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 June 30, 2019
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. 001-11596
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
58-1954497 (IRS Employer Identification Number) | |
8302 Dunwoody Place, Suite 250, Atlanta, GA (Address of principal executive offices) |
30350 (Zip Code) |
(770) 587-9898
(Registrant’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] 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 [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 July 23, 2019 | |
| Common Stock, $.001 Par Value | 12,069,776 shares |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. – Financial Statements
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets
| (Amounts in Thousands, Except for Share and Per Share Amounts) | June 30, 2019 (Unaudited) | December 31, 2018 (Audited) | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 384 | $ | 810 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $142 and $105, respectively | 7,747 | 7,735 | ||||||
| Unbilled receivables - current | 6,158 | 3,105 | ||||||
| Inventories | 452 | 449 | ||||||
| Prepaid and other assets | 2,166 | 2,552 | ||||||
| Finite risk sinking fund (restricted cash) - current | 5,000 | — | ||||||
| Current assets related to discontinued operations | 98 | 107 | ||||||
| Total current assets | 22,005 | 14,758 | ||||||
| Property and equipment: | ||||||||
| Buildings and land | 19,782 | 19,782 | ||||||
| Equipment | 19,306 | 19,157 | ||||||
| Vehicles | 412 | 369 | ||||||
| Leasehold improvements | 23 | 23 | ||||||
| Office furniture and equipment | 1,556 | 1,551 | ||||||
| Construction-in-progress | 1,469 | 1,389 | ||||||
| Total property and equipment | 42,548 | 42,271 | ||||||
| Less accumulated depreciation | (26,982 | ) | (26,532 | ) | ||||
| Net property and equipment | 15,566 | 15,739 | ||||||
| Property and equipment related to discontinued operations | 81 | 81 | ||||||
| Operating lease right-of-use assets | 2,667 | — | ||||||
| Intangibles and other long term assets: | ||||||||
| Permits | 8,706 | 8,443 | ||||||
| Other intangible assets - net | 1,167 | 1,278 | ||||||
| Finite risk sinking fund (restricted cash) | 11,159 | 15,971 | ||||||
| Other assets | 1,224 | 1,054 | ||||||
| Other assets related to discontinued operations | 78 | 118 | ||||||
| Total assets | $ | 62,653 | $ | 57,442 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Consolidated Balance Sheets, Continued
| (Amounts in Thousands, Except for Share and per Share Amounts) | June 30, 2019 (Unaudited) | December 31, 2018 (Audited) | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 9,640 | $ | 5,497 | ||||
| Accrued expenses | 4,583 | 5,014 | ||||||
| Disposal/transportation accrual | 1,953 | 1,542 | ||||||
| Deferred revenue | 4,785 | 6,595 | ||||||
| Accrued closure costs - current | 156 | 1,142 | ||||||
| Current portion of long-term debt | 362 | 1,184 | ||||||
| Current portion of long-term debt - related party | 219 | — | ||||||
| Current portion of operating lease liabilities | 231 | — | ||||||
| Current portion of finance lease liabilities | 245 | 181 | ||||||
| Current liabilities related to discontinued operations | 311 | 356 | ||||||
| Total current liabilities | 22,485 | 21,511 | ||||||
| Accrued closure costs | 5,797 | 5,608 | ||||||
| Other long-term liabilities | 278 | 255 | ||||||
| Deferred tax liabilities | 593 | 586 | ||||||
| Long-term debt, less current portion | 1,659 | 2,118 | ||||||
| Long-term debt, less current portion - related party | 1,935 | — | ||||||
| Long-term operating lease liabilities, less current portion | 2,468 | — | ||||||
| Long-term finance lease liabilities, less current portion | 212 | 268 | ||||||
| Long-term liabilities related to discontinued operations | 967 | 963 | ||||||
| Total long-term liabilities | 13,909 | 9,798 | ||||||
| Total liabilities | 36,394 | 31,309 | ||||||
| Commitments and Contingencies (Note 10) | ||||||||
| 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; 12,062,081 and 11,944,215 shares issued, respectively; 12,054,439 and 11,936,573 shares outstanding, respectively | 12 | 12 | ||||||
