UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

Form 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended September 30, 2018

 

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 of

incorporation or organization)

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

 

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

 

N/A

 

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

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes [X] No [  ]

 

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

 

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

 

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

 

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

 

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

 

Class   Outstanding at November 3, 2018
Common Stock, $.001 Par Value   11,936,573 shares

 

 

 

   
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

 

INDEX

 

Page No.
PART I FINANCIAL INFORMATION  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets - September 30, 2018 and December 31, 2017 1
     
  Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2018 and 2017 3
     
  Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2018 and 2017 4
     
  Consolidated Statement of Stockholders’ Equity - Nine Months Ended September 30, 2018 5
     
  Consolidated Statements of Cash Flows -Nine Months Ended September 30, 2018 and 2017 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
     
Item 4. Controls and Procedures 39
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 6. Exhibits 39

 

   
 

 

PART I - FINANCIAL INFORMATION

ITEM 1. – Financial Statements

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets

 

   September 30,   December 31, 
   2018   2017 
(Amounts in Thousands, Except for Share and Per Share Amounts)  (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $793   $1,063 
Accounts receivable, net of allowance for doubtful accounts of $159 and $720, respectively   8,300    7,940 
Unbilled receivables - current   3,389    4,547 
Inventories   357    393 
Prepaid and other assets   3,331    3,281 
Current assets related to discontinued operations   95    89 
Total current assets   16,265    17,313 
           
Property and equipment:          
Buildings and land   19,782    23,806 
Equipment   18,317    33,182 
Vehicles   376    393 
Leasehold improvements   119    11,549 
Office furniture and equipment   1,577    1,670 
Construction-in-progress   1,278    653 
Total property and equipment   41,449    71,253 
Less accumulated depreciation   (26,107)   (56,383)
Net property and equipment   15,342    14,870 
           
Property and equipment related to discontinued operations   81    81 
           
Intangibles and other long term assets:          
Permits   8,393    8,419 
Other intangible assets - net   1,327    1,487 
Unbilled receivables - non-current   -    184 
Finite risk sinking fund   15,888    15,676 
Other assets   1,175    1,313 
Other assets related to discontinued operations   138    195 
Total assets  $58,609   $59,538 

 

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

 

 1 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets, Continued

 

   September 30,   December 31, 
   2018   2017 
(Amounts in Thousands, Except for Share and per Share Amounts)  (Unaudited)   (Audited) 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $4,521   $3,537 
Accrued expenses   5,085    4,782 
Disposal/transportation accrual   1,497    2,071 
Deferred revenue   5,872    4,311 
Accrued closure costs - current   1,039    2,791 
Current portion of long-term debt   1,244    1,184 
Current liabilities related to discontinued operations   940    905 
Total current liabilities   20,198    19,581 
           
Accrued closure costs   5,635    5,604 
Other long-term liabilities   207    1,191 
Deferred tax liabilities   350    1,694 
Long-term debt, less current portion   3,179    2,663 
Long-term liabilities related to discontinued operations   354    359 
Total long-term liabilities   9,725    11,511 
           
Total liabilities   29,923    31,092 
           
Commitments and Contingencies (Note 9)          
           
Series B Preferred Stock of subsidiary, $0 par value; 1,467,396 shares authorized; 0 and 1,284,730 shares issued, respectively; 0 and 1,284,730 shares outstanding, respectively; liquidation value of $1.00 per share plus accrued and unpaid dividends of $0 and $995, respectively (Note 13)       1,285 
           
Stockholders’ Equity:          
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding        
Common Stock, $.001 par value; 30,000,000 shares authorized; 11,930,247 and 11,738,623 shares issued, respectively; 11,922,605 and 11,730,981 shares outstanding, respectively   12    12 
Additional paid-in capital   107,435    106,417 
Accumulated deficit   (77,245)   (77,893)
Accumulated other comprehensive loss   (151)   (112)
Less Common Stock in treasury, at cost; 7,642 shares   (88)   (88)
Total Perma-Fix Environmental Services, Inc. stockholders’ equity   29,963    28,336 
Non-controlling interest   (1,277)   (1,175)
Total stockholders’ equity   28,686    27,161 
           
Total liabilities and stockholders’ equity  $58,609   $59,538 

 

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)  2018   2017   2018   2017 
                 
Net revenues  $11,984   $11,758   $37,801   $37,179 
Cost of goods sold   10,159    10,013    30,612    30,362 
Gross profit   1,825    1,745    7,189    6,817 
                     
Selling, general and administrative expenses   2,640    2,653    8,061    8,337 
Research and development   229    293    680    1,300 
Gain on disposal of property and equipment   (9)       (34)   (1)
Impairment loss on tangible assets       672    —     672 
Loss from operations   (1,035)   (1,873)   (1,518)   (3,491)
                     
Other income (expense):                    
Interest income   82    34    212    105 
Interest expense   (62)   (59)   (177)   (249)
Interest expense-financing fees   (10)   (9)   (27)   (27)
Net gain on exchange offer of Series B Preferred Stock of subsidary (Note 13)           1,596     
Other       1        2 
(Loss) income from continuing operations before taxes   (1,025)   (1,906)   86    (3,660)
Income tax (benefit) expense   (1,342)   71    (1,272)   218 
Income (loss) from continuing operations, net of taxes   317    (1,977)   1,358    (3,878)
                     
