Notes
to Consolidated Financial Statements
September
30, 2019
(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, 2018.
The
consolidated 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 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, 2019 are not necessarily indicative of results
to be expected for the fiscal year ending December 31, 2019.
The
Company suggests that these consolidated 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, 2018.
2.
|
Summary
of Significant Accounting Policies
|
Our
accounting policies are as set forth in the notes to the December 31, 2018 consolidated financial statements referred to above.
Recently
Adopted Accounting Standards
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use (“ROU”) lease assets and
lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required
application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Targeted
Improvements,” to Topic 842 which included an option to not restate comparative periods in transition and elect to use the
effective date of Topic 842 as the date of initial application of transition, which the Company elected. As permitted under Topic
842, the Company adopted several practical expedients that permit us to not reassess (1) whether any expired or existing contract
as of the adoption date is or contain a lease, (2) lease classification for any expired or existing leases as of the adoption
date, and (3) initial direct costs for any existing leases as of the adoption date. As a result of the adoption of Topic 842 on
January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $2,602,000 and operating
lease liabilities of $2,622,000. The cumulative-effect adjustment was immaterial to our beginning accumulated deficit upon adoption
of ASU 2016-02. The adoption of Topic 842 had an immaterial impact on our Consolidated Statements of Operations and Cash Flows
for the nine months ended September 30, 2019. The Company’s accounting for finance leases remained substantially unchanged.
The Company has expanded its consolidated financial statement disclosure upon adoption of this standard (see “Note 4 –
Leases”).
In
February 2018, FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the reclassification of certain
income tax effects related to the new Tax Cuts and Jobs Act legislation between “Accumulated other comprehensive income”
and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets
related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where
the related items were originally recognized in “Other comprehensive income” (rather than in “Income from continuing
operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of
adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The adoption
of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on the Company’s financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for
acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions
in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards.
ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to
the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for
under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after
December 15, 2018, with early adoption permitted. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not
have a material impact on the Company’s financial statements.
Recently
Issued Accounting Standards – Not Yet Adopted
In
June 2016, the FASB issued ASU No. 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”),” which amends the current approach to estimate credit losses on certain financial assets, including trade and
other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities
to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the
valuation allowance are recorded in current earnings and reversal of previous losses is permitted. In April 2019, the FASB issued
ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments,” which, with respect to credit losses, among other things, clarifies and
addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable
interest rates. Additionally, in May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326):
Targeted Transition Relief,” which allows entities to irrevocably elect the fair value option on certain financial instruments.
These standards are effective for interim and annual reporting periods beginning after December 15, 2019. Entities are required
to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first
reporting period in which the guidance is adopted. The Company is currently assessing the impact that these standards will have
on its financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement.” ASU 2018-13 improves the disclosure requirements on fair value measurements. ASU
2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact that this standard
will have on its financial statements.
Disaggregation
of Revenue
In
general, the Company’s business segmentation is aligned according to the nature and economic characteristics of our services
and provides meaningful disaggregation of each business segment’s results of operations. The nature of the Company’s
performance obligations within our Treatment and Services Segments result in the recognition of our revenue primarily over time.
The following tables present further disaggregation of our revenues by different categories for our Services and Treatment Segments:
Revenue
by Contract Type
(In
thousands)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Fixed
price
|
|
$
|
10,081
|
|
|
$
|
5,364
|
|
|
$
|
15,445
|
|
|
$
|
9,103
|
|
|
$
|
304
|
|
|
$
|
9,407
|
|
Time
and materials
|
|
|
―
|
|
|
|
7,090
|
|
|
|
7,090
|
|
|
|
―
|
|
|
|
2,577
|
|
|
|
2,577
|
|
Total
|
|
$
|
10,081
|
|
|
$
|
12,454
|
|
|
$
|
22,535
|
|
|
$
|
9,103
|
|
|
$
|
2,881
|
|
|
$
|
11,984
|
|
Revenue
by Contract Type
(In
thousands)
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Fixed
price
|
|
$
|
30,079
|
|
|
$
|
9,231
|
|
|
$
|
39,310
|
|
|
$
|
27,207
|
|
|
$
|
1,040
|
|
|
$
|
28,247
|
|
Time
and materials
|
|
|
―
|
|
|
|
12,068
|
|
|
|
12,068
|
|
|
|
―
|
|
|
|
9,554
|
|
|
|
9,554
|
|
Total
|
|
$
|
30,079
|
|
|
$
|
21,299
|
|
|
$
|
51,378
|
|
|
$
|
27,207
|
|
|
$
|
10,594
|
|
|
$
|
37,801
|
|
Revenue
by generator
(In
thousands)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Domestic
government
|
|
$
|
7,537
|
|
|
$
|
10,155
|
|
|
$
|
17,692
|
|
|
$
|
6,552
|
|
|
$
|
1,848
|
|
|
$
|
8,400
|
|
Domestic
commercial
|
|
|
2,535
|
|
|
|
475
|
|
|
|
3,010
|
|
|
|
2,437
|
|
|
|
718
|
|
|
|
3,155
|
|
Foreign
government
|
|
|
―
|
|
|
|
1,804
|
|
|
|
1,804
|
|
|
|
114
|
|
|
|
294
|
|
|
|
408
|
|
Foreign
commercial
|
|
|
9
|
|
|
|
20
|
|
|
|
29
|
|
|
|
―
|
|
|
|
21
|
|
|
|
21
|
|
Total
|
|
$
|
10,081
|
|
|
$
|
12,454
|
|
|
$
|
22,535
|
|
|
$
|
9,103
|
|
|
$
|
2,881
|
|
|
$
|
11,984
|
|
Revenue
by generator
(In
thousands)
|
|
Nine
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Domestic
government
|
|
$
|
21,986
|
|
|
$
|
15,683
|
|
|
$
|
37,669
|
|
|
$
|
19,098
|
|
|
$
|
8,231
|
|
|
$
|
27,329
|
|
Domestic
commercial
|
|
|
7,809
|
|
|
|
2,088
|
|
|
|
9,897
|
|
|
|
7,995
|
|
|
|
1,661
|
|
|
|
9,656
|
|
Foreign
government
|
|
|
220
|
|
|
|
3,465
|
|
|
|
3,685
|
|
|
|
114
|
|
|
|
632
|
|
|
|
746
|
|
Foreign
commercial
|
|
|
64
|
|
|
|
63
|
|
|
|
127
|
|
|
|
―
|
|
|
|
70
|
|
|
|
70
|
|
Total
|
|
$
|
30,079
|
|
|
$
|
21,299
|
|
|
$
|
51,378
|
|
|
$
|
27,207
|
|
|
$
|
10,594
|
|
|
$
|
37,801
|
|
Contract
Balances
The
timing of revenue recognition, billings, and cash collections results in accounts receivable and unbilled receivables (contract
assets). The Company’s contract liabilities consist of deferred revenues which represents advance payment from customers
in advance of the completion of our performance obligation.