| Additional paid-in capital | 108,110 | 107,548 | ||||||
| Accumulated deficit | (80,013 | ) | (79,630 | ) | ||||
| Accumulated other comprehensive loss | (206 | ) | (214 | ) | ||||
| Less Common Stock in treasury, at cost; 7,642 shares | (88 | ) | (88 | ) | ||||
| Total Perma-Fix Environmental Services, Inc. stockholders’ equity | 27,815 | 27,628 | ||||||
| Non-controlling interest | (1,556 | ) | (1,495 | ) | ||||
| Total stockholders’ equity | 26,259 | 26,133 | ||||||
| Total liabilities and stockholders’ equity | $ | 62,653 | $ | 57,442 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| (Amounts in Thousands, Except for Per | June 30, | June 30, | ||||||||||||||
| Share Amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net revenues | $ | 17,135 | $ | 13,160 | $ | 28,843 | $ | 25,817 | ||||||||
| Cost of goods sold | 13,864 | 11,117 | 23,071 | 20,454 | ||||||||||||
| Gross profit | 3,271 | 2,043 | 5,772 | 5,363 | ||||||||||||
| Selling, general and administrative expenses | 2,705 | 2,640 | 5,603 | 5,420 | ||||||||||||
| Research and development | 223 | 219 | 450 | 451 | ||||||||||||
| Gain on disposal of property and equipment | (1 | ) | (17 | ) | (1 | ) | (25 | ) | ||||||||
| Income (loss) from operations | 344 | (799 | ) | (280 | ) | (483 | ) | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 107 | 81 | 188 | 130 | ||||||||||||
| Interest expense | (107 | ) | (62 | ) | (194 | ) | (115 | ) | ||||||||
| Interest expense-financing fees | (60 | ) | (9 | ) | (70 | ) | (18 | ) | ||||||||
| Other | 95 | — | 224 | — | ||||||||||||
| Net gain on exchange offer of Series B Preferred Stock of subsidiary | — | 1,596 | — | 1,596 | ||||||||||||
| Income (loss) from continuing operations before taxes | 379 | 807 | (132 | ) | 1,110 | |||||||||||
| Income tax expense | 6 | 19 | 45 | 70 | ||||||||||||
| Income (loss) from continuing operations, net of taxes | 373 | 788 | (177 | ) | 1,040 | |||||||||||
| Loss from discontinued operations (net of taxes of $0) | (115 | ) | (206 | ) | (267 | ) | (363 | ) | ||||||||
| Net income (loss) | 258 | 582 | (444 | ) | 677 | |||||||||||
| Net loss attributable to non-controlling interest | (31 | ) | (28 | ) | (61 | ) | (68 | ) | ||||||||
| Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders | $ | 289 | $ | 610 | $ | (383 | ) | $ | 745 | |||||||
| Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic and diluted: | ||||||||||||||||
| Continuing operations | $ | .03 | $ | .07 | $ | (.01 | ) | $ | .09 | |||||||
| Discontinued operations | (.01 | ) | (.02 | ) | (.02 | ) | (.03 | ) | ||||||||
| Net income (loss) per common share | $ | .02 | $ | .05 | $ | (.03 | ) | $ | .06 | |||||||
| Number of common shares used in computing net income (loss) per share: | ||||||||||||||||
| Basic | 12,054 | 11,813 | 12,008 | 11,780 | ||||||||||||
| Diluted | 12,122 | 11,913 | 12,008 | 11,849 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Amounts in Thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net income (loss) | $ | 258 | $ | 582 | $ | (444 | ) | $ | 677 | |||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation (loss) gain | (4 | ) | (49 | ) | 8 | (57 | ) | |||||||||
| Comprehensive income (loss) | 254 | 533 | (436 | ) | 620 | |||||||||||
| Comprehensive loss attributable to non-controlling interest | (31 | ) | (28 | ) | (61 | ) | (68 | ) | ||||||||
| Comprehensive income (loss) attributable to Perma-Fix Environmental Services, Inc. stockholders | $ | 285 | $ | 561 | $ | (375 | ) | $ | 688 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC
Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Amounts in thousands, except for share amounts)
| Common Stock | Additional Paid-In | Common Stock Held In | Accumulated Other Comprehensive | Non-controlling Interest in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Treasury | Loss | Subsidiary | Deficit | Equity | |||||||||||||||||||||||||
| Balance at December 31, 2018 | 11,944,215 | $ | 12 | $ | 107,548 | $ | (88 | ) | $ | (214 | ) | $ | (1,495 | ) | $ | (79,630 | ) | $ | 26,133 | |||||||||||||
