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, 2009

Or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                                         to                                       

Commission File No.        111596     

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

Delaware
58-1954497
(State or other jurisdiction
(IRS Employer Identification Number)
of incorporation or organization)
 
   
8302 Dunwoody Place, Suite 250, Atlanta, GA
30350
 (Address of principal executive offices)
 (Zip Code)

(770) 587-9898
(Registrant's telephone number)

N/A

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T    No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes £    No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer £        Accelerated Filer T        Non-accelerated Filer £        Smaller reporting company £

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 2, 2009  
    Common Stock, $.001 Par Value   
 
   54,529,415  
   
    shares of registrant’s   
   
   Common Stock  
 


 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

INDEX

     
Page No.
PART I
FINANCIAL INFORMATION
   
       
Item 1.
Condensed Financial Statements
   
       
 
Consolidated Balance Sheets -
   
 
September 30, 2009 (unaudited) and December 31, 2008
 
  1
       
 
Consolidated Statements of Operations -
   
 
Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)
 
  3
       
 
Consolidated Statements of Cash Flows -
   
 
Nine Months Ended September 30, 2009 and 2008 (unaudited)
 
  4
       
 
Consolidated Statement of Stockholders’ Equity -
   
 
Nine Months Ended September 30, 2009 (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
 
53
       
Item 4.
Controls and Procedures
 
54
       
PART II
OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
56
       
Item 1A.
Risk Factors
 
56
       
Item 4.
Submission of Matters to a Vote of Security Holders
 
56
       
Item 6.
Exhibits
 
58

 
 

 

PART I – FINANCIAL INFORMATION
ITEM 1. – FINANCIAL STATEMENTS

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
       
   
2009
   
December 31,
 
(Amount in Thousands, Except for Share Amounts)
 
(Unaudited)
   
2008
 
             
ASSETS
           
Current assets:
           
Cash
  $ 73     $ 129  
Restricted cash
    55       55  
Accounts receivable, net of allowance for doubtful
               
accounts of $218 and $333, respectively
    18,275       13,416  
Unbilled receivables – current
    9,746       13,104  
Inventories
    335       344  
Prepaid and other assets
    3,315       2,565  
Current assets related to discontinued operations
    74       110  
Total current assets
    31,873       29,723  
                 
Property and equipment:
               
Buildings and land
    26,718       24,726  
Equipment
    31,561       31,315  
Vehicles
    650       637  
Leasehold improvements
    11,455       11,455  
Office furniture and equipment
    1,929       1,904  
Construction-in-progress
    2,003       1,159  
      74,316       71,196  
Less accumulated depreciation and amortization
    (27,287 )     (23,762 )
Net property and equipment
    47,029       47,434  
                 
Property and equipment related to discontinued operations
    651       651  
                 
Intangibles and other long term assets:
               
Permits
    17,286       17,125  
Goodwill
    12,054       11,320  
Unbilled receivables – non-current
    2,896       3,858  
Finite Risk Sinking Fund
    15,457       11,345  
Other assets
    2,429       2,256  
Total assets
  $ 129,675     $ 123,712  

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

 
1

 

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

   
September 30,
       
   
2009
   
December 31,
 
(Amount in Thousands, Except for Share Amounts)
 
(Unaudited)
   
2008
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Current liabilities:
           
Accounts payable
  $ 5,423     $ 11,076  
Current environmental accrual
    187       186  
Accrued expenses
    7,564       8,896  
Disposal/transportation accrual
    3,129       5,847  
Unearned revenue
    8,624       4,371  
Current liabilities related to discontinued operations
    1,188       1,211  
Current portion of long-term debt
    3,064       2,022  
Total current liabilities
    29,179       33,609  
                 
Environmental accruals
    466       620  
Accrued closure costs
    12,136       10,141  
Other long-term liabilities
    492       457  
Long-term liabilities related to discontinued operations
    1,040       1,783  
Long-term debt, less current portion
    17,794       14,181  
Total long-term liabilities
    31,928       27,182  
                 
Total liabilities
    61,107       60,791  
                 
Commitments and Contingencies
               
                 
Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares
               
authorized, 1,284,730 shares issued and outstanding, liquidation
               
value $1.00 per share
    1,285       1,285  
                 
Stockholders' equity:
               
Preferred Stock, $.001 par value; 2,000,000 shares authorized,
               
no shares issued and outstanding
           
Common Stock, $.001 par value; 75,000,000 shares authorized,
               
54,502,037 and 53,934,560 shares issued and outstanding, respectively
    54       54  
Additional paid-in capital
    99,107       97,381  
Accumulated deficit
    (31,878 )     (35,799 )
                 
Total stockholders' equity
    67,283       61,636  
                 
Total liabilities and stockholders' equity
  $ 129,675     $ 123,712  

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)
 
2009
   
2008
   
2009
   
2008
 
                         
Net revenues
  $ 26,534     $ 15,989     $ 72,234     $ 51,961  
Cost of goods sold
    18,846       11,884       53,433       37,536  
Gross profit
    7,688       4,105       18,801       14,425  
                                 
Selling, general and administrative expenses
    4,486       4,648       13,290       13,704  
Asset impairment recovery
          (507 )           (507 )
(Gain) loss on disposal of property and equipment
    (3 )     (2 )     (15 )     139  
Income (loss) from operations
    3,205       (34 )     5,526       1,089  
                                 
Other income (expense):
                               
Interest income
    29       52       121       170  
Interest expense
    (331 )     (294 )     (1,346 )     (1,031 )
Interest expense-financing fees
    (104 )     (14 )     (180 )     (124 )
Other
    (5 )           5       (5 )
Income (loss) from continuing operations before taxes
    2,794       (290 )     4,126       99  
Income tax expense (benefit)
    165       (14 )     265       3  
Income (loss) from continuing operations
    2,629       (276 )     3,861       96  
                                 
(Loss) income from discontinued operations, net of taxes
    (7 )     (159 )     60       (1,218 )
Gain on disposal of discontinued operations, net of taxes
          94             2,309  
Net income (loss) applicable to Common Stockholders
  $ 2,622     $ (341 )   $ 3,921     $ 1,187  
                                 
Net income (loss) per common share – basic
                               
Continuing operations
  $ .05     $ (.01 )   $ .07     $  
Discontinued operations
                      (.02 )
Disposal of discontinued operations
                      .04  
Net income (loss) per common share
  $ .05     $ (.01 )   $ .07     $ .02  
                                 
Net income (loss) per common share – diluted
                               
Continuing operations
  $ .05     $ (.01 )   $ .07     $  
Discontinued operations
                      (.02 )
Disposal of discontinued operations
                      .04  
Net income (loss) per common share
  $ .05     $ (.01 )   $ .07     $ .02  
                                 
Number of common shares used in computing
                               
net income (loss) per share:
                               
Basic
    54,281       53,844       54,130       53,760  
Diluted
    54,954       53,844       54,412       54,149  

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

 
3

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
September 30,
 
(Amounts in Thousands)
 
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 3,921     $ 1,187  
Less: Income on discontinued operations
    60       1,091  
                 
