Board in October 2016. The options granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSO was $3.79 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On July 27, 2017, the Company granted 12,000 NQSOs from the Company’s 2003 Plan to five of the six re-elected directors at the Annual Meeting. Dr. Louis F. Centofanti, who is a member of the Board, is not eligible to receive options under the 2003 Plan since he is also an employee of the Company, pursuant to the 2003 Plan. The NQSOs granted to the five directors were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSO was $3.55 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

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On July 27, 2017, the Company granted ISOs from the 2017 Plan (following the approval of the 2017 Plan by the Company’s stockholders as discussed above) to the named executive officers as follows: 50,000 ISOs to our Chief Executive Officer (“CEO”) (Louis F. Centofanti); 100,000 ISOs to our Executive Vice President (“EVP”)/Chief Operating Officer (“COO”) (Mr. Mark Duff); and 50,000 ISOs to our Chief Financial Officer (“CFO”) (Mr. Ben Naccarato). Effective September 8, 2017, Mr. Duff succeeded Dr. Centofanti as the CEO with Dr. Centofanti serving as EVP of Strategic Initiatives and continues to serve as a member of the Board (see “Note 12 – Related Party Transaction for further detail of this transition”). The ISOs granted were for a contractual term of six years with one-fifth yearly vesting over a five year period. The exercise price of the ISO was $3.65 per share, which was equal to the fair market value of the Company’s common stock on the date of grant.

 

On May 15, 2016, the Company granted 50,000 ISOs from the Company’s 2010 Plan to Mr. Duff. The ISOs granted were for a contractual term of six years with one-third yearly vesting over a three year period. The exercise price of the ISO was $3.97 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

 

On July 28, 2016, the Company granted an aggregate of 12,000 NQSOs from the 2003 Plan to five of the seven re-elected directors at our Annual Meeting of Stockholders held on July 28, 2016. Two of the directors were not eligible to receive options under the 2003 Stock Plan as they were employees of the Company or its subsidiaries. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSOs was $4.60 per share, which was equal to the Company’s closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The fair value of the options granted during the nine months ended September 30, 2017 and 2016 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows:

 

   Employee Stock Option Granted 
   July 27, 2017   May 15, 2016 
Weighted-average fair value per share  $1.88   $2.00 
Risk -free interest rate (1)   1.98%   1.27%
Expected volatility of stock (2)   53.15%   53.12%
Dividend yield   None    None 
Expected option life (3)   6.0 years    6.0 years 

 

   Outside Director Stock Options Granted 
   January 13, 2017   July 27, 2017   July 28, 2016 
Weighted-average fair value per share  $2.63   $2.48   $3.00 
Risk -free interest rate (1)   2.40%   2.32%   1.52%
Expected volatility of stock (2)   56.32%   57.21%   55.99%
Dividend yield   None    None    None 
Expected option life (3)   10.0 years    10.0 years    10.0 years 

 

(1) The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.

 

(2) The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.

 

(3) The expected option life is based on historical exercises and post-vesting data.

 

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The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2017 and 2016 for our employee and director stock options.

 

   Three Months Ended   Nine Months Ended 
Stock Options  September 30,   September 30, 
   2017   2016   2017   2016 
Employee Stock Options  $22,000   $12,000   $43,000   $42,000 
Director Stock Options   12,000    13,000    32,000    27,000 
Total  $34,000   $25,000   $75,000   $69,000 

 

As of September 30, 2017, the Company has approximately $436,000 of total unrecognized compensation cost related to unvested employee and director options, of which $42,000 is expected to be recognized in remaining 2017, $112,000 in 2018, $87,000 in 2019, $75,000 in 2020, $75,000 in 2021, with the remaining $45,000 in 2022.

 

Stock Options to Consultant

 

Mr. Robert Ferguson (“Ferguson”) is a consultant to the Board and a consultant to the Company in connection with the Company’s Test Bed Initiative (“TBI”) at its Perma-Fix Northwest Richland, Inc. (“PFNWR”) facility. For Ferguson’s consulting work with the Board, he has been receiving monthly compensation of $4,000. For Ferguson’s consulting work in connection with the Company’s TBI, on July 27, 2017 (“grant date”), the Company granted Ferguson a stock option from the Company’s 2017 Plan (see above for a discussion of the 2017 Plan) for the purchase of up to 100,000 shares of the Company’s common stock at an exercise price of $3.65 a share, which was the fair market value of the Company’s common stock on the date of grant (“Ferguson Stock Option”). The vesting of the Ferguson Stock Option is subject to the achievement of the following milestones (“waste” as noted below is defined as liquid law (“low activity waste”) and/or liquid TRU (“transuranic waste”)):

 

  Upon treatment and disposal of three gallons of waste at the PFNWR facility by January 27, 2018, 10,000 shares of the Ferguson Stock Option shall become exercisable;
     
  Upon treatment and disposal of 2,000 gallons of waste at the PFNWR facility by January 27, 2019, 30,000 shares of the Ferguson Stock Option shall become exercisable; and
     
  Upon treatment and disposal of 50,000 gallons of waste at the PFNWR facility and assistance, on terms satisfactory to the Company, in preparing certain justifications of cost and pricing data for the waste and obtaining a long-term commercial contract relating to the treatment, storage and disposal of waste by January 27, 2021, 60,000 shares of the Ferguson Stock Option shall become exercisable.

