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       June 30, 2007      

Or

o
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
(Address of principal executive offices)
30350
(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 T No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £     Accelerated Filer T     Non-accelerated filer £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T  
 
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 August 6, 2007
Common Stock, $.001 Par Value
53,035,257
 
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.

INDEX
 
 
PART I 
FINANCIAL INFORMATION
Page No.
       
 
Item 1.
 Financial Statements  
       
 
  
Consolidated Balance Sheets -
    June 30, 2007 (unaudited) and December 31, 20061
1
 
 
  
   
Consolidated Statements of Operations -
    Three and Six Months Ended June 30, 2007 and 2006 (unaudited)
3
 
 
  
 
Consolidated Statements of Cash Flows -
    Six Months Ended June 30, 2007 and 2006 (unaudited)
4
 
 
  
 
Consolidated Statement of Stockholders’ Equity -
    Six Months Ended June 30, 2007 (unaudited)
5
 
 
 
   
Notes to Consolidated Financial Statements
6
 
 
 
 
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
26
   
 
 
 
Item 3.
Quantitative and Qualitative Disclosures
About Market Risk
49
   
 
 
 
Item 4.
Controls and Procedures
50
   
 
 
   
 
 
PART II
OTHER INFORMATION
  
   
 
  
 
Item 1.
Legal Proceedings
52
       
 
Item 1A.
Risk Factors
53
   
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
53
   
 
 
 
Item 5.
Other Information
53
   
 
  
 
Item 6.
Exhibits
54
 
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

 
(Amounts in Thousands, Except for Share Amounts)
  
June 30, 2007 (Unaudited)
 
December 31, 2006
  
           
ASSETS
          
Current assets:
          
Cash
  
$
60
  
$
2,528
  
Restricted cash
    
35
   
35
 
Investment trading securities
    
121
   
¾
 
Accounts receivable, net of allowance for doubtful
   
10,547
   
9,488
 
account of $73 and $168
              
Unbilled receivables
    
11,758
   
12,313
 
Inventories
    
312
   
325
 
Prepaid expenses
    
1,920
   
2,855
 
Other receibables    
74
   
1,596
 
Current assets included in assets for sale, net of allowance for
              
doubtful accounts of $330 and $247
    
9,014
   
7,100
 
Total current assets
  
$
33,841
  
$
36,240
  
 
              
Property and equipment:
              
Buildings and land
    
20,428
   
11,244
 
Equipment
    
29,929
   
20,599
 
Vehicles
    
141
   
141
 
Leasehold improvements
    
11,458
   
11,452
 
Office furniture and equipment
    
2,256
   
1,930
 
Construction-in-progress
    
1,295
   
4,609
 
     
65,507
   
49,975
 
Less accumulated depreciation and amortization
    
(17,985
)
  
(16,630
)
Net property and equipment
    
47,522
   
33,345
 
               
Property and equipment included in assets for sale, net of accumulated depreciation of $13,641 and $13,341
    
13,194
   
13,281
 
               
Intangibles and other assets:
              
Permits
    
11,110
   
11,025
 
Goodwill
    
12,769
   
1,330
 
Unbilled receivable - non-current
    
3,275
   
2,600
 
Finite Risk Sinking Fund
    
5,633
   
4,518
 
Other assets
    
1,699
   
1,954
 
Intangibles and other assets included in assets held for sale
    
2,369
   
2,369
 
Total assets
  
$
131,412
  
$
106,662
  
               
The accompanying notes are an integral part of these consolidated financial statements.
 
1
 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
 
(Amounts in Thousands, Except for Share Amounts)
  
June 30, 2007 (Unaudited)
 
December 31, 2006
  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
          
Current liabilities:
          
Accounts payable
  
$
5,109
  
$
2,456
  
Current environmental accrual
    
447
   
453
 
Accrued expenses
    
12,348
   
8,118
 
Unearned revenue
    
3,758
   
3,575
 
Current liabilities related to assets held for sale
    
7,525
   
6,737
 
Current portion of long-term debt
    
4,080
   
2,092
 
Total current liabilities
    
33,267
   
23,431
 
               
Environmental accruals
    
296
   
348
 
Accrued closure costs
    
8,665
   
4,825
 
Other long-term liabilities
    
3,275
   
3,018
 
Long-term liabilities related to assets held for sale
    
3,746
   
3,895
 
Long-term debt, less current portion
    
13,549
   
5,407
 
Total long-term liabilities
    
29,531
   
17,493
 
               
Commitments and Contingencies
              
               
Total liabilities
    
62,798
   
40,924
 
               
Preferred Stock of subsidiary, $1.00 par value; 1,467,396
   
1,285
   
1,285
 
shares authorized, 1,284,730 shares issued and
             
outstanding, liquidation value $1.00 per share
              
               
Stockholders’ equity:
              
Preferred Stock, $.001 par value; 2,000,000 shares authorized,
              
no shares issued and outstanding
    
¾
   
¾
 
Common Stock, $.001 par value; 75,000,000 shares authorized,
              
52,252,363 and 52,053,744 shares issued, including 0 shares held
              
and 988,000 shares of treasury stock retired in 2006, respectively
    
52
   
52
 
Additional paid-in capital
    
95,691
   
92,980
 
Stock subscription receivable
    
(52
)
  
(79
)
Accumulated deficit
    
(28,362
)
  
(28,500
)
Total stockholders' equity
    
67,329
   
64,453
 
Total liabilities and stockholders' equity
  
$
131,412
  
$
106,662
  
               
 
The accompanying notes are an integral part of these consolidated financial statements.
 
2
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
  
Six Months Ended
  
   
June 30,
  
June 30,
  
(Amounts in Thousands, Except for Per Share Amounts)
  
2007
 
2006
 
2007
 
2006
  
                   
Net revenues
  
$
13,537
  
$
14,040
  
$
26,458
  
$
26,936
  
Cost of goods sold
    
8,733
   
8,107
   
17,054
   
15,950
 
Gross profit
    
4,804
   
5,933
   
9,404
   
10,986
 
                           
Selling, general and administrative expenses
    
3,759
   
3,689
   
7,474
   
7,090
 
Loss on disposal of property and equipment
    
2
   
¾
   
2
   
1
 
Income from operations
    
1,043
   
2,244
   
1,928
   
3,895
 
                           
Other income (expense):
                          
Interest income
    
78
   
58
   
166
   
89
 
Interest expense
    
(272
)
  
(389
)
  
(473
)
  
(719
)
Interest expense-financing fees
    
(48
)
  
(48
)
  
(96
)
  
(96
)
Other
    
9
   
(17
)
  
(7
)
  
(32
)
Income from continuing operations before taxes
    
810
   
1,848
   
1,518
   
3,137
 
Income tax expense
    
58
   
107
   
183
   
179
 
Income from continuing operations
    
752
   
1,741
   
1,335
   
2,958
 
                           
Income (loss) from discontinued operations, net of taxes
    
470
   
84
   
(1,197
)
  
(455
)
Net income
   
1,222
   
1,825
   
138
   
2,503
 
                           
Preferred Stock dividends
    
¾
   
¾
   
¾
   
¾
 
Net income applicable to Common Stock
  
$
1,222
  
$
1,825
  
$
138
  
$
2,503
  
                           
Net income (loss) per common share - basic
                          
Continuing operations
  
$
.01
  
$
.04
  
$
.02
  
$
.06
  
Discontinued operations
    
.01
   
¾
   
(.02
)
  
(.01
)
Net income (loss) per common share
  
$
.02
  
$
.04
  
$
¾
  
$
.05
  
                           
Net income (loss) per common share - diluted
                          
Continuing operations
  
$
.01
  
$
.04
  
$
.02
  
$
.06
  
Discontinued operations
    
.01
   
¾
   
(.02
)
  
(.01
)
Net income (loss) per common share
  
$
.02
  
$
.04
  
$
¾
  
$
.05
  
                           
Number of common shares used in computing
                          
net income (loss) per share:
                          
Basic
    
52,131
   
45,117
   
52,097
   
44,975
 
Diluted
    
53,601
   
46,380
   
53,333
   
45,805
 
                           
The accompanying notes are an integral part of these consolidated financial statements.
 