The
following table represents changes in our contract assets and contract liabilities balances:
|
|
|
|
|
|
|
|
Year-to-date
|
|
|
Year-to-date
|
|
(In
thousands)
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Change
($)
|
|
|
Change
(%)
|
|
Contract
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account
receivables, net of allowance
|
|
$
|
10,781
|
|
|
$
|
7,735
|
|
|
$
|
3,046
|
|
|
|
39.4
|
%
|
Unbilled
receivables - current
|
|
|
9,245
|
|
|
|
3,105
|
|
|
|
6,140
|
|
|
|
197.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
$
|
6,239
|
|
|
$
|
6,595
|
|
|
$
|
(356
|
)
|
|
|
(5.4
|
)%
|
During
the three and nine months ended September 30, 2019, the Company recognized revenue of $1,877,000 and $9,322,000, respectively,
related to untreated waste that was in the Company’s control as of December 31, 2018. During the three and nine months ended
September 30, 2018, the Company recognized revenue of $1,032,000 and $6,605,000, respectively, related to untreated waste that
was in the Company’s control as of December 31, 2017. All revenue recognized in each period related to performance obligations
satisfied within the respective period.
Incremental
Costs to Obtain a Contract
Costs
incurred to obtain contracts with our customers are immaterial and as a result, the Company expenses (within selling, general
and administration expenses (“SG&A”)) incremental costs incurred in obtaining contracts with our customers as
incurred.
Remaining
Performance Obligations
The
Company applies the practical expedient in paragraph 606-10-50-14 of ASC 606, “Revenue from Contract with Customers,”
and does not disclose information about remaining performance obligations that have original expected durations of one year or
less.
At
the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on facts and circumstances
present in that arrangement. Lease classifications, recognition, and measurement are then determined at the lease commencement
date.
The
Company’s operating lease ROU assets and operating lease liabilities represent primarily leases for office/warehouse spaces
used to conduct our business. These leases have remaining terms of approximately 4 to 11 years which include one or more options
to renew, with renewal terms from 3 years to 8 years. Based on the Company’s reasonable certainty to exercise these renewal
options, the renewal to extend the lease terms are included in valuing our ROU assets and liabilities. As most of our operating
leases do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate when determining
the present value of the lease payments. The incremental borrowing rate is determined based on the Company’s secured borrowing
rate, lease terms and current economic environment. Some of our operating leases include both lease (rent payments) and non-lease
components (maintenance costs such as cleaning and landscaping services). The Company has elected the practical expedient to account
for lease component and non-lease component as a single component for all leases. Lease expense for operating leases is recognized
on a straight-line basis over the lease term.
Finance
leases primarily consist of processing and lab equipment for our facilities. The Company’s finance leases generally have
terms between two to three years and some of the leases include options to purchase the underlying assets at fair market value
at the conclusion of the lease term. At September 30, 2019, assets recorded under finance leases were $1,046,000 less accumulated
depreciation of $48,000, resulting in net fixed assets under finance leases of $998,000, which is recorded within net property
and equipment on the Consolidated Balance Sheets.
The
Company adopted the policy to not recognize ROU assets and liabilities for short term leases.
The
components of lease cost for the Company’s leases were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2019
|
|
|
|
|
|
|
|
|
Operating
Leases:
|
|
|
|
|
|
|
|
|
Lease
cost
|
|
$
|
114
|
|
|
$
|
342
|
|
|
|
|
|
|
|
|
|
|
Finance
Leases:
|
|
|
|
|
|
|
|
|
Amortization
of ROU assets
|
|
|
20
|
|
|
|
39
|
|
Interest
on lease liability
|
|
|
15
|
|
|
|
40
|
|
|
|
|
35
|
|
|
|
79
|
|
Short-term
lease rent expense
|
|
|
41
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
Total
lease cost
|
|
$
|
190
|
|
|
$
|
534
|
|
The
weighted average remaining lease term and the weighted average discount rate for operating and finance leases at September 30,
2019 was:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Weighted
average remaining lease terms (years)
|
|
|
9.0
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
Weighted average
discount rate
|
|
|
8.0
|
%
|
|
|
11.6
|
%
|
The
following table reconciles the undiscounted cash flows for the operating and finance leases at September 30, 2019 to the operating
and finance lease liabilities recorded on the balance sheet (in thousands):
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2019
Remainder
|
|
$
|
108
|
|
|
$
|
103
|
|
2020
|
|
|
443
|
|
|
|
433
|
|
2021
|
|
|
450
|
|
|
|
124
|
|
2022
|
|
|
459
|
|
|
|
105
|
|
2023
|
|
|
466
|
|
|
|
―
|
|
2024
and thereafter
|
|
|
1,799
|
|
|
|
―
|
|
Total
undiscounted lease payments
|
|
|
3,725
|
|
|
|
765
|
|
Less:
Imputed interest
|
|
|
(1,082
|
)
|
|
|
(95
|
)
|
Present
value of lease payments
|
|
$
|
2,643
|
|
|
$
|
670
|
|
|
|
|
|
|
|
|
|
|
Current
portion of operating lease obligations
|
|
$
|
237
|
|
|
$
|
―
|
|
Long-term
operating lease obligations, less current portion
|
|
$
|
2,406
|
|
|
$
|
―
|
|
Current
portion of finance lease obligations
|
|
$
|
―
|
|
|
$
|
319
|
|
Long-term
finance lease obligations, less current portion
|
|
$
|
―
|
|
|
$
|
351
|
|
Supplemental
cash flow and other information related to our leases were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2019
|
|
|
September
30, 2019
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating
cash flow used in operating leases
|
|
$
|
109
|
|
|
$
|
326
|
|
Operating
cash flow used in finance leases
|
|
$
|
15
|
|
|
$
|
40
|
|
Financing
cash flow used in finance leases
|
|
$
|
73
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
ROU
assets obtained in exchange for lease obligations for:
|
|
|
|
|
|
|
|
|
Finance
liabilities
|
|
$
|
390
|
|
|
$
|
528
|
|
Operating
liabilities
|
|
$
|
―
|
|
|
$
|
182
|
|
The
following table summarizes information relating to the Company’s definite-lived intangible assets:
|
|
Weighted
Average
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
Amortization
Period
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
Gross
Carrying
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
Intangibles
(amount in thousands)
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
|
|
11
|
|
|
$
|
740
|
|
|
$
|
(353
|
)
|
|
$
|
387
|
|
|
$
|
728
|
|
|
$
|
(336
|
)
|
|
$
|
392
|
|
Software
|
|
3
|
|
|
|
414
|
|
|
|
(407
|
)
|
|
|
7
|
|
|
|
410
|
|
|
|
(403
|
)
|
|
|
7
|
|
Customer
relationships
|
|
10
|
|
|
|
3,370
|
|
|
|
(2,657
|
)
|
|
|
713
|
|
|
|
3,370
|
|
|
|
(2,491
|
)
|
|
|
879
|
|
Permit
|
|
10
|
|
|
|
545
|
|
|
|
(545
|
)
|
|
|
―
|
|
|
|
545
|
|
|
|
(538
|
)
|
|
|
7
|
|
Total
|
|
|
|
|
$
|
5,069
|
|
|
$
|
(3,962
|
)
|
|
$
|
1,107
|
|
|
$
|
5,053
|
|
|
$
|
(3,768
|
)
|
|
$
|
1,285
|
|
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 had only one definite-lived permit that was subject to amortization.