 

The term of the Ferguson Stock Option is seven (7) years from the grant date. Each of the milestones is exclusive of each other; therefore, achievement of any of the milestones above by Ferguson by the designated date will provide Ferguson the right to exercise the number of options in accordance with the milestone attained.

 

The Company accounts for stock-based compensation issued to consultants in accordance with the provisions of ASC 505-50, “Equity-Based Payments to Non-Employees.” Measurement of stock-based payment transactions with consultants is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instrument issued. The measurement date for the fair value of the stock-based payment transaction is determined at the earlier of performance commitment date or performance completion date. In accordance with ASC 505-50, when it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purpose of recognition of costs during those periods, the equity instrument is measured at the then-current fair value at each of those interim financial reporting dates. The equity instrument is ultimately recorded at its fair value at its measurement date. Accordingly, at September 30, 2017, the Company has recorded approximately $21,000 in consulting expenses (included in selling, general and administrative expenses (“SG&A”)) and additional paid-in capital in connection with this transaction which amount was estimated to be the fair value of the 10,000 options in the first milestone at September 30, 2017 using the Black-Scholes valuation model with the following assumptions: 52.64% volatility, risk free interest rate of 2.12%, and an expected life of approximately 6.8 years and no dividends.

 

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Summary of Stock Option Plans

 

The summary of the Company’s total Stock Option Plans as of September 30, 2017, as compared to September 30, 2016, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2010 and 2017 Plans and the 2003 Plan:

 

   Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (3) 
Options outstanding January 1, 2017   247,200   $6.69           
Granted   318,000    3.65           
Exercised                  
Forfeited/expired   (50,400)   8.95           
Options outstanding end of period (1)   514,800   $4.59    5.7   $65,490 
Options exercisable at September 30, 2017(1)   169,467   $6.45    4.8   $17,490 
Options exercisable and expected to be vested at September 30, 2017   514,800   $4.59    5.7   $65,490 

 

   Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (3) 
Options outstanding January 1, 2016   218,200   $7.65           
Granted   62,000    4.09           
Exercised                  
Forfeited/expired   (33,000)   8.14           
Options outstanding end of period (2)   247,200   $6.69    4.6   $126,267 
Options exercisable at September 30, 2016 (2)   181,867   $7.61    4.0   $69,516 
Options exercisable and expected to be vested at September 30, 2016   239,750   $6.78    4.6   $118,542 

 

(1) Options with exercise prices ranging from $2.79 to $13.35

(2) Options with exercise prices ranging from $2.79 to $14.75

(3) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

 

Stock Issuance for Services

 

During the nine months ended September 30, 2017, the Company issued a total of 44,545 shares of its common stock under the 2003 Plan to its outside directors as compensation for serving on our Board. The Company has recorded approximately $175,000 in compensation expenses for the nine months ended September 30, 2017 (included in selling, general and administration expenses) in connection with the issuance of shares of its common stock to outside directors.

 

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5. (Loss) Income Per Share

 

Basic (loss) income per share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted (loss) income per share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. In periods where they are anti-dilutive, such amounts are excluded from the calculations of dilutive earnings per share. The following table reconciles the loss and average share amounts used to compute both basic and diluted loss per share:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   (Unaudited)   (Unaudited) 
(Amounts in Thousands, Except for Per Share Amounts)  2017   2016   2017   2016 
Net loss attributable to Perma-Fix Environmental Services, Inc., common stockholders:                    
Loss from continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders  $(1,899)  $(1,365)  $(3,504)  $(13,008)
Loss from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders   (145)   (191)   (436)   (622)
Net loss attributable to Perma-Fix Environmental Services, Inc. common stockholders  $(2,044)  $(1,556)  $(3,940)  $(13,630)
Basic loss per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $(.17)  $(.13)  $(.34)  $(1.18)
Diluted loss per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $(.17)  $(.13)  $(.34)  $(1.18)
Weighted average shares outstanding:                    
Basic weighted average shares outstanding   11,714    11,632    11,698    11,588 
Add: dilutive effect of stock options                
Add: dilutive effect of warrants                
Diluted weighted average shares outstanding   11,714    11,632    11,698    11,588 
                     
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:                    
Stock options   185    98    497    150 

 

6. Long Term Debt

 

Long-term debt consists of the following at September 30, 2017 and December 31, 2016:

 

(Amounts in Thousands)  September 30, 2017   December 31, 2016 
Revolving Credit facility dated October 31, 2011, as amended, borrowings based upon eligible accounts receivable, subject to monthly borrowing base calculation, balance due March 24, 2021. Effective interest rate for the first nine months of 2017 was 4.2%. (1)  $   $3,803 
Term Loan dated October 31, 2011, as amended, payable in equal monthly installments of principal of $102, balance due on March 24, 2021. Effective interest rate for first nine months of 2017 was 4.5%. (1) (2)   4,143 (3)   5,030 (3)
Total debt   4,143    8,833 
Less current portion of long-term debt   1,184    1,184 
Long-term debt  $2,959   $7,649 

 

(1) Our revolving credit facility is collateralized by our accounts receivable and our term loan is collateralized by our property and equipment.