| Net loss | — | — | — | — | — | (30 | ) | (672 | ) | (702 | ) | |||||||||||||||||||||
| Foreign currency translation | — | — | — | — | 12 | — | — | 12 | ||||||||||||||||||||||||
| Issuance of Common Stock for services | 24,964 | — | 60 | — | — | — | — | 60 | ||||||||||||||||||||||||
| Stock-Based Compensation | — | — | 48 | — | — | — | — | 48 | ||||||||||||||||||||||||
| Balance at March 31, 2019 | 11,969,179 | $ | 12 | $ | 107,656 | $ | (88 | ) | $ | (202 | ) | $ | (1,525 | ) | $ | (80,302 | ) | $ | 25,551 | |||||||||||||
| Net income (loss) | — | — | — | — | — | (31 | ) | 289 | 258 | |||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (4 | ) | — | — | (4 | ) | ||||||||||||||||||||||
| Issuance of Common Stock for services | 17,902 | — | 62 | — | — | — | — | 62 | ||||||||||||||||||||||||
| Stock-Based Compensation | — | — | 36 | — | — | — | — | 36 | ||||||||||||||||||||||||
| Issuance of Common Stock with debt | 75,000 | — | 263 | — | — | — | — | 263 | ||||||||||||||||||||||||
| Issuance of warrant with debt | — | — | 93 | — | — | — | — | 93 | ||||||||||||||||||||||||
| Balance at June 30, 2019 | 12,062,081 | $ | 12 | $ | 108,110 | $ | (88 | ) | $ | (206 | ) | $ | (1,556 | ) | $ | (80,013 | ) | $ | 26,259 | |||||||||||||
| Balance at December 31, 2017 | 11,738,623 | $ | 12 | $ | 106,417 | $ | (88 | ) | $ | (112 | ) | $ | (1,175 | ) | $ | (77,893 | ) | $ | 27,161 | |||||||||||||
| Adoption of accounting standards | — | — | — | — | — | — | (317 | ) | (317 | ) | ||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | (40 | ) | 135 | 95 | |||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (8 | ) | — | — | (8 | ) | ||||||||||||||||||||||
| Issuance of Common Stock for services | 16,074 | — | 60 | — | — | — | — | 60 | ||||||||||||||||||||||||
| Stock-Based Compensation | — | — | 46 | — | — | — | — | 46 | ||||||||||||||||||||||||
| Balance at March 31, 2018 | 11,754,697 | $ | 12 | $ | 106,523 | $ | (88 | ) | $ | (120 | ) | $ | (1,215 | ) | $ | (78,075 | ) | $ | 27,037 | |||||||||||||
| Net income (loss) | — | — | — | — | — | (28 | ) | 610 | 582 | |||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | (49 | ) | — | — | (49 | ) | ||||||||||||||||||||||
| 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 | 134,994 | — | 648 | — | — | — | — | 648 | ||||||||||||||||||||||||
| Issuance of Common Stock for services | 15,493 | — | 65 | — | — | — | — | 65 | ||||||||||||||||||||||||
| Stock-Based Compensation | — | — | 45 | — | — | — | — | 45 | ||||||||||||||||||||||||
| Balance at June 30, 2018 | 11,915,184 | $ | 12 | $ | 107,317 | $ | (88 | ) | $ | (169 | ) | $ | (1,243 | ) | $ | (77,465 | ) | $ | 28,364 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (Amounts in Thousands) | 2019 | 2018 | ||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | (444 | ) | $ | 677 | |||
| Less: loss from discontinued operations, net of taxes of $0 | (267 | ) | (363 | ) | ||||
| (Loss) income from continuing operations, net of taxes | (177 | ) | 1,040 | |||||
| Adjustments to reconcile (loss) income from continuing operations to cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 641 | 731 | ||||||
| Amortization of debt discount/debt issuance costs | 67 | 18 | ||||||
| Deferred tax expense | 7 | 36 | ||||||
| Provision for bad debt reserves | 37 | 8 | ||||||
| Gain on disposal of property and equipment | (1 | ) | (25 | ) | ||||
| Gain on exchange offer of Series B Preferred Stock of subsidiary | — | (1,659 | ) | |||||
| Issuance of common stock for services | 122 | 125 | ||||||
| Stock-based compensation | 84 | 91 | ||||||
| Changes in operating assets and liabilities of continuing operations | ||||||||
| Accounts receivable | (49 | ) | 1,857 | |||||
| Unbilled receivables | (3,053 | ) | 1,584 | |||||
| Prepaid expenses, inventories and other assets | 281 | 773 | ||||||
| Accounts payable, accrued expenses and unearned revenue | 1,178 | (1,922 | ) | |||||
| Cash (used in) provided by continuing operations | (863 | ) | 2,657 | |||||
| Cash used in discontinued operations | (334 | ) | (322 | ) | ||||
