SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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 November 5, 2007
Common Stock, $.001 Par Value
 
53,065,924
 


 

 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.

INDEX

PART I
 
FINANCIAL INFORMATION
 
Page No.
             
   
Item 1.
 
Financial Statements
   
             
       
Consolidated Balance Sheets -
   
       
September 30, 2007 (unaudited) and December 31, 2006
 
1
           
 
       
Consolidated Statements of Operations -
 
 
       
Three and Nine Months Ended September 30, 2007 and 2006 (unaudited)
 
3
           
 
       
Consolidated Statements of Cash Flows -
 
 
       
Nine Months Ended September 30, 2007 and 2006 (unaudited)
 
4
           
 
       
Consolidated Statement of Stockholders’ Equity -
 
 
       
Nine Months Ended September 30, 2007 (unaudited)
 
5
           
 
       
Notes to Consolidated Financial Statements
 
6
           
 
   
Item 2.
 
Management’s Discussion and Analysis of
 
 
       
Financial Condition and Results of Operations
 
28
           
 
   
Item 3.
 
Quantitative and Qualitative Disclosures
 
 
       
About Market Risk
 
56
           
 
   
Item 4.
 
Controls and Procedures
 
57
           
 
PART II
 
OTHER INFORMATION
 
 
           
 
   
Item 1.
 
Legal Proceedings
 
59
           
 
   
Item 1A.
 
Risk Factors
 
60
           
 
   
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
60
           
 
   
Item 5.
 
Other Information
 
60
           
 
   
Item 6.
 
Exhibits
 
61
 


PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
 
December 31,
 
(Amounts in Thousands, Except for Share Amounts)
 
2007
 
2006
 
   
(Unaudited) 
     
ASSETS
         
Current assets:
         
Cash
 
$
108
 
$
2,528
 
Restricted cash
   
35
   
35
 
Investment trading securities
   
84
   
¾
 
Accounts receivable, net of allowance for doubtful
   
10,204
   
9,488
 
accounts of $128 and $168
             
Unbilled receivables
   
11,383
   
12,313
 
Inventories
   
322
   
325
 
Prepaid expenses
   
4,024
   
2,855
 
Other receivables
   
41
   
1,596
 
Assets for sale included in current assets, net of allowance for
             
doubtful accounts of $274 and $247
   
6,069
   
7,100
 
Total current assets
   
32,270
   
36,240
 
               
Property and equipment:
             
Buildings and land
   
20,534
   
11,244
 
Equipment
   
30,125
   
20,599
 
Vehicles
   
141
   
141
 
Leasehold improvements
   
11,458
   
11,452
 
Office furniture and equipment
   
2,267
   
1,930
 
Construction-in-progress
   
1,461
   
4,609
 
     
65,986
   
49,975
 
Less accumulated depreciation and amortization
   
(19,094
)
 
(16,630
)
Net property and equipment
   
46,892
   
33,345
 
               
Property and equipment included in assets for sale, net of accumulated depreciation of $12,583 and $13,341
   
12,568
   
13,281
 
               
Intangibles and other assets:
             
Permits
   
15,625
   
11,025
 
Goodwill
   
9,418
   
1,330
 
Unbilled receivable - non-current
   
3,276
   
2,600
 
Finite Risk Sinking Fund
   
5,961
   
4,518
 
Other assets
   
2,627
   
1,954
 
Intangibles and other assets included in assets for sale
   
2,369
   
2,369
 
Total assets
 
$
131,006
 
$
106,662
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
1

 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED

   
September 30, 2007
 
December 31,
 
(Amounts in Thousands, Except for Share Amounts)
 
(Unaudited)
 
2006
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
         
Current liabilities:
         
Accounts payable
 
$
3,753
 
$
2,456
 
Current environmental accrual
   
360
   
453
 
Accrued expenses
   
14,918
   
8,118
 
Unearned revenue
   
3,281
   
3,575
 
Current liabilities related to asset held for sale
   
8,006
   
6,737
 
Current portion of long-term debt
   
4,078
   
2,092
 
Total current liabilities
   
34,396
   
23,431
 
               
Environmental accruals
   
247
   
348
 
Accrued closure costs
   
8,702
   
4,825
 
Other long-term liabilities
   
3,411
   
3,018
 
Long-term liabilities related to assets held for sale
   
3,722
   
3,895
 
Long-term debt, less current portion
   
13,547
   
5,407
 
Total long-term liabilities
   
29,629
   
17,493
 
               
Total liabilities
   
64,025
   
40,924
 
               
Commitments and Contingencies
             
               
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,
             
53,055,924 and 52,053,744 shares issued, including 0 shares held
             
and 988,000 shares of treasury stock retired in 2006, respectively
   
53
   
52
 
Additional paid-in capital
   
95,996
   
92,980
 
Stock subscription receivable
   
(39
)
 
(79
)
Accumulated deficit
   
(30,314
)
 
(28,500
)
Total stockholders' equity
   
65,696
   
64,453
 
Total liabilities and stockholders' equity
 
$
131,006
 
$
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
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
(Amounts in Thousands, Except for Per Share Amounts)
 
2007
 
2006
 
2007
 
2006
 
                   
Net revenues
 
$
13,840
 
$
12,088
 
$
40,298
 
$
39,025
 
Cost of goods sold
   
9,574
   
7,720
   
26,628
   
23,671
 
Gross profit
   
4,266
   
4,368
   
13,670
   
15,354
 
                           
Selling, general and administrative expenses
   
4,061
   
3,564
   
11,535
   
10,654
 
(Gain) loss on disposal of property and equipment
   
(4
)
 