 

(2) Prior to April 1, 2016, the monthly installment payment under the term loan was approximately $190,000.

 

(3) Net of debt issuance costs of ($124,000) and ($151,000) at September 30, 2017 and December 31, 2016, respectively.

 

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Revolving Credit and Term Loan Agreement

 

The Company entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011 (“Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Loan Agreement, as subsequently amended (“Amended Loan Agreement”), provides the Company with the following credit facility with a maturity date of March 24, 2021: (a) up to $12,000,000 revolving credit (“revolving credit”), subject to the amount of borrowings based on a percentage of eligible receivables (as defined) and (b) a term loan (“term loan”) of approximately $6,100,000, which requires monthly installments of approximately $101,600 (based on a seven-year amortization).

 

Under the Amended Loan Agreement, the Company has the option of paying an annual rate of interest due on the revolving credit at prime (4.25% at September 30, 2017) plus 2% or London Inter Bank Offer Rate (“LIBOR”) plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%.

 

Pursuant to the Amended Loan Agreement, the Company may terminate the Amended Loan Agreement, upon 90 days’ prior written notice upon payment in full of its obligations under the Amended Loan Agreement. The Company agreed to pay PNC 1.0% of the total financing in the event the Company had paid off its obligations on or before March 23, 2017, .50% of the total financing if the Company pays off its obligations after March 23, 2017 but prior to or on March 23, 2018, and .25% of the total financing if the Company pays off its obligations after March 23, 2018 but prior to or on March 23, 2019. No early termination fee shall apply if the Company pays off its obligations after March 23, 2019.

 

At September 30, 2017, the availability under our revolving credit was $4,257,000, based on our eligible receivables and includes an indefinite reduction of borrowing availability of $2,000,000 that the Company’s lender has imposed, which includes $750,000 that was imposed immediately upon the Company’s receipt of finite risk sinking funds on May 1, 2017, in connection with the cancellation of the closure policy for the Company’s PFNWR subsidiary (see “Note 8 – Commitments and Contingencies – Insurance” below for further information of the PFNWR closure policy and the receipt of the related sinking funds).

 

The Company’s credit facility with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. The Company met its quarterly financial covenants in the first, second, and third quarters of 2017 and expects to meet its quarterly financial covenants in the next twelve months.

 

7. East Tennessee Materials and Energy Corporation (“M&EC”)

 

The Company continues its plan to close its M&EC facility by the end of the M&EC’s lease term of January 21, 2018. Operations at the M&EC facility are continuing during the remaining term of the lease and the facility continues to transition waste shipments and operational capabilities to our other Treatment Segment facilities, subject to customer requirements and regulatory approvals. Simultaneously, the Company continues with closure and decommissioning activities in accordance with M&EC’s license and permit requirements.

 

In accordance with ASC 360, “Property, Plant, and Equipment,” the Company performed an updated financial valuation of M&EC’s remaining long-lived tangible assets (inclusive of the capitalized asset retirement costs) for further potential impairment during the third quarter of 2017. Based on our analysis using an undiscounted cash flow approach, the Company concluded that the carrying value of the remaining tangible assets for M&EC was not recoverable and exceeded its fair value. Consequently, the Company fully impaired the remaining tangible assets at M&EC resulting in $672,000 in tangible asset impairment loss.

 

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At September 30, 2017, total accrued closure liabilities for our M&EC subsidiary totaled approximately $2,927,000 which is recorded as current liabilities. At December 31, 2016, M&EC had long-term closure liabilities of approximately $881,000 which were reclassified to current at March 31, 2017. The Company recorded an additional $550,000 in closure costs and current closure liabilities during the third quarter of 2017 due to a change in estimated closure costs. The following reflects changes to the closure liabilities for the M&EC subsidiary from year end 2016:

 

Amounts in thousands    
Balance as of December 31, 2016  $3,058 
Accretion expense   149 
Adjustment to closure liability   550 
Payments   (830)
Balance as of September 30, 2017  $2,927 

 

Revenues for the M&EC subsidiary were $578,000 and $5,650,000 for the three and nine months ended September 30, 2017, respectively, and $703,000 and $3,458,000 for the corresponding periods of 2016, respectively.

 

8. Commitments and Contingencies

 

Hazardous Waste

 

In connection with our waste management services, we process both hazardous and non-hazardous waste, which we transport to our own, or other, facilities for destruction or disposal. As a result of disposing of hazardous substances, in the event any cleanup is required, we could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our part.

 

Legal Matters

 

In the normal course of conducting our business, we may be involved in various litigation. We are not a party to any litigation or governmental proceeding which our management believes could result in any judgments or fines against us that would have a material adverse effect on our financial position, liquidity or results of future operations.