| Cash (used in) provided by operating activities | (1,197 | ) | 2,335 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (312 | ) | (554 | ) | ||||
| Proceeds from sale of property and equipment | 32 | 26 | ||||||
| Cash used in investing activities of continuing operations | (280 | ) | (528 | ) | ||||
| Cash provided by investing activities of dicontinued operations | 44 | 36 | ||||||
| Cash used in investing activities | (236 | ) | (492 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayments of revolving credit borrowings | (23,816 | ) | (28,048 | ) | ||||
| Borrowing on revolving credit | 23,177 | 28,048 | ||||||
| Proceeds from issuance of long-term debt - related party | 2,500 | — | ||||||
| Proceeds from finance leases | 120 | — | ||||||
| Principal repayments of finance lease liabilities | (101 | ) | (5 | ) | ||||
| Principal repayments of long term debt | (610 | ) | (610 | ) | ||||
| Payment of debt issuance costs | (90 | ) | — | |||||
| Proceeds from issuance of common stock upon exercise of options | — | 36 | ||||||
| Cash provided by (used in) financing activities of continuing operations | 1,180 | (579 | ) | |||||
| Effect of exchange rate changes on cash | 15 | (12 | ) | |||||
| Decrease (increase) in cash and finite risk sinking fund (restricted cash) | (238 | ) | 1,252 | |||||
| Cash and finite risk sinking fund (restricted cash) at beginning of period | 16,781 | 16,739 | ||||||
| Cash and finite risk sinking fund (restricted cash) at end of period | $ | 16,543 | $ | 17,991 | ||||
| Supplemental disclosure: | ||||||||
| Interest paid | $ | 184 | $ | 115 | ||||
| Income taxes paid | 121 | 160 | ||||||
| Equipment purchase subject to capital lease | 22 | 213 | ||||||
| Issuance of Common Stock with debt | 263 | — | ||||||
| Issuance of Warrant with debt | 93 | — | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
PERMA-FIX ENVIRONMENTAL SERVICES, INC.
Notes to Consolidated Financial Statements
June 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, 2018.
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 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 six months ended June 30, 2019 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2019.
The Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
2. Summary of Significant Accounting Policies
Our accounting policies are as set forth in the notes to the December 31, 2018 consolidated financial statements referred to above.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use (“ROU”) lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Targeted Improvements,” to Topic 842 which included an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application of transition, which the Company elected. As permitted under Topic 842, the Company adopted several practical expedients that permit us to not reassess (1) whether any expired or existing contract as of the adoption date is or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, and (3) initial direct costs for any existing leases as of the adoption date. As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $2,602,000 and operating lease liabilities of $2,622,000. The cumulative-effect adjustment was immaterial to our beginning accumulated deficit upon adoption of ASU 2016-02. The adoption of Topic 842 had an immaterial impact on our Consolidated Statements of Operations and Cash Flows for the six months ended June 30, 2019. The Company’s accounting for finance leases remained substantially unchanged. The Company has expanded its consolidated financial statement disclosure upon adoption of this standard (see “Note 4 – Leases”).
| 7 |
In February 2018, FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the reclassification of certain income tax effects related to the new Tax Cuts and Jobs Act legislation between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive income” (rather than in “Income from continuing operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on the Company’s financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on the Company’s financial statements.