3
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Six Months Ended
  
   
June 30,
  
(Amounts in Thousands)
  
2007
 
2006
  
Cash flows from operating activities:
          
Net income
  
$
138
  
$
2,503
  
Loss on discontinued operations
    
1,197
 
  
455
 
               
Income from continuing operations
    
1,335
   
2,958
 
               
Adjustments to reconcile net income (loss) to cash provided by (used in) operations:
              
Depreciation and amortization
    
1,628
   
1,510
 
Provision (credit) for bad debt and other reserves
    
(41
)
  
(144
)
Loss on disposal of property and equipment
    
2
   
1
 
Issuance of Common Stock for services
    
25
   
22
 
Share based compensation
    
162
   
85
 
Changes in operating assets and liabilities of continuing operations, net of
             
effects from business acquisitions:
              
Accounts receivable
    
1,276
   
1,849
 
Unbilled receivables
    
(121
)
  
(3,141
)
Prepaid expenses, inventories and other assets
    
2,926
   
2,821
 
Accounts payable, accrued expenses, and unearned revenue
    
(596
)
  
(3,017
)
Cash provided by continuing operations
    
6,596
   
2,944
 
Cash used in discontinued operations
    
(1,815
)
  
(1,428
)
Cash provided by Operating Activities
    
4,781
   
1,516
 
               
Cash flows from investing activities:
              
Purchases of property and equipment, net
    
(1,627
)
  
(1,294
)
Proceeds from sale of plant, property and equipment
    
4
   
¾
 
Change in restricted cash, net
    
¾
   
¾
 
Change in finite risk sinking fund
    
(1,115
)
  
(1,080
)
Cash used for acquisition consideration, net of cash acquired
    
(2,341
)
  
¾
 
Cash used in investing activities of continuing operations
    
(5,079
)
  
(2,374
)
Cash (used in) provided by investing activities of discontinued operations
    
(322
)
  
134
 
Cash used in Investing Activities
    
(5,401
)
  
(2,240
)
               
Cash flows from financing activities:
              
Net borrowings of revolving credit
    
4,452
   
1,297
 
Principal repayments of long-term debt
    
(6,482
)
  
(1,208
)
Proceeds from issuance of stock
    
359
   
1,501
 
Repayment of stock subscription receivable
    
27
   
¾
 
Cash (used in) provided by financing activities of continuing operations
    
(1,644
)
  
1,590
 
Principal repayment of long-term debt for discontinued operations
    
(204
)
  
(247
)
Cash (used in) provided by financing activities
    
(1,848
)
  
1,343
 
               
(Decrease) Increase in cash
    
(2,468
)
  
619
 
Cash at beginning of period
    
2,528
   
94
 
Cash at end of period
  
$
60
  
$
713
  
               
Supplemental disclosure:
              
Interest paid
  
$
420
  
$
501
  
Non-cash investing and financing activities:
              
Long-term debt incurred for purchase of property and equipment
    
603
   
94
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited, for the six months ended June 30, 2007)
 
 
(Amounts in thousands,
    
Common Stock
 
 
Additional Paid-
 
 
Loan for
 
 
Accumulated
 
 
Total Stockholders'
  
except for share amounts)
    
Shares
 
 
Amount
 
 
In Capital
 
 
Equity
 
 
 Deficit
 
 
 Equity
  
Balance at December 31, 2006
    
52,053,744
 
$
52
  
$
92,980
  
$
(79
)
$
(28,500
)
$
64,453
  
                                       
Net Income
    
¾
   
¾
   
¾
   
¾
   
138
   
138
 
Issuance of Common Stock for cash
                                     
and services
    
¾
   
¾
   
25
   
¾
   
¾
   
25
 
Issuance of Common Stock upon
                                     
exercise of Warrants & Options
   
198,619
   
¾
   
359
   
¾
   
¾
   
359
 
Common Stock Issuable in conjunction
                                      
with acquisition
    
¾
         
2,165
               
2,165
 
Share based compensation
    
¾
   
¾
   
162
   
¾
   
¾
   
162
 
Repayment of stock subscription receivable
    
¾
   
¾
   
¾
   
27
   
¾
   
27
 
Balance at June 30, 2007
    
52,252,363
 
$
52
  
$
95,691
  
$
(52
)
$
(28,362
)
$
67,329
  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007
(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, 2006.

1.
Basis of Presentation
 
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. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America 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.

It is suggested 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, 2006.

On May 18, 2007, our Board of Directors authorized management to consider the divestiture of all or a part of our Industrial Segment. On May 25, 2007, we entered into a letter of intent to sell our Industrial Segment to The Environmental Quality Company (EQ), excluding our facility in Pittsburgh, Pennsylvania, owned by our subsidiary, Perma-Fix of Pittsburgh, Inc. (“PFP), and our facility in Detroit, Michigan, owned by our subsidiary, Perma-Fix of Michigan, Inc. (“PFMI”), two facilities which have been approved as discontinued operations by our Board of Directors effective November, 8, 2005, and October 4, 2004, respectively. Subsequent to entering into the letter of intent with EQ, the EQ has advised us that they will be unable to proceed with the transaction as contemplated by the letter of intent. As a result, we are in the process of considering additional offers that we have received to purchase all or portions of our Industrial Segment. Management considers the sale of the Industrial Segment before June 30, 2008 to be probable. At May 25, 2007, the Industrial Segment met the held for sale criteria under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and therefore, certain assets and liabilities of the Industrial Segment are presented as held for sale, and we have ceased depreciation of the Industrial Segment’s long-lived assets classified as held for sale. The result of operations and cash flows of the Industrial Segment have been reported in the Consolidated Financial Statements as discontinued operations for all periods presented.

The results of operations for the six months ended June 30, 2007, are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2007.

2.
Summary of Significant Accounting Policies

Our accounting policies are as set forth in the notes to consolidated financial statements referred to above, with the exception of investment as discussed below, which was added to our balance sheet as of June 30, 2007, as result of the acquisition of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and its wholly owned subsidiary Pacific EcoSolutions, Inc (PEcoS) (n/k/a Perma-Fix Northwest Richland, Inc.). See “Note 10 - Acquisition” in “Notes to “Consolidated Financial Statements” on terms and accounting treatment of the acquisition.

6
 
Investment
Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company accounts for its investments in debt and equity securities under Statement of Financial Accounting Standards, (“SFAS”) 115, “Accounting for Certain Investments in Debt and Equity Securities” which requires certain securities to be categorized as either trading, available-for-sale, or held-to-maturity. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Investments classified as held-to-maturity are carried at amortized cost. The Company currently has only trading securities with unrealized gains and losses included in earnings. The Company reviews its investments quarterly for declines in market value that are other than temporary. Investments that have declined in market value that are determined to be other than temporary, are charged to other income by writing that investment down to market value.

Recently Adopted Accounting Pronouncements
FIN 48
Effective January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48), which supplements Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the tax position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. With the adoption of FIN 48, companies are required to adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Any necessary adjustments would be recorded directly to retained earnings and reported as a change in accounting principle. We adopted FIN 48 as of January 1, 2007, and concluded that we have not taken any uncertain tax positions on any of our open returns filed through the period ended December 31, 2005, that would materially distort our financial statements.

We have not yet filed our income tax returns for the tax year ended December 31, 2006; however, we expect that the actual income tax returns will mirror tax positions taken within our income tax provision for 2006. As we believe that all such positions are fully supportable by existing Federal law and related interpretations, there are no uncertain income tax positions to consider in accordance with FIN 48.

We reassess the validity of our conclusions regarding uncertain income tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position's sustainability under audit. The impact of this reassessment for the second quarter of 2007 did not have any impact on our results of operations, financial condition or liquidity.

Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation. Additionally, prior period balances and results have been reclassified for the retroactive effect of discontinued operations. Refer to Note 7.