 

Insurance

 

The Company has a 25-year finite risk insurance policy entered into in June 2003 with American International Group, Inc. (“AIG”), which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The policy, as amended, provides for a maximum allowable coverage of $39,000,000 and has available capacity to allow for annual inflation and other performance and surety bond requirements. All of the required payments for this finite risk insurance policy, as amended, were previously made by the Company. At September 30, 2017, our financial assurance coverage amount under this policy totaled approximately $29,473,000. The Company has recorded $15,642,000 and $15,546,000 in sinking funds related to this policy in other long term assets on the accompanying Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively, which includes interest earned of $1,171,000 and $1,075,000 on the sinking funds as of September 30, 2017 and December 31, 2016, respectively. Interest income for the three and nine months ended September 30, 2017 was approximately $35,000 and $96,000, respectively. Interest income for the three and nine month periods ended September 30, 2016, was approximately $24,000 and $62,000, respectively. If the Company so elects, AIG is obligated to pay us an amount equal to 100% of the sinking fund account balance in return for complete release of liability from both us and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

 

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The Company also had a finite risk insurance policy dated August 2007 for our PFNWR facility with AIG (“PFNWR policy”) which provided financial assurance to the State of Washington in the event of closure of the PFNWR facility. The Company had recorded $5,941,000 in finite risk sinking funds at December 31, 2016 in other long term assets on the accompanying Consolidated Balance Sheets which included interest earned of $241,000 on the sinking fund. In April 2017, the Company received final releases from state and federal regulators for the PFNWR policy which enabled the Company to cancel the PFNWR policy resulting in the release of approximately $5,951,000 on May 1, 2017 in finite sinking funds previously held by AIG as collateral for the PFNWR policy. The Company used the released finite sinking funds to pay off its revolving credit with the remaining funds to be used for general working capital needs. The Company has acquired new bonds in the required amount of approximately $7,000,000 (“new bonds”) to replace the PFNWR policy in providing financial assurance for the PFNWR facility. Upon receipt of the $5,951,000 in finite sinking funds from AIG, the Company and its lender executed a standby letter of credit in the amount of $2,500,000 as collateral for the new bonds for the PFNWR facility. In addition, the Company’s lender placed an additional $750,000 restriction on the Company’s borrowing availability pursuant to a “Condition Subsequent” clause in the November 17, 2016 amendment that the Company entered into with its lender. Interest income earned under the PFNWR policy for the three and nine months ended September 30, 2017 was approximately $2,000 and $10,000, respectively. Interest income for the three and nine month periods ended September 30, 2016, was approximately $7,000 and $14,000, respectively.

 

Letter of Credits and Bonding Requirements

 

From time to time, we are required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations, including facility closures. At September 30, 2017, the total amount of standby letters of credit outstanding totaled approximately $2,675,000 and the total amount of bonds outstanding totaled approximately $8,253,000.

 

9. Discontinued Operations

 

The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment: (1) subsidiaries divested in 2011 and prior, (2) two previously closed locations, and (3) our Perma-Fix of South Georgia, Inc. (“PFSG”) facility, which is currently in the process of undergoing closure, subject to regulatory approval of necessary plans and permits.

 

The Company’s discontinued operations had losses of $145,000 and $191,000 for the three months ended September 30, 2017 and 2016, respectively (net of taxes of $0 for each period) and losses of $436,000 and $622,000 for the nine months ended September 30, 2017 and 2016, respectively (net of taxes of $0 for each period). The losses were primarily due to costs incurred in the administration and continued monitoring of our discontinued operations. The Company’s discontinued operations had no revenues for each of the periods noted above.

 

The following table presents the major class of assets of discontinued operations at September 30, 2017 and December 31, 2016.

 

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(Amounts in Thousands)  September 30, 2017   December 31, 2016 
Current assets          
Other assets  $96   $85 
Total current assets   96    85 
Long-term assets          
Property, plant and equipment, net (1)   81    81 
Other assets   214    268 
Total long-term assets   295    349 
Total assets  $391   $434 
Current liabilities          
Accounts payable  $38   $13 
Accrued expenses and other liabilities   260    268 
Environmental liabilities   296    677 
Total current liabilities   594    958 
Long-term liabilities          
Closure liabilities   118    113 
Environmental liabilities   587    248 
Total long-term liabilities   705    361 
Total liabilities  $1,299   $1,319 

 

(1) net of accumulated depreciation of $10,000 for each period presented.

 

The Company’s discontinued operations include a note receivable in the amount of approximately $375,000 recorded in May 2016 resulting from the sale of property at our Perma-Fix of Michigan, Inc. subsidiary. This note requires 60 equal monthly installment payments by the buyer of approximately $7,250 (which includes interest). At September 30, 2017, the outstanding amount on this note receivable totaled approximately $286,000, of which approximately $72,000 is included in “Current assets related to discontinued operations” and approximately $214,000 is included in “Other assets related to discontinued operations” in the accompanying Consolidated Balance Sheets.