This definite-lived permit was fully amortized in the first quarter of 2019.
The
following table summarizes the expected amortization over the next five years for our definite-lived intangible assets:
|
|
Amount
|
|
Year
|
|
(In
thousands)
|
|
|
|
|
|
2019
(remaining)
|
|
$
|
61
|
|
2020
|
|
|
219
|
|
2121
|
|
|
199
|
|
2022
|
|
|
173
|
|
2023
|
|
|
132
|
|
Amortization
expense relating to the definite-lived intangible assets as discussed above was $60,000 and $194,000 for the three and nine months
ended September 30, 2019, respectively, and $84,000 and $253,000 for the three and nine months ended September 30, 2018, respectively.
6.
|
Capital
Stock, Stock Plans and Stock-Based Compensation
|
The
Company has certain stock option plans under which it may awards incentive stock options (“ISOs”) and/or non-qualified
stock options (“NQSOs”) to employees, officers, outside directors, and outside consultants.
On
January 17, 2019 the Company granted 105,000 ISOs from the 2017 Stock Option Plan (“2017 Plan”) to certain employees,
which included our named executive officers as follows: 25,000 ISOs to our Chief Executive Officer (“CEO”); 15,000
ISOs to our Chief Financial Officer (“CFO”); and 15,000 ISOs to our Executive Vice President (“EVP”) of
Strategic Initiatives. The ISOs granted were for a contractual term of six years with one-fifth vesting annually over a five year
period. The exercise price of the ISO was $3.15 per share, which was equal to the fair market value of the Company’s Common
Stock on the date of grant.
On
July 25, 2019, the Company granted an aggregate of 12,000 NQSOs from the Company’s 2003 Outside Directors Stock Plan (“2003
Plan”) to five of the six re-elected directors at the Company’s Annual Meeting of Stockholders held on July 25, 2019.
Dr. Louis F. Centofanti (a Board member) was not eligible to receive options under the 2003 Plan as an employee of the Company,
pursuant to the 2003 Plan. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The
exercise price of the NQSO was $3.31 per share, which was equal to our closing stock price the day preceding the grant date, pursuant
to the 2003 Plan.
On
August 29, 2019 the Company granted an aggregate of 12,500 ISOs from the 2017 Plan to certain employees. The ISOs granted were
for a contractual term of six years with one-fifth vesting annually over a five year period. The exercise price of the ISO was
$3.90 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.
On
January 18, 2018, the Company granted 6,000 NQSOs from the Company’s 2003 Plan to a new director elected by the Company’s
Board of Directors (“Board”) to fill a vacancy on the Board. The NQSOs granted were for a contractual term of ten
years with a vesting period of six months. The exercise price of the options was $4.05 per share, which was equal to our closing
stock price the day preceding the grant date, pursuant to the 2003 Plan.
On
July 26, 2018, the Company granted an aggregate of 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 (a Board member) was not eligible to receive options under the 2003 Plan
as an employee of the Company, pursuant to the 2003 Plan. The NQSOs granted were for a contractual term of ten years with a vesting
period of six months. The exercise price of the NQSO was $4.30 per share, which was equal to our closing stock price the day preceding
the grant date, pursuant to the 2003 Plan.
The
Company granted a NQSO to Robert Ferguson on July 27, 2017 from the Company’s 2017 Plan for the purchase of up to 100,000
shares of the Company’s Common Stock (“Ferguson Stock Option”) in connection with his work as a consultant to
the Company’s Test Bed Initiative (“TBI”) at our Perma-Fix Northwest Richland, Inc. (“PFNWR”) facility.
The vesting of the Ferguson Stock Option is subject to the achievement of three separate milestones by certain dates. On January
17, 2019, the Company’s Compensation and Stock Option Committee (“Compensation Committee”) and Board approved
an amendment to the Ferguson Stock Option whereby the vesting date for the second milestone was extended to March 31, 2020 from
January 27, 2019. The 10,000 options under the first milestone were vested and exercised by Robert Ferguson in May 2018. All other
terms of the Ferguson Stock Option remain unchanged.
The
Company estimates 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 as discussed above and the related assumptions used in the Black-Scholes
option model used to value the options granted were as follows:
|
|
Employee
Stock Option Granted
|
|
|
|
January
17, 2019
|
|
|
August
29, 2019
|
|
Weighted-average
fair value per share
|
|
$
|
1.42
|
|
|
$
|
1.77
|
|
Risk
-free interest rate (1)
|
|
|
2.58
|
%
|
|
|
1.40
|
%
|
Expected
volatility of stock (2)
|
|
|
48.67
|
%
|
|
|
51.38
|
%
|
Dividend
yield
|
|
|
None
|
|
|
|
None
|
|
Expected
option life (3)
|
|
|
5.0
years
|
|
|
|
5.0
years
|
|
|
|
Outside
Director Stock Option Granted
|
|
|
|
July
25, 2019
|
|
|
January
18, 2018
|
|
|
July
26, 2018
|
|
Weighted-average
fair value per share
|
|
$
|
2.27
|
|
|
$
|
2.55
|
|
|
$
|
3.02
|
|
Risk
-free interest rate (1)
|
|
|
2.08
|
%
|
|
|
2.62
|
%
|
|
|
2.98
|
%
|
Expected
volatility of stock (2)
|
|
|
54.28
|
%
|
|
|
57.29
|
%
|
|
|
55.34
|
%
|
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.