3.
Stock Based Compensation

On January 1, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised) ("SFAS 123R"), Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, superseding APB Opinion No. 25,
7
Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes accounting standards for entity exchanges of equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative upon adopting SFAS 123R. 
 
We adopted SFAS 123R utilizing the modified prospective method in which compensation cost is recognized beginning with the effective date based on SFAS 123R requirements for all (a) share-based payments granted after the effective date and (b) awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

Prior to our adoption of SFAS 123R, on July 28, 2005, the Compensation and Stock Option Committee of the Board of Directors approved the acceleration of vesting for all the outstanding and unvested options to purchase Common Stock awarded to employees as of the approval date. The Board of Directors approved the accelerated vesting of these options based on the belief that it was in the best interest of our stockholders to reduce future compensation expense that would otherwise be required in the statement of operations upon adoption of SFAS 123R, effective beginning January 1, 2006. The accelerated vesting triggered the re-measurement of compensation cost under current accounting standards.  In the event a holder of an accelerated vesting option terminates employment with us prior to the end of the original vesting term of such options, we will recognize the compensation expense at the time of termination. 

As of June 30, 2007, we had 2,419,833 employee stock options outstanding, which included 1,558,500 that were outstanding and fully vested at December 31, 2005, 794,666 of the 833,000 employee stock options approved and granted on March 2, 2006, of which 242,666 are vested, and 66,667 of the 100,000 employee stock options approved and granted on May 15, 2006, of which 33,333 became vested and were exercised on May 15, 2007. The weighted average exercise price of the 1,801,166 outstanding and fully vested employee stock options is $1.96 with a weighted contractual life of 3.79 years. The employee stock options outstanding at December 31, 2005 are ten year options, issuable at exercise prices from $1.25 to $3.00 per share, and expiration dates from October 14, 2008 to October 28, 2014. The employee stock option grants in March and May 2006 are six year options with a three year vesting period, with exercise prices from $1.85 to $1.86 per share. Additionally, we also have 489,000 outstanding and fully vested director stock options, of which 90,000 became fully vested in January 2007, with exercise price ranging from $1.2188 to $2.98 per share and expiration dates from December 8, 2007 to July 27, 2016. The 90,000 director stock options were granted on July 27, 2006, resulting from the reelection of our Board of Directors. The weighted average exercise price of the 489,000 outstanding and fully vested director stock option is $1.97 with a weighted contractual life of 6.17 years. We have not granted any employee or director stock options for the six months ended June 30, 2007.

For the three and six months ended June 30, 2007, we recognized share based compensation expense of approximately $51,000 and $138,000, respectively, for the employee stock options grants of March 2, 2006 and May 15, 2006, as compared to $56,000 and $74,000 for the same period ended June 30, 2006. For the stock option grants on March 2, 2006 and May 15, 2006, we have estimated compensation expense based on the fair value at grant date using the Black-Scholes valuation model, and have recognized compensation expense using a straight-line amortization method over the three year vesting period. As SFAS 123R requires that stock-based compensation expense be based on options that are ultimately expected to vest, approximately $30,000 of the $138,000 share based compensation expense recognized above for the six months ended June 30, 2007, was the result of the difference between our estimated forfeiture rate of 5.7% and the actual forfeiture rate of 1.7% for the first year vesting of our March 2, 2006 employee option grant. When estimating forfeitures, we consider
8
trends of actual option forfeitures. The forfeiture rates are evaluated, and revised as necessary. We had no share based compensation expense and recognized $24,000 for the three and six months ended June 30, 2007, respectively, for the 90,000 director option grant made on July 27, 2006, which became vested in January 2007, as compared to no share based compensation expense and $11,000 for the corresponding period ended June 30, 2006. The $11,000 in share based compensation recognized for the six months ended June 30, 2006, resulted from our director stock options granted prior to but not yet vested as of January 1, 2006, pursuant to the adoption of SFAS 123R. In total, the share compensation expense for the three and six months ended June 30, 2007 for our director and employee stock option impacted our results of operations by $51,000 and $162,000, respectively, as compared to $56,000 and $85,000 for the corresponding period ended June 30, 2006. We have approximately $518,000 of total unrecognized compensation cost related to unvested options as of June 30, 2007, of which approximately $109,000 will be recognized in remaining 2007, $219,000 will be recognized in 2008, and the remaining $190,000 in 2009.
 
We calculated a fair value of $0.868 for each March 2, 2006 option grant on the date of grant using the Black-Scholes option pricing model with the following assumptions: no dividend yield; an expected life of four years; expected volatility of 54.0%; and a risk free interest rate of 4.70%. We calculated a fair value of $0.877 for the May 15, 2006 option grant on the date of grant with the following assumptions: no dividend yield; an expected life of four years; an expected volatility of 54.6%; and a risk-free interest rate of 5.03%. We calculated a fair value of $1.742 for each July 27, 2006 director option grant on the date of the grant with the following assumptions: no dividend yield; an expected life of ten years; an expected volatility of 73.31%; and a risk free interest rate of 4.98%.

Our computation of expected volatility is based on historical volatility from our traded common stock. Due to our change in the contractual term and vesting period, we utilized the simplified method, defined in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, to calculate the expected term for our 2006 grants. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
 
9
4.
Earnings Per Share

Basic EPS is based on the weighted average number of shares of Common Stock outstanding during the period. Diluted EPS includes the dilutive effect of potential common shares.

The following is a reconciliation of basic net income (loss) per share to diluted net income (loss) per share for the three and six months ended June 30, 2007 and 2006:

   
Three Months Ended
June 30,
  
 Six Months Ended
June 30,
  
(Amounts in thousands except per share amounts)
  
2007
 
2006
 
2007
 
2006
  
Earnings per share from continuing operations
                     
Income from continuing operations
  
$
752
  
$
1,741
 
$
1,335
 
$
2,958
 
Preferred stock dividends
    
¾
   
¾
   
¾
   
¾
 
Income from continuing operations applicable to
   
752
   
1,741
   
1,335
   
2,958
 
Common Stock
                          
Effect of dilutive securities:
                          
Preferred Stock dividends
    
¾
   
¾
   
¾
   
¾
 
Income- diluted
  
$
752
  
$
1,741
 
$
1,335
 
$
2,958
 
Basic income per share
  
$
.01
  
$
.04
 
$
.02
 
$
.06
 
Diluted income per share
  
$
.01
  
$
.04
 
$
.02
 
$
.06
 
                           
Earnings per share from discontinued operations
                          
Income (loss) - basic and diluted
  
$
470
  
$
84
 
$
(1,197
)
$
(455
)
Basic income (loss) per share
  
$
.01
  
$
¾
 
$
(.02
)
$
(.01
)
Diluted income (loss) per share
  
$
.01
  
$
¾
 
$
(.02
)
$
(.01
)
                           
Weighted average shares outstanding - basic
    
52,131
   
45,117
   
52,097
   
44,975
 
Potential shares exercisable under stock option
                         
plan
    
882
   
284
   
711
   
184
 
Potential shares upon exercise of Warrants
    
588
   
979
   
525
   
646
 
Weighted average shares outstanding - diluted
    
53,601
   
46,380
   
53,333
   
45,805
 
 
    
 
    
    
   
 
    
 
  
                           
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
                          
Upon exercise of options
    
115
   
1,293
   
155
   
1,293
 
Upon exercise of Warrants
    
¾
   
1,776
   
¾
   
1,776
 
 
10
 
5.
Long Term Debt

Long-term debt consists of the following at June 30, 2007, and December 31, 2006:
(Amounts in Thousands)
  
June 30, 2007 (Unaudited)
  
December 31, 2006
  
Revolving Credit facility dated December 22, 2000, borrowings based
          
upon eligible accounts receivable, subject to monthly borrowing base
          
calculation, variable interest paid monthly at prime rate plus ½%
          
(8.75% at June 30, 2007), balance due in August 2008.
  
$
4,452
  
$
¾
  
Term Loan dated December 22, 2000, payable in equal monthly
             
installments of principal of $83, balance due in August 2008, variable
              
interest paid monthly at prime rate plus 1% (9.25% at June 30, 2007).
    