Loss from discontinued operations, net of taxes of $0   (131)   (145)   (495)   (436)
Net income (loss)   186    (2,122)   863    (4,314)
                     
Net loss attributable to non-controlling interest   (35)   (78)   (102)   (374)
                     
Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders  $221   $(2,044)  $965   $(3,940)
                     
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic and diluted:                    
Continuing operations  $.03   $(.16)  $.12   $(.30)
Discontinued operations   (.01)   (.01)   (.04)   (.04)
Net income (loss) per common share  $.02   $(.17)  $.08   $(.34)
                     
Number of common shares used in computing net income (loss) per share:                    
Basic   11,922    11,714    11,828    11,698 
Diluted   12,027    11,714    11,909    11,698 

 

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

 

 3 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(Amounts in Thousands)   2018     2017     2018     2017  
                         
Net income (loss)   $ 186     $ (2,122 )   $ 863     $ (4,314 )
Other comprehensive income (loss):                                
Foreign currency translation adjustment     18       12       (39 )     39  
                                 
Comprehensive income (loss)     204       (2,110 )     824       (4,275 )
Comprehensive loss attributable to non-controlling interest     (35 )     (78 )     (102 )     (374 )
Comprehensive income (loss) attributable to Perma-Fix Environmental Services, Inc. stockholders   $ 239     $ (2,032 )   $ 926     $ (3,901 )

 

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

 

 4 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2018

 

(Amounts in thousands, except

  Common Stock   Additional Paid-In   Common Stock  Held In   Accumulated Other Comprehensive   Non-controlling Interest in   Accumulated   Total Stockholders’ 

for share amounts)

  Shares   Amount   Capital   Treasury   Loss   Subsidiary   Deficit   Equity 
                                 
Balance at December 31, 2017   11,738,623   $12   $106,417   $(88)  $(112)  $(1,175)  $(77,893)   27,161 
Adoption of accounting standards
updates (Note 2)
                                 (317)   (317)
Net (loss) income                       (102)   965    863 
Foreign currency translation adjustment                   (39)           (39)
Issuance of Common Stock upon exercise of options   10,000        36                    36 
Issuance of Common Stock from exchange offer of Series B Preferred Stock of subsidiary (Note 13)   134,994        648                    648 
Issuance of Common Stock for services   46,630        191                    191 
Stock-Based Compensation           143                    143 
Balance at September 30, 2018   11,930,247   $12   $107,435   $(88)  $(151)  $(1,277)  $(77,245)   28,686 

 

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

 

 5 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   September 30, 
(Amounts in Thousands)  2018   2017 
Cash flows from operating activities:          
Net income (loss)  $863   $(4,314)
Less: loss from discontinued operations, net of taxes of $0   (495)   (436)
           
Income (loss) from continuing operations, net of taxes   1,358    (3,878)
Adjustments to reconcile income (loss) from continuing operations to cash provided by (used in) operating activities:          
Depreciation and amortization   1,095    3,394 
Amortization of debt issuance costs   27    27 
Deferred tax (benefit) expense   (1,344)   105 
Provision for bad debt reserves   22    85 
Gain on disposal of property and equipment   (34)   (1)
Gain on exchange offer of Series B Preferred Stock of subsidiary (Note 13)   (1,659)    
Impairment loss on tangible assets       672 
Issuance of common stock for services   191    161 
Stock-based compensation   143    96 
Changes in operating assets and liabilities of continuing operations          
Accounts receivable   (382)   41 
Unbilled receivables   1,342    (1,554)
Prepaid expenses, inventories and other assets   1,272    293 
Accounts payable, accrued expenses and unearned revenue   (983)   914 
Cash provided by continuing operations   1,048    355 
Cash used in discontinued operations   (468)   (464)
Cash provided by (used in) operating activities   580    (109)
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,102)   (200)
Proceeds from sale of property and equipment   34    7 
Cash used in investing activities of continuing operations   (1,068)   (193)
Cash provided by investing activities of discontinued operations   54    52 
Cash used in investing activities   (1,014)   (141)
           
Cash flows from financing activities:          
Repayments of revolving credit borrowings   (40,906)   (34,979)
Borrowing on revolving credit   42,189    31,176 
Proceeds from issuance of common stock upon exercise of options   36     
Principal repayments of long term debt   (935)   (914)
Cash provided by (used in) financing activities of continuing operations   384    (4,717)
           
Effect of exchange rate changes on cash   (8)   14 
           
Decrease in cash and finite risk sinking fund (restricted cash) (Note 2)   (58)   (4,953)
Cash and finite risk sinking fund (restricted cash) at beginning of period (Note 2)   16,739    21,650 
Cash and finite risk sinking fund (restricted cash) at end of period (Note 2)  $16,681   $16,697 
           
Supplemental disclosure:          
Interest paid  $173   $252 
Income taxes paid   160    17 
Equipment purchase subject to capital lease   213     

 

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

 

 6 
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Notes to Consolidated Financial Statements

September 30, 2018

(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, 2017.