The
following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2019 and 2018
for our employee and director stock options.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
Stock
Options
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Employee
Stock Options
|
|
$
|
35,000
|
|
|
$
|
37,000
|
|
|
$
|
114,000
|
|
|
$
|
110,000
|
|
Director
Stock Options
|
|
|
10,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
33,000
|
|
Total
|
|
$
|
45,000
|
|
|
$
|
52,000
|
|
|
$
|
129,000
|
|
|
$
|
143,000
|
|
At
September 30, 2019, the Company has approximately $480,000 of total unrecognized compensation cost related to unvested options
for employee and directors, of which $49,000 is expected to be recognized in remaining 2019, $147,000 in 2020, $143,000 in 2021,
$104,000 in 2022, $33,000 in 2023, with the remaining $4,000 in 2024. At September 30, 2019, the Company has not recognized compensation
costs (fair value of approximately $148,000 at September 30, 2019) for the remaining 90,000 Ferguson Stock Option discussed above
since achievement of the performance obligation under each of the two remaining milestones is uncertain at September 30, 2019.
The
summary of the Company’s total Stock Option Plans as of September 30, 2019 and September 30, 2018, and changes during the
periods then ended, are presented below. The Company’s Plans consist of the 2010 Stock Option Plan, the 2017 Plans and the
2003 Plan:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic
Value
(2)
|
|
Options
outstanding January 1, 2019
|
|
|
616,000
|
|
|
$
|
4.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
129,500
|
|
|
|
3.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
─
|
|
|
|
─
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(31,800
|
)
|
|
|
8.68
|
|
|
|
|
|
|
|
|
|
Options
outstanding end of period (1)
|
|
|
713,700
|
|
|
$
|
3.85
|
|
|
|
4.4
|
|
|
$
|
611,942
|
|
Options
exercisable as of September 30, 2019(1)
|
|
|
299,200
|
|
|
$
|
4.30
|
|
|
|
4.0
|
|
|
$
|
188,082
|
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic
Value (2)
|
|
Options
outstanding January 1, 2018
|
|
|
624,800
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,000
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(16,800
|
)
|
|
|
11.70
|
|
|
|
|
|
|
|
|
|
Options
outstanding end of period (1)
|
|
|
616,000
|
|
|
$
|
4.23
|
|
|
|
5.0
|
|
|
$
|
279,630
|
|
Options
exercisable at September 30, 2018(1)
|
|
|
227,333
|
|
|
$
|
5.17
|
|
|
|
4.6
|
|
|
$
|
72,296
|
|
(1)
Options with exercise prices ranging from $2.79 to $13.35
(2)
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise
price
During
the nine months ended September 30, 2019, the Company issued a total of 58,203 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 $182,000 in compensation
expenses (included in selling, general and administration (“SG&A”) expenses) in connection with the issuance of
shares of its Common Stock to outside directors.
7.
|
Income
(Loss) Per Share
|
Basic
income (loss) per share is calculated based on the weighted-average number of outstanding common shares during the applicable
period. Diluted income (loss) 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 (loss) per share. The following table reconciles the income (loss) and average share amounts used to compute
both basic and diluted income (loss) per share:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
(Amounts
in Thousands, Except for Per Share Amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net
income attributable to Perma-Fix Environmental Services, Inc., common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, net of taxes
|
|
$
|
1,895
|
|
|
|
317
|
|
|
|
1,719
|
|
|
|
1,358
|
|
Net
loss attributable to non-controlling interest
|
|
|
(29
|
)
|
|
|
(35
|
)
|
|
|
(90
|
)
|
|
|
(102
|
)
|
Income
from continuing operations attributable to Perma-Fix Environmental Services, Inc. common
stockholders
|
|
$
|
1,924
|
|
|
$
|
352
|
|
|
$
|
1,809
|
|
|
$
|
1,460
|
|
Loss
from discontinuing operations attributable to Perma-Fix Environmental Services, Inc.
common stockholders
|
|
|
(156
|
)
|
|
|
(131
|
)
|
|
|
(424
|
)
|
|
|
(495
|
)
|
Net
income attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
1,768
|
|
|
$
|
221
|
|
|
$
|
1,385
|
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
.15
|
|
|
$
|
.02
|
|
|
$
|
.12
|
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
.15
|
|
|
$
|
.02
|
|
|
$
|
.11
|
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
12,070
|
|
|
|
11,922
|
|
|
|
12,029
|
|
|
|
11,828
|
|
Add:
dilutive effect of stock options
|
|
|
47
|
|
|
|
105
|
|
|
|
29
|
|
|
|
81
|
|
Add:
dilutive effect of warrant
|
|
|
6
|
|
|
|
─
|
|
|
|
3
|
|
|
|
─
|
|
Diluted
weighted average shares outstanding
|
|
|
12,123
|
|
|
|
12,027
|
|
|
|
12,061
|
|
|
|
11,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential
shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
159
|
|
|
|
83
|
|
|
|
165
|
|
|
|
83
|
|
Long-term
debt consists of the following at September 30, 2019 and December 31, 2018:
(Amounts
in Thousands)
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Revolving
Credit facility dated October 31, 2011, as amended, borrowings based upon eligible accounts receivable, subject to monthly
borrowing base calculation, balance due on March 24, 2021. Effective interest rate for the first nine months of 2019 was 6.7%.
(1)
|
|
$
|
─
|
|
|
$
|
639
|
|
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 the first nine months of 2019 was 6.7%. (1)
|
|
|
1,915
|
(2)
|
|
|
2,663
|
(2)
|
Promissory
Note with related party dated April 1, 2019, payable in twelve monthly installments of interest only, starting May 1, 2019
followed with twelve monthly installments of approximately $208 in principal plus accrued interest. Interest accrues at annual
rate of 4.0%. (3)
|
|
|
1,994
|
(4)
|
|
|
─
|
|
Total
debt
|
|
|
3,909
|
|
|
|
3,302
|
|
Less
current portion of long-term debt
|
|
|
987
|
|
|
|
1,184
|
|
Long-term
debt
|
|
$
|
2,922
|
|
|
$
|
2,118
|
|
(1)
Our revolving credit facility is collateralized by our accounts receivable and our term loan is collateralized by our property,
plant, and equipment. Effective July 1, 2019, monthly installment principal payment on the Term Loan was amended to approximately
$35,547 from approximately $101,600. See discussion of the amendment dated June 20, 2019 to the Company’s loan agreement
below.