 

10. Operating Segments

 

In accordance with ASC 280, “Segment Reporting”, the Company defines an operating segment as a business activity: (a) from which we may earn revenue and incur expenses; (2) whose operating results are regularly reviewed by the chief operating decision maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance; and (3) for which discrete financial information is available.

 

Our reporting segments are defined as below:

 

TREATMENT SEGMENT reporting includes:

 

  - nuclear, low-level radioactive, mixed, hazardous and non-hazardous waste treatment, processing and disposal services primarily through four uniquely licensed and permitted treatment and storage facilities (see “Note 7 – East Tennessee Materials and Energy Corporation (“M&EC”) for further detail of pending closure of the M&EC facility); and
  - R&D activities to identify, develop and implement innovative waste processing techniques for problematic waste streams.

 

SERVICES SEGMENT, which includes:

 

  - On-site waste management services to commercial and government customers;
  - Technical services, which include:

 

  o professional radiological measurement and site survey of large government and commercial installations using advanced methods, technology and engineering;

 

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  o integrated Occupational Safety and Health services including industrial hygiene (“IH”) assessments; hazardous materials surveys, e.g., exposure monitoring; lead and asbestos management/abatement oversight; indoor air quality evaluations; health risk and exposure assessments; health & safety plan/program development, compliance auditing and training services; and Occupational Safety and Health Administration (“OSHA”) citation assistance;
  o global technical services providing consulting, engineering, project management, waste management, environmental, and decontamination and decommissioning field, technical, and management personnel and services to commercial and government customers;

 

  - Nuclear services, which include:

 

  o technology-based services including engineering, decontamination and decommissioning (“D&D”), specialty services and construction, logistics, transportation, processing and disposal;
  o remediation of nuclear licensed and federal facilities and the remediation cleanup of nuclear legacy sites. Such services capability includes: project investigation; radiological engineering; partial and total plant D&D; facility decontamination, dismantling, demolition, and planning; site restoration; site construction; logistics; transportation; and emergency response; and

 

  - A company owned equipment calibration and maintenance laboratory that services, maintains, calibrates, and sources (i.e., rental) of health physics, IH and customized nuclear, environmental, and occupational safety and health (“NEOSH”) instrumentation.

 

MEDICAL SEGMENT reporting includes: R&D costs for the new medical isotope production technology from our majority-owned Polish subsidiary, PF Medical. The Medical Segment has not generated any revenue as it continues to be primarily in the R&D stage. All costs incurred for the Medical Segment are reflected within R&D in the accompanying Consolidated Statements of Operations and consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development of this new technology.

 

Our reporting segments exclude our corporate headquarters and our discontinued operations (see Note 9 – “Discontinued Operations”) which do not generate revenues.

 

The table below presents certain financial information of our operating segments for the three and nine months ended September 30, 2017 and 2016 (in thousands).

 

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Segment Reporting for the Quarter Ended September 30, 2017

 

    Treatment     Services     Medical     Segments Total     Corporate (1)     Consolidated Total  
Revenue from external customers   $ 9,355     $ 2,403           $ 11,758     $     $ 11,758  
Intercompany revenues     77       10             87              
Gross profit     1,613       132             1,745             1,745  
Research and development     96             197       293             293  
Interest income                             34       34  
Interest expense     (1 )     (1 )           (2 )     (57 )     (59 )
Interest expense-financing fees                             (9 )     (9 )
Depreciation and amortization     964       134             1,098       9       1,107  
Segment income (loss) before income taxes     40 (3)     (478 )     (197 )     (635 )     (1,271 )     (1,906 )
Income tax expense     70                   70       1       71  
Segment (loss) income     (30 )     (478 )     (197 )     (705 )     (1,272 )     (1,977 )
Expenditures for segment assets     81       3             84             84  

 

Segment Reporting for the Quarter Ended September 30, 2016  

 

   Treatment   Services   Medical   Segments Total   Corporate (1)   Consolidated Total 
Revenue from external customers  $7,643   $5,278       $12,921   $   $12,921 
Intercompany revenues   28    8        36         
Gross profit   837    970        1,807        1,807 
Research and development   95    4    342    441        441 
Interest income                   31    31 
Interest expense   (2)   (2)       (4)   (97)   (101)
Interest expense-financing fees                   (14)   (14)
Depreciation and amortization   1,019    161        1,180    9    1,189 
Segment (loss) income before income taxes   (90)   360    (342)   (72)   (1,391)   (1,463)
Income tax expense   35            35    2    37 
Segment (loss) income   (125)   360    (342)   (107)   (1,393)   (1,500)
Expenditures for segment assets   63    13        76        76 

 

Segment Reporting for the Nine Months Ended September 30, 2017 

 

   Treatment   Services   Medical   Segments Total   Corporate (1)   Consolidated Total 
Revenue from external customers  $29,019   $8,160       $37,179   $   $37,179 
Intercompany revenues   191    21        212         
Gross profit   6,474    343        6,817        6,817 
Research and development   339        947    1,286    14    1,300 
Interest income                   105    105 
Interest expense   (27)   (2)       (29)   (220)   (249)
Interest expense-financing fees                   (27)   (27)
Depreciation and amortization   2,960    405        3,365    29    3,394 
Segment income (loss) before income taxes   2,880 (3)   (1,738)   (947)   195    (3,855)   (3,660)
Income tax expense   215            215    3    218 
Segment income (loss)   2,665    (1,738)   (947)   (20)   (3,858)   (3,878)
Expenditures for segment assets   188    12        200        200 