 

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 (“the Commission”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been 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, 2018 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2018.

 

The Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

2. Summary of Significant Accounting Policies

 

Our accounting policies are as set forth in the notes to the December 31, 2017 consolidated financial statements referred to above.

 

Recently Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” followed by a series of related accounting standard updates (collectively referred to as “Topic 606”), which superseded nearly all existing revenue recognition guidance. Topic 606 provides a single, comprehensive revenue recognition model for all contracts with customers. Under the new standard, a five-step process is utilized in order to determine revenue recognition, depicting the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Topic 606 also requires additional disclosure surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Topic 606 is effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). The new standard permits two implementation approaches: the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company adopted Topic 606 effective January 1, 2018 under the modified retrospective approach to all contracts as of date of adoption. The Company recognized the cumulative effect of initially adopting Topic 606 as an increase of approximately $317,000 to the opening balance of accumulated deficit at January 1, 2018. The adoption of Topic 606 did not result in significant changes to our revenues within our Treatment and Services Segments. The cumulative impact to the opening balance of accumulated deficit at January 1, 2018 was primarily driven by changes to the timing of revenue recognition in certain immaterial waste streams within our Treatment Segment. See “Note 3 – Revenue” for additional disclosures related to our revenues under the new standard. The comparative previous period information continues to be reported under the accounting standards in effect for that period. We expect the impact of the adoption of Topic 606 to be immaterial to our consolidated financial statements on an on-going basis.

 

 7 
 

 

The cumulative effect of the changes made to our January 1, 2018 unaudited Consolidated Balance Sheet for the adoption of Topic 606 was as follows (in thousands):

 

   Balance at   Adjustment   Opening balance at 
   December 31,   Due to   January 1, 
   2017   Topic 606   2018 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Disposal/transportation accrual  $2,071   $(455)  $1,616 
Deferred revenue   4,311    772    5,083 
                
Stockholders’ Equity:               
Accumulated deficit  $(77,893)  $(317)  $(78,210)

 

In accordance with Topic 606 requirements, the disclosure of the impact of adoption of Topic 606 on our unaudited Consolidated Balance Sheets, Consolidated Statement of Operations, and Consolidated Statement of Comprehensive Income was as follows (in thousands):

 

Consolidated Balance Sheet  September 30, 2018 
       Balances Before     
       Adoption of   Effect of Change 
   As Reported   Topic 606   Higher/(Lower) 
             
LIABILITIES AND STOCKHOLDERS’ EQUITY               
Current liabilities:               
Disposal/transportation accrual  $1,497   $1,935   $(438)
Deferred revenue   5,872    5,154    718 
                
Stockholders’ Equity:               
Accumulated deficit  $(77,245)  $(77,282)  $37 

 

Consolidated Statement of Operations  For the three months ended September 30, 2018 
       Balances Before     
       Adoption of   Effect of Change 
   As Reported   Topic 606   Higher/(Lower) 
             
Revenues  $11,984   $11,958   $26 
Cost of goods sold   10,159    10,163    (4)
Income from continuing operations, net of taxes   317    287    30 
Net income attributable to Perma-Fix Services, Inc. common stockholders   221    191    30 
                
Net income attributable to Perma-Fix Environmental Services, Inc. common stockholders - basic and diluted:               
Continuing operations  $.03   $.03   $ 
Net income per common shares  $.02   $.02   $ 

 

 8 
 

 

Consolidated Statement of Operations  For the nine months ended September 30, 2018 
       Balances Before     
       Adoption of   Effect of Change 
   As Reported   Topic 606   Higher/(Lower) 
             
Revenues  $37,801   $37,746   $55 
Cost of goods sold   30,612    30,594    18 
Income from continuing operations, net of taxes   1,358    1,321    37 
Net income attributable to Perma-Fix Services, Inc. common stockholders   965    928    37 
               
Net income attributable to Perma-Fix Environmental Services, Inc. common stockholders - basic and diluted:               
Continuing operations  $.12   $.12   $ 
Net income per common shares  $.08   $.08   $ 

 

Consolidated Statement of Comprehensive Income  For the three months ended September 30, 2018 
       Balances Before     
       Adoption of   Effect of Change 
   As Reported   Topic 606   Higher/(Lower) 
             
Net income  $186   $156   $30 
Comprehensive income attributable to Perma-Fix Environmental Services, Inc. stockholders   239    209    30 

 

Consolidated Statement of Comprehensive Income  For the nine months ended September 30, 2018 
       Balances Before     
       Adoption of   Effect of Change 
   As Reported   Topic 606   Higher/(Lower) 
             
Net income  $863   $826   $37 
Comprehensive income attributable to Perma-Fix Environmental Services, Inc. stockholders   926    889    37 

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),” which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. Subsequently, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230), Restricted Cash, a consensus of the FASB Emerging Issues Task Force,” which clarifies the guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents. Although ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU 2016-15 and ASU 2016-18 are effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company retrospectively adopted these ASUs effectively January 1, 2018 and has included finite risk sinking funds (included in other long term assets of the Company’s Consolidated Statement of Balance Sheets) of $15,888,000 and $15,642,000 at September 30, 2018 and 2017, respectively, as well as previously reported cash, when reconciling the beginning-of- period and end-of-period cash and restricted cash on the accompanying Company’s Consolidated Statements of Cash Flows. The Company’s finite risk sinking funds represent cash held as collateral under the Company’s financial assurance policy (see “Note 9 – Commitment and Contingencies – Insurance” for a discussion of the Company’s finite risk sinking funds). The adoption of these ASUs by the Company effective January 1, 2018 did not have a material impact on the Company’s financial position and results of operations.