Income from continuing operations
    3,861       96  
Adjustments to reconcile net income to cash provided by operations:
               
Depreciation and amortization
    3,569       3,817  
Asset impairment recovery
          (507 )
Non-cash financing costs
    133        
Provision for bad debt and other reserves
    274       33  
(Gain) loss on disposal of plant, property and equipment
    (15 )     139  
Issuance of common stock for services
    189       201  
Share based compensation
    390       335  
Changes in operating assets and liabilities of continuing operations, net of
               
effect from business acquisitions:
               
Accounts receivable
    (5,134 )     6,387  
Unbilled receivables
    4,320       (742 )
Prepaid expenses, inventories and other assets
    1,052       2,367  
Accounts payable, accrued expenses and unearned revenue
    (8,460 )     (7,720 )
Cash provided by continuing operations
    179       4,406  
Cash used in discontinued operations
    (679 )     (3,306 )
Cash (used in) provided by operating activities
    (500 )     1,100  
                 
Cash flows from investing activities:
               
Purchases of property and equipment
    (1,016 )     (810 )
Proceeds from sale of plant, property and equipment
    16       31  
Payment to finite risk sinking fund
    (4,112 )     (4,704 )
Payment of earn-out to Nuvotec shareholders
    (734 )      
Cash used for acquisition considerations, net of cash acquired
          (14 )
Cash used in investing activities of continuing operations
    (5,846 )     (5,497 )
Proceeds from sale of discontinued operations
          6,620  
Cash provided by discontinued operations
    11       42  
Net cash (used in) provided by investing activities
    (5,835 )     1,165  
                 
Cash flows from financing activities:
               
Net borrowing (repayments) of revolving credit
    4,136       (3,483 )
Principal repayments of long term debt
    (2,073 )     (6,658 )
Proceeds from issuance of long term debt
    2,982       7,000  
Proceeds from issuance of stock
    481       184  
Proceeds from finite risk financing
    753       878  
Repayment of stock subscription receivable
          25  
Cash provided by (used in) financing activities of continuing operations
    6,279       (2,054 )
Principal repayment of long-term debt for discontinued operations
          (238 )
Cash provided by (used in) financing activities
    6,279       (2,292 )
                 
Decrease in cash
    (56 )     (27 )
Cash at beginning of period
    129       118  
Cash at end of period
  $ 73     $ 91  
                 
Supplemental disclosure:
               
Interest paid, net of amounts capitalized
  $ 3,832     $ 1,032  
Income taxes paid
    261       29  
Non-cash investing and financing activities:
               
Long-term debt incurred for purchase of property and equipment
    125       20  
Issuance of Common Stock for debt
    476        
Issuance of Warrants for debt
    190        

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, 2009)

(Amounts in thousands,
 
Common Stock
   
Additional
Paid-In
   
Accumulated
   
Total
Stockholders'
 
except for share amounts)
 
Shares
   
Amount
   
Capital
   
Deficit
   
Equity
 
Balance at December 31, 2008
    53,934,560     $ 54     $ 97,381     $ (35,799 )   $ 61,636  
                                         
Net income
                      3,921       3,921  
Issuance of Common Stock for debt
    200,000             476             476  
Issuance of Warrants for debt
                190             190  
Issuance of Common Stock for services
    109,144             189             189  
Issuance of Common Stock upon
                                       
exercise of Options
    258,333             481             481  
Share Based Compensation
                390             390  
Balance at September 30, 2009
    54,502,037     $ 54     $ 99,107     $ (31,878 )   $ 67,283  

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, 2009
(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, 2008.

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 (“SEC”).  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, 2009, are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2009.

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, 2008.

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on November 6, 2009.  We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.

2.    Summary of Significant Accounting Policies

Our accounting policies are as set forth in the notes to consolidated financial statements referred to above.

Recently Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as FASB Accounting Standards Codification (“ASC”) 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP.  ASC 105 is now the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASUs”).  The FASB will not consider ASUs as authoritative in their own right.  ASUs will serve only to update the Codification, provide background about the guidance and provide the bases for conclusions on the changes in the Codification.  These provisions of FASB ASC 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, the Company adopted ASC 105 in the third quarter of 2009.  References made to FASB guidance throughout this document have been updated for the Codification.  The adoption of ASC 105 did not have an impact on the Company’s financial condition or results of operations.

 
6

 
 
In April 2009, the FASB issued guidance now codified as FASB ASC 320, “Investments-Debt and Equity Securities”, which is designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. The guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of ASC 320 did not materially impact the Company’s financial position, result of operations, or its disclosure requirements.
 
In April 2009, the FASB issued guidance now codified as FASB ASC 820, “Fair Value Measurement and Disclosures”, which provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for an asset or liability have significantly decreased.  ASC 820 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  The guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of ASC 820 did not materially impact the Company’s financial position, result of operations, or its disclosure requirements.
 
In April 2009, the FASB issued guidance now codified as FASB ASC 825, “Financial Instruments - Overall,” which amends previous ASC 825 guidance to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends ASC 270, “Interim Reporting”, to require those disclosures in all interim financial statements.  This guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of ASC 825 did not materially impact the Company’s financial position, result of operations, or its disclosure requirements.

In May 2009, the FASB issued guidance now codified as FASB ASC 855, “Subsequent Events - - Overall”, which modifies the definition of what qualifies as a subsequent event, those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued, and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  This standard is effective for interim and annual financial period ending after June 15, 2009.  This standard did not have a material effect on our results of operations or financial position.
 
In August 2009, the FASB issued ASU 2009-05, “Fair Value Measurements and Disclosures (Topic 820)”. The purpose of this ASU is to clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. This guidance is effective upon issuance.  ASU 2009-05 did not materially impact the Company’s financial position, result of operations, or its disclosure requirements.

Recently Issue Accounting Standards
In April 2009, the FASB issued updated guidance related to business combinations, which is included in the Codification in ASC 805-20, “Business Combinations – Identifiable Assets, Liabilities and Any Non-controlling Interest” (“ASC 805-20”).  ASC 805-20 amends and clarifies ASC 805 to address application issues regarding initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations.  In circumstances where the acquisition date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount.  ASC 805-20 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company expects ASC 805-20 may have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, term and size of the acquired contingencies.

 
7

 

In June 2009, the FASB issued new guidance on the accounting for the transfers of financial assets.  The new guidance, which was issued as Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”, has not yet been adopted into Codification.  The new guidance requires additional disclosures for transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets.  There is no longer a concept of a qualifying special-purpose entity, and the requirements for derecognizing financial assets have changed.  The new guidance is effective on a prospective basis for the annual period beginning after November 15, 2009 and interim and annual periods thereafter.  The Company does not expect that the provisions of the new guidance will have a material effect on its results of operations, financial position or liquidity.
 