5,000
   
5,500
 
Promissory Note dated June 25, 2001, payable in semiannual installments
             
on June 30 and December 31 through December 31, 2008, variable
              
interest accrues at the applicable law rate determined under the IRS
              
Code Section (10.0% on June 30, 2007) and is payable in one lump
             
sum at the end of installment period.
    
1,034
   
1,434
 
Promissory Note dated June 25,2007, payable in monthly installments
              
of principal of $160 starting July 2007 and $173 starting July 2008,
              
variable interest paid monthly at prime rate plus 1.125%
    
4,000
   
¾
 
Installment Agreement in the Agreement and Plan of Merger with
             
Nuvotec and PEcoS, dated April 27, 2007, payable in three equal yearly
             
installment of principal of $833 beginning June 2009. Interest accrues at
              
annual rate of 8.25% on outstanding principal balance starting
             
June 2007 and payable yearly starting June 2008
    
2,500
   
¾
 
Installment Agreement dated June 25, 2001, payable in semiannual IRS
             
installments on June 30 and December 31 through December 31, 2008,
              
variable interest accrues at the applicable law rate determined under the
              
Code Section (10.0% on June 30, 2007) and is payable in one
             
lump sum at the end of installment period.
    
253
   
353
 
Various capital lease and promissory note obligations, payable 2007 to
              
2012, interest at rates ranging from 5.0% to 15.7%.
   
1,372
   
1,042
 
     
18,611
   
8,329
 
Less current portion of long-term debt
    
4,080
   
2,092
 
Less long-term debt related to assets held for sale
    
982
   
830
 
   
$
13,549
  
$
5,407
  
 
Revolving Credit and Term Loan Agreement
On December 22, 2000, we entered into a Revolving Credit, Term Loan and Security Agreement (“Agreement”) with PNC Bank, National Association, a national banking association (“PNC”) acting as agent (“Agent”) for lenders, and as issuing bank, as amended. The Agreement provides for a term loan (“Term Loan”) in the amount of $7,000,000, which requires monthly installments of $83,000 with the remaining unpaid principal balance due on May 31, 2008. The Agreement also provides for a revolving line of credit (“Revolving Credit”) with a maximum principal amount outstanding at any one time of $18,000,000, as amended. The Revolving Credit advances are subject to limitations of an amount up to the sum of (a) up to 85% of Commercial Receivables aged 90 days or less from invoice date, (b) up to 85% of Commercial Broker Receivables aged up to 120 days from invoice date, (c) up to 85% of acceptable Government Agency Receivables aged up to 150 days from invoice date, and (d) up to 50% of acceptable unbilled amounts aged up to 60 days, less (e) reserves the Agent reasonably deems proper and necessary. As of June 30, 2007, the excess availability under our Revolving Credit was $7,006,000 based on our eligible receivables.
11
Pursuant to the Agreement, as amended, the Term Loan bears interest at a floating rate equal to the prime rate plus 1%, and the Revolving Credit at a floating rate equal to the prime rate plus ½%. The Agreement was subject to a prepayment fee of 1% until March 25, 2006, and ½% until March 25, 2007, had we elected to terminate the Agreement with PNC.

On June 12, 2007, we entered into Amendment No. 6 with PNC Bank. Pursuant to Amendment No. 6, PNC provided Consent to the Company’s acquisition of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and its wholly owned subsidiary, PEcoS (k/n/a Perma-Fix of Northwest Richland, Inc.), which was completed on June 13, 2007. See “Note 10 - Acqusition” in “Notes to Consolidated Financial Statements” for terms and accounting treatment of the acquisition. PNC also provided consent for the Company to issue a corporate guaranty for a portion of the debt being assumed as result of the acquisition. In addition, the Amendment provided us with an additional $2,000,000 of availability via a sub-facility within our secured revolver loan. The availability from this sub-facility will be amortized at a rate of $83,333 per month.

On July 18, 2007, we entered into Amendment No. 7 with PNC Bank, which extended the due date of the $25 million credit facility entered into on December 22, 2000 from May 31, 2008 to August 29, 2008. Pursuant to the term of the Amendment, we may terminate the agreement upon 60 days’ prior written notice upon payment in full of the obligation.

Promissory Notes
In conjunction with our acquisition of M&EC, M&EC issued a promissory note for a principal amount of $3.7 million to Performance Development Corporation (“PDC”), dated June 25, 2001, for monies advanced to M&EC for certain services performed by PDC. The promissory note is payable over eight years on a semiannual basis on June 30 and December 31. The principal repayments for 2007 will be approximately $400,000 semiannually. Interest is accrued at the applicable law rate (“Applicable Rate”) pursuant to the provisions of section 6621 of the Internal Revenue Code of 1986 as amended (10% on June 30, 2007) and payable in one lump sum at the end of the loan period. On June 30, 2007, the outstanding balance was $2,951,000 including accrued interest of approximately $1,917,000. Pursuant to the agreement the accrued interest is to be paid at the end of the term, and as such, is recorded as a long-term liability. PDC has directed M&EC to make all payments under the promissory note directly to the Internal Revenue Service (“IRS”) to be applied to PDC’s obligations under its installment agreement with the IRS.

In conjunction with our acquisition of Nuvotec (n/k/as Perma-Fix Northwest, Inc.) and PEcoS (n/k/a as Perma-Fix Northwest Richland, Inc.), which was completed on June 13, 2007, we entered into a promissory note for a principal amount of $4.0 million to KeyBank National Association, dated June 13, 2007, which represents debt assumed by us as result of the acquisition. The promissory note is payable over a two years period with monthly principal repayment of $160,000 starting July 2007 and $173 starting July 2008, along with accrued interest. Interest is accrued at prime rate plus 1.125%.

Installment Agreement
Additionally, M&EC entered into an installment agreement with the IRS for a principal amount of $923,000 effective June 25, 2001, for certain withholding taxes owed by M&EC. The installment agreement is payable over eight years on a semiannual basis on June 30 and December 31. The principal repayments for 2007 will be approximately $100,000 semiannually. Interest is accrued at the Applicable Rate, and is adjusted on a quarterly basis and payable in lump sum at the end of the installment period. On June 30, 2007, the rate was 10%. On June 30, 2007, the outstanding balance was $715,000 including accrued interest of approximately $462,000. The accrued interest is to be paid at the end of the term, and as such, is recorded as a long-term liability, pursuant to the terms of the agreement.
12
In conjunction with our acquisition of Nuvotec (n/k/as Perma-Fix Northwest, Inc.) and PEcoS (n/k/a as Perma-Fix Northwest Richland, Inc.), which was completed on June 13, 2007, pursuant to the Agreement and Plan of Merger, dated April 27, 2007, which was subsequently amended on June 13, 2007, we agreed to pay shareholders of Nuvotec that qualified as accredited investors pursuant to Rule 501 of Regulation D promulgated under the Securities Act of 1933, $2.5 million, with principal payable in equal installment of $833,333 on June 30, 2009, June 30, 2010, and June 30, 2011. Interest is accrued on outstanding principal balance at 8.25% starting in June 2007 and is payable on June 30, 2008, June 30, 2009, June 30, 2010, and June 30, 2011.