 

 9 
 

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which eliminates the existing exception in U.S. GAAP prohibiting the recognition of the income tax consequences for intra-entity asset transfers. Under ASU 2016-16, entities are required to recognize the income tax consequences of intra-entity asset transfers other than inventory when the transfer occurs. ASU 2016-16 is effective on a modified retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The adoption of ASU 2016-16 by the Company effective January 1, 2018 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) – Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The adoption of ASU 2017-01 by the Company effective January 1, 2018 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted, including in an interim period. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. The adoption of ASU 2017-01 by the Company effective January 1, 2018 did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

Recently Issued Accounting Standards – Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842 (Leases),” which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Also, in July 2018, the FASB issued ASU 2018-11, “Leases – (Topic 842): Targeted Improvements,” which provides an additional (and optional) transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. For public companies, these standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. These ASUs are effective January 1, 2019 for the Company. The Company is still evaluating the potential impact of adopting these standards on our financial statements.

 

In February 2018, FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the reclassification of certain income tax effects related to the new Tax Cuts and Jobs Act legislation between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive income” (rather than in “Income from continuing operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company does not expect that the adoption of ASU 2018-09 will have a material impact on the Company’s financial statements.

 

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In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company does not expect that the adoption of ASU 2018-09 will have a material impact on the Company’s financial statements.

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements.” ASU 2018-09 provides amendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entities within the scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of ASU 2018-09. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The guidance applicable immediately did not have a material impact on the Company’s financial statements. The Company does not expect the remaining guidance under this ASU will have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 improves the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact that this standard will have on its financial statements.

 

3. Revenue

 

The Company accounts for revenue in accordance with ASC Topic 606, which the Company adopted on January 1, 2018 using the modified retrospective method. The majority of our revenue is derived from short term contracts with an original expected length of one year or less.

 

Performance Obligation

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue as the performance obligation is satisfied.

 

Treatment Segment Revenues:

 

Contracts in our Treatment Segment have a single performance obligation as the promise to receive, treat and dispose of waste is not separately identifiable in the contract and, therefore, not distinct. Performance obligations are generally satisfied over time using the input method. Under the input method, the Company uses a measure of progress divided into major phases which include receipt, treatment/processing and shipment/final disposal. As major processing phases are completed and the costs are incurred, the proportional percentage of revenue is recognized. Transaction price for Treatment Segment contracts are determined by the stated fixed rate per unit price as stipulated in the contract.

 

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Services Segment Revenues:

 

Revenues for our Services Segment are generated from time and materials, cost reimbursement or fixed price arrangements:

 

The Company’s primary obligation to customers in time and materials contracts relate to the provision of services to the customer at the direction of the customer. This provision of services at the request of the customer is the performance obligation, which is satisfied over time. Revenue earned from time and materials contracts is determined using the input method and is based on contractually defined billing rates applied to services performed and materials delivered.

 

The Company’s primary performance obligation to customers in cost reimbursement contracts is to complete certain tasks and work streams. Each specified work stream or task within the contract is considered to be a separate performance obligation. The transaction price is calculated using an estimated cost to complete the various scope items to achieve the performance obligation as stipulated in the contract. An estimate is prepared for each individual scope item in the contract and the transaction price is allocated on a time and materials basis as services are provided. Revenue from cost reimbursement contracts is recognized over time using the input method based on costs incurred, plus a proportionate amount of fee earned.

 

Under fixed price contracts, the objective of the project is not attained unless all scope items within the contract are completed and all of the services promised within fixed fee contracts constitute a single performance obligation. Transaction price is estimated based upon the estimated cost to complete the overall project. Revenue from fixed price contracts is recognized over time using the output method based on the percentage of project completion multiplied by the total fee as a measure of progress.

 

The nature of our contracts does not give rise to variable consideration.

 

Significant Payment Terms

 

Invoicing is based on schedules established in customer contracts. Payment terms vary by customers but are generally established at 30 days from invoicing.