(2)
Net of debt issuance costs of ($111,000) and ($80,000) at September 30, 2019 and December 31, 2018, respectively.
(3)
Uncollateralized note.
(4)
Net of debt discount/debt issuance of ($298,000) at September 30, 2019. The Promissory Note provides for prepayment of principal
over the term of the Note without penalty. During the third quarter of 2019, the Company made prepayments of principal totaling
$208,000.
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 (“Amended
Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Amended Loan Agreement
has been amended from time to time since the execution of the Amended Loan Agreement. The Amended Loan Agreement, as subsequently
amended (“Revised 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”) 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).
The maximum that the Company can borrow under the revolving credit is based on a percentage of eligible receivables (as defined)
at any one time reduced by outstanding standby letters of credit and borrowing reductions that our lender may impose from time
to time.
On
March 29, 2019, the Company entered into an amendment to its Revised Loan Agreement with its lender under the credit facility
which provided the following:
●
|
waived
the Company’s failure to meet the minimum quarterly fixed charge coverage ratio (“FCCR”) requirement for
the fourth quarter of 2018;
|
●
|
waived
the quarterly FCCR testing requirement for the first quarter of 2019;
|
●
|
revised
the methodology to be used in calculating the FCCR in each of the second and third quarters of 2019 (with continued requirement
to maintain a minimum 1.15:1 ratio in each of the quarters);
|
●
|
revised
the minimum Tangible Adjusted Net Worth requirement (as defined in the Revised Loan Agreement) from $26,000,000 to $25,000,000;
|
●
|
eliminated
the London InterBank Offer Rate (“LIBOR”) interest payment option of paying annual rate of interest due on our
term loan and revolving credit until the Company becomes compliant with its FCCR requirement again. Prior to this amendment,
the Company had the option of paying annual rate of interest due on the revolving credit at prime (5.00% at September 30,
2019) plus 2% or LIBOR plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%;
|
●
|
provided
consent for the $2,500,000 loan that the Company entered into with Robert Ferguson on April 1, 2019 discussed below. The Company
is not allowed to make any principal prepayment on this loan until it receives the restricted finite risk sinking funds of
approximately $5,000,000 held as collateral by AIG Specialty Insurance Company (“AIG”) under our financial assurance
policy resulting from the closure of the Company’s East Tennessee Material and Energy Corporation (“M&EC”)
facility (see “Note 10 – Commitments and Contingencies – Insurance” for a discussion of the receipt
of this $5,000,000 in finite risk sinking funds on July 22, 2019); and
|
●
|
revised
the annual rate used to calculate the Facility Fee (as defined in the Revised Loan Agreement) (unused revolving credit line
fee) from 0.250% to 0.375%.
|
On
June 20, 2019, the Company entered into another amendment to its Revised Loan Agreement with its lender under the credit facility
which provided the following, among other things:
●
|
removed
the FCCR calculation requirement for the second, third and fourth quarter of 2019. Starting in the first quarter of 2020,
the Company will again be required to maintain a minimum FCCR of not less than 1.15 to 1.0 for the four quarter period ending
March 31, 2020 and for each fiscal quarter thereafter;
|
●
|
requires
the Company to maintain a minimum Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted
EBITDA” as defined in the Amendment) of at least (i) $475,000 for the one quarter period ending June 30, 2019; (ii)
$2,350,000 for the two quarter period ending September 30, 2019; and (iii) $3,750,000 for the three quarter period ending
December 31, 2019;
|
●
|
immediate
release of $450,000 of the $1,000,000 indefinite reduction in borrowing availability that our lender had previously imposed.
Release of another $300,000 of the remaining $550,000 reduction in borrowing availability by our lender if the Company meets
its minimum Adjusted EBITDA requirement for the quarter ending September 30, 2019 as discussed above, in addition to the Company
having received no less than $4,000,000 of the restricted finite risk sinking funds held as collateral by AIG under our financial
assurance policy. Our lender will release the final $250,000 reduction in borrowing availability if the Company meets its
Adjusted EBITDA requirement for the three quarter period ending December 31, 2019; and
|
●
|
reduce
the term loan monthly principal payment starting July 1, 2019 from $101,600 to approximately $35,547, with the remaining balance
of the term loan due at the maturity of the Revised Loan Agreement which is March 24, 2021.
|
Most
of the other terms of the Revised Loan Agreement, as amended, remain principally unchanged. In connection with amendment dated
March 29, 2019 and June 20, 2019, the Company paid its lender a fee of $20,000 and $50,000, respectively.
Pursuant
to the Revised Loan Agreement, as amended, the Company may terminate the Revised Loan Agreement, as amended, upon 90 days’
prior written notice upon payment in full of its obligations under the Revised Loan Agreement, as amended. No early termination
fee shall apply if the Company pays off its obligations after March 23, 2019.
At
September 30, 2019, the borrowing availability under our revolving credit was approximately $9,319,000, based on our eligible
receivables and includes an indefinite reduction of borrowing availability of $550,000 that the Company’s lender has imposed.
Our borrowing availability under our revolving credit was also reduced by outstanding standby letters of credit totaling approximately
$2,639,000.
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. As discussed above, our lender waived/removed our FCCR testing requirement for each of the quarters
in 2019. The Company met its “Adjusted EBITDA” minimum requirement in the second and third quarters of 2019 in accordance
to the amendment dated June 20, 2019 discussed above. Additionally, the Company met its remaining financial covenant requirements
in the first, second and third quarters of 2019. As a result of the Company meeting the “Adjusted EBITDA” minimum
requirement for the third quarter of 2019, the Company’s lender is expected to release $300,000 of the $550,000 reduction
in borrowing availability subsequent to the filing of the Company’s Form 10-Q for the third quarter 2019.