 

Segment Reporting for the Nine Months Ended September 30, 2016 

 

   Treatment   Services   Medical   Segments
Total
   Corporate (1)   Consolidated Total 
Revenue from external customers  $22,832   $14,936       $37,768   $    $37,768 
Intercompany revenues   38    23        61         
Gross profit   1,280    2,377        3,657        3,657 
Research and development   321    38    1,196    1,555    15    1,570 
Interest income   3            3    75    78 
Interest expense   (19)   (2)       (21)   (356)   (377)
Interest expense-financing fees                   (99)   (99)
Depreciation and amortization   2,437    482        2,919    67    2,986 
Segment (loss) income before income taxes   (11,895)(2)   682    (1,196)   (12,409)   (4,164)   (16,573)
Income tax (benefit) expense   (3,095)(2)           (3,095)   2    (3,093)
Segment (loss) income   (8,800)   682    (1,196)   (9,314)   (4,166)   (13,480)
Expenditures for segment assets   86    17    1    104        104 

 

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(1) Amounts reflect the activity for corporate headquarters not included in the segment information.

 

(2) Amounts include tangible and intangible asset impairment losses of $1,816,000 and $8,288,000, respectively for the Company’s M&EC subsidiary. Also includes a tax benefit of approximately $3,203,000 recorded resulting from the intangible impairment loss recorded for our M&EC subsidiary.

 

(3) Amounts include tangible asset impairment loss of $672,000 for the Company’s M&EC subsidiary (see “Note 7 – East Tennessee Materials and Energy Corporation (“M&EC”)”).

 

11. Income Taxes

 

The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes.

 

The Company had income tax expenses of $71,000 and $218,000 for continuing operations for the three and nine months ended September 30, 2017, respectively, and income tax expense of $37,000 and income tax benefit of $3,093,000 for continuing operations for the three and nine months ended September 30, 2016, respectively. The Company’s effective tax rates were approximately 3.7% and 6.0% for the three and nine months ended September 30, 2017, respectively, and 2.5% and (18.7%) for the three and nine months ended September 30, 2016, respectively. The Company’s income tax benefit for the nine months ended September 30, 2016 was primarily the result of a tax benefit recorded in the amount of $3,203,000 resulting from the permit impairment loss recorded for the Company’s M&EC subsidiary.

 

12. Related Party Transactions

 

Employment Agreements

 

On September 8, 2017, the Company’s Board approved the appointment of Mr. Mark Duff as the Company’s new CEO, succeeding Dr. Louis Centofanti, who will serve as EVP of Strategic Initiatives and continue to serve as a member of the Board.

 

Immediately after the appointment of Mark Duff as the Company’s new CEO, the Company’s Compensation Committee and the Board approved, and the Company entered into, an employment agreement with each of Mark Duff, CEO (the “CEO Employment Agreement”), Dr. Louis Centofanti, EVP of Strategic Initiatives (the “EVP Employment Agreement”), and Ben Naccarato, CFO (the “CFO Employment Agreement”) and, collectively with the CEO Employment Agreement, the EVP Employment Agreement, and the CFO Employment Agreement, the “New Employment Agreements” and each individually the “New Employment Agreement”. The Company had previously entered into an employment agreement with each of Dr. Louis Centofanti and Ben Naccarato on July 10, 2014 which both employment agreements are due to expire on July 10, 2018, as amended (the “July 10, 2014 Employment Agreements”). The Company also had previously entered into an employment agreement dated January 19, 2017 (which was effective June 11, 2016) with Mark Duff which is due to expire on June 11, 2019 (the “January 19, 2017 Employment Agreement”). The July 10, 2014 Employment Agreements and the January 19, 2017 Employment Agreement were terminated effective September 8, 2017.

 

Pursuant to New Employment Agreements, which are effective September 8, 2017 (the “Initial Term”), (a) Mark Duff will serve as the Company’s CEO, with an annual salary of $267,000; (b) Dr. Louis Centofanti will serve as the Company’s EVP of Strategic Initiative, with an annual salary of $223,400; and (c) Ben Naccarato will continue to serve as the Company’s CFO, with an annual salary of $229,494. In addition, each of these executive officers is entitled to participate in the Company’s broad-based benefits plans and to certain performance compensation payable under separate Management Incentive Plans (“MIPs”) as approved by the Company’s Compensation Committee. The Company’s Compensation Committee and the Board approved individual 2017 MIPs on January 19, 2017 (which are effective January 1, 2017) for each Mark Duff, Dr. Louis Centofanti, and Ben Naccarato, which remain effective for fiscal year 2017.