¾
   
(1
)
 
1
 
Income from operations
   
209
   
804
   
2,136
   
4,699
 
                           
Other income (expense):
                         
Interest income
   
71
   
100
   
238
   
189
 
Interest expense
   
(476
)
 
(276
)
 
(949
)
 
(995
)
Interest expense-financing fees
   
(48
)
 
(48
)
 
(143
)
 
(144
)
Other
   
(41
)
 
(6
)
 
(48
)
 
(39
)
(Loss) income from continuing operations before taxes
   
(285
)
 
574
   
1,234
   
3,710
 
Income tax (benefit) expense
   
(161
)
 
(26
)
 
23
   
152
 
(Loss) income from continuing operations
   
(124
)
 
600
   
1,211
   
3,558
 
                           
Loss from discontinued operations, net of taxes
   
(1,828
)
 
(270
)
 
(3,025
)
 
(724
)
Net (loss) income
   
(1,952
)
 
330
   
(1,814
)
 
2,834
 
                           
Preferred Stock dividends
   
¾
   
¾
   
¾
   
¾
 
Net (loss) income applicable to Common Stock
 
$
(1,952
)
$
330
 
$
(1,814
)
$
2,834
 
                           
Net income (loss) per common share - basic
                         
Continuing operations
 
$
¾
 
$
.01
 
$
.02
 
$
.08
 
Discontinued operations
   
(.04
)
 
¾
   
(.05
)
 
(.02
)
Net (loss) income per common share
 
$
(.04
)
$
.01
 
$
(.03
)
$
.06
 
                           
Net income (loss) per common share - diluted
                         
Continuing operations
 
$
¾
 
$
.01
 
$
.02
 
$
.08
 
Discontinued operations
   
(.04
)
 
¾
   
(.05
)
 
(.02
)
Net (loss) income per common share
 
$
(.04
)
$
.01
 
$
(.03
)
$
.06
 
                           
Number of common shares used in computing
                         
net income (loss) per share:
                         
Basic
   
52,843
   
50,541
   
52,349
   
46,851
 
Diluted
   
52,843
   
51,430
   
53,673
   
47,414
 
                           
The accompanying notes are an integral part of these consolidated financial statements.
 
3


PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended  
 
   
September 30,
 
(Amounts in Thousands)
 
2007
 
2006
 
Cash flows from operating activities:
         
Net (loss) income
 
$
(1,814
)
$
2,834
 
Loss on discontinued operations
   
3,025
   
724
 
               
Income from continuing operations
   
1,211
   
3,558
 
               
Adjustments to reconcile net (loss) income to cash provided by (used in) operations:
             
Depreciation and amortization
   
2,745
   
2,322
 
Provision (benefit) for bad debt and other reserves
   
52
   
(104
)
(Gain) loss on disposal of property and equipment
   
(1
)
 
1
 
Issuance of Common Stock for services
   
165
   
150
 
Share based compensation
   
288
   
173
 
Changes in operating assets and liabilities of continuing operations, net of
             
effects from business acquisitions:
             
Accounts receivable
   
1,526
   
3,177
 
Unbilled receivables
   
254
   
(5,067
)
Prepaid expenses, inventories and other assets
   
2,246
   
858
 
Accounts payable, accrued expenses, and unearned revenue
   
(2,937
)
 
(3,781
)
Cash provided by continuing operations
   
5,549
   
1,287
 
Cash provided by (used in) discontinued operations
   
481
   
(1,594
)
Cash provided by (used in) operating activities
   
6,030
   
(307
)
               
Cash flows from investing activities:
             
Purchases of property and equipment, net
   
(2,109
)
 
(3,322
)
Proceeds from sale of plant, property and equipment
   
7
   
¾
 
Change in restricted cash, net
   
¾
   
(25
)
Change in finite risk sinking fund
   
(1,443
)
 
(1,133
)
Cash used for acquisition consideration, net of cash acquired
   
(2,685
)
 
¾
 
Cash used in investing activities of continuing operations
   
(6,230
)
 
(4,480
)
Cash used in investing activities of discontinued operations
   
(326
)
 
(76
)
Cash used in investing activities
   
(6,556
)
 
(4,556
)
               
Cash flows from financing activities:
             
Net borrowings (repayment) of revolving credit
   
5,202
   
(2,447
)
Principal repayments of long-term debt
   
(7,245
)
 
(1,507
)
Proceeds from issuance of stock
   
399
   
12,007
 
Repayment of stock subscription receivable
   
40
   
8
 
Cash (used in) provided by financing activities of continuing operations
   
(1,604
)
 
8,061
 
Principal repayment of long-term debt for discontinued operations
   
(290
)
 
(312
)
Cash (used in) provided by financing activities
   
(1,894
)
 
7,749
 
               
(Decrease) Increase in cash
   
(2,420
)
 
2,886
 
Cash at beginning of period
   
2,528
   
94
 
Cash at end of period
 
$
108
 
$
2,980
 
               
Supplemental disclosure:
             
Interest paid
 
$
314
 
$
691
 
Non-cash investing and financing activities:
             
Long-term debt incurred for purchase of property and equipment
   
613
   
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 nine months ended September 30, 2007)