Recently Issued Accounting Standards – Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”),” which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses is permitted. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which, with respect to credit losses, among other things, clarifies and addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable interest rates. Additionally, in May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” which allows entities to irrevocably elect the fair value option on certain financial instruments. These standards are effective for interim and annual reporting periods beginning after December 15, 2019. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently assessing the impact that these standards will have on its financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 improves the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact that this standard will have on its financial statements.
| 8 |
3. Revenue
Disaggregation of Revenue
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of our services and provides meaningful disaggregation of each business segment’s results of operations. The nature of the Company’s performance obligations within our Treatment and Services Segments result in the recognition of our revenue primarily over time. The following tables present further disaggregation of our revenues by different categories for our Services and Treatment Segments:
| Revenue by Contract Type | ||||||||||||||||||||||||
| (In thousands) | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
| Treatment | Services | Total | Treatment | Services | Total | |||||||||||||||||||
| Fixed price | $ | 10,094 | $ | 2,709 | $ | 12,803 | $ | 9,146 | $ | 718 | $ | 9,864 | ||||||||||||
| Time and materials | ― | 4,332 | 4,332 | ― | 3,296 | 3,296 | ||||||||||||||||||
| Total | $ | 10,094 | $ | 7,041 | $ | 17,135 | $ | 9,146 | $ | 4,014 | $ | 13,160 | ||||||||||||
| Revenue by Contract Type | ||||||||||||||||||||||||
| (In thousands) | Six Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
| Treatment | Services | Total | Treatment | Services | Total | |||||||||||||||||||
| Fixed price | $ | 19,999 | $ | 3,137 | $ | 23,136 | $ | 18,105 | $ | 808 | $ | 18,913 | ||||||||||||
| Time and materials | ― | 5,707 | 5,707 | ― | 6,904 | 6,904 | ||||||||||||||||||
| Total | $ | 19,999 | $ | 8,844 | $ | 28,843 | $ | 18,105 | $ | 7,712 | $ | 25,817 | ||||||||||||
| Revenue by generator | ||||||||||||||||||||||||
| (In thousands) | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
| Treatment | Services | Total | Treatment | Services | Total | |||||||||||||||||||
| Domestic government | $ | 6,537 | $ | 4,842 | $ | 11,379 | $ | 6,011 | $ | 3,265 | $ | 9,276 | ||||||||||||
| Domestic commercial | 3,395 | 855 | 4,250 | 3,135 | 541 | 3,676 | ||||||||||||||||||
| Foreign government | 162 | 1,323 | 1,485 | ― | 185 | 185 | ||||||||||||||||||
| Foreign commercial | ― | 21 | 21 | ― | 23 | 23 | ||||||||||||||||||
| Total | $ | 10,094 | $ | 7,041 | $ | 17,135 | $ | 9,146 | $ | 4,014 | $ | 13,160 | ||||||||||||
| Revenue by generator | ||||||||||||||||||||||||
| (In thousands) | Six Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
| Treatment | Services | Total | Treatment | Services | Total | |||||||||||||||||||
| Domestic government | $ | 14,449 | $ | 5,529 | $ | 19,978 | $ | 12,546 | $ | 6,383 | $ | 18,929 | ||||||||||||
| Domestic commercial | 5,274 | 1,613 | 6,887 | 5,559 | 943 | 6,502 | ||||||||||||||||||
| Foreign government | 220 | 1,659 | 1,879 | ― | 338 | 338 | ||||||||||||||||||
| Foreign commercial | 56 | 43 | 99 | ― | 48 | 48 | ||||||||||||||||||
| Total | $ | 19,999 | $ | 8,844 | $ | 28,843 | $ | 18,105 | $ | 7,712 | $ | 25,817 | ||||||||||||
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) | June 30, 2019 | December 31, 2018 | Change ($) | Change (%) | ||||||||||||
| Contract assets | ||||||||||||||||
| Account receivables, net of allowance | $ | 7,747 | $ | 7,735 | $ | 12 | 0.2 | % | ||||||||
| Unbilled receivables - current | 6,158 | 3,105 | 3,053 | 98.3 | % | |||||||||||
| Contract liabilities | ||||||||||||||||
| Deferred revenue | $ | 4,785 | $ | 6,595 | $ | (1,810 | ) | (27.4 | )% | |||||||
| 9 |
During the three and six months ended June 30, 2019, the Company recognized revenue of $2,866,000 and $7,446,000, respectively, which was included in the deferred revenue balance at the beginning of the year. During the three and six months ended June 30, 2018, the Company recognized revenue of $1,629,000 and $5,440,000, 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.