Loan
and Securities Purchase Agreement, Promissory Note and Subordination Agreement
On
April 1, 2019, the Company completed a lending transaction with Robert Ferguson (the “Lender”), whereby the Company
borrowed from the Lender the sum of $2,500,000 pursuant to the terms of a Loan and Security Purchase Agreement and promissory
note (the “Loan”). The Lender is a shareholder of the Company. The Lender also currently serves as a consultant to
the Company in connection with the TBI at its PFNWR subsidiary. The proceeds from the Loan were used for general working capital
purposes. The Loan is unsecured, with a term of two years with interest payable at a fixed interest rate of 4.00% per annum. The
Loan provides for monthly payments of accrued interest only during the first year of the Loan, with the first interest payment
due May 1, 2019 and monthly payments of approximately $208,333 in principal plus accrued interest starting in the second year
of the Loan. The Loan also allows for prepayment of principal payments over the term of the Loan without penalty. During the third
quarter of 2019, the Company made total prepayments in principal of $208,000. In connection with the above Loan, the Lender agreed
under the terms of the Loan and a Subordination Agreement with our credit facility lender, to subordinate payment under the Loan,
and agreed that the Loan will be junior in right of payment to the credit facility in the event of default or bankruptcy or other
insolvency proceeding by us. In connection with this capital raise transaction described above and consideration for us receiving
the Loan, the Company issued a Warrant (the “Warrant”) to the Lender to purchase up to 60,000 shares of our Common
Stock at an exercise price of $3.51 per share, which was the closing bid price for a share of our Common Stock on NASDAQ.com immediately
preceding the execution of the Loan and Warrant. The Warrant is exercisable six months from April 1, 2019 and expires on April
1, 2024. The fair value of the Warrant was estimated to be approximately $93,000 using the Black-Scholes option pricing model
with the following assumptions: 50.76% volatility, risk free interest rate of 2.31%, an expected life of five years and no dividends.
As further consideration for this capital raise transaction relating to the Loan, the Company issued 75,000 shares of its Common
Stock to the Lender. The Company determined the fair value of the 75,000 shares of Common Stock to be approximately $263,000 which
was based on the closing bid price for a share of the Company’s Common Stock on NASDAQ.com immediately preceding the execution
of the Loan, pursuant to the Loan and Securities Purchase Agreement. The fair value of the Warrant and Common Stock and the related
closing fees incurred totaling approximately $398,000 from the transaction was recorded as debt discount/debt issuance costs,
which is being amortized over the term of the loan as interest expense – financing fees. The 75,000 shares of Common Stock,
the Warrant and the 60,000 shares of Common Stock that may be purchased under the Warrant will be and was issued in a private
placement that was exempt from registration under Rule 506 and/or Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933,
as amended (the “Act”) and bear a restrictive legend against resale except in a transaction registered under the Act
or in a transaction exempt from registration thereunder.
Upon
default, the Lender will have the right to elect to receive in full and complete satisfaction of the Company’s obligations
under the Loan either: (a) the cash amount equal to the sum of the unpaid principal balance owing under the loan and all accrued
and unpaid interest thereon (the “Payoff Amount”) or (b) upon meeting certain conditions, the number of whole shares
of the Company’s Common Stock (the “Payoff Shares”) determined by dividing the Payoff Amount by the dollar amount
equal to the closing bid price of our Common Stock on the date immediately prior to the date of default, as reported or quoted
on the primary nationally recognized exchange or automated quotation system on which our Common Stock is listed; provided however,
that the dollar amount of such closing bid price shall not be less than $3.51, the closing bid price for our Common Stock as disclosed
on NASDAQ.com immediately preceding the signing of this loan agreement.
If
issued, the Payoff Shares will not be registered and the Lender will not be entitled to registration rights with respect to the
Payoff Shares. The aggregate number of shares, warrant shares, and Payoff Shares that are or will be issued to the Lender pursuant
to the Loan, together with the aggregate shares of the Company’s Common Stock and other voting securities owned by the Lender
or which may be acquired by the Lender as of the date of issuance of the Payoff Shares, shall not exceed the number of shares
of the Company’s Common Stock equal to 14.9% of the number of shares of the Company’s Common Stock issued and outstanding
as of the date immediately prior to the default, less the number of shares of the Company’s Common Stock owned by the Lender
immediately prior to the date of such default plus the number of shares of our Common Stock that may be acquired by the Lender
under warrants and/or options outstanding immediately prior to the date of such default.
The
Company has completed the closure and decommissioning activities of its M&EC facility in accordance with M&EC’s
license and permit requirements.
At
September 30, 2019, total accrued closure liabilities for our M&EC subsidiary totaled approximately $110,000 which are recorded
as current liabilities. The Company recorded an additional $165,000 in closure costs and current closure liabilities in each of
the first and second quarters of 2019 due to finalization of closure requirements. The following reflects changes to the closure
liabilities for the M&EC facility from year end 2018:
Amounts
in thousands
|
|
|
|
Balance
as of December 31, 2018
|
|
$
|
1,142
|
|
Adjustment
to closure liability
|
|
|
330
|
|
Spending
|
|
|
(1,362
|
)
|
Balance
as of September 30, 2019
|
|
$
|
110
|
|
10.
|
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 are 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 (“2003 Closure Policy”) with AIG, which
provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The 2003
Closure Policy, as amended, provided for a maximum allowable coverage of $39,000,000 which included available capacity to allow
for annual inflation and other performance and surety bond requirements. As a result of the closure of the Company’s M&EC
facility, on July 22, 2019, AIG released $5,000,000 of the finite risk sinking funds held as collateral under the 2003 Closure
Policy to the Company. The finite risk sinking funds received by the Company are to be used for general working capital needs.
In conjunction with the release of the finite risk sinking funds by AIG, total coverage under the 2003 Closure Policy was amended
from $30,549,000 to $19,314,000. Additionally, the maximum coverage allowable under the 2003 Closure Policy was amended from $39,000,000
to approximately $28,177,000 which includes available capacity to allow for annual inflation and other performance and surety
bond requirements. At September 30, 2019 and December 31, 2018, finite risk sinking funds contributed by the Company related to
the 2003 Closure Policy which is included in other long term assets on the accompanying Consolidated Balance Sheets totaled $11,236,000
and $15,971,000, respectively, which included interest earned of $1,765,000 and $1,500,000 on the finite risk sinking funds as
of September 30, 2019 and December 31, 2018, respectively. Interest income for the three and nine months ended September 30, 2019
was approximately $77,000 and $265,000, respectively. Interest income for the three and nine months ended September 30, 2018 was
approximately $82,000 and $212,000, respectively. If the Company so elects, AIG is obligated to pay us an amount equal to 100%
of the finite risk 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.
Letter
of Credits and Bonding Requirements
From
time to time, the Company is 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, 2019, the total amount of standby letters of credit
outstanding was approximately $2,639,000 and the total amount of bonds outstanding was approximately $28,213,000.
11.
|
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
is in closure status, which final closure is subject to regulatory approval of necessary plans and permits.