6.
Commitments and Contingencies

Hazardous Waste
In connection with our waste management services, we handle 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
In the normal course of conducting our business, we are involved in various litigation. There has been no material change in legal proceedings from those disclosed previously in the Company’s Form 10-K for the year ended December 31, 2006, and our Form 10-Q for the period ended March 31, 2007, except as follows: 

We have previously disclosed that in December 2004, our Dayton, Ohio subsidiary, Perma-Fix of Dayton, Inc. (PFD) was sued under the citizen’s suit provisions of the Clean Air Act in the United States District Court for the Southern District of Ohio, Western District, styled Barbara Fisher v. Perma-Fix of Dayton, Inc. The suit alleges violation by PFD of a number of state and federal clean air statutes in connection with the operation of PFD’s facility, primarily due to PFD’s operating its facility without a Title V air permit. The complaint further alleges that PFD failed to install appropriate air pollution control equipment, conduct appropriate recordkeeping, properly monitor and report, and further alleges that air emissions from PFD’s facility injured persons, endangered the health of the public and constituted a nuisance in violation of Ohio law. The action seeks remediation, injunctive relief, imposition of civil penalties, attorney fees, and costs and other forms of relief. On or about May 19, 2006, the U.S. Department of Justice (“DOJ”), on behalf of the EPA, intervened in the case seeking injunctive relief and civil penalties against PFD for alleged violations which parallel certain claims asserted in the citizen’s suit, including claims PFD’s failure to have obtained, and to have operated its facility without, a Title V air permit, failure to install appropriate air pollution control equipment and conduct appropriate recordkeeping, monitoring and reporting was in violation of the Clean Air Act and applicable regulations. The federal complaint also alleges that PFD failed to respond to a formal request for information from the EPA in a timely manner and request civil penalties.

On April 25, 2007, PFD reached an agreement in principle (“AIP”) with DOJ/USEPA representatives to settle all of the United States’ claims. In addition to taking specific actions to address relevant air pollution control regulations and permit requirements, the AIP states that PFD will pay a civil penalty of $800,000. However, at this time, PFD expects the $800,000 may consist of as many as three components: 1) cash payment to the appropriate regulatory authority; 2) supplemental environmental project(s) consisting of cash equivalent investment(s) in PFD’s facility and/or the local community; and 3) supplemental environmental project(s) consisting of one or more capital projects. Completing a formal settlement agreement (consent decree) and meeting the DOJ/EPA official approval requirements (including public notice and comment) is on-going. Cost estimates associated with taking action to address air pollution control regulations and permit requirements will depend on specific details of the consent decree. Absent agreement on all terms and format of such a final consent decree is not reached, then the AIP will be null and void and no party may seek to enforce it. The AIP does not address the citizen’s suit. We therefore, expect the citizen’s suit to continue after settlement with the federal government. PFD continues to mount a vigorous defense against, and seek an acceptable resolution of, the claims and requests for relief of the citizen’s group.
13
As of June 30, 2007, we have incurred approximately $2.9 million in costs in vigorously defending against the lawsuits above. About $1.2 million was incurred in the first quarter of 2007. On April 12, 2007, our insurer, American International Group (“AIG”), withdrew its prior coverage denial and has agreed to defend and indemnify PFD in the above lawsuit described, subject to AIG’s reservation of rights as discussed below.

AIG has agreed to reimburse PFD for reasonable defense costs of litigation prior to its assumption of the defense, but this agreement to defend and indemnify PFD is subject to the AIG’s reservation of its rights to deny indemnity pursuant to various policy provisions and exclusions, including, without limitation, payment of any civil penalties and fines, as well as and AIG’s right to recoup any defense cost it has advanced if AIG later determines that its policy provides no coverage. At this time, the amount of AIG’s reimbursement for legal and out of pocket defense costs incurred to date is estimated to be $2.5 million, which AIG has agreed to reimburse and which we have recorded as a recovery within our discontinued operations for the quarter ended June 30, 2007. Partial reimbursement from AIG of $750,000 was received on July 11, 2007. The balance of the reimbursement is currently expected to be received during the third quarter of 2007.

Insurance
We believe we maintain insurance coverage adequate for our needs and which is similar to, or greater than, the coverage maintained by other companies of our size in the industry. There can be no assurances, however, those liabilities, which may be incurred by us, will be covered by our insurance or that the dollar amount of such liabilities, which are covered, will not exceed our policy limits. Under our insurance contracts, we usually accept self-insured retentions, which we believe is appropriate for our specific business risks. We are required by EPA regulations to carry environmental impairment liability insurance providing coverage for damages on a claims-made basis in amounts of at least $1,000,000 per occurrence and $2,000,000 per year in the aggregate. To meet the requirements of customers, we have exceeded these coverage amounts.

In June 2003, we entered into a 25-year finite risk insurance policy, which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. Prior to obtaining or renewing operating permits we are required to provide financial assurance that guarantees to the states that in the event of closure our permitted facilities will be closed in accordance with the regulations. The policy provides a maximum $35 million of financial assurance coverage of which the coverage amount totals $30,096,000 at June 30, 2007, and has available capacity to allow for annual inflation and other performance and surety bond requirements. This finite risk insurance policy required an upfront payment of $4.0 million, of which $2,766,000 represented the full premium for the 25-year term of the policy, and the remaining $1,234,000, was deposited in a sinking fund account representing a restricted cash account. In February 2007, we paid our fourth of nine required annual installments of $1,004,000, of which $991,000 was deposited in the sinking fund account, the remaining $13,000 represents a terrorism premium. As of June 30, 2007, we have recorded $5,633,000 in our sinking fund on the balance sheet, which includes interest earned of $436,000 on the sinking fund as of June 30, 2007. Interest income for the three and six months ended June 30, 2007, was $67,000 and $124,000, respectively.

7.
Discontinued Operations

Our Industrial Segment has sustained losses in each year since 2000. The facilities in our Industrial Segment provide on-and-off site treatment, storage, processing and disposal of hazardous and non-hazardous industrial waste, and wastewater. Certain of our facilities within the Industrial Segment provide waste management services to governmental agencies. On May 18, 2007, our Board of Directors authorized management to consider the divestiture of all or a part of our Industrial Segment. On May 25, 2007, we entered into a letter of intent to sell our Industrial Segment to The Environmental Quality Company (EQ), excluding our facility in Pittsburgh, Pennsylvania,
14
owned by our subsidiary, Perma-Fix of Pittsburgh, Inc. (“PFP), and our facility in Detroit, Michigan, owned by our subsidiary, Perma-Fix of Michigan, Inc. (“PFMI”), two facilities which have been approved as discontinued operations by our Board of Directors effective November, 8, 2005, and October 4, 2004, respectively. Subsequent to entering into the letter of intent with EQ, EQ has advised us that they will be unable to proceed with the transaction as contemplated by the letter of intent. As a result, we are in the process of considering additional offers that we have received to purchase all or portions of our Industrial Segment. Management considers the sale of the Industrial Segment before June 30, 2008 to be probable.
 
At May 25, 2007, the Industrial Segment met the held for sale criteria under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and therefore, certain assets and liabilities of the Industrial Segment are presented as held for sale, and we have ceased depreciation of the Industrial Segment’s long-lived assets classified as held for sale. The result of operations and cash flows of the Industrial Segment have been reported in the Consolidated Financial Statements as discontinued operations for all periods presented.

We performed an updated internal analysis on the tangible and intangible assets to test for impairment in the Industrial Segment, as required by Statement of Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or disposal of Long-Lived Assets” and SFAS 142, “Goodwill and Other Intangible Assets”. Our analysis included the comparison of the offered sale price to the carrying value of the investment in the Industrial Segment. Based on our analysis of recent development and consideration of our most recent October 1, 2006 report which was conducted by an independent appraiser, we concluded that no impairment existed as of June 30, 2007.

The following table summarizes the results of discontinued operations for the three and six months ended June 20, 2007, and 2006. These results are included in our Consolidated Statements of Operations as part of our “Income (loss) from discontinued operations, net of taxes”.
 