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.
4. Leases
At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on facts and circumstances present in that arrangement. Lease classifications, recognition, and measurement are then determined at the lease commencement date.
The Company’s operating lease ROU assets and operating lease liabilities represent primarily leases for office spaces used to conduct our business. These leases have remaining terms of approximately 5 to 11 years which include one or more options to renew, with renewal terms from 3 years to 8 years. Based on the Company’s reasonable certainty to exercise these renewal options, the renewal to extend the lease terms are included in valuing our ROU assets and liabilities. As most of our operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate when determining the present value of the lease payments. The incremental borrowing rate is determined based on the Company’s secured borrowing rate, lease terms and current economic environment. Some of our operating leases include both lease (rent payments) and non-lease components (maintenance costs such as cleaning and landscaping services). The Company has elected the practical expedient to account for lease component and non-lease component as a single component for all leases. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Finance leases primarily consist of processing and lab equipment for our facilities. The Company’s finance leases generally have terms between two to three years and some of the leases include options to purchase the underlying assets at fair market value at the conclusion of the lease term. At June 30, 2019, assets recorded under finance leases were $655,000 less accumulated depreciation of $28,000, resulting in net fixed assets under finance leases of $627,000, which is recorded within net property and equipment on the Consolidated Balance Sheets.
The Company adopted the policy to not recognize ROU assets and liabilities for short term leases.
The components of lease cost for the Company’s leases were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||
| June 30, 2019 | June 30, 2019 | |||||||
| Operating Leases: | ||||||||
| Lease cost | $ | 124 | $ | 228 | ||||
| Finance Leases: | ||||||||
| Amortization of ROU assets | 10 | 19 | ||||||
| Interest on lease liablity | 13 | 25 | ||||||
| 23 | 44 | |||||||
| Short-term lease rent expense | 23 | 72 | ||||||
| Total lease cost | $ | 170 | $ | 344 | ||||
| 10 |
The weighted average remaining lease term and the weighted average discount rate for operating and finance leases at June 30, 2019 was:
| Operating Leases | Finance Leases | |||||||
| Weighted average remaining lease terms (years) | 9.2 | 1.5 | ||||||
| Weighted average discount rate | 8.0 | % | 11.1 | % | ||||
The following table reconciles the undiscounted cash flows for the operating and finance leases at June 30, 2019 to the operating and finance lease liabilities recorded on the balance sheet (in thousands):
| Operating Leases | Finance Leases | |||||||
| 2019 Remainder | $ | 218 | $ | 141 | ||||
| 2020 | 443 | 336 | ||||||
| 2021 | 450 | 27 | ||||||
| 2022 | 459 | ― | ||||||
| 2023 | 466 | ― | ||||||
| 2024 and thereafter | 1,799 | ― | ||||||
| Total undiscounted lease payments | 3,835 | 504 | ||||||
| Less: Imputed interest | (1,136 | ) | (47 | ) | ||||
| Present value of lease payments | $ | 2,699 | $ | 457 | ||||
| Current portion of operating lease obligations | $ | 231 | $ | ― | ||||
| Long-term operating lease obligations, less current portion | $ | 2,468 | $ | ― | ||||
| Current portion of finance lease obligations | $ | ― | $ | 245 | ||||
| Long-term finance lease obligations, less current portion | $ | ― | $ | 212 | ||||
Supplemental cash flow and other information related to our leases were as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||
| June 30, 2019 | June 30, 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flow used in operating leases | $ | 119 | $ | 217 | ||||
| Operating cash flow used in finance leases | $ | 13 | $ | 25 | ||||
| Financing cash flow used in finance leases | $ | 57 | $ | 101 | ||||
| ROU assets obtained in exchange for lease obligations for: | ||||||||
| Finance liabilities | $ | ― | $ | 138 | ||||
| Operating liabilities | $ | 182 | $ | 182 | ||||
5. Intangible Assets
The following table summarizes information relating to the Company’s definite-lived intangible assets:
| June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||
| Useful | Gross | Net | Gross | Net | ||||||||||||||||||||||||
| Intangibles (amount | Lives | Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||||
| in thousands) | (Years) | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||||
| Patent | 1-17 | $ | 740 | $ | (348 | ) | $ | 392 | $ | 728 | $ | (336 | ) | $ | 392 | |||||||||||||
| Software | 3 | 412 | (406 | ) | 6 | 410 | (403 | ) | 7 | |||||||||||||||||||
| Customer relationships | 10 | 3,370 | (2,601 | ) | 769 | 3,370 | (2,491 | ) | 879 | |||||||||||||||||||
| Permit | 10 | 545 | (545 | ) | — | 545 | (538 | ) | 7 | |||||||||||||||||||
| Total | $ | 5,067 | $ | (3,900 | ) | $ | 1,167 | $ | 5,053 | $ | (3,768 | ) | $ | 1,285 | ||||||||||||||
| 11 |
The intangible assets noted above are amortized on a straight-line basis over their useful lives with the exception of customer relationships which are being amortized using an accelerated method. The Company had only one definite-lived permit that was subject to amortization. This definite-lived permit was fully amortized in the first quarter of 2019.