 

Disaggregation of Revenue

 

In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of our services and provides meaningful disaggregation of each business segment’s results of operations. The following tables present further disaggregation of our revenues by different categories for our Services and Treatment Segments:

 

Revenue by Contract Type
(In thousands)  Three Months Ended   Three Months Ended 
   September 30, 2018   September 30, 2017 
   Treatment   Services   Total   Treatment   Services   Total 
Fixed price  $9,103   $304   $9,407   $9,355   $383   $9,738 
Cost reimbursement                        
Time and materials       2,577    2,577        2,020    2,020 
Total  $9,103   $2,881   $11,984   $9,355   $2,403   $11,758 

 

Revenue by Contract Type
(In thousands)  Nine Months Ended   Nine Months Ended 
   September 30, 2018   September 30, 2017 
   Treatment   Services   Total   Treatment   Services   Total 
Fixed price  $27,207   $1,040   $28,247   $29,019   $623   $29,642 
Cost reimbursement                        
Time and materials       9,554    9,554        7,537    7,537 
Total  $27,207   $10,594   $37,801   $29,019   $8,160   $37,179 

 

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Revenue by generator    
(In thousands)  Three Months Ended   Three Months Ended 
   September 30, 2018   September 30, 2017 
   Treatment   Services   Total   Treatment   Services   Total 
Domestic government  $6,552   $1,848   $8,400   $7,170   $1,376   $8,546 
Domestic commercial   2,437    718    3,155    2,185    523    2,708 
Foreign government   114    294    408        483    483 
Foreign commercial       21    21        21    21 
Total  $9,103   $2,881   $11,984   $9,355   $2,403   $11,758 

 

Revenue by generator    
(In thousands)  Nine Months Ended   Nine Months Ended 
   September 30, 2018   September 30, 2017 
   Treatment   Services   Total   Treatment   Services   Total 
Domestic government  $19,098   $8,231   $27,329   $21,764   $5,919   $27,683 
Domestic commercial   7,995    1,661    9,656    7,255    1,417    8,672 
Foreign government   114    632    746        762    762 
Foreign commercial       70    70        62    62 
Total  $27,207   $10,594   $37,801   $29,019   $8,160   $37,179 

 

Contract Balances

 

The timing of revenue recognition, billings, and cash collections results in accounts receivable and unbilled receivables (contract assets). The Company’s contract liabilities consist of deferred revenues which represents advance payment from customers in advance of the completion of our performance obligation.

 

The following table represents changes in our contract assets and contract liabilities balances:

 

         Year-to-date   Year-to-date 
(In thousands)  September 30, 2018   January 1, 2018   Change ($)   Change (%) 
Contract assets                    
Account receivables, net of allowance  $8,300   $7,940   $360    4.5%
Unbilled receivables - current   3,389    4,547    (1,158)   (25.5)%
Unbilled receivables - non-current       184    (184)   (100.0)%
                     
Contract liabilities                    
Deferred revenue  $5,872   $5,083   $789    15.5%

 

The net decrease in our contract assets was primarily due to timing of our invoicing and accounts receivable collections. The Company provides various payment terms to our customers; therefore, our accounts receivable are impacted by these terms and the related timing of accounts receivable collections.

 

During the three and nine months ended September 30, 2018, the Company recognized revenue of $1,032,000 and $6,605,000, respectively, which was included in the deferred revenue balance at the beginning of the year. During the three and nine months ended September 30, 2017, the Company recognized revenue of $389,000 and $4,735,000, respectively, which was included in the deferred revenue balance at the beginning of the year. All revenue recognized in each period related to performance obligations satisfied within the respective period.

 

Incremental Costs to Obtain a Contract

 

Costs incurred to obtain contracts with our customers are immaterial and as a result, the Company expenses (within selling, general and administration expenses (“SG&A”)) incremental costs incurred in obtaining contracts with our customer as incurred.

 

Remaining Performance Obligations

 

The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

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The Company applies the transition practical expedient in paragraph 606-10-65-1(f)(3) and does not disclose the amount of the transaction price allocated to the remaining performance obligations or an explanation of when the Company expects to recognize that amount as revenue for periods prior to the adoption of Topic 606.

 

4. Intangible Assets

 

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

 

       September 30, 2018   December 31, 2017 
   Useful   Gross       Net   Gross       Net 
   Lives   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   (Years)   Amount   Amortization   Amount   Amount   Amortization   Amount 
Intangibles (amount in thousands)                            
Patent   1-17   $710   $(330)  $380   $657   $(306)  $351 
Software   3    410    (403)   7    410    (398)   12 
Customer relationships   12    3,370    (2,430)   940    3,370    (2,246)   1,124 
Permit   10    545    (523)   22    545    (483)   62 
Total       $5,035   $(3,686)  $1,349   $4,982   $(3,433)  $1,549 

 

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

 

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

 

   Amount 
Year  (In thousands) 
     
2018 (remaining)  $84 
2019   256 
2020   220 
2121   199 
2022   173 

 

Amortization expense relating to the definite-lived intangible assets as discussed above was $84,000 and $253,000 for the three and nine months ended September 30, 2018, respectively, and $93,000 and $281,000 for the three and nine months ended September 30, 2017, respectively.

 

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

 

The Company has certain stock option plans under which it awards incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) to employees, officers, and outside directors.