   
Three Months Ended
  
 Six Months Ended
  
(Amounts in Thousands)
  
June 30,
  
 June 30,
  
   
2007
 
2006
 
 2007
 
2006
  
                    
Net revenue
  
$
8,152
  
$
9,474
  
$
15,387
 
$
17,696
  
Operating income (loss) from
                         
discontinued operations
  
$
470
  
$
84
  
$
(1,197
)
$
(455
)
Income tax provision
  
$
¾
  
$
¾
  
$
¾
 
$
¾
  
Income (loss) from discontinued operations
  
$
470
  
$
84
  
$
(1,197
)
$
(455
)
 
 
As previously disclosed, the Company’s insurer recently withdrew its prior denial of coverage and agreed to defend and indemnify Perma-Fix and its Dayton, Ohio subsidiary in the previously disclosed lawsuit brought against the Dayton, Ohio subsidiary by a citizens’ group and the federal government alleging, among other things, that our Dayton subsidiary was operating without appropriate air permits. Our insurer’s agreement is subject to a reservation of rights to deny indemnity pursuant to various provisions and exclusions under the policy, including, without limitation, payment of any civil penalties and fines, and the insurer’s right to recoup any defense cost it has advanced in the event that the policy provides no coverage. Perma-Fix has recently been advised that its insurer will reimburse the Company for approximately $2.5 million previously spent to defend this litigation. As a result, the Company recorded a recovery within discontinued operations of $2.5 million for the quarter ended June 30, 2007. In accordance with EITF (Emerging Issues Task Force) 01-10, Perma-Fix has received $750,000 of the $2.5 million anticipated cash reimbursement from its insurer and anticipates recovering the balance during the third quarter of 2007. This was partially offset by $800,000 of reserves recorded in discontinued operations for the anticipated settlement (see “Note 6 - Commitments and Contingencies - Legal”).

15
Asset and liabilities related to discontinued operations total $24,577,000 and $11,271,000 as of June 30, 2007, respectively and $22,750,000 and $10,632,000 as of December 31, 2006, respectively.

The following table presents Industrial Segment’s major classes of assets and liabilities classified as held for sale as of June 30, 2007, and December 31, 2006:

(Amounts in Thousands)
  
2007
 
2006
  
            
Account receivable, net
  
$
5,036
  
$
5,768
  
Inventories
    
543
   
522
  
Other assets
    
5,804
   
3,179
  
Property, plant and equipment, net
    
13,194
   
13,281
  
Total assets held for sale
  
$
24,577
  
$
22,750
  
Account payable
  
$
2,096
  
$
2,132
  
Accrued expenses and other liabilities
    
4,433
   
3,760
  
Deferred revenue
    
¾
   
¾
 
Note payable
    
982
   
830
  
Environmental liabilities
    
1,094
   
1,094
  
Total liabilities held for sale
  
$
8,605
  
$
7,816
  

The table above represents the respective assets and liabilities that are held for sale as of June 30, 2007, and December 31, 2006 which excludes certain liabilities, consisting of the pension liability at Perma-Fix Michigan (see discussion below) and the environmental liabilities at Perma-Fix of Michigan and Perma-Fix Dayton. Pension liability of $1,352,000 and environmental liabilities of $1,314,000 are excluded from liabilities held for sale as of June 30, 2007, and pension liability of $1,433,000 and environmental liabilities of $1,383,000 are excluded from liabilities held for sale as of December 31, 2006. The held for sale asset and liabilities balances as of June 30, 2007 may differ from the respective balances at closing.

Non Operational Facilities
The Industrial Segment includes two previously shut-down facilities which were presented as discontinued operations in prior years. These facilities include Perma-Fix of Pittsburgh (PFP) and Perma-Fix of Michigan (PFMI). Our decision to discontinue operations at PFP was due to our reevaluation of the facility and our inability to achieve profitability at the facility. During February 2006, we completed the remediation of the leased property and the equipment at PFP, and released the property back to the owner. Our decision to discontinue operations at PFMI was principally a result of two fires that significantly disrupted operations at the facility in 2003, and the facility’s continued drain on the financial resources of our Industrial Segment. As a result of the discontinued operations at the PFMI facility, we are required to complete certain closure and remediation activities pursuant to our RCRA permit. Also, in order to close and dispose of the facility, we may have to complete certain additional remediation activities related to the land, building, and equipment. The level and cost of the clean-up and remediation will be determined by state mandated requirements, the extent to which is not known at this time. Also, impacting this estimate is the level of contamination discovered, as we begin remediation, and the related clean-up standards which must be met in order to dispose of or sell the facility. We engaged our engineering firm, SYA, to perform an analysis and related estimate of the cost to complete the RCRA portion of the closure/clean-up costs and the potential long-term remediation costs. Based upon this analysis, we estimated the cost of this environmental closure and remediation liability to be $2,464,000. During 2006 we re-evaluated our required activities to close and remediate the facility, and during the quarter ended June 30, 2006, we began implementing the modified methodology to remediate the facility. As a result of the reevaluation and the change in methodology, we reduced the accrual by $1,182,000. We have spent approximately $689,000 for closure costs since September 30, 2004, of which $60,000 has been spent during the six months of 2007 and $74,000 was spent in 2006. We have $593,000 accrued for the closure, as of June 30, 2007, and we anticipate spending $346,000 in 2007 with the remainder over the next five years.
16
As of June 30, 2007, PFMI has a pension payable of $1,352,000. The pension plan withdrawal liability, is a result of the termination of the union employees of PFMI. The PFMI union employees participate in the Central States Teamsters Pension Fund ("CST"), which provides that a partial or full termination of union employees may result in a withdrawal liability, due from PFMI to CST. The recorded liability is based upon a demand letter received from CST in August 2005 that provided for the payment of $22,000 per month over an eight year period. This obligation is recorded as a long-term liability, with a current portion of $158,000 that we expect to pay over the next year.
 
8.
Operating Segments

Pursuant to FAS 131, we define an operating segment as a business activity:

·  
from which we may earn revenue and incur expenses;
·  
whose operating results are regularly reviewed by the segment president to make decisions about resources to be allocated to the segment and assess its performance; and
·  
For which discrete financial information is available.

We currently have two operating segments, which are defined as each business line that we operate. This however, excludes corporate headquarters, which does not generate revenue, and our discontinued operations, which include our facilities in our Industrial Segment. (See “Note 7 - Discontinued Operations” to “Notes to Consolidated Financial Statements”.
 
Our operating segments are defined as follows:

The Nuclear Waste Management Services segment provides treatment, storage, processing and disposal of nuclear, low-level radioactive, mixed (waste containing both hazardous and non-hazardous constituents), hazardous and non-hazardous waste through our four facilities; Perma-Fix of Florida, Inc., Diversified Scientific Services, Inc., East Tennessee Materials and Energy Corporation, and our newly acquired facility, Perma-Fix of Northwest (See “Note 10 - Acquisition” to “Notes to Consolidated Financial Statements”).

The Consulting Engineering Services segment provides environmental engineering and regulatory compliance services through Schreiber, Yonley & Associates, Inc. which includes oversight management of environmental restoration projects, air and soil sampling and compliance and training activities to industrial and government customers, as well as, engineering and compliance support needed by our other segments.

Our discontinued operations encompass our facilities in our Industrial Waste Management Services Segment which provides on-and-off site treatment, storage, processing and disposal of hazardous and non-hazardous industrial waste, and wastewater through our six facilities; Perma-Fix Treatment Services, Inc., Perma-Fix of Dayton, Inc., Perma-Fix of Ft. Lauderdale, Inc., Perma-Fix of Orlando, Inc., Perma-Fix of South Georgia, Inc., and Perma-Fix of Maryland, Inc. We provide through certain of our facilities various waste management services to certain governmental agencies. Our discontinued operations also include PFMI and PFP, two non-operational facilities.

The following table presents certain financial information in thousands by business segment as of and for the three and six months ended June 30, 2007 and 2006, for our operating segments.