The
Company’s discontinued operations had net losses of $156,000 and $131,000 for the three months ended September 30, 2019
and 2018, respectively (net of taxes of $0 for each period) and net losses of $424,000 and $495,000 for the nine months ended
September 30, 2019 and 2018, 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. Net loss for the nine months ended September 30,
2018 included an increase of approximately $50,000 in remediation reserve recorded in the second quarter of 2018 for our Perma-Fix
of Dayton (“PFD”) subsidiary due to reassessment of the remediation reserve. 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 as of September 30, 2019 and December 31, 2018.
No assets and liabilities were held for sale at each of the periods noted.
(Amounts
in Thousands)
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Other
assets
|
|
$
|
99
|
|
|
$
|
107
|
|
Total
current assets
|
|
|
99
|
|
|
|
107
|
|
Long-term
assets
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net (1)
|
|
|
81
|
|
|
|
81
|
|
Other
assets
|
|
|
57
|
|
|
|
118
|
|
Total
long-term assets
|
|
|
138
|
|
|
|
199
|
|
Total
assets
|
|
$
|
237
|
|
|
$
|
306
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
19
|
|
|
$
|
10
|
|
Accrued
expenses and other liabilities
|
|
|
286
|
|
|
|
296
|
|
Environmental
liabilities
|
|
|
418
|
|
|
|
50
|
|
Total
current liabilities
|
|
|
723
|
|
|
|
356
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Closure
liabilities
|
|
|
132
|
|
|
|
126
|
|
Environmental
liabilities
|
|
|
459
|
|
|
|
837
|
|
Total
long-term liabilities
|
|
|
591
|
|
|
|
963
|
|
Total
liabilities
|
|
$
|
1,314
|
|
|
$
|
1,319
|
|
(1)
net of accumulated depreciation of $10,000 for each period presented.
The
Company’s discontinued operations included a note receivable in the original 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, 2019, the outstanding amount
on this note receivable totaled approximately $138,000, of which approximately $81,000 is included in “Current assets related
to discontinued operations” and approximately $57,000 is included in “Other assets related to discontinued operations”
in the accompanying Consolidated Balance Sheets.
In
accordance with ASC 280, “Segment Reporting”, the Company defines an operating segment as a business activity: (1)
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, which includes:
|
-
|
nuclear,
low-level radioactive, mixed waste (containing both hazardous and low-level radioactive constituents), hazardous and non-hazardous
waste treatment, processing and disposal services primarily through three uniquely licensed and permitted treatment and storage
facilities; and
|
|
-
|
R&D
activities to identify, develop and implement innovative waste processing techniques for problematic waste streams.
|
SERVICES
SEGMENT, which includes:
|
-
|
Technical
services, which include:
|
|
o
|
professional
radiological measurement and site survey of large government and commercial installations using advanced methods, technology
and engineering;
|
|
o
|
integrated
Occupational Safety and Health services including 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 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; and
|
|
o
|
on-site
waste management services to commercial and governmental 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; logistics; transportation; and emergency response; and
|
|
-
|
A
company owned equipment calibration and maintenance laboratory that services, maintains, calibrates, and sources (i.e., rental)
health physics, IH and customized NIOSH instrumentation.
|
|
-
|
A
company owned gamma spectroscopy laboratory for the analysis of oil and gas industry solids and liquids.
|
MEDICAL
SEGMENT, which includes: Research and Development (“R&D”) of the Company’s medical isotope production technology
by our majority-owned Polish subsidiary, Perma-Fix Medical S.A. and its wholly-owned subsidiary Perma-Fix Medical Corporation
(“PFM Corporation”) (together known as “PF Medical” or the Medical Segment). The Company’s Medical
Segment has not generated any revenue as it remains in the R&D stage. The Medical Segment has substantially reduced its R&D
activities due to the need for capital to fund these activities. The Company anticipates that the Medical Segment will not resume
full R&D activities until the necessary capital is obtained through its own credit facility or additional equity raise or
obtains partners willing to provide funding for its R&D. All costs incurred by the Medical Segment are reflected within R&D
in the accompanying consolidated financial statements.
Our
reporting segments exclude our corporate headquarters and our discontinued operations (see “Note 11 – 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,
2019 and 2018 (in thousands).
Segment
Reporting for the Quarter Ended September 30, 2019
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
10,081
|
|
|
$
|
12,454
|
|
|
|
—
|
|
|
$
|
22,535
|
|
|
$
|
—
|
|
|
$
|
22,535
|
|
Intercompany
revenues
|
|
|
75
|
|
|
|
38
|
|
|
|
—
|
|
|
|
113
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
3,338
|
|
|
|
1,819
|
|
|
|
—
|
|
|
|
5,157
|
|
|
|
—
|
|
|
|
5,157
|
|
Research
and development
|
|
|
85
|
|
|
|
—
|
|
|
|
74
|
|
|
|
159
|
|
|
|
6
|
|
|
|
165
|
|
Interest
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77
|
|
|
|
77
|
|
Interest
expense
|
|
|
(19
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(24
|
)
|
|
|
(75
|
)
|
|
|
(99
|
)
|
Interest
expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
(69
|
)
|
Depreciation
and amortization
|
|
|
243
|
|
|
|
79
|
|
|
|
—
|
|
|
|
322
|
|
|
|
6
|
|
|
|
328
|
|
Segment
income (loss) before income taxes
|
|
|
2,244
|
|
|
|
1,193
|
|
|
|
(74
|
)
|
|
|
3,363
|
|
|
|
(1,413
|
)
|
|
|
1,950
|
|
Income
tax expense
|
|
|
55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
—
|