In June 2009, the FASB issued revised guidance on the accounting for variable interest entities.  The revised guidance, which was issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”, has not yet been adopted into Codification.  The revised guidance reflects the elimination of the concept of a qualifying special-purpose entity and replaces the quantitative-based risks and rewards calculation of the previous guidance for determining which company, if any, has a controlling financial interest in a variable interest entity.  The revised guidance requires an analysis of whether a company has: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity.  An entity is required to be re-evaluated as a variable interest entity when the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights to direct the activities that most significantly impact the entity’s economic performance.  Additional disclosures are required about a company’s involvement in variable interest entities and an ongoing assessment of whether a company is the primary beneficiary.  This guidance is effective for fiscal years beginning after November 15, 2009.  The Company does not expect this guidance to materially impact its operations, financial position, and disclosure requirement.

In September 2009, the FASB issued ASU No. 2009-12, “Fair Value Measurements and Disclosures (Topic 820) – Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent)”.  This ASU permits, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this ASU on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date.  The ASU also requires disclosures by major category of investment about the attributes of investments within the scope of the Update.  ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009.  The Company does not expect ASU 2009-12 to materially impact our financial condition, results of operations, and disclosures.

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – A Consensus of the FASB Emerging Issues Task Force.”  This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. ASU 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal year beginning on or after June 15, 2010, with early adoption permitted.  The Company is currently evaluating ASU 2009-13 on its financial positions and results of operations.

 
8

 

Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation.

3.    Stock Based Compensation

We follow FASB ASC 718, “Compensation – Stock Compensation” (“ASC 718”) to account for stock based compensation.  ASC 718 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.  ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. 

The Company has certain stock option plans under which it awards incentive and non-qualified stock options to employees, officers, and outside directors.  Stock options granted to employees have either a ten year contractual term with one-fifth yearly vesting over a five year period or a six year contractual term with one-third yearly vesting over a three year period.  Stock options granted to outside directors have a ten year contractual term with vesting period of six months.

On July 29, 2009, we granted 84,000 options from the Company’s 2003 Outside Directors Stock Plan to our seven outside directors as a result of the re-election of our board members at our Annual Meeting of Stockholders held on July 29, 2009.  The options granted were for a contractual term of ten years with vesting period of six months.  The exercise price of the options was $2.67 per share which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.  We granted 84,000 options from the same stock plan on August 5, 2008 to our seven outside directors as a result of the re-election our board members at our August 5, 2008 Annual Meeting of Stockholders.  The options granted were for a contractual term of ten years with vesting period of six months.  The exercise price of the options was $2.34 per share which was equal to our closing stock price the day preceding the grant date, pursuant to the stock plan.

For the nine months ended September 30, 2009, we granted a total of 145,000 Incentive Stock Options (“ISO”) to our Chief Financial Officer (“CFO”) and certain employees of the Company on February 26, 2009 which allows for the purchase of 145,000 shares of Common Stock from the Company’s 2004 Stock Option Plan.  The options granted were for a contractual term of six years with vesting period over a three year period at one-third increments per year.  The exercise price of the options granted was $1.42 per share which was based on our closing stock price on the date of grant.  For the nine months ended September 30, 2008, we granted 918,000 ISO’s to certain officers and employees of the Company on August 5, 2008 from the 2004 Stock Option Plan.  The options granted were for a contractual term of six years with vesting period at one-third increments per year.  The exercise price of the options granted was $2.34 per share.

As of September 30, 2009, we had 2,555,014 employee stock options outstanding, of which 1,794,681 are vested.  The weighted average exercise price of the 1,794,681 outstanding and fully vested employee stock option is $1.92 with a remaining weighted contractual life of 2.71 years.  Additionally, we had 714,000 outstanding director stock options, of which 630,000 are vested.  The weighted average exercise price of the 630,000 outstanding and fully vested direction stock option is $2.21 with a weighted remaining contractual life of 5.57 years.

The Company estimates fair value of stock options using the Black-Scholes valuation model.  Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the expected annual dividend yield.  The fair value of the employee and director stock options granted above and the related assumptions used in the Black-Scholes option pricing model used to value the options granted as of September 30, 2008 and September 30, 2009 were as follows.

 
9

 

   
Employee Stock Options Granted
 
   
September 30, 2009
   
September 30, 2008
 
Weighted-average fair value per share
  $ .76     $ 1.17  
Risk -free interest rate (1)
 
2.07% - 2.40
    3.28 %
Expected volatility of stock (2)
 
59.16% - 60.38
%      55.54 %
Dividend yield
 
None
   
None
 
Expected option life (3)
 
4.6 years - 5.8 years
   
5.1 years
 

   
Outside Director Stock Options Granted
 
   
September 30, 2009
   
September 30, 2008
 
Weighted-average fair value per share
  $ 1.97     $ 1.79  
Risk -free interest rate (1)
    3.69 %     4.04 %
Expected volatility of stock (2)
    63.37 %     66.53 %
Dividend yield
 
None
   
None
 
Expected option life (3)
 
10.0 years
   
10.0 years
 

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

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

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

The following table summarizes share based compensation expense recognized for the three and nine months ended September 30, 2009 and 2008 for our employee and director stock options.

   
Three Months Ended
   
Nine Months Ended
 
Stock Options
 
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Employee Stock Options
  $ 110,000     $ 106,000     $ 304,000     $ 247,000  
Director Stock Options
    56,000       45,000       86,000       88,000  
Total
  $ 166,000     $ 151,000     $ 390,000     $ 335,000  

We recognized share based compensation expense using a straight-line amortization method over the requisite period, which is the vesting period of the stock option grant.  ASC 718 requires that stock based compensation expense be based on options that are ultimately expected to vest.  ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  When actual forfeitures vary from our estimates, we recognize the difference in compensation expense in the period the actual forfeitures occur or when options vest.  Of the $110,000 in share based compensation recorded for the employee stock options for the three months ended September 30, 2009, approximately $18,000 was the result of the difference between our estimated forfeiture rate and the actual forfeiture rate for the first year vesting of our August 5, 2008 employee option grant. We have generally estimated forfeiture rate based on historical trends of actual forfeiture.  We reduced our estimated forfeiture rate for the second year vesting of our August 5, 2008 employee option grant by approximately 1.9% as result of our re-evaluation of this forfeiture rate.  As of September 30, 2009, we have approximately $729,000 of total unrecognized compensation cost related to unvested options, of which $163,000 is expected to be recognized in remaining 2009, $345,000 in 2010, $216,000 in 2011, and $5,000 in 2012.

 
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4.    Capital Stock, Stock Plans, and Warrants

During the nine months ended September 30, 2009, we issued 258,333 shares of our Common Stock upon exercise of employee stock options, at exercise prices of $1.86, resulting in total proceeds received of approximately $481,000.  We issued a total of 109,144 shares of our Common Stock under our 2003 Outside Directors Stock Plan to our outside directors as compensation for serving on our Board of Directors, with 50,559 shares, 34,205 shares, and 24,380 shares issued in the first, second, and third quarter of 2009, respectively.  We pay each of our outside directors $2,167 monthly in fees for serving as a member of our Board of Directors.  The Audit Committee Chairman receives an additional monthly fee of $1,833 due to the position’s additional responsibility.  In addition, each board member is paid $1,000 for each board meeting attended as well as $500 for each telephonic conference call.  As a member of the Board of Directors, each director elects to receive either 65% or 100% of the director’s fee in shares of our Common Stock based on 75% of the fair market value of our Common Stock determined on the business day immediately preceding the date that the quarterly fee is due.  The balance of each director’s fee, if any, is payable in cash.