 

23

 

 

Each of the New Employment Agreements is effective for three years from the Initial Term unless earlier terminated by the Company or by the executive officer. At the end of the Initial Term of each New Employment Agreement, each New Employment Agreement will automatically be extended for one additional year, unless at least six months prior to the expiration of the Initial Term, the Company or the executive officer provides written notice not to extend the terms of the New Employment Agreement.

 

Pursuant to the New Employment Agreements, if the executive officer’s employment is terminated due to death/disability or for cause (as defined in the agreements), the Company will pay to the executive officer or to his estate an amount equal to the sum of any unpaid base salary and accrued unused vacation time through the date of termination and any benefits due to the executive officer under any employee benefit plan (the “Accrued Amounts”) plus any performance compensation payable pursuant to the MIP.

 

If the executive officer terminates his employment for “good reason” (as defined in the agreements) or is terminated without cause (including the executive officer terminating his employment for “good reason” or is terminated without cause within 24 months after a Change in Control (as defined in the agreement)), the Company will pay the executive officer a sum equal to the total Accrued Amounts, two years of full base salary, performance compensation (under the MIP) earned with respect to the fiscal year immediately preceding the date of termination, and an additional year of performance compensation (under the MIP) earned, if not already paid, with respect to the fiscal year immediately preceding the date of termination. If the executive terminates his employment for a reason other than for good reason, the Company will pay to the executive the amount equal to the Accrued Amounts plus any performance compensation payable pursuant to the MIP.

 

If there is a Change in Control (as defined in the agreements), all outstanding stock options to purchase common stock held by the executive officer will immediately become exercisable in full commencing on the date of termination through the original term of the options. In the event of the death of an executive officer, all outstanding stock options to purchase common stock held by the executive officer will immediately become exercisable in full commencing on the date of termination, with such options exercisable for the lesser of the original option term or twelve months from the date of the executive officer’s death. Severance benefits payable with respect to a termination (other than Accrued Amounts) shall not be payable until the termination constitutes a “separation from service” (as defined under Treasury Regulation Section 1.409A-1(h)).

 

Robert L. Ferguson

 

Mr. Robert Ferguson (“Ferguson”) is a consultant to the Board and a consultant to the Company. In connection with his consulting work for the Company, on July 27, 2017, the Company granted an option to Ferguson for the purchase of up to 100,000 shares of the Company’s common stock (see information of this option in “Note 4 – Capital Stock, Stock Plans and Stock-Based Compensation”).

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-looking Statements

 

Certain statements contained within this report may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, the “Private Securities Litigation Reform Act of 1995”). All statements in this report other than a statement of historical fact are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the Company to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “intend,” “will,” and similar expressions identify forward-looking statements. Forward-looking statements contained herein relate to, among other things,

 

24

 

 

demand for our services;
reductions in the level of government funding in future years;
reducing operating costs;
expect to meet our quarterly financial covenant requirements in the next twelve months;
cash flow requirements;
government funding for our services;
may not have liquidity to repay debt if our lender accelerates payment of our borrowings;
our cash flows from operations and our available liquidity from our credit facility are sufficient to fund our operations;
manner in which the government will be required to spend funding to remediate federal sites;
fund capital expenditures from cash from operations and/or financing;
fund remediation expenditures for sites from funds generated internally;
compliance with environmental regulations;
potential effect of being a PRP;
further reduce or delay or eliminate R&D program if the Medical Segment is unable to raise the necessary capital; and
potential sites for violations of environmental laws and remediation of our facilities.

 

While the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance such expectations will prove to be correct. There are a variety of factors, which could cause future outcomes to differ materially from those described in this report, including, but not limited to:

 

general economic conditions;
material reduction in revenues;
ability to meet PNC covenant requirements;
inability to collect in a timely manner a material amount of receivables;
increased competitive pressures;
inability to maintain and obtain required permits and approvals to conduct operations;
public not accepting our new technology;
inability to develop new and existing technologies in the conduct of operations;
inability to maintain and obtain closure and operating insurance requirements;
inability to retain or renew certain required permits;
discovery of additional contamination or expanded contamination at any of the sites or facilities leased or owned by us or our subsidiaries which would result in a material increase in remediation expenditures;
delays at our third party disposal site can extend collection of our receivables greater than twelve months;
refusal of third party disposal sites to accept our waste;
changes in federal, state and local laws and regulations, especially environmental laws and regulations, or in interpretation of such;
requirements to obtain permits for TSD activities or licensing requirements to handle low level radioactive materials are limited or lessened;
potential increases in equipment, maintenance, operating or labor costs;
management retention and development;
financial valuation of intangible assets is substantially more/less than expected;
the requirement to use internally generated funds for purposes not presently anticipated;
inability to continue to be profitable on an annualized basis;
inability of the Company to maintain the listing of its Common Stock on the NASDAQ;
terminations of contracts with federal agencies or subcontracts involving federal agencies, or reduction in amount of waste delivered to the Company under the contracts or subcontracts;
renegotiation of contracts involving the federal government;
federal government’s inability or failure to provide necessary funding to remediate contaminated federal sites;

 

25

 

 

disposal expense accrual could prove to be inadequate in the event the waste requires re-treatment;
inability to raise capital on commercially reasonable terms;
inability to increase profitable revenue;
lender refuses to waive non-compliance or revise our covenant so that we are in compliance in the event of default; and

risk factors and other factors set forth in “Special Note Regarding Forward-Looking Statements” contained in the Company’s 2016 Form 10-K and Form 10-Q for the quarters ended March 31, 2017, June 30, 2017, and September 30, 2017.