 
(Amounts in thousands,
 
Common Stock
 
Additional Paid-In
 
Stock Subscription
 
Accumulated
 
Total Stockholders'
 
except for share amounts)
 
Shares
 
Amount
 
Capital
 
Receivable
 
Deficit
 
Equity
 
Balance at December 31, 2006
   
52,053,744
 
$
52
 
$
92,980
 
$
(79
)
$
(28,500
)
$
64,453
 
                                       
Net Income
   
¾
   
¾
   
¾
   
¾
   
(1,814
)
 
(1,814
)
Issuance of Common Stock for cash
                                     
and services
   
69,187
   
¾
   
165
   
¾
   
¾
   
165
 
Issuance of Common Stock upon
                                     
exercise of Options
   
223,786
   
¾
   
399
   
¾
   
¾
   
399
 
Common Stock Issued in conjunction
                                     
with acquisition
   
709,207
   
1
   
2,164
               
2,165
 
Share based compensation
   
¾
   
¾
   
288
   
¾
   
¾
   
288
 
Repayment of stock subscription receivable
   
¾
   
¾
   
¾
   
40
   
¾
   
40
 
Balance at September 30, 2007
   
53,055,924
 
$
53
 
$
95,996
 
$
(39
)
$
(30,314
)
$
65,696
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
5

 
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 (“LOI”) 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, EQ advised us that they would be unable to proceed with the transaction as contemplated by the letter of intent. We have since received offers and entered into LOIs with various companies to sell the following facilities within our Industrial Segment: On August 2, 2007, we entered into a LOI with the Amerex Group, Inc. to sell our Perma-Fix Treatment Services, Inc. facility; On September 10, 2007, we entered into two separate LOIs with Triumvirate Environmental, Inc., with one LOI covering the sale of our Perma-Fix Maryland, Inc., Perma-Fix of Fort Lauderdale, Inc., and Perma-Fix of Orlando, Inc. facilities, and the other LOI covering the sale of our Perma-Fix of South Georgia, Inc. facility; On October 2, 2007, we entered into a LOI with OGM, Ltd. to sell our Perma-Fix of Dayton, Inc. facility. Each of the above LOIs is subject to the completion of due diligence and the parties entering into a definitive purchase agreements. Management considers the sale of the Industrial Segment before June 30, 2008 to be probable (see Note 7, “Discontinued Operations” as to the terms of the various LOIs). 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.
 
6



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 in the second quarter of 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.

Investment
Management determines the appropriate classification of its investments at the time of acquisition and re-evaluates 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, 2006, that would materially distort our financial statements.

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 third 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.
 
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, 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 September 30, 2007, we had 2,366,667 employee stock options outstanding, which included 1,534,000 that were outstanding and fully vested at December 31, 2005, 766,000 of the 878,000 employee stock options approved and granted on March 2, 2006, of which 242,000 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 1,776,000 outstanding and fully vested employee stock options is $1.96 with a weighted contractual life of 3.49 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 1, 2007 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. We have not granted any employee stock options for the nine months ended September 30, 2007.

Additionally, we have 591,000 outstanding director stock options, of which 102,000 were newly granted ten year options with exercise price of $2.95, with vesting period of six months, resulting from the election of our Board of Directors on August 2, 2007. The weighted average exercise price of the 489,000 exercisable director stock options outstanding as of September 30, 2007, is $1.97 with a weighted contractual life of 5.92. The director stock options outstanding as of September 30, 2007 are ten year options, issuable at exercise prices ranging from $1.22 to $2.98 per share and expiration dates from December 8, 2007 to August 2, 2017.

For the three and nine months ended September 30, 2007, we recognized share based compensation expense of approximately $52,000 and $190,000, respectively, for the employee stock options grants of March 2, 2006 and May 15, 2006, as compared to $60,000 and $134,000 for the same period ended September 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 $190,000 share based compensation expense recognized above for the nine months ended September 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 trends of actual option forfeitures. The forfeiture rates are evaluated, and revised as necessary. We recognized approximately $75,000 and $98,000 share based compensation expense for our director options the three and nine months ended September 30, 2007, respectively, as compared to $28,000 and $39,000 for the corresponding period ended September 30, 2006. For the director option grants on August 2, 2007, 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 six months vesting period. In total, the share compensation expense for the three and nine months ended September 30, 2007 for our director and employee stock options impacted our results of operations by $127,000 and $288,000, respectively, as compared to $88,000 and $173,000 for the corresponding period ended September 30, 2006. We have approximately $625,000 of total unrecognized compensation cost related to unvested options as of September 30, 2007, of which approximately $172,000 will be recognized in the fourth quarter of 2007, $261,000 will be recognized in 2008, and the remaining $192,000 in 2009.
 
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For the director option grant of August 2, 2007, we calculated a fair value of $2.95 for each option grant with the following assumptions using the Black-Scholes option pricing model: no dividend yield; an expected life of ten years; an expected volatility of 67.60%; and a risk free interest rate of 4.77%. We calculated a fair value of $0.868 for each March 2, 2006 option grant on the date of grant 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.
 