In the second quarter of 2009, the Company issued in a private placement an aggregate of 200,000 shares of the Company’s Common Stock (“Shares”) and two Warrants to purchase up to an aggregate of 150,000 shares of the Company’s Common Stock (“Warrant Shares”) as consideration of a $3,000,000 loan received by the Company from Mr. William N. Lampson and Mr. Diehl Rettig, the Lenders, pursuant to a Loan and Securities Purchase Agreement (“Agreement”) dated May 8, 2009.  Mr. Lampson was formerly a major shareholder of Nuvotec usa, Inc. (n/k/a Perma-Fix Northwest, Inc. (“PFNW”)) and its wholly owned subsidiary, Pacific EcoSolution, Inc. (n/k/a Perma-Fix Northwest Richland, Inc. (“PFNWR”)) prior to our acquisition of PFNW and PFNWR, and Mr. Rettig was formerly a shareholder of, and counsel for, Nuvotec usa, Inc. and its subsidiaries at the time of our acquisition and after our acquisition Mr. Rettig has continued to perform certain legal services for PFNWR.  The Lenders are also stockholders of the Company having received shares of our Common Stock in connection with our acquisition of PFNW and PFNWR.  Under the Agreement, Mr. Lampson received 180,000 Shares and a Warrant to purchase up to an aggregate of 135,000 Warrant Shares and Mr. Rettig received 20,000 Shares and a Warrant to purchase up to an aggregate of 15,000 Warrant Shares.  The Warrants are exercisable six months from May 8, 2009 and expire two years from May 8, 2009.  The fair value of the 200,000 shares of Common Stock was determined to be approximately $476,000 which was based on the closing price of the stock of $2.38 per share on May 8, 2009.  The fair value of the Warrants was estimated to be approximately $190,000 using the Black-Scholes option pricing model.  The fair value of the Common Stock and Warrants was recorded as a debt discount to the loan and is being amortized over the term of the loan as interest expense – financing fees.  (See Note 6 – “Long Term Debt – Promissory Note and Installment Agreement” for accounting treatment of the Common Stock and Warrants).

 
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The summary of the Company’s total Plans as of September 30, 2009 as compared to September 30, 2008, 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, 2009
    3,417,347     $ 2.03              
Granted
    229,000       1.88              
Exercised
    (258,333 )     1.86           $ 152,750  
Forfeited
    (119,000 )     2.14                
Options outstanding End of Period (1)
    3,269,014       2.03       4.0     $ 1,124,662  
Options Exercisable at September 30, 2009 (1)
    2,424,681     $ 1.99       3.5     $ 922,992  
Options Vested and expected to be vested at September 30, 2009
    3,231,231     $ 2.03       4.0     $ 1,122,395  

   
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
Options outstanding Janury 1, 2008
    2,590,026     $ 1.91              
Granted
    1,002,000       2.29              
Exercised
    (111,179 )     1.66           $ 95,103  
Forfeited
    (81,001 )     1.80                
Options outstanding End of Period (2)
    3,399,846       2.03       4.6     $ 572,397  
Options Exercisable at September 30, 2008 (2)
    2,138,013     $ 1.94       4.0     $ 511,727  
Options Vested and expected to be vested at September 30, 2008
    3,336,346     $ 2.03       4.6     $ 568,341  

(1) Option with exercise price ranging from $1.25 to $2.98
(2) Option with exercise price ranging from $1.22 to $2.98

On July 28, 2006, our Board of Directors 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.  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.

 
12

 

5.    Earnings (Loss) Per Share

Basic earning per share excludes any dilutive effects of stock options, warrants, and convertible preferred stock.  In periods where they are anti-dilutive, such amounts are excluded from the calculations of dilutive earnings per share.

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, 2009 and 2008:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Amounts in Thousands, Except for Per Share Amounts)
 
2009
   
2008
   
2009
   
2008
 
Income (loss) per share from continuing operations
                       
Income (loss) from continuing operations applicable to
                       
Common Stockholders
  $ 2,629     $ (276 )     3,861     $ 96  
Basic income (loss) per share
  $ .05     $ (.01 )     .07     $  
Diluted income (loss) per share
  $ .05     $ (.01 )     .07     $  
                                 
(Loss) income per share from discontinued operations
                               
(Loss) income from discontinued operations
  $ (7 )   $ (159 )     60     $ (1,218 )
Basic loss per share
  $     $           $ (.02 )
Diluted loss per share
  $     $           $ (.02 )
                                 
Income per share from disposal of discontinued operations
                               
Gain on disposal of discontinued operations
  $     $ 94           $ 2,309  
Basic income per share
  $     $           $ .04  
Diluted income per share
  $     $           $ .04  
                                 
Weighted average common shares outstanding – basic
    54,281       53,844       54,130       53,760  
Potential shares exercisable under stock option plans
    614             243       389  
Potential shares upon exercise of Warrants
    59             39        
Weighted average shares outstanding – diluted
    54,954       53,844       54,412       54,149  
                                 
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:
                               
Upon exercise of options
    241       157       1,785       1,172  
Upon exercise of Warrants
                       

 
13

 
 
6.    Long Term Debt
 
Long-term debt consists of the following at September 30, 2009 and December 31, 2008:
(Amounts in Thousands)
 
September
30, 2009
   
December 31,
2008
 
Revolving Credit facility dated December 22, 2000, borrowings based
           
upon eligible accounts receivable, subject to monthly borrowing base
           
calculation, variable interest paid monthly at option of prime rate
           
(3.25% at September 30, 2009) plus 2.0% or minimum floor base London
           
InterBank Offer Rate ("LIBOR") of 2.5% plus 3.0%, balance due in
           
July 2012. (1) (3)
  $ 10,652     $ 6,516  
Term Loan dated December 22, 2000, payable in equal monthly
               
installments of principal of $83, balance due in July 2012, variable
               
interest paid monthly at option of prime rate plus 2.5% or minimum floor
               
base LIBOR of 2.5% plus 3.5%. (1) (3)
    5,917       6,667  
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
    1,667       2,500  
Promissory Note dated May 8, 2009, payable in monthly installments of
               
principal of $87 starting June 8, 2009, balance due May 8, 2011, variable
               
interest paid monthly at LIBOR plus 4.5%, with LIBOR at least 1.5%.(2)
    2,117    
──
 
Various capital lease and promissory note obligations, payable 2009 to
               
2013, interest at rates ranging from 5.0% to 12.6%.
    505       520  
      20,858       16,203  
  Less current portion of long-term debt
    3,064       2,022  
    $ 17,794     $ 14,181  

(1)  Prior to March 5, 2009, variable interest was paid monthly at prime plus 1/2% for our Revolving Credit and prime plus 1.0% for our Term Loan.

(2)  Net of debt discount recorded ($666,000) and amortized ($133,000) based on the estimated fair value of two Warrants and 200,000 shares of the Company’s Common Stock issued on May 8, 2009 in connection with a $3,000,000 promissory note entered into by the Company and Mr. William Lampson and Mr. Diehl Rettig.  See “Promissory Note and Installment Agreement” below for additional information.   