 

On January 18, 2018, the Company granted 6,000 NQSOs from the Company’s 2003 Outside Directors Stock Plan (“2003 Plan”) to a new director elected by the Company’s Board of Directors (“Board”) to fill a vacancy on the Board. The options granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the options was $4.05 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On July 26, 2018, the Company granted an aggregate of 12,000 NQSOs from the Company’s 2003 Plan to five of the six re-elected directors at the Annual Meeting. Dr. Louis F. Centofanti (a Board member) was not eligible to receive options under the 2003 Plan as an employee of the Company, pursuant to the 2003 Plan. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSO was $4.30 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

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

 

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

 

On July 27, 2017, the Company granted an aggregate of 200,000 ISOs from the 2017 Stock Option Plan (“2017 Plan”) to the Company’s named executive officers. The ISOs granted were for a contractual term of six years with one-fifth yearly vesting over a five year period. The exercise price of the ISO was $3.65 per share, which was equal to the fair market value of the Company’s common stock on the date of grant.

 

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

 

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

 

   Outside Director Stock Options Granted 
   January 18, 2018   July 26, 2018   January 13, 2017   July 27, 2017 
Weighted-average fair value per share  $2.55    3.02   $2.63   $2.48 
Risk -free interest rate (1)   2.62%   2.98%   2.40%   2.32%
Expected volatility of stock (2)   57.29%   55.34%   56.32%   57.21%
Dividend yield   None    None    None    None 
Expected option life (3)   10.0 years    10.0 years    10.0 years    10.0 years 

 

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

 

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

 

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

 

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The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2018 and 2017 for our employee and director stock options.

 

   Three Months Ended   Nine Months Ended 
Stock Options  September 30,   September 30, 
   2018   2017   2018   2017 
Employee Stock Options  $37,000   $22,000   $110,000   $43,000 
Director Stock Options   15,000    12,000    33,000    32,000 
Total  $52,000   $34,000   $143,000   $75,000 

 

At September 30, 2018, the Company has approximately $487,000 of total unrecognized compensation cost related to unvested options, of which $55,000 is expected to be recognized in remaining 2018, $130,000 in 2019, $114,000 in 2020, $114,000 in 2021, with the remaining $74,000 in 2022.

 

The summary of the Company’s total Stock Option Plans as of September 30, 2018 and September 30, 2017, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2017 Stock Plan and the 2003 Plan:

 

   Shares   Weighted Average Exercise
Price
   Weighted Average Remaining Contractual Term
(years)
   Aggregate Intrinsic Value (2) 
Options outstanding January 1, 2018   624,800   $4.42           
Granted   18,000    4.22           
Exercised   (10,000)   3.65           
Forfeited/expired   (16,800)   11.70           
Options outstanding end of period (1)   616,000   $4.23    5.0   $279,630 
Options exercisable at September 30, 2018(1)   227,333   $5.17    4.6   $72,296 
Options exercisable and expected to be vested at September 30, 2018   616,000   $4.23    5.0   $279,630 

 

   Shares   Weighted Average Exercise
Price
   Weighted Average Remaining Contractual Term
(years)
   Aggregate Intrinsic Value (2) 
Options outstanding January 1, 2017   247,200   $6.69           
Granted   318,000    3.65           
Exercised                  
Forfeited/expired   (50,400)   8.95           
Options outstanding end of period (1)   514,800   $4.59    5.7   $65,490 
Options exercisable at September 30, 2017(1)   169,467   $6.45    4.8   $17,490 
Options exercisable and expected to be vested at September 30, 2017   514,800   $4.59    5.7   $65,490 

 

(1)Options with exercise prices ranging from $2.79 to $13.35
(2)The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price

 

During the nine months ended September 30, 2018, the Company issued a total of 46,630 shares of its Common Stock under the 2003 Plan to its outside directors as compensation for serving on our Board. The Company has recorded approximately $191,000 in compensation expense for the nine months ended September 30, 2018 (included in SG&A) in connection with the issuance of shares of its common stock to outside directors.

 

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On May 1, 2018, Robert Ferguson exercised an option related to the Company’s 2017 Plan for the purchase of 10,000 shares of the Company’s Common Stock at $3.65 per share, resulting in total proceeds received by the Company in the amount of $36,500. Robert Ferguson is a consultant to the Company in connection with the Company’s Test Bed Initiative (“TBI”) at its Perma-Fix Northwest Richland, Inc. facility and is also an advisor to the Company’s Board of Directors. The option exercised by Robert Ferguson was granted to him on July 27, 2017 in connection with his consulting work for the TBI.

 

6. Income (Loss) Per Share

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   (Unaudited)   (Unaudited) 
(Amounts in Thousands, Except for Per Share Amounts)  2018   2017   2018   2017 
Net income (loss) attributable to Perma-Fix Environmental Services, Inc., common stockholders:                    
Income (loss) from continuing operations, net of taxes  $317    (1,977)   1,358    (3,878)
Net loss attributable to non-controlling interest   (35)   (78)   (102)   (374)
Income (loss) from continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders  $352   $(1,899)  $1,460   $(3,504)
Loss from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders   (131)   (145)   (495)   (436)
Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders  $221   $(2,044)  $965   $(3,940)
                     
Basic income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.02   $(.17)  $.08   $(.34)
                     
Diluted income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.02   $(.17)  $.08   $(.34)
                     
Weighted average shares outstanding:                    
Basic weighted average shares outstanding   11,922    11,714    11,828    11,698 
Add: dilutive effect of stock options   105        81     
Add: dilutive effect of warrants                
Diluted weighted average shares outstanding   12,027    11,714    11,909    11,698 
                     