 
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 nine months ended September 30, 2007 and 2006:

   
Three Months Ended
September 30,
 
 Nine Months Ended
September 30,
 
(Amounts in thousands except per share amounts)
 
2007
 
2006
 
2007
 
2006
 
Earnings per share from continuing operations
                    
(Loss) income from continuing operations
 
$
(124
)
$
600
 
$
1,211
 
$
3,558
 
Preferred stock dividends
   
¾
   
¾
   
¾
   
¾
 
(Loss) income from continuing operations
   
(124
)
 
600
   
1,211
   
3,558
 
applicable to Common Stock
                         
Effect of dilutive securities:
                         
Preferred Stock dividends
   
¾
   
¾
   
¾
   
¾
 
(Loss) income- diluted
 
$
(124
)
$
600
 
$
1,211
 
$
3,558
 
Basic income per share
 
$
¾
 
$
.01
 
$
.02
 
$
.08
 
Diluted income per share
 
$
¾
 
$
.01
 
$
.02
 
$
.08
 
                           
Loss per share from discontinued operations
                         
Loss - basic and diluted
 
$
(1,828
)
$
(270
)
$
(3,025
)
$
(724
)
Basic loss per share
 
$
(.04
)
$
¾
 
$
(.05
)
$
(.02
)
Diluted loss per share
 
$
(.04
)
$
¾
 
$
(.05
)
$
(.02
)
                           
Weighted average common shares outstanding - basic
   
52,843
   
50,541
   
52,349
   
46,851
 
Potential shares exercisable under stock option
                         
plan
   
¾
   
479
   
771
   
253
 
Potential shares upon exercise of Warrants
   
¾
   
410
   
553
   
310
 
Weighted average common shares outstanding - diluted
   
52,843
   
51,430
   
53,673
   
47,414
 
                           
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
                         
Upon exercise of options
   
217
   
385
   
232
   
1,190
 
Upon exercise of Warrants
   
¾
   
1,776
   
¾
   
1,776
 
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5.
Long Term Debt

Long-term debt consists of the following at September 30, 2007, and December 31, 2006:

(Amounts in Thousands)
 
September 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 September 30, 2007), balance due in November 2008.
 
$
5,202
 
$
¾
 
Term Loan dated December 22, 2000, payable in equal monthly
             
installments of principal of $83, balance due in November 2008, variable
             
interest paid monthly at prime rate plus 1% (9.25% at September 30, 2007).
   
4,750
   
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 September 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%
   
3,520
   
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 September 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%.
   
1,262
   
1,042
 
     
18,521
   
8,329
 
Less current portion of long-term debt
   
4,078
   
2,092
 
Less long-term debt related to assets held for sale
   
896
   
830
 
   
$
13,547
 
$
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 September 30, 2007, the excess availability under our Revolving Credit was $7,418,000 based on our eligible receivables.

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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. 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.

On November 2, 2007, we entered into Amendment No. 8 with PNC Bank, which extended the due date of the $25 million credit facility from August 29, 2008 to November 27, 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 semi-annual basis on June 30 and December 31. The principal repayments for 2007 will be approximately $400,000 semi-annually. 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 September 30, 2007) and payable in one lump sum at the end of the loan period. On September 30, 2007, the outstanding balance was $3,026,000 including accrued interest of approximately $1,992,000. 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 $173,000 starting July 2008, along with accrued interest. Interest is accrued at prime rate plus 1.125%. On September 30, 2007, the outstanding principal balance was $3,520,000.

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 September 30, 2007, the rate was 10%. On September 30, 2007, the outstanding balance was $734,000 including accrued interest of approximately $481,000. 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.
 
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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. As of September 30, 2007, we had accrued interest of approximately $58,000.

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-Qs for the periods ended March 31, 2007 and June 30, 2007, except as follows: 

Perma-Fix of Dayton, Inc. (“PFD”)
As previously disclosed, our subsidiary, Perma-Fix of Dayton, Inc., is defending a lawsuit styled Barbara Fisher v. Perma-Fix of Dayton, Inc., in the United States District Court, Southern District of Ohio (the “Fisher Lawsuit”). This citizen’s suit was brought under the Clean Air Act alleging, among other things, violations by PFD of state and federal clean air statutes connected with the operation of PFD’s facility located in Dayton, Ohio. As further previously disclosed, the U.S. Department of Justice, on behalf of the Environmental Protection Agency, intervened in the Fisher Lawsuit alleging, among other things, substantially similar violations alleged in the Fisher Lawsuit (the “Government’s Lawsuit”).

We also previously disclosed that PFD has reached an agreement in principle with the government to settle the Government’s Lawsuit, whereby PFD has agreed to take specific action to address relevant air pollution regulations and permit requirements and to pay a civil penalty of $800,000. If the Government Lawsuit settlement is finalized, we anticipate the penalty to consist of two components:

·  
cash payment to the appropriate regulatory authority; and
   
·  
supplemental environmental projects consisting of one or more capital projects.

We are negotiating with the DOJ and EPA to complete a formal consent decree (settlement agreement) to finalize the settlement of the Government’s Lawsuit in accordance with the agreement in principle and to meet the government’s approval requirements (including public notice and comment).

Recently, we reached an agreement in principle to settle the Fisher Lawsuit, whereby PFD would pay a total of $1,325,000. The purpose of the proposed settlement is to avoid the uncertainties and expense of continuing the litigation and to settle and compromise on any and all claims that the Fisher Plaintiff could have raised against PFD.
 
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Settlement of the Fisher Lawsuit is subject to, among other things, execution and court acceptance of a definitive settlement agreement. Our insurer has agreed to contribute $500,000 toward the settlement cost of the Fisher Lawsuit. Discussions are ongoing with our insurer as to whether, and to what extent any additional contribution may be made in connection with the settlement of the Fisher Lawsuit and as to whether any contribution will be made in connection with the settlement of the Government Lawsuit.