(3)  Our Revolving Credit is collateralized by our account receivables and our Term Loan is collateralized by our property, plant, and equipment.   

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 provided for a term loan ("Term Loan") in the amount of $7,000,000, which requires monthly installments of $83,000.  The Agreement also provided 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, 2009, the excess availability under our Revolving Credit was $7,560,000 based on our eligible receivables.

 
14

 

Pursuant to the Agreement, as amended, we may terminate the Agreement upon 90 days’ prior written notice upon payment in full of the obligation.  We agreed to pay PNC 1% of the total financing in the event we pay off our obligations on or prior to August 4, 2009 and 1/2 % of the total financing if we pay off our obligations on or after August 5, 2009, but prior to August 4, 2010.  No early termination fee shall apply if we pay off our obligations after August 5, 2010.

On March 5, 2009, we entered into an Amendment to our PNC Agreement.  This Amendment increased our borrowing availability by approximately an additional $2,200,000.  In addition, pursuant to the Amendment, monthly interest due on our revolving line of credit was amended from prime plus 1/2% to prime plus 2.0% and monthly interest due on our Term Loan was amended from prime plus 1.0% to prime plus 2.5%.  The Company also has the option to pay monthly interest due on the revolving line of credit by using the LIBOR, with the minimum floor base LIBOR rate of 2.5%, plus 3.0% and to pay monthly interest due on the Term Loan using the minimum floor base LIBOR of 2.5%, plus 3.5%.  In addition, pursuant to the Amendment, the fixed charge coverage ratio was amended to reduce the availability monthly by $48,000.  The Amendment also allowed us to retain funds received from the sale of our PFO property which was completed in the fourth quarter of 2008.  All other terms and conditions to the credit facility remain principally unchanged.  As a condition of this Amendment, we paid PNC a fee of $25,000.  Funds made available under this Amendment were used to secure the additional financial assurance coverage needed by our DSSI subsidiary to operate under the PCB permit issued by the EPA on November 26, 2008.

Promissory Note and Installment Agreement
In acquiring Perma-Fix Northwest, Inc. (“PFNW”- f/k/a Nuvotec) and Perma-Fix Northwest Richland, Inc. (“PFNWR” – f/k/a Pacific EcoSolutions, Inc. (“PEcoS”)), we agreed to pay former shareholders of Nuvotec who qualified as accredited investors, including Robert Ferguson, a current director, pursuant to Rule 501 of Regulation D promulgated under the Securities Act of 1933 $2,500,000, 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.  In June 2009, we paid the first principal installment of $833,333, along with accrued interest.  As of September 30, 2009, interest paid totaled approximately $422,000.  Interest accrued as of September 30, 2009 totaled approximately $34,000.  See Note 7 – “Commitments and Contingencies - Earn-Out Amount - PFNW and PFNWR” and Note 12 – “Related Party Transaction” in this section for information regarding Mr. Robert Ferguson.

As discussed in Note 4 – “Capital Stock, Stock Plans, and Warrants”, on May 8, 2009, the Company entered into a promissory note with William N. Lampson and Mr. Diehl Rettig, the Lenders, for $3,000,000.  Mr. Lampson was formerly a major shareholder of Nuvotec usa, Inc. (n/k/a Perma-Fix Northwest, Inc. (“PFNW”)) and its wholly owned subsidiary, Pacific EcoSolution, Inc. (n/k/a Perma-Fix Northwest Richland, Inc. (“PFNWR”)) prior to our acquisition of PFNW and PFNWR, and Mr. Rettig was formerly a shareholder of, and counsel for, Nuvotec usa, Inc. and its subsidiaries at the time of our acquisition and after our acquisition Mr. Rettig has continued to perform certain legal services for PFNWR.  Both of the Lenders are also stockholders of the Company having received shares of our Common Stock in connection with our acquisition of PFNW and PFNWR.  We used the proceeds of the loan to pay off approximately $2,225,000 (which consisted of interests only) in the second quarter of 2009 due on a promissory note, dated June 25, 2001, as amended on December 28, 2008, entered into by our M&EC subsidiary with PDC, with the remaining proceeds used for working capital purposes. The promissory note provides for monthly principal repayment of approximately $87,000 plus accrued interest, starting June 8, 2009, and on the 8th day of each month thereafter, with interest payable at LIBOR plus 4.5%, with LIBOR at least 1.5%.  Any unpaid principal balance along with accrued interest is due May 8, 2011.  We paid approximately $22,000 in closing costs for the promissory note which is being amortized over the terms of the note.  The promissory note may be prepaid at anytime by the Company without penalty.  As consideration of the Company receiving this loan, we issued in a private placement a Warrant to Mr. Lampson and a Warrant to Mr. Diehl to purchase up to 135,000 and 15,000 shares, respectively, of the Company’s Common Stock at an exercise price of $1.50 per share.  The Warrants are exercisable six months from May 8, 2009 and expire two years from May 8, 2009.  We estimated the fair value of the Warrants to be approximately $190,000 using the Black-Scholes option pricing model with the following assumption:  70.47% volatility, risk free interest rate of 1.0%, an expected life of two years and no dividends.  We also issued an aggregate of 200,000 shares of the Company’s Common Stock during the second quarter of 2009 with Mr. Lampson receiving 180,000 shares and Mr. Rettig receiving 20,000 shares of the Company’s Common Stock.  We determined the fair value of the 200,000 shares of Common Stock to be $476,000 which was based on the closing price of the stock of $2.38 per share on May 8, 2009.  The fair value of the Warrants and Common Stock was recorded as a debt discount and is being amortized over the term of the loan as interest expense – financing fees.  Debt discount amortized as of September 30, 2009 totaled approximately $133,000, of which approximately $83,000 was amortized in the third quarter of 2009.

 
15

 

The promissory note includes an embedded Put Option (“Put”) that can be exercised upon default.  We concluded that the Put should have been bifurcated at inception; however, the Put Option had and continues to have nominal value as of September 30, 2009.  We will continue to monitor the fair value of the Put on a quarterly basis.

7.    Commitments and Contingencies

Hazardous Waste
In connection with our waste management services, we handle hazardous, non-hazardous, and low level radioactive and mixed waste (waste containing both hazardous and radioactive waste), which we transport to our own, or other facilities for destruction or disposal.  As a result of disposing of hazardous and radioactive 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 litigations.

Perma-Fix of Dayton (“PFD”), Perma-Fix of Florida (“PFF”), Perma-Fix of Orlando (“PFO”), Perma-Fix of South Georgia (“PFSG”), and Perma-Fix of Memphis (“PFM”)
In May 2007, the above facilities were named Potentially Responsible Parties (“PRPs”) at the Marine Shale Superfund site in St. Mary Parish, Louisiana (“Site”).  Information provided by the EPA indicates that, from 1985 through 1996, the Perma-Fix facilities above were responsible for shipping 2.8% of the total waste volume received by Marine Shale.  Subject to finalization of this estimate by the PRP group, PFF, PFO and PFD could be considered de-minimus at .06%, .07% and .28% respectively.  PFSG and PFM would be major at 1.12% and 1.27% respectively.  However, at this time the contributions of all facilities are consolidated.