 

Overview

 

Revenue decreased $1,163,000 or 9.0% to $11,758,000 for the three months ended September 30, 2017 from $12,921,000 for the corresponding period of 2016. Revenue from our Services Segment decreased $2,875,000 or 54.5% primarily due the completion of a significant nuclear services project in December 2016. Revenue from our Treatment Segment increased $1,712,000 or 22.4% due to higher waste volume and higher averaged price waste. Total gross profit decreased $62,000 or 3.4% for the three months ended September 30, 2017 as compared to the corresponding period of 2016. Total gross profit for the third quarter of 2017 included additional closure costs recorded in the amount of $550,000 in connection with our East Tennessee Material and Energy Corporation (“M&EC”) facility as discussed below. Excluding the $550,000 in closure costs recorded, total gross profit increased by $488,000 or 27.0% primarily due to increased revenue in our Treatment Segment. Total Selling, General, and Administrative (“SG&A”) expenses decreased $79,000 or 2.9% for the three months ended September 30, 2017 as compared to the corresponding period of 2016.

 

Revenue decreased $589,000 or 1.6% to $37,179,000 for the nine months ended September 30, 2017 from $37,768,000 for the corresponding period of 2016. The decrease in revenue was primarily due to the decrease in revenue of approximately $6,776,000 or 45.4% to $8,160,000 from $14,936,000 in the Services Segment. Treatment Segment revenue increased approximately $6,187,000 or 27.1% from higher waste volume and higher averaged price waste. Total gross profit increased $3,160,000 or 86.4% for the nine months ended September 30, 2017 as compared to the corresponding period of 2016 primarily due to higher revenue generated from our Treatment Segment. Total SG&A expenses increased $175,000 or 2.1% for the nine months ended September 30, 2017 as compared to the corresponding period of 2016.

 

We continue our plan to close our M&EC facility by the end of the M&EC’s lease term of January 21, 2018. In accordance with Accounting Standards Codification 360, “Property, Plant, and Equipment,” we performed an updated financial valuation of M&EC’s remaining long-lived tangible assets (inclusive of the capitalized asset retirement costs) for further potential impairment during the third quarter of 2017. Based on our analysis using an undiscounted cash flow approach, we concluded that the carrying value of the remaining tangible assets for M&EC was not recoverable and exceeded its fair value. Consequently, we fully impaired the remaining tangible assets for M&EC resulting in $672,000 in tangible asset impairment loss. During the third quarter of 2017, we also recorded an additional $550,000 in closure liabilities due to a change in estimated closure costs for our M&EC facility.

 

As previously reported, at the direction of Dr. Louis Centofanti, our former Chief Executive Officer (“CEO”) and President, and the Board of Directors (the “Board”), we instituted our succession plan during the third quarter of 2017, in which Dr. Centofanti resigned his position as our CEO and President and the Board elected Mr. Mark Duff as the new CEO and President of the Company. In order to have Dr. Centofanti remain active in the operation of the Company, the Board then elected Dr. Centofanti as Executive Vice President of Strategic Initiatives. Dr. Centofanti continues to serve as a member of the Board.

 

26

 

 

Business Environment and Outlook

 

Our Treatment and Services Segments’ business continues to be heavily dependent on services that we provide to governmental clients directly as the contractor or indirectly as a subcontractor. We believe demand for our services will continue to be subject to fluctuations due to a variety of factors beyond our control, including the current economic conditions and the manner in which the government will be required to spend funding to remediate federal sites. In addition, our governmental contracts and subcontracts relating to activities at governmental sites are generally subject to termination or renegotiation on 30 days notice at the government’s option. Significant reductions in the level of governmental funding or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows. As previously disclosed, during the latter part of 2016, our Medical Segment reduced substantially its research and development (“R&D”) activities due to the need for capital to fund such activities. Our Medical Segment continues to seek various sources in order to raise this capital. We anticipate that our Medical Segment R&D activities will be limited until it obtains the necessary capital through obtaining its own credit facility or additional equity raise. If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to further reduce or delay or eliminate its R&D program.

 

Results of Operations

 

The reporting of financial results and pertinent discussions are tailored to three reportable segments: The Treatment, Services, and Medical Segments. Our Medical Segment encompasses the operations of our majority-owned Polish subsidiary, PF Medical, which has not generated any revenue and all costs incurred are included within R&D.

 

Summary – Three and Nine Months Ended September 30, 2017 and 2016

 

   Three Months Ended   Nine Months Ended 
Consolidated (amounts in  September 30,   September 30, 
thousands)  2017   %   2016   %   2017   %   2016   % 
Net revenues  $11,758    100.0   $12,921    100.0   $37,179    100.0   $37,768    100.0 
Cost of goods sold   10,013    85.2