As of the date of this report, we have therefore recorded a total of $1,625,000 of reserves in our discontinued operations for PFD to settle the Fisher Lawsuit and the Government Lawsuit. The Company recorded $825,000 in the third quarter of 2007.

As previously reported, on April 12, 2007 our insurer agreed to reimburse PFD for reasonable defense costs of litigation incurred prior to our insurer’s assumption of the defense, but this agreement to defend and indemnify PFD was subject to the our insurer’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 our insurer’s right to recoup any defense cost it has advanced if our insurer later determines that its policy provides no coverage. When, our insurer withdrew its prior coverage denial and agreed to defend and indemnify PFD in the above described lawsuits, subject to certain reservation of rights, we had incurred more than $2.5 million in costs in vigorously defending against the Fisher Lawsuit and the Government Lawsuit. To date, our insurer has reimbursed PFD $2.5 million for legal defense fees and disbursements, which we recorded as a recovery within our discontinued operations in the second quarter of 2007. Partial reimbursement from our insurer of $750,000 was received on July 11, 2007. A second reimbursement of approximately $1.75 million was received on August 17, 2007. Our insurer has advised us that they will reimburse us for approximately another $82,000 in legal fees and disbursements, subject to our insurer’s reservation of rights as noted above. We anticipate receiving this additional reimbursement in the fourth quarter of 2007.

Perma-Fix of Orlando, Inc. (“PFO”)
Recently, PFO has been named as a defendant in four cases related to a series of toxic tort cases, the “Brottem Litigation” that are pending in the Circuit Court of Seminole County, Florida. All of the cases involve allegations of toxic chemical exposure at a former telecommunications manufacturing facility located in Lake Mary, Florida, known generally as the “Rinehart Road Plant”. PFO is presently a defendant, together with numerous other defendants, in the following four cases: Brottem v. Siemens, et al.; Canada v. Siemens et al.; Bennett v. Siemens et al. and the recently filed Culbreath v. Siemens et al. All of the cases seek unspecified money damages for alleged personal injuries or wrongful death. With the exception of PFO, the named defendants are all present or former owners of the subject property, including several prominent manufacturers that operated the Rinehart Road Plant. The allegations in all of the cases are essentially identical.

The basic allegations are that PFO provided “industrial waste management services” to the Defendants and that PFO negligently “failed to prevent” the discharge of toxic chemicals or negligently “failed to warn” the plaintiffs about the dangers presented by the improper handling and disposal of chemicals at the facility. The complaints make no attempt to specify the time and manner of the alleged exposures in connection with PFO’s “industrial waste management services.” PFO has moved to dismiss for failure to state a cause of action.
 
At this time, the cases involve a large number of claims involving personal injuries. At this very early stage, it is not possible to accurately assess PFO’s potential liability. Our insurer has agreed to defend and indemnify us in these lawsuits, excluding our deductible of $250,000, subject to a reservation of rights to deny indemnity pursuant to various provisions and exclusions under our policy.
 
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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 September 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 September 30, 2007, we have recorded $5,702,000 in our sinking fund on the balance sheet, which includes interest earned of $505,000 on the sinking fund as of September 30, 2007. Interest income for the three and nine months ended September 30, 2007, was $69,000 and $193,000, respectively.

In August 2007, we entered into a second finite risk insurance policy for our Perma-Fix Northwest Richland, Inc. facility, which was acquired on June 13, 2007. The policy provides an initial $7.8 million of financial assurance coverage with annual growth rate of 1.5%, which at the end of the four year term policy, will provide maximum coverage of $8.2 million. The policy will renew automatically on an annual basis at the end of the four year term and will not be subject to any renewal fees. The policy requires total payment of $4.4 million, consisting of an annual payment of $1.4 million, and two annual payments of $1.5 million, starting July 31, 2007. In July 2007, we paid the first of our three annual payments of $1.4 million, of which $1.1 million represented premium on the policy and the remaining $258,000 was deposited into a sinking fund account. Each of the two remaining $1.5 million payments will consist of $176,000 in premium with the remaining $1.3 million to be deposited into a sinking fund. As of September 30, 2007, we have recorded $259,000 in our sinking fund on the balance sheet, which includes interest earned of $1,000 on the sinking fund as of September 30, 2007.

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 (“LOI”) 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, EQ advised us that they would be unable to proceed with the transaction as contemplated by the letter of intent. We have since received offers and entered into LOIs with various companies to sell the following facilities within our Industrial Segment: On August 2, 2007, we entered into a LOI with the Amerex Group, Inc. to sell Perma-Fix Treatment Services, Inc. facility for $2.2 million and assumption of certain liabilities; On September 10, 2007, we entered into two separate LOIs with Triumvirate Environmental, Inc., with one LOI covering the sale of substantially all of the assets of Perma-Fix Maryland, Inc., Perma-Fix of Fort Lauderdale, Inc., and Perma-Fix of Orlando, Inc. facilities for approximately $12.0 million, plus assumption of certain liabilities, and the other LOI covering the sale of substantially all of the assets of Perma-Fix of South Georgia, Inc. facility for approximately $1.1 million, and assumption of certain liabilities; On October 2, 2007, we entered into a LOI with OGM, Ltd. to sell the business and substantially all of the assets of Perma-Fix of Dayton, Inc. for approximately $3.0 million and assumption of certain liabilities. Each of the above LOIs is subject to the completion of due diligence, parties entering into a definitive purchase agreement, and approval of our lender and approval of the Board of Directors of the parties thereto. Management considers the sale of the Industrial Segment before June 30, 2008 to be probable.
 