As of the date of this report, the Louisiana Department of Environmental Quality (“LDEQ”) has collected approximately $8,400,000 for the remediation of the site and has completed removal of above ground waste from the site.  The EPA’s unofficial estimate to complete remediation of the site is between $9,000,000 and $12,000,000; however, based on preliminary outside consulting work hired by the PRP group, which we are a party to, the remediation costs could be below EPA’s estimation.  As a result of negotiations with LDEQ and EPA, further remediation work by LDEQ has been put on hold pending completion of a site assessment by the PRP Group.  This site assessment could result in remediation activities to be completed within the funds held by LDEQ.  As part of the PRP Group, we have paid an initial assessment of $10,000 in the fourth quarter of 2007, which was allocated among the facilities. In addition, we accrued approximately $27,000 in the third quarter of 2008 for our estimated portion of the cost of the site assessment, which was allocated among the facilities.  As of September 30, 2009, $18,000 of the accrued amount has been paid, of which $9,000 was paid in the fourth quarter of 2008 and $9,000 was paid in the second quarter of 2009.  We anticipate paying the remaining $9,000 in the fourth quarter of 2009.  As of the date of this report, we cannot accurately access our ultimate liability.  The Company records its environmental liabilities when they are probable of payment and can be estimated within a reasonable range.  Since this contingency currently does not meet this criteria, a liability has not been established.

 
16

 

Industrial Segment Divested Facilities/Operations
As previously disclosed, our subsidiary, Perma-Fix Treatment Services, Inc. (“PFTS”), sold substantially all of its assets in May 2008, pursuant to an Asset Purchase Agreement, as amended (“Agreement”).  Under the Agreement, the buyer assumed certain debts and obligations of PFTS.  We have sued the buyer of the PFTS assets regarding certain liabilities which we believe the buyer assumed and agreed to pay under the Agreement but which the buyer has refused to pay.  The buyer has filed a counterclaim against us and is alleging that PFTS made certain misrepresentations and failed to disclose certain liabilities.  The pending litigation is styled American Environmental Landfill, Inc. v. Perma-Fix Environmental Services, Inc. v. A Clean Environment, Inc., Case No. CJ-2008-659, pending in the District Court of Osage County, State of Oklahoma.  This matter has been ordered to arbitration.

Earn-Out Amount – Perma-Fix Northwest, Inc. (“PFNW”) and Perma-Fix Northwest Richland, Inc. (“PFNWR”)
Pursuant to the merger agreement relating to our acquisition of PFNW and PFNWR in June 2007, we are required to pay to those former shareholders of PFNW immediately prior to our acquisition, which includes Robert L. Ferguson (“Ferguson”), a current member of our Board of Directors, an earn-out amount upon meeting certain conditions for each fiscal period ending June 30, 2008, June 30, 2009, June 30, 2010, and June 30, 2011, with the aggregate earn-out amount to be paid by us not to exceed the sum of $4,552,000 (See Note 12 – “Related Party Transaction” in this section for information regarding Mr. Ferguson).  Under the agreement, the earn-out amount to be paid for any particular fiscal year is to be an amount equal to 10% of the amount that the revenues of our nuclear business (as defined) for such fiscal year exceeds the budgeted amount of revenues for our nuclear business for that particular period, with the first $1,000,000 being placed in an escrow account for a period of two years from the date that the full $1,000,000 is placed in escrow for losses suffered or to be suffered by us, PFNW and PFNWR under the sellers’ and its shareholders’ indemnification obligations.  No earn-out was required to be paid for fiscal 2008, and for 2009 we were required to pay an earn-out of approximately $734,000, which was recorded as an increase to goodwill for PFNWR in the second quarter of 2009.  Under the merger agreement, the former shareholders established a liquidating trust in which Ferguson and William Lampson (“Lampson”) were appointed trustees and were further appointed as representatives of the former shareholders in connection with matters arising under the merger agreement.  Prior to payment of the earn-out amount of approximately $734,000 for fiscal year 2009, we negotiated an amendment to the merger agreement with Ferguson and Lampson (as representatives for the former shareholders and as trustees under the liquidating trust) and the paying agent for the former shareholders and entered into an amendment that provides as follows:

 
·
The termination of the escrow arrangement.  As a result, the earn-out amount for the fiscal period ended June 30, 2009 in the amount of approximately $734,000 was deposited by us on September 30, 2009, with the paying agent in full and complete satisfaction of our obligations in connection with the earn-out for the fiscal period ended June 30, 2009.

 
·
Any indemnification obligations payable to us under the merger agreement will be deducted (“Offset Amount”) from any earn-out amounts payable by us for the fiscal periods ended June 30, 2010, and June 30, 2011.  The Offset Amount for the fiscal year ended June 30, 2010, will include the sum of approximately $93,000, of which approximately $60,000 represents excise tax assessment issued by the State of Washington for the annual periods 2005 to 2007, with the remaining representing a refund request from a PEcoS customer in connection with service for waste treatment prior to our acquisition of PFNWR and PFNW.  The Offset Amount may be revised by us by written notice to the representatives pursuant to the merger agreement.

 
17

 

 
·
We may elect to pay any future earn-out amounts payable under the merger agreement for each of the fiscal periods ended June 30, 2010, and 2011, less the Offset Amount, in excess of $1,000,000 by means of a three year unsecured promissory note bearing an annual rate of 6.0%, payable in 36 equal monthly installments.
 
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 with American International Group, Inc. (“AIG”), 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 provided an initial maximum $35,000,000 of financial assurance coverage and has available capacity to allow for annual inflation and other performance and surety bond requirements.  Our initial finite risk insurance policy required an upfront payment of $4,000,000, 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.  We are required to make seven annual installments, as amended, of $1,004,000, of which $991,000 is to be deposited in the sinking fund account, with the remaining $13,000 represents a terrorism premium.  In addition, we are required to make a final payment of $2,008,000, of which $1,982,000 is to be deposited in the sinking fund account, with the remaining $26,000 represents a terrorism premium.  In March 2009, we paid our sixth of the eight required remaining payments.  In March 2009, we secured additional financial assurance coverage of approximately $5,421,000 with AIG which enabled our Diversified Scientific Services, Inc. (“DSSI”) facility to receive and process wastes under a permit issued by the U.S. Environment Protection Agency (“EPA”) Region 4 on November 26, 2008 to commercially store and dispose of Polychlorinated Biphenyls (“PCBs”).  We secured this additional financial assurance coverage requirement by increasing our initial 25-year finite risk insurance policy with AIG from maximum policy coverage of $35,000,000 to $39,000,000, of which our total financial coverage amounts to $35,869,000 as of September 30, 2009.  Payment for this additional financial assurance coverage requires a total payment of approximately $5,219,000, consisting of an upfront payment of $2,000,000 made on March 6, 2009, of which approximately $1,655,000 was deposited into a sinking fund account, with the remaining representing fee payable to AIG.  In addition, we are required to make three yearly payments of approximately $1,073,000 starting December 31, 2009, of which $888,000 will be deposited into a sinking fund account, with the remaining to represent fee payable to AIG.