17

Segment Reporting for the Quarter Ended June 30, 2007
                  
   
Nuclear
 
 
 
Engineering
 
Segments Total
 
Corporate (2)
 
 
 
Consolidated Total
  
Revenue from external customers
  
$
13,005
    
(3)
 
$
532
  
$
13,537
  
$
¾
       
$
13,537
  
Intercompany revenues
    
737
         
308
   
1,045
   
¾
         
1,045
 
Gross profit
    
4,639
         
165
   
4,804
   
¾
         
4,804
 
Interest income
    
¾
         
¾
   
¾
   
78
         
78
 
Interest expense
    
131
         
¾
   
131
   
141
         
272
 
Interest expense-financing fees
    
¾
         
¾
   
¾
   
48
         
48
 
Depreciation and amortization
    
832
         
9
   
841
   
16
         
857
 
Segment profit (loss)
    
2,295
         
43
   
2,338
   
(1,586
)
        
752
 
Segment assets(1)
    
95,572
         
2,008
   
97,580
   
33,832
   
(4)
 
  
131,412
 
Expenditures for segment assets
    
496
         
2
   
498
   
10
         
508
 
Total long-term debt
    
8,166
         
11
   
8,177
   
9,452
   
(5)
 
  
17,629
 
                                             
Segment Reporting for the Quarter Ended June 30, 2006
                        
 
    
Nuclear
 
 
 
 
 
Engineering
 
 
Segments Total
 
 
Corporate (2)
 
 
 
 
 
Consolidated Total
  
Revenue from external customers
  
$
13,106
    
(3)
 
$
934
  
$
14,040
  
$
¾
       
$
14,040
  
Intercompany revenues
    
596
         
130
   
726
   
¾
         
726
 
Gross profit
    
5,714
         
219
   
5,933
   
¾
         
5,933
 
Interest income
    
¾
         
¾
   
¾
   
58
         
58
 
Interest expense
    
123
         
¾
   
123
   
266
         
389
 
Interest expense-financing fees
    
¾
         
¾
   
¾
   
48
         
48
 
Depreciation and amortization
    
735
         
10
   
745
   
12
         
757
 
Segment profit (loss)
    
3,375
         
60
   
3,435
   
(1,694
)
        
1,741
 
Segment assets(1)
    
64,593
         
2,483
   
67,076
   
32,468
   
(4)
 
  
99,544
 
Expenditures for segment assets
    
954
         
26
   
980
   
12
         
992
 
Total long-term debt
    
2,562
         
19
   
2,581
   
9,744
   
(5)
 
  
12,325
 
                                             
Segment Reporting for the Six Months Ended June 30, 2007
                  
 
    
Nuclear
 
 
 
 
 
Engineering
 
 
Segments Total
 
 
Corporate(2)
 
 
 
 
 
Consolidated Total
  
Revenue from external customers
  
$
25,349
    
(3)
 
$
1,109
  
$
26,458
  
$
¾
       
$
26,458
  
Intercompany revenues
    
1,292
         
543
   
1,835
   
¾
         
1,835
 
Gross profit
    
9,071
         
333
   
9,404
   
¾
         
9,404
 
Interest income
    
¾
         
¾
   
¾
   
166
         
166
 
Interest expense
    
222
         
1
   
223
   
250
         
473
 
Interest expense-financing fees
    
¾
         
¾
   
¾
   
96
         
96
 
Depreciation and amortization
    
1,575
         
18
   
1,593
   
35
         
1,628
 
Segment profit (loss)
    
4,305
         
92
   
4,397
   
(3,062
)
        
1,335
 
Segment assets(1)
    
95,572
         
2,008
   
97,580
   
33,832
   
(4)
 
  
131,412
 
Expenditures for segment assets
    
1,849
         
13
   
1,862
   
13
         
1,875
 
Total long-term debt
    
8,166
         
11
   
8,177
   
9,452
   
(5)
 
  
17,629
 
                                             
Segment Reporting for the Six Months Ended June 30, 2006
                  
 
    
Nuclear
 
 
 
 
 
Engineering
 
 
Segments Total
 
 
Corporate(2)
 
 
 
 
 
Consolidated Total
  
Revenue from external customers
  
$
25,264
    
(3)
 
$
1,672
  
$
26,936
  
$
¾
       
$
26,936
  
Intercompany revenues
    
1,269
         
240
   
1,509
   
¾
         
1,509
 
Gross profit
    
10,535
         
451
   
10,986
   
¾
         
10,986
 
Interest income
    
¾
         
¾
   
¾
   
89
         
89
 
Interest expense
    
235
         
1
   
236
   
483
         
719
 
Interest expense-financing fees
    
¾
         
¾
   
¾
   
96
         
96
 
Depreciation and amortization
    
1,467
         
20
   
1,487
   
23
         
1,510
 
Segment profit (loss)
    
6,082
         
151
   
6,233
   
(3,275
)
        
2,958
 
Segment assets(1)
    
64,593
         
2,483
   
67,076
   
32,468
   
(4)
 
  
99,544
 
Expenditures for segment assets
    
1,218
         
51
   
1,269
   
25
   
 
    
1,294
 
Total long-term debt
    
2,562
         
19
   
2,581
   
9,744
   
(5)
 
  
12,325
 
 
18
 
(1)
Segment assets have been adjusted for intercompany accounts to reflect actual assets for each segment.

(2)
Amounts reflect the activity for corporate headquarters not included in the segment information.

(3)
The consolidated revenues within the Nuclear segment include the LATA/Parallax revenues for the three and six months ended June 30, 2007, which total $2,056,000 or 15.2% and $4,010,000 or 15.2% of total revenues, respectively. LATA/Parallax revenues for same periods in 2006 were $4,214,000 or 30.0% and $4,401,000 or 16.3%.

(4)
Amount includes assets from our discontinued operations of $24,577,000 and $24,191,000 as of June 30, 2007 and 2006, respectively.

(5)
Includes the balance outstanding from our revolving line of credit and term loan, which is utilized by all of our segments.

9.
Income Taxes

In July 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority. It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

We adopted FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, we have concluded that we have not taken any uncertain tax positions on any of our open income tax returns filed through the period ended December 31, 2005 that would materially distort our financial statement. Our methods of accounting are based on established income tax principles approved in the Internal Revenue Code (IRC) and are properly calculated and reflected within our income tax returns. In addition, we have filed income tax returns in all applicable jurisdictions in which we had material nexus warranting an income tax return filing.

We have not yet filed our income tax returns for the tax year ended December 31, 2006; however, we expect that the actual income tax returns will mirror tax positions taken within our income tax provision for 2006. As we believe that all such positions are fully supportable by existing Federal law and related interpretations, there are no uncertain income tax positions to consider in accordance with FIN 48.

We reassess the validity of our conclusions regarding uncertain income tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position's sustainability under audit. The impact of this reassessment for the second quarter of 2007 did not have any impact on our results of operations, financial condition or liquidity.

10.
Acquisition of Nuvotec

On June 13, 2007, the Company completed its acquisition of Nuvotec and its wholly owned subsidiary, Pacific Ecosolutions, Inc (PEcoS), pursuant to the terms of the Merger Agreement, between Perma-Fix, Perma-Fix’s wholly owned subsidiary, Transitory, Nuvotec, and PEcoS, dated April 27, 2007, which was subsequently amended on June 13, 2007. The Company acquired 100% of the voting shares of Nuvotec. The acquisition was structured as a reverse subsidiary merger, with Transitory being merged into Nuvotec, and Nuvotec being the surviving corporation. As a result of the merger, Nuvotec became a wholly owned subsidiary of Perma-Fix Environmental Services Inc. (PESI). Nuvotec’s name was changed to Perma-Fix Northwest, Inc. (“PFNW”). PEcoS, whose name was changed to Perma-Fix Northwest Richland, Inc. (“PFNWR”) on August 2, 2007, is a wholly-owned subsidiary of PFNW. PEcoS is a permitted hazardous, low level radioactive and mixed waste treatment, storage and disposal facility located in the Hanford U.S. Department of Energy site in the eastern part of the state of Washington. The strategic addition of Nuvotec provides the Company with immediate access to treat some of the most complex nuclear waste streams in the nation should provide significant growth opportunity in the coming years.
 
19
Under the terms of the Merger Agreement, the purchase price paid by the Company in connection with the acquisition was $16.7 million, consisting of as follows:
 
(a)
$2.3 million in cash at closing of the merger, with $1.5 million payable to unaccredited shareholders and $0.8 million payable to shareholders of Nuvotec that qualified as accredited investors pursuant to Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”):accredited shareholders.
 