14

 
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 based on the new LOIs entered into as discussed above, 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, as required by SFAS 144, included the comparison of the offered sale price less cost to sale to the carrying value of the investment under each LOI separately. Based on our analysis, we concluded that the carrying value of the tangible assets for Perma-Fix Dayton, Inc. facility exceeded its fair value, less cost to sell. Consequently, we recorded $564,000 in tangible asset impairment loss in the third quarter of 2007 which is included in “Loss from discontinued operations, net of taxes” on our Consolidated Statements of Operations. We also performed financial valuations on the intangible assets of the Industrial Segment to test for impairment as required by SFAS 142. We concluded that no other tangible and intangible impairments existed as of September 30, 2007.

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2007, and 2006. These results are included in our Consolidated Statements of Operations as part of our “Loss from discontinued operations, net of taxes”.

   
Three Months Ended
 
 Nine Months Ended
 
(Amounts in Thousands)
 
September 30,
 
 September 30,
 
   
2007
 
2006
 
 2007
 
2006
 
                    
Net revenues
 
$
7,960
 
$
9,178
 
$
23,347
 
$
26,874
 
Operating loss from discontinued operations
 
$
(1,826
)
$
(270
)
$
(3,023
)
$
(724
)
Income tax provision
 
$
2
 
$
¾
 
$
2
 
$
¾
 
Loss from discontinued operations
 
$
(1,828
)
$
(270
)
$
(3,025
)
$
(724
)

As previously disclosed in the second quarter of 2007, the Company’s insurer 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, styled Barbara Fisher v. Perma-Fix of Dayton, Inc. and the federal government (DOJ/USEPA) alleging, among other things, that our Dayton subsidiary was operating without appropriate air permits. Our insurer’s agreement was 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. We were advised by our insurer in the second quarter of 2007 that we would be reimbursed approximately $2.5 million previously spent to defend this litigation, which we recorded as a recovery within discontinued operations in the second quarter of 2007, in accordance with EITF (Emerging Issues Task Force) 01-10. We received $750,000 of the $2.5 million on July 11, 2007. We received the second reimbursement of approximately $1.75 million on August 17, 2007. Our insurer has advised us that they will reimburse us for approximately another $82,000 in legal fees and disbursements in defending this litigation. We anticipate receiving this additional reimbursement in the fourth quarter of 2007.
 
15


As previously reported, on April 25, 2007, PFD reached an agreement in principal (“AIP”) with DOJ/USEPA representatives to settle all of the United States’ claims, and under the AIP, PFD has agreed to take specific action to address relevant air pollution regulations and to pay a civil penalty of $800,000. As a result, we recorded $800,000 of reserves in discontinued operations in the second quarter of 2007 for the anticipated settlement. Recently, we reached an agreement in principle to settle the Fisher Lawsuit which requires PFD to pay a total of $1,325,000. The purpose of the proposed settlement is to avoid the uncertainties and expense of continuing the litigation and to settle and compromise on any and all claims that the Fisher Plaintiff could have raised against PFD. Settlement of the Fisher Lawsuit is subject to, among other things, execution of a definitive settlement agreement and approval and entry of the definitive settlement agreement by the court. Our insurer has agreed to contribute $500,000 toward the settlement cost of the Fisher Lawsuit. Discussions are ongoing with our insurer as to whether, and to what extent any additional contribution may be made in connection with the settlement of the Fisher Lawsuit and as to whether any contribution will be made in connection with the settlement of the Government Lawsuit.

As of the date of this report, we have therefore recorded a total of $1,625,000 of reserves in our discontinued operations for settlement by PFD of the Fisher Lawsuit and the Government Lawsuit. The Company recorded $825,000 of reserve in the third quarter of 2007 within our discontinued operations based on the anticipated settlement cost to PFD for the Fisher Lawsuit. See “--Known Trends and Uncertainties-Certain Legal Proceedings” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for more detailed discussion of the agreements in principle, issues with our insurer as to these agreements, and conditions precedent to these settlements.

Asset and liabilities related to discontinued operations total $21,006,000 and $11,728,000 as of September 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 September 30, 2007, and December 31, 2006:

16

 
(Amounts in Thousands)
 
2007
 
2006
 
            
Account receivable, net
 
$
4,915
 
$
5,768
 
Inventories
   
391
   
522
 
Other assets
   
3,132
   
3,179
 
Property, plant and equipment, net
   
12,568
   
13,281
 
Total assets held for sale
 
$
21,006
 
$
22,750
 
Account payable
 
$
2,247
 
$
2,132
 
Accrued expenses and other liabilities
   
4,857
   
3,760
 
Deferred revenue
   
¾
   
¾
 
Note payable
   
896
   
830
 
Environmental liabilities
   
1,146
   
1,094
 
Total liabilities held for sale
 
$
9,146
 
$
7,816
 
 
The table above represents the respective assets and liabilities that are held for sale as of September 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 $1,287,000 and environmental liabilities of $1,295,000 are excluded from liabilities held for sale as of September 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 September 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 were required to complete certain closure and remediation activities pursuant to our RCRA permit, which were completed in January 2006. In September 2006, PFMI signed a Corrective Action Consent Order with the State of Michigan, requiring performance of studies and development and execution of plans related to the potential clean-up of soils in portions of the property. The level and cost of the clean-up and remediation are determined by state mandated requirements. Upon discontinuation of operations in 2004, 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, based on state-mandated criteria, 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 $707,000 for closure costs since September 30, 2004, of which $78,000 has been spent during the nine months of 2007 and $74,000 was spent in 2006. We have $575,000 accrued for the closure, as of September 30, 2007, and we anticipate spending $78,000 in the fourth quarter of 2007 with the remainder over the next six years. Based on the current status of the Corrective Action, we believe that the remaining reserve is adequate to cover the liability.
 