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:                    
Stock options   83    185    83    497 

 

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7. Long Term Debt

 

Long-term debt consists of the following at September 30, 2018 and December 31, 2017:

 

(Amounts in Thousands)   September 30, 2018     December 31, 2017  
Revolving Credit facility dated October 31, 2011, as amended, borrowings based upon eligible accounts receivable, subject to monthly borrowing base calculation, balance due March 24, 2021. Effective interest rate for the first nine months of 2018 was 5.5%(1)   $ 1,283     $  
Term Loan dated October 31, 2011, as amended, payable in equal monthly installments of principal of $102, balance due on March 24, 2021. Effective interest rate for the first nine months of 2018 was 5.4%. (1)     2,959 (2)     3,847 (2)
Capital Lease (3)     181        
Total debt     4,423       3,847  
Less current portion of long-term debt     1,244       1,184  
Long-term debt   $ 3,179     $ 2,663  

 

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

 

(2) Net of debt issuance costs of ($88,000) and ($115,000) at September 30, 2018 and December 31, 2017, respectively.

 

(3) One capital lease payable through December 2020, interest at rate of 11.9%.

 

Revolving Credit and Term Loan Agreement

 

The Company entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011 (“Amended Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Amended Loan Agreement has been amended from time to time since the execution of the Amended Loan Agreement. The Amended Loan Agreement, as subsequently amended (“Revised Loan Agreement”), provides the Company with the following credit facility with a maturity date of March 24, 2021: (a) up to $12,000,000 revolving credit (“revolving credit”) and (b) a term loan (“term loan”) of approximately $6,100,000, which requires monthly installments of approximately $101,600 (based on a seven-year amortization). The maximum that we can borrow under the revolving credit is based on a percentage of eligible receivables (as defined) at any one time reduced by outstanding standby letters of credit and borrowing reductions that our lender may impose from time to time.

 

Under the Revised Loan Agreement, we have the option of paying an annual rate of interest due on the revolving credit at prime (5.25% at September 30, 2018) plus 2% or London Inter Bank Offer Rate (“LIBOR”) plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%.

 

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

 

At September 30, 2018, the borrowing availability under our revolving credit was approximately $2,524,000, based on our eligible receivables and includes an indefinite reduction of borrowing availability of $1,000,000 that the Company’s lender has imposed. The Company’s borrowing availability under our revolving credit was also reduced by outstanding standby letters of credit totaling approximately $2,660,000. Previously, the Company’s lender had imposed an indefinite reduction of borrowing availability of $2,000,000; however, on July 26, 2018, the Company entered into an amendment to our Revised Loan Agreement with our lender which provided, among other things, for the release of $1,000,000 of the $2,000,000 reduction in borrowing availability by our lender. The release of this $1,000,000 in borrowing availability reduction is to be used by the Company for working capital purposes. Most of the other terms of the Revised Loan Agreement remain principally unchanged.

 

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The Company’s credit facility with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. The Company met its quarterly financial covenants in the first, second, and third quarters of 2018 and expects to meet its quarterly financial covenants in each of the remaining quarters of 2018 and 2019.

 

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

 

The Company continues its plan to close its M&EC facility. Operations at the M&EC facility are limited to the decommissioning and deconstruction of leased premises and related improvements, and equipment removal. The Company continues to transition operational capabilities to our other Treatment Segment facilities, subject to customer requirements and regulatory approvals. The Company continues with closure and decommissioning activities in accordance with M&EC’s license and permit requirements and currently expects to complete on-site M&EC facility closure activities on or before December 31, 2018.

 

At September 30, 2018, total accrued closure liabilities for our M&EC subsidiary totaled approximately $1,039,000 which are recorded as current liabilities. During the second quarter and third quarter of 2018, the Company recorded an additional $1,215,000 and $1,093,000, respectively, in closure costs and current closure liabilities due to changes in estimated future closure costs. The following reflects changes to the closure liabilities for the M&EC facility from year end 2017:

 

Amounts in thousands    
Balance as of December 31, 2017  $2,791 
Accretion expense   19 
Adjustment to closure liabilities   2,308 
Payments   (4,079)
Balance as of September 30, 2018  $1,039 

 

Revenues for the M&EC subsidiary were $23,000 and $155,000 for the three and nine months ended September 30, 2018, respectively, and $578,000 and $5,650,000 for the corresponding periods of 2017, respectively.

 

9. Commitments and Contingencies

 

Hazardous Waste

 

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

 

Legal Matters

 

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

 

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Insurance

 

The Company has a 25-year finite risk insurance policy entered into in June 2003 with American International Group, Inc. (“AIG”), which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The policy, as amended, provides for a maximum allowable coverage of $39,000,000 and has available capacity to allow for annual inflation and other performance and surety bond requirements. At September 30, 2018, our financial assurance coverage amount under this policy totaled approximately $29,911,000. The Company has recorded $15,888,000 and $15,676,000 in sinking funds related to this policy in other long term assets on the accompanying Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, respectively, which includes interest earned of $1,417,000 and $1,205,000 on the sinking funds as of September 30, 2018 and December 31, 2017, respectively. Interest income for the three and nine months ended September 30, 2018 was approximately $82,000 and $212,000, respectively. Interest income for the three and nine month periods ended September 30, 2017, was approximately $35,000 and $96,000, respectively. If the Company so elects, AIG is obligated to pay us an amount equal to 100% of the sinking fund account balance in return for complete release of liability from both us and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

 

Letter of Credits and Bonding Requirements

 

From time to time, the Company is required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations, including facility closures. At September 30, 2018, the total amount of standby letters of credit outstanding totaled approximately $2,660,000 and the total amount of bonds outstanding totaled approximately $11,081,000.