As of September 30, 2009, we have recorded $9,623,000 in our sinking fund related to the policy noted above on the balance sheet, which includes interest earned of $789,000 on the sinking fund as of September 30, 2009.  Interest income for the three and nine months ended September 30, 2009 was $16,000 and $59,000, respectively.  On the fourth and subsequent anniversaries of the contract inception, we may elect to terminate this contract.  If we so elect, the Insurer is obligated to pay us an amount equal to 100% of the sinking fund account balance in return for complete releases of liability from both us and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

 
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In August 2007, we entered into a second finite risk insurance policy for our PFNWR facility, which we acquired in June 2007, with AIG.  The policy provides an initial $7,800,000 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 $8,200,000.  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 $7,158,000, consisting of an initial payment of $1,363,000 and two annual payments of $1,520,000, payable by July 31, 2008 and July 31, 2009, and an additional $2,755,000 payment to be made in five quarterly payments of $551,000 beginning September 2007.  In July 2007, we paid the initial payment of $1,363,000, of which $1,106,000 represented premium on the policy and the remaining was deposited into a sinking fund account.  We have made both of the annual payments of $1,520,000, of which one annual payment was made in the third quarter of 2009.  For each of the $1,520,000 payments, $1,344,000 was deposited into a sinking fund account and the remaining represented premium.   We have made all of the five quarterly payments which were deposited into a sinking fund.  As of September 30, 2009, we have recorded $5,834,000 in our sinking fund related to this policy on the balance sheet, which includes interest earned of $134,000 on the sinking fund as of September 30, 2009.  Interest income for the three months and nine months ended September 30, 2009 totaled $12,000 and $62,000, respectively.

8.    Discontinued Operations and Divestitures
Our discontinued operations encompass our PFMD, PFD, and PFTS facilities within our Industrial Segment as well as two previously shut down locations, PFP and PFMI, two facilities which were approved as discontinued operations by our Board of Directors effective November 8, 2005, and October 4, 2004, respectively.

On January 8, 2008, we sold substantially all of the assets of PFMD, pursuant to the terms of an Asset Purchase Agreement, dated January 8, 2008.  In consideration for such assets, the buyer paid us $3,811,000 (purchase price of $3,825,000 less closing costs) in cash at the closing and assumed certain liabilities of PFMD.  The cash consideration was subject to certain working capital adjustments after closing.  Proceeds received from the sale were used to pay down our term loan, with the remaining funds used to pay down our revolver.  We recorded $1,786,000 (net of taxes of $71,000) in final gain on the sale of PFMD which was recorded separately on the Consolidated Statement of Operations as “Gain on disposal of discontinued operations, net of taxes” for the year ended December 31, 2008.

On March 14, 2008, we completed the sale of substantially all of the assets of PFD, pursuant to the terms of an Asset Purchase Agreement, dated March 14, 2008, for approximately $2,143,000 in cash, subject to certain working capital adjustments after the closing, plus the assumption by the buyer of certain of PFD’s liabilities and obligations.  We received cash of approximately $2,139,000 at closing, which was net of certain closing costs.  The proceeds received were used to pay down our term loan.  Our final gain on the sale PFD totaled $256,000, net of taxes of $0, which was recorded on the Consolidated Statement of Operations as “Gain on disposal of discontinued operations, net of taxes”, for the year ended December 31, 2008.

On May 30, 2008, we completed the sale of substantially all of the assets of PFTS, pursuant to the terms of an Asset Purchase Agreement, dated May 14, 2008 as amended by a First Amendment dated May 30, 2008.  In consideration for such assets, the buyer paid us $1,468,000 (purchase price of $1,503,000 less certain closing/settlement costs) in cash at closing and assumed certain liabilities of PFTS.  The cash consideration was subject to certain working capital adjustments after closing.  The proceeds received were used to pay down our term loan with the remaining funds used to pay down our revolver.  We recorded a final gain on the sale of PFTS of $281,000, net of taxes of $0, which was recorded on the Consolidated Statement of Operations as “Gain on disposal of discontinued operations, net of taxes”, for the year ended December 31, 2008.  We have sued the buyer of the PFTS’ assets regarding certain liabilities which we believe that the buyer assumed and agreed to pay under the Asset Purchase Agreement but which the buyer has refused to satisfy as of the date of this report.   The buyer has filed a counterclaim against us and is alleging that PFTS made certain misrepresentations and failed to disclose certain liabilities.  The pending litigation is styled American Environmental Landfill, Inc. v. Perma-Fix Environmental Services, Inc. v. A Clean Environment, Inc., Case No. CJ-2008-659, pending in the District Court of Osage County, State of Oklahoma.  This matter has been ordered to arbitration.

 
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The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2009 and 2008.  The gains on disposals of discontinued operations, net of taxes, were reported separately on our Consolidated Statements of Operations as “Gain on disposal of discontinued operations, net of taxes”.  The operating results of discontinued operations are included in our Consolidated Statements of Operations as part of our “Income (loss) from discontinued operations, net of taxes”.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Amounts in Thousands)
 
2009
   
2008
   
2009
   
2008
 
                         
Net revenues
  $     $     $     $ 3,195  
Interest recovery (expense)
  $ 95     $ (28 )   $ (64 )   $ (99 )
Operating (loss) income from discontinued operations (1)
  $ (7 )   $ (159 )   $ 60     $ (1,218 )
Gain on disposal of discontinued operations (2)
  $     $ 94     $     $ 2,309  
(Loss) income from discontinued operations
  $ (7 )   $ (65 )   $ 60     $ 1,091  

(1)  Net of taxes of $0 for all periods noted.

(2) Net of taxes of $35,000 and $78,000 for three and nine months ended September 30, 2008, respectively.

Our “(Loss) income from discontinued operations, net of taxes” on the Consolidated Statement of Operations for the three and nine months ended September 30, 2009 included approximately $115,000 in abated interest in connection with an excise tax audit for fiscal years 1999 to 2006 for PFTS.  In the second quarter of 2009, we recorded approximately $119,000 in interest expense in connection with this excise tax audit.  Our “income from discontinued operations, net of taxes” for the nine months ended September 30, 2009 also included a recovery of approximately $400,000 in closure cost for PFTS recorded in the first quarter of 2009.  In connection with the divestiture of PFTS above, the buyer of PFTS’s assets was required to replace our financial assurance bond with its own financial assurance mechanism for facility closures.  Our financial assurance bond for PFTS was required to remain in place until the buyer has provided replacement coverage.  On March 24, 2009, the appropriate regulatory authority authorized the release of our financial assurance bond for PFTS which resulted in this recovery this closure costs.

Assets and liabilities related to discontinued operations total $725,000 and $2,228,000 as of September 30, 2009, respectively and $761,000 and $2,994,000 as of December 31, 2008, respectively.