17


As of September 30, 2007, PFMI has a pension payable of $1,287,000. 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, which was purchased in June 2007.

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 nine months ended September 30, 2007 and 2006, for our operating segments.
 
18


Segment Reporting for the Quarter Ended September 30, 2007
   
Nuclear
   
Engineering
 
Segments Total
 
Corporate(2)
     
Consolidated Total
 
Revenue from external customers
 
$
13,211
 
(3
)
$
629
 
$
13,840
 
$
¾
     
$
13,840
 
Intercompany revenues
   
1,036
       
305
   
1,341
   
¾
       
1,341
 
Gross profit
   
4,035
       
231
   
4,266
   
¾
       
4,266
 
Interest income
   
¾
       
¾
   
¾
   
71
       
71
 
Interest expense
   
240
       
¾
   
240
   
236
       
476
 
Interest expense-financing fees
   
¾
       
¾
   
¾
   
48
       
48
 
Depreciation and amortization
   
1,092
       
10
   
1,102
   
16
       
1,118
 
Segment profit (loss)
   
1,319
       
70
   
1,389
   
(1,513
)
     
(124
)
Segment assets(1)
   
95,319
       
2,012
   
97,331
   
33,675
 
(4
)
 
131,006
 
Expenditures for segment assets
   
488
       
¾
   
488
   
4
       
492
 
Total long-term debt
   
7,665
       
8
   
7,673
   
9,952
 
(5
)
 
17,625
 
                                         
 
Segment Reporting for the Quarter Ended September 30, 2006
 
   
Nuclear 
       
Engineering
   
Segments Total
 
 
Corporate(2)
 
     
Consolidated Total
 
Revenue from external customers
 
$
11,023
 
(3
)
$
1,065
 
$
12,088
 
$
¾
     
$
12,088
 
Intercompany revenues
   
579
       
172
   
751
   
¾
       
751
 
Gross profit
   
4,127
       
241
   
4,368
   
¾
       
4,368
 
Interest income
   
¾
       
¾
   
¾
   
100
       
100
 
Interest expense
   
127
       
¾
   
127
   
149
       
276
 
Interest expense-financing fees
   
¾
       
¾
   
¾
   
48
       
48
 
Depreciation and amortization
   
784
       
10
   
794
   
14
       
808
 
Segment profit (loss)
   
1,997
       
95
   
2,092
   
(1,492
)
     
600
 
Segment assets(1)
   
67,653
       
2,407
   
70,060
   
35,363
 
(4
)
 
105,423
 
Expenditures for segment assets
   
1,994
       
8
   
2,002
   
25
       
2,027
 
Total long-term debt
   
2,515
       
17
   
2,532
   
5,750
 
(5
)
 
8,282
 
                                         
 
Segment Reporting for the Nine Months Ended September 30, 2007
 
   
Nuclear 
       
Engineering
   
Segments Total
   
Corporate(2)
 
     
Consolidated Total
 
Revenue from external customers
 
$
38,560
 
(3
)
$
1,738
 
$
40,298
 
$
¾
     
$
40,298
 
Intercompany revenues
   
2,328
       
845
   
3,173
   
¾
       
3,173
 
Gross profit
   
13,106
       
564
   
13,670
   
¾
       
13,670
 
Interest income
   
1
       
¾
   
¾
   
237
       
238
 
Interest expense
   
462
       
1
   
463
   
486
       
949
 
Interest expense-financing fees
   
¾
       
¾
   
¾
   
143
       
143
 
Depreciation and amortization
   
2,666
       
27
   
2,693
   
52
       
2,745
 
Segment profit (loss)
   
5,625
       
162
   
5,787
   
(4,576
)
     
1,211
 
Segment assets(1)
   
95,319
       
2,012
   
97,331
   
33,675
 
(4
)
 
131,006
 
Expenditures for segment assets
   
2,337
       
13
   
2,350
   
17
       
2,367
 
Total long-term debt
   
7,665
       
8
   
7,673
   
9,952
 
(5
)
 
17,625
 
                                         
 
Segment Reporting for the Nine Months Ended September 30, 2006
 
   
Nuclear 
 
 
 
 
Engineering
 
 
Segments Total
 
 
Corporate(2)
 
 
   
Consolidated Total
 
Revenue from external customers
 
$
36,288
 
(3
)
$
2,737
 
$
39,025
 
$
¾
     
$
39,025
 
Intercompany revenues
   
1,848
       
413
   
2,261
   
¾
       
2,261
 
Gross profit
   
14,662
       
692
   
15,354
   
¾
       
15,354
 
Interest income
   
¾
       
¾
   
¾
   
189
       
189
 
Interest expense
   
362
       
1
   
363
   
632
       
995
 
Interest expense-financing fees
   
¾
       
¾
   
¾
   
144
       
144
 
Depreciation and amortization
   
2,254
       
30
   
2,284
   
38
       
2,322
 
Segment profit (loss)
   