|
|
|
55
|
|
Segment
income (loss)
|
|
|
2,189
|
|
|
|
1,193
|
|
|
|
(74
|
)
|
|
|
3,308
|
|
|
|
(1,413
|
)
|
|
|
1,895
|
|
Expenditures
for segment assets
|
|
|
470
|
|
|
|
31
|
|
|
|
—
|
|
|
|
501
|
|
|
|
—
|
|
|
|
501
|
|
Segment
Reporting for the Quarter Ended September 30, 2018
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
9,103
|
|
|
$
|
2,881
|
|
|
|
—
|
|
|
$
|
11,984
|
|
|
$
|
—
|
|
|
$
|
11,984
|
|
Intercompany
revenues
|
|
|
174
|
|
|
|
16
|
|
|
|
—
|
|
|
|
190
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
1,564
|
|
|
|
261
|
|
|
|
—
|
|
|
|
1,825
|
|
|
|
—
|
|
|
|
1,825
|
|
Research
and development
|
|
|
126
|
|
|
|
—
|
|
|
|
88
|
|
|
|
214
|
|
|
|
15
|
|
|
|
229
|
|
Interest
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
82
|
|
Interest
expense
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(53
|
)
|
|
|
(62
|
)
|
Interest
expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Depreciation
and amortization
|
|
|
234
|
|
|
|
122
|
|
|
|
—
|
|
|
|
356
|
|
|
|
8
|
|
|
|
364
|
|
Segment
income (loss) before income taxes
|
|
|
506
|
|
|
|
(224
|
)
|
|
|
(88
|
)
|
|
|
194
|
|
|
|
(1,219
|
)
|
|
|
(1,025
|
)
|
Income
tax (benefit) expense
|
|
|
(1,342
|
)(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,342
|
)
|
|
|
—
|
|
|
|
(1,342
|
)
|
Segment
income (loss)
|
|
|
1,848
|
|
|
|
(224
|
)
|
|
|
(88
|
)
|
|
|
1,536
|
|
|
|
(1,219
|
)
|
|
|
317
|
|
Expenditures
for segment assets
|
|
|
525
|
|
|
|
22
|
|
|
|
—
|
|
|
|
547
|
|
|
|
1
|
|
|
|
548
|
|
Segment
Reporting for the Nine Months Ended September 30, 2019
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
30,079
|
|
|
$
|
21,299
|
|
|
|
—
|
|
|
$
|
51,378
|
|
|
$
|
—
|
|
|
$
|
51,378
|
|
Intercompany
revenues
|
|
|
83
|
|
|
|
101
|
|
|
|
—
|
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
8,921
|
|
|
|
2,008
|
|
|
|
—
|
|
|
|
10,929
|
|
|
|
—
|
|
|
|
10,929
|
|
Research
and development
|
|
|
367
|
|
|
|
—
|
|
|
|
228
|
|
|
|
595
|
|
|
|
20
|
|
|
|
615
|
|
Interest
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
265
|
|
|
|
265
|
|
Interest
expense
|
|
|
(66
|
)
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
(84
|
)
|
|
|
(209
|
)
|
|
|
(293
|
)
|
Interest
expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(139
|
)
|
|
|
(139
|
)
|
Depreciation
and amortization
|
|
|
713
|
|
|
|
236
|
|
|
|
—
|
|
|
|
949
|
|
|
|
19
|
|
|
|
968
|
|
Segment
income (loss) before income taxes
|
|
|
5,731
|
|
|
|
318
|
|
|
|
(228
|
)
|
|
|
5,821
|
|
|
|
(4,003
|
)
|
|
|
1,818
|
|
Income
tax expense
|
|
|
99
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99
|
|
|
|
—
|
|
|
|
99
|
|
Segment
income (loss)
|
|
|
5,632
|
|
|
|
318
|
|
|
|
(228
|
)
|
|
|
5,722
|
|
|
|
(4,003
|
)
|
|
|
1,719
|
|
Expenditures
for segment assets
|
|
|
764
|
|
|
|
49
|
|
|
|
—
|
|
|
|
813
|
|
|
|
—
|
|
|
|
813
|
|
Segment
Reporting for the Nine Months Ended September 30, 2018
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue
from external customers
|
|
$
|
27,207
|
|
|
$
|
10,594
|
|
|
|
—
|
|
|
$
|
37,801
|
|
|
$
|
—
|
|
|
$
|
37,801
|
|
Intercompany
revenues
|
|
|
463
|
|
|
|
55
|
|
|
|
—
|
|
|
|
518
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
5,867
|
|
|
|
1,322
|
|
|
|
—
|
|
|
|
7,189
|
|
|
|
—
|
|
|
|
7,189
|
|
Research
and development
|
|
|
355
|
|
|
|
—
|
|
|
|
259
|
|
|
|
614
|
|
|
|
66
|
|
|
|
680
|
|
Interest
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
212
|
|
|
|
212
|
|
Interest
expense
|
|
|
(16
|
)
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
(159
|
)
|
|
|
(177
|
)
|
Interest
expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Depreciation
and amortization
|
|
|
702
|
|
|
|
367
|
|
|
|
—
|
|
|
|
1,069
|
|
|
|
26
|
|
|
|
1,095
|
|
Segment
income (loss) before income taxes
|
|
|
4,279
|
(2)
|
|
|
(194
|
)
|
|
|
(259
|
)
|
|
|
3,826
|
|
|
|
(3,740
|
)
|
|
|
86
|
|
Income
tax (benefit) expense
|
|
|
(1,277
|
)(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,277
|
)
|
|
|
5
|
|
|
|
(1,272
|
)
|
Segment
income (loss)
|
|
|
5,556
|
|
|
|
(194
|
)
|
|
|
(259
|
)
|
|
|
5,103
|
|
|
|
(3,745
|
)
|
|
|
1,358
|
|
Expenditures
for segment assets
|
|
|
1,016
|
|
|
|
82
|
|
|
|
—
|
|
|
|
1,098
|
|
|
|
4
|
|
|
|
1,102
|
|
(1)
Amounts reflect the activity for corporate headquarters not included in the segment information.
(2)
Amounts included a net gain of $1,596,000 recorded resulting from the exchange offer of the Series B Preferred Stock of
our M&EC subsidiary which was consummated on May 30, 2018.
(3)
Amounts included a tax benefit recorded in the amount of approximately $1,380,000 during the third quarter. (see “Note
13 – Income Taxes” below).
The
Company had income tax expense of $55,000 and income tax benefit of $1,342,000 for continuing operations for the three months
ended September 30, 2019 and 2018, respectively and income tax expense of $99,000 and income tax benefit of $1,272,000 for the
nine months ended September 30, 2019 and 2018, respectively. Our effective tax rates were approximately 2.8% and 130.9% for the
three months ended September 30, 2019 and 2018, respectively, and 5.4% and 1,479.1% for the nine months ended September 30, 2019
and 2018, respectively. The Company’s tax rate for each periods discussed above was impacted by the Company’s full
valuation on its net deferred tax assets. Additionally, during the third quarter of 2018, the Company recorded a tax benefit in
the amount of approximately $1,380,000 resulting from the release of a portion of the valuation allowance on deferred tax assets
related to indefinite-lived net operating losses generated due to the closure of our M&EC facility. The small tax expense
for the third quarter of 2019 was comprised of state tax expense for separate company filing states and the increase in the deferred
tax liability related to the amortization of indefinite lived intangible assets.