The following table presents the Industrial Segment’s major classes of assets and liabilities of discontinued operations that are classified as held for sale as of September 30, 2009 and December 31, 2008.  The held for sale asset and liabilities balances as of December 31, 2008 may differ from the respective balances at closing:

 
20

 

   
September 30,
   
December 31,
 
(Amounts in Thousands)
 
2009
   
2008
 
             
Account receivable, net
  $     $  
Inventories
           
Other assets
          22  
Property, plant and equipment, net (1)
    651       651  
Total assets held for sale
  $ 651     $ 673  
Account payable
  $     $  
Accrued expenses and other liabilities
          5  
Note payable
           
Environmental liabilities
           
Total liabilities held for sale
  $     $ 5  

 
(1) net of accumulated depreciation of $13 for as of September 30, 2009 and December 31, 2008.

The following table presents the Industrial Segment’s major classes of assets and liabilities of discontinued operations that are not held for sale as of September 30, 2009 and December 31, 2008:

   
September 30,
   
December 31,
 
(Amounts in Thousands)
 
2009
   
2008
 
             
Other assets
  $ 74     $ 88  
Total assets of discontinued operations
  $ 74     $ 88  
Account payable
  $ 2     $ 15  
Accrued expenses and other liabilities
    1,348       1,947  
Deferred revenue
           
Environmental liabilities
    878       1,027  
Total liabilities of discontinued operations
  $ 2,228     $ 2,989  

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.  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.  During 2006, based on state-mandated criteria, we began implementing the modified methodology to remediate the facility.  We have spent approximately $817,000 for closure costs since discontinuation of PFMI in October 2004, of which approximately $72,000 was spent during the nine months ended September 30, 2009 and $26,000 was spent during 2008.  We have $466,000 accrued for the closure, as of September 30, 2009, and we anticipate spending $18,000 in the remaining three months of 2009, with the remainder over the next five years.  Based on the current status of the Corrective Action, we believe that the remaining reserve is adequate to cover the liability.

 
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As of September 30, 2009, PFMI has a pension payable of $958,000.  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 $184,000 that we expect to pay over the next year.

9.
Change in Estimate - Legacy Waste Accrual - Perma-Fix Northwest, Inc. (“PFNW”) and Perma-Fix Northwest Richland, Inc. (“PFNWR”)

In acquiring PFNWR and PFNW in June 2007, the Company allocated the cost of the acquisition to the specific tangible and intangible assets acquired and liabilities assumed based upon their fair values at the date of acquisition as required by FASB ASC 805, “Business Combination”.  Judgment and estimates were made to determine these values using the most readily available information at the time of acquisition.  During the quarter ended June 30, 2008, we finalized the cost of the acquisition to the assets acquired and liabilities. Adjustments to assets acquired or liabilities assumed during the purchase allocation period, which is generally one year, was recorded to goodwill.

During the third quarter of 2009, as result of a change in estimate related to accrued costs to dispose of legacy waste that were assumed as part of our acquisition of PFNWR and PFNW in June 2007, we reduced our disposal/transportation accrual by approximately $787,000 which was recorded as a reduction to our disposal/transportation expense in our cost of goods sold for the quarter ended September 30, 2009.  The change in estimate was necessary due to our accumulation of new information that has resulted in our identifying more efficient and cost effective ways to dispose of this legacy waste.

10.  Operating Segments

In accordance to FASB ASC 280, “Segment Reporting”, 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 three 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 certain facilities within our Industrial Segment (See “Note 8 – Discontinued Operations and Divestitures” to “Notes to Consolidated Financial Statements”).

Our operating segments are defined as follows:

The Nuclear Waste Management Services Segment (“Nuclear 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 Perma-Fix of Northwest Richland, Inc.

The Consulting Engineering Services Segment (“Engineering Segment”) provides environmental engineering and regulatory compliance services through Schreiber, Yonley & Associates, Inc. which includes oversight management of environmental restoration projects, air, soil, and water sampling, compliance reporting, emission reduction strategies, compliance auditing, and various compliance and training activities to industrial and government customers, as well as, engineering and compliance support needed by our other segments.

The Industrial Waste Management Services Segment (“Industrial Segment”) provides on-and-off site treatment, storage, processing and disposal of hazardous and non-hazardous industrial waste, and wastewater through our three facilities: Perma-Fix of Ft. Lauderdale, Inc., Perma-Fix of Orlando, Inc., and Perma-Fix of South Georgia, Inc.

 
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The table below presents certain financial information of our operating segment as of and for the three and nine months ended September 30, 2009 and 2008 (in thousands).

Segment Reporting for the Quarter Ended September 30, 2009
   
Nuclear
   
Industrial
   
Engineering
   
Segments
Total
   
Corporate (2)
   
Consolidated
Total
 
Revenue from external customers
  $ 23,518
(3)
  $ 2,128     $ 888     $ 26,534     $     $ 26,534  
Intercompany revenues
    366       150       91       607             607  
Gross profit
    6,689       741       258       7,688             7,688  
Interest income
                            29       29  
Interest expense (recovery)
    67       (25 )     1       43       288       331  
Interest expense-financing fees
                            104       104  
Depreciation and amortization
    1,066       107       8       1,181       7       1,188  
Segment profit (loss)
    4,220       266       74       4,560       (1,931 )     2,629  
Segment assets(1)
    100,642       5,322       2,222       108,186       21,489
(4)
    129,675  
Expenditures for segment assets
    425       14       1       440       24       464  
Total long-term debt
    2,032       116       24       2,172       18,686
(5)
    20,858  

Segment Reporting for the Quarter Ended September 30, 2008
   
Nuclear
   
Industrial
   
Engineering
   
Segments
Total
   
Corporate (2)
   
Consolidated
Total
 
Revenue from external customers
  $ 12,519
(3)
  $ 2,624     $ 846     $ 15,989     $     $ 15,989  
Intercompany revenues
    802       213       200       1,215             1,215  
Gross profit
    3,168       590       347       4,105             4,105  
Interest income
                            52       52  
Interest expense
    134       4       1       139       155       294  
Interest expense-financing fees
    2                   2       12       14  
Depreciation and amortization
    1,073       485       8       1,566       13       1,579  
Segment profit (loss)
    782       309       170       1,261       (1,537 )     (276 )
Segment assets(1)
    93,044       6,021       2,110       101,175       16,984
(4)
    118,159  
Expenditures for segment assets
    207       3       3       213       5       218  
Total long-term debt
    4,655       171             4,826       10,283       15,109  

Segment Reporting for the Nine Months Ended September 30, 2009
   
Nuclear
   
Industrial
   
Engineering
   
Segments
Total
   
Corporate (2)
   
Consolidated
Total
 
Revenue from external customers
  $ 63,364
(3)
  $ 6,200     $ 2,670     $ 72,234     $     $ 72,234  
Intercompany revenues
    1,807       525       314       2,646             2,646  
Gross profit
    16,281       1,723       797       18,801             18,801  
Interest income
                            121       121  
Interest expense
    592       14       3       609       737       1,346  
Interest expense-financing fees
                            180       180  
Depreciation and amortization
    3,196       320       27       3,543       26       3,569  
Segment profit (loss)
    8,682       180       319       9,181       (5,320 )     3,861  
Segment assets(1)
    100,642       5,322       2,222       108,186       21,489