8,078
       
246
   
8,324
   
(4,766
)
     
3,558
 
Segment assets(1)
   
67,653
       
2,407
   
70,060
   
35,363
 
(4
)
 
105,423
 
Expenditures for segment assets
   
3,212
       
59
   
3,271
   
50
       
3,321
 
Total long-term debt
   
2,515
       
17
   
2,532
   
5,750
 
(5
)
 
8,282
 
 
19

 
(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 nine months ended September 30, 2007, which total $2,029,000 or 14.7% and $7,167,000 or 17.8% of total revenues, respectively. LATA/Parallax revenues for same periods in 2006 were $2,672,000 or 22.1% and $7,344,000 or 18.8%.

(4)
Amount includes assets from our discontinued operations of $21,006,000 and $23,944,000 as of September 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, 2006 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 re-assess 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 third 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 and should provide significant growth opportunity in the coming years.
 
20

 
Under the terms of the Merger Agreement, the purchase price paid by the Company in connection with the acquisition was $17.0 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”).
 
(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 $0.6 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 September 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 estimated fair value of the net tangible assets and intangible assets on the acquisition date, which amounted to $8.1 million, was allocated to goodwill which is not amortized but subject to an annual impairment test. 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 September 30, 2007.
 
21

 

(Amounts in thousands)
     
Cash
 
$
2,300
 
Assumed debt
   
9,412
 
Installment payments
   
2,500
 
Common Stock of the Company
   
2,165
 
Transaction costs
   
602
 
Total consideration
 
$
16,979
 

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
 
$
2,834
 
Property, plant and equipment
   
13,978
 
Permits
   
4,500
 
Goodwill
   
8,067
 
Total assets acquired
   
29,379
 
Current liabilities
   
(8,632
)
Non-current liabilties
   
(3,768
)
Total liabilities assumed
   
(12,400
)
         
Net assets acquired
 
$
16,979
 
 
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 though 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.

22

 

(Amounts in Thousands, Except per Shares)
          
   
Three Months Ended September 30,
 
   
(unaudited)
 
 (unaudited)
 
   
2007
 
 2006
 
Net revenues
 
$
13,840
 
$
16,748
 
Net (loss) income
 
$
(124
)
$
2,089
 
Net income per share - basic
 
$
¾
 
$
.04
 
Net income per share - diluted
 
$
¾
 
$
.04
 
Weighted average shares outstanding - basic
   
52,843
   
50,541
 
Weighted average shares outstanding - diluted
   
52,843
   
51,430
 
 
   
Nine Months Ended September 30,
 
   
(unaudited)
 
 (unaudited)
 
   
2007
 
 2006
 
Net revenues
 
$
44,736
 
$
49,905
 
Net income
 
$
633
 
$
5,573
 
Net income per share - basic
 
$
.01
 
$
.12
 
Net income per share - diluted
 
$
.01
 
$
.12
 
Weighted average shares outstanding - basic
   
52,349
   
46,851
 
Weighted average shares outstanding - diluted
   
53,673
   
47,414
 
 
11.
Capital Stock

During the nine months ended September 30, 2007, we issued 223,786 shares of our Common Stock upon exercise of 226,084 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. Total proceeds received during the nine months ended September 30, 2007 related to warrant and option exercises totaled approximately $439,000, which includes $399,000 from employee stock option exercises and $40,000 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.

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.

23

 

The summary of the Company’s total Plans as of September 30, 2007 as compared to September 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
   
102,000
   
2.95
             
Exercised
   
226,084
   
1.80
       
$
238,671
 
Forfeited
   
34,999
   
1.83
             
Options outstanding End of Period
   
2,657,667
   
1.91
   
4.8
 
$
3,086,524
 
Options Exercisable at September 30, 2007
   
1,965,000
 
$
1.87
   
4.6
 
$
2,358,911
 
Options Vested and expected to be vested at September 30, 2007
   
2,613,127
 
$
1.91
   
4.8
 
$
3,032,631
 
                           
                           
 
   
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
Options outstanding January 1, 2006
   
2,546,750
 
$
1.79
             
Granted
   
1,068,000
   
1.88
             
Exercised
   
401,500
   
1.32
       
$
277,193
 
Forfeited
   
224,500
   
2.07
             
Options outstanding End of Period
   
2,988,750
   
1.86
   
5.5
 
$
742,028
 
Options Exercisable at September 30, 2006
   
1,930,750
 
$
1.85
   
5.4
 
$
537,748
 
Options Vested and expected to be vested at September 30, 2006
   
2,939,274
 
$
1.86
   
5.5
 
$
731,638
 
24

 
The following tables summarize information about options under the plans outstanding at September 30, 2007 and 2006:

   
Options Outstanding
 
Options Exercisable
 
Description and Range of Exercise Prices at September 30, 2007
 
Number Outstanding
 
Weighted Average Remaining Contractual Life
 
Weighted Average Exercise Price
 
Number Outstanding
 
Weighted Average Remaining Contractual Life
 
Weighted Average Exercise Price
 
                           
Performance Equity Plan
   
9,000
   
1.0
 
$
1.25
   
9,000
   
1.0
 
$
1.25
 
($1.25)