(b)
Also payable only to the shareholders of Nuvotec that qualified as accredited investors:
 
·  
$2.5 million, payable over a four year period, unsecured and nonnegotiable and bearing an annual rate of interest of 8.25%, with (i) accrued interest only payable on June 30, 2008, (ii) $833,333.33, plus accrued and unpaid interest, payable on June 30, 2009, (iii) $833,333.33, plus accrued and unpaid interest, payable on June 30, 2010, and (iv) the remaining unpaid principal balance, plus accrued and unpaid interest, payable on June 30, 2011 (collectively, the “Installment Payments”). The Installment Payments may be prepaid at any time by Perma-Fix without penalty; and
 
·  
709,207 shares of Perma-Fix common stock, which were issued on July 23, 2007, with such number of shares determined by dividing $2.0 million by 95% of average of the closing price of the common stock as quoted on the Nasdaq during the 20 trading days period ending five business days prior to the closing of the merger. The value of these shares on June 13, 2007 was $2.2 million, which was determined by the average closing price of the common stock as quoted on the Nasdaq four days prior to and following the completion date of the acquisition, which was June 13, 2007.
 
(c)
The assumption of $9.4 million of debt, $8.9 million of which was payable to KeyBank National Association which represents debt owed by PFNW under a credit facility. As part of the closing, the Company paid down $5.4 million of this debt resulting in debt remaining of $4.0 million. 
 
(d)
Transaction costs totaling $0.3 million.
 
In addition to the above, an agreement to a contingency of an earn-out amount not to exceed $4.4 million over a four year period (“Earn-Out Amount”). The earn-out amounts will be earned if certain annual revenue targets are met by the Company’s combined Nuclear Segment. The first $1.0 million of the earn-out amount, when earned, will be placed in an escrow account to satisfy certain indemnification obligations under the Merger Agreement of Nuvotec, PEcoS, and the shareholders of Nuvotec to Perma-Fix that are identified by Perma-Fix within the escrow period as provided in the Merger Agreement. As of June 30, 2007 the Company has not made or accrued any earn-out payments to Nuvotec shareholders because such revenue targets have not been met.
 
The acquisition was accounted for using the purchase method of accounting, pursuant to SFAS 141, “Business Combinations”. The consideration for the acquisition was attributed to net assets on the basis of the fair value of assets acquired and liabilities assumed as of June 13, 2007. The results of operations after June 13, 2007 have been included in the consolidated financial statements. The excess of the cost of the acquisition over the fair value of the net tangible assets and intangible assets on the acquisition date, which amounted to $11.4 million, was allocated to goodwill. The Company has not yet finalized the allocation of the purchase price to the net assets acquired in this acquisition. As such the estimated purchase price allocation is preliminary and subject to further revision. The following table summarizes the preliminary purchase price to the net assets acquired in this acquisition as of June 30, 2007.
 
20

(Amounts in thousands)
  
 
  
Cash
  
$
2,300
  
Assumed debt
    
9,412
 
Installment payments
    
2,500
 
Stock
    
2,165
 
Transaction costs
    
290
 
Total consideration
  
$
16,667
  
 

The following table presents the allocation of the preliminary acquisition cost, including professional fees and other related acquisition costs, to the assets and liabilities assumed based on their fair values:
 
(Amounts in thousands)
  
 
  
       
Current assets
  
$
2,676
  
Property, plant and equipment
    
13,978
 
Goodwill
    
11,471
 
Other assets
    
409
 
Total assets acquired
    
28,534
 
Current liabilities
    
(4,927
)
Long-term debt
    
(6,940
)
Total liabilities assumed
    
(11,867
)
         
Net assets acquired
  
$
16,667
  

21
The results of operations of Nuvotec (n/k/a Perma-Fix Northwest, Inc.) and PEcoS (n/k/a Perma-Fix Northwest Richland, Inc.) have been included in Perma-Fix’s consolidated financial statements from the date of the closing of the acquisition, which was June 13, 2007. The following unaudited pro forma financial information presents the combined results of operations of combining Nuvotec and PEcoS and Perma Fix as through the acquisition had occurred as of the beginning of the periods presented. As Perma-Fix provides a valuation allowance on substantially all of its deferred tax assets, any deferred tax impact resulting from the reevaluation of the fixed assets has not been recognized. The pro forma financial information does not necessarily represent the results of operations that would have occurred had Nuvotec and PEcoS and Perma Fix been a single company during the periods presented, nor does Perma Fix believe that the pro forma financial information presented is necessarily representative of future operating results.


(Amounts in Thousands, Except Shares)
           
   
Three Months Ended June 30
 
 
 
(unaudited)
 
 (unaudited)
 
 
 
2007
 
 2006
  
Revenue
  
$
16,144
  
$
17,382
 
Net Income (loss)
  
$
116
  
$
2,462
 
Net Income (loss) per share - basic
 
$
¾
  
$
.05
 
Net Income (loss) per share - diluted
  
$
¾
  
$
.05
 
Weighted average shares outstanding - basic
    
52,131
   
45,117
 
Weighted average shares outstanding - diluted
    
53,601
   
46,380
 
               
               
               
 
  
Six Months Ended June 30
 
 
 
(unaudited)
 
 
(unaudited)
 
 
 
 
2007
 
 
2006
  
Revenue
  
$
30,896
  
$
33,155
 
Net Income (loss)
  
$
757
  
$
3,482
 
Net Income (loss) per share - basic
 
$
.01
  
$
.08
 
Net Income (loss) per share - diluted
  
$
.01
  
$
.08
 
Weighted average shares outstanding - basic
    
52,097
   
44,975
 
Weighted average shares outstanding - diluted
    
53,333
   
45,805
 
 
 
11.
Capital Stock

During the six months ended June 30, 2007, we issued 198,619 shares of our Common Stock upon exercise of 200,917 employee stock options, at exercise prices from $1.25 to $2.19 per share. An optionee surrendered 2,298 shares of personally held Common Stock of the Company as payment for the exercise of the 4,000 options. We also had 1,775,638 warrants to purchase shares of our Common Stocks expiring on March 22, 2007. Total proceeds received during the six months ended June 30, 2007 related to warrant and option exercises totaled approximately $386,000, which includes $359,000 from employee stock option exercises and $27,000 from repayment of stock subscription resulting from exercise of warrants to purchase 60,000 shares of our Common Stock on a loan by the Company at an arms length basis in 2006.

22
On July 28, 2006, our Board of Directors has authorized a common stock repurchase program to purchase up to $2,000,000 of our Common Stock, through open market and privately negotiated transactions, with the timing, the amount of repurchase transactions and the prices paid under the program as deemed appropriate by management and dependent on market conditions and corporate and regulatory considerations. We plan to fund any repurchases under this program through our internal cash flow and/or borrowings under our line of credit. As of the date of this report, we have not repurchased any of our Common Stock under the program as we continue to evaluate this repurchase program within our internal cash flow and/or borrowings under our line of credit.

The summary of the Company’s total Plans as of June 30, 2007 as compared to June 30, 2006 and changes during the period then ended are presented as follows:

   
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
  
Options outstanding Janury 1, 2007
    
2,816,750
 
$
1.86
              
Granted
   
¾
   
¾
             
Exercised
    
200,917
   
1.82
       
$
238,763
  
Forfeited
    
7,000
   
1.72
             
Options outstanding End of Period
    
2,608,833
   
1.86
   
4.9
 
$
3,145,530
  
Options Exercisable at June 30, 2007
    
1,990,166
 
$
1.87
    
4.9
 
$
2,396,276
  
Options Vested and expected to be vested at June 30, 2007
    
2,561,913
 
$
1.86
    
4.9
 
$
3,088,757
  
                           
                           
 
    
Shares
 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Contractual Term
 
 
Aggregate Intrinsic Value
  
Options outstanding January 1, 2006
    
2,546,750
 
$
1.79
              
Granted
   
978,000
   
1.86
             
Exercised
    
252,000
   
1.14
       
$
—
  
Forfeited
    
24,500
   
1.92
             
Options outstanding End of Period
    
3,248,250
   
1.86
   
5.6
 
$
968,411
  
Options Exercisable at June 30, 2006
    
2,270,250
 
$
1.86
    
5.6
 
$
703,351
  
Options Vested and expected to be vested at June 30, 2006
    
3,198,204
 
$
1.92