 

10. Discontinued Operations

 

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

 

The Company’s discontinued operations had losses of $131,000 and $145,000 for the three months ended September 30, 2018 and 2017, respectively (net of taxes of $0 for each period) and losses of $495,000 and $436,000 for the nine months ended September 30, 2018 and 2017, respectively (net of taxes of $0 for each period). The net loss for the six months ended September 30, 2018 included an increase of approximately $50,000 in remediation reserve recorded in the second quarter of 2018 for our Perma-Fix of Dayton (“PFD”) subsidiary due to reassessment of the remediation reserve. The remaining losses for each of the periods noted above were primarily due to costs incurred in the administration and continued monitoring of our discontinued operations. The Company’s discontinued operations had no revenues for each of the periods noted above.

 

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The following table presents the major class of assets of discontinued operations at September 30, 2018 and December 31, 2017.

 

   September 30,   December 31, 
(Amounts in Thousands)  2018   2017 
Current assets          
Other assets  $95   $89 
Total current assets   95    89 
Long-term assets          
Property, plant and equipment, net (1)   81    81 
Other assets   138    195 
Total long-term assets   219    276 
Total assets  $314   $365 
Current liabilities          
Accounts payable  $14   $8 
Accrued expenses and other liabilities   268    265 
Environmental liabilities   658    632 
Total current liabilities   940    905 
Long-term liabilities          
Closure liabilities   125    120 
Environmental liabilities   229    239 
Total long-term liabilities   354    359 
Total liabilities  $1,294   $1,264 

 

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

 

The Company’s discontinued operations include a note receivable in the amount of approximately $375,000 recorded in May 2016 resulting from the sale of property at our Perma-Fix of Michigan, Inc. subsidiary. This note requires 60 equal monthly installment payments by the buyer of approximately $7,250 (which includes interest). At September 30, 2018, the outstanding amount on this note receivable totaled approximately $214,000, of which approximately $76,000 is included in “Current assets related to discontinued operations” and approximately $138,000 is included in “Other assets related to discontinued operations” in the accompanying Consolidated Balance Sheets.

 

11. Operating Segments

 

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

 

Our reporting segments are defined as below:

 

TREATMENT SEGMENT, which includes:

 

  nuclear, low-level radioactive, mixed waste (containing both hazardous and low-level radioactive constituents), hazardous and non-hazardous waste treatment, processing and disposal services primarily through three uniquely licensed and permitted treatment and storage facilities; and
  research and development (“R&D”) activities to identify, develop and implement innovative waste processing techniques for problematic waste streams.

 

SERVICES SEGMENT, which includes:

 

  Technical services, which include:

 

  professional radiological measurement and site survey of large government and commercial installations using advanced methods, technology and engineering;
  integrated Occupational Safety and Health services including industrial hygiene (“IH”) assessments; hazardous materials surveys, e.g., exposure monitoring; lead and asbestos management/abatement oversight; indoor air quality evaluations; health risk and exposure assessments; health & safety plan/program development, compliance auditing and training services; and Occupational Safety and Health Administration (“OSHA”) citation assistance;

 

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  global technical services providing consulting, engineering, project management, waste management, environmental, and decontamination and decommissioning field, technical, and management personnel and services to commercial and government customers; and
  on-site waste management services to commercial and governmental customers.

 

  Nuclear services, which include:

 

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

 

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

 

MEDICAL SEGMENT reporting includes: R&D costs for the new medical isotope production technology from our majority-owned Polish subsidiary, PF Medical. The Medical Segment has not generated any revenue as it continues to be primarily in the R&D stage. All costs incurred for the Medical Segment are reflected within R&D in the accompanying Consolidated Statements of Operations. As previously disclosed, during 2016, the Medical Segment ceased a substantial portion of its R&D activities for the medical isotope production technology due to the need for substantial capital to fund such activities. The Company does not anticipate that the Medical Segment will restart such activities until it obtains such funding.

 

Our reporting segments exclude our corporate headquarters and our discontinued operations (see “Note 10 – Discontinued Operations”) which do not generate revenues.

 

The table below presents certain financial information of our operating segments for the three and nine months ended September 30, 2018 and 2017 (in thousands).

 

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Segment Reporting for the Quarter Ended September 30, 2018

 

   Treatment   Services   Medical   Segments Total  

Corporate (1)

   Consolidated Total 
Revenue from external customers  $9,103   $2,881       $11,984   $   $11,984 
Intercompany revenues   174    16        190         
Gross profit   1,564    261