The following table summarizes the expected amortization over the next five years for our definite-lived intangible assets:
| Amount | ||||
| Year | (In thousands) | |||
| 2019 (remaining) | $ | 122 | ||
| 2020 | 219 | |||
| 2121 | 198 | |||
| 2022 | 172 | |||
| 2023 | 132 | |||
Amortization expenses relating to the definite-lived intangible assets as discussed above were $61,000 and $134,000 for the three and six months ended June 30, 2019, respectively, and $85,000 and $169,000 for the three and six months ended June 30, 2018, respectively.
6. Capital Stock, Stock Plans and Stock Based Compensation
The Company has certain stock option plans under which it may awards incentive stock options (“ISOs”) and/or non-qualified stock options (“NQSOs”) to employees, officers, outside directors, and outside consultants.
On January 17, 2019 the Company granted 105,000 ISOs from the 2017 Stock Option Plan to certain employees, which included our named executive officers as follows: 25,000 ISOs to our Chief Executive Officer (“CEO”), Mark Duff; 15,000 ISOs to our Chief Financial Officer (“CFO”), Ben Naccarato; and 15,000 ISOs to our Executive Vice President (“EVP”) of Strategic Initiatives, Dr. Louis Centofanti. The ISOs granted were for a contractual term of six years with one-fifth vesting annually over a five year period. The exercise price of the ISO was $3.15 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.
On January 18, 2018, the Company granted 6,000 NQSOs from the Company’s 2003 Outside Directors Stock Plan to a new director elected by the Company’s Board of Directors (“Board”) to fill a vacancy on the Board. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the options was $4.05 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.
The Company granted a NQSO to Robert Ferguson on July 27, 2017 from the Company’s 2017 Stock Option Plan for the purchase of up to 100,000 shares of the Company’s Common Stock (“Ferguson Stock Option”) in connection with his work as a consultant to the Company’s Test Bed Initiative (“TBI”) at our Perma-Fix Northwest Richland, Inc. (“PFNWR”) facility. The vesting of the Ferguson Stock Option is subject to the achievement of three separate milestones by certain dates. On January 17, 2019, the Company’s Compensation and Stock Option Committee (“Compensation Committee”) and Board approved an amendment to the Ferguson Stock Option whereby the vesting date for the second milestone was extended to March 31, 2020 from January 27, 2019. The 10,000 options under the first milestone were vested and exercised by Robert Ferguson in May 2018. All other terms of the Ferguson Stock Option remain unchanged.
| 12 |
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 on January 17, 2019 and January 18, 2018 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 | Outside Director Stock Options Granted | |||||||
| January 17, 2019 | January 18, 2018 | |||||||
| Weighted-average fair value per option | $ | 1.42 | $ | 2.55 | ||||
| Risk -free interest rate (1) | 2.58 | % | 2.62 | % | ||||
| Expected volatility of stock (2) | 48.67 | % | 57.29 | % | ||||
| Dividend yield | None | None | ||||||
| Expected option life (3) | 5.0 years | 10.0 years | ||||||
(1) The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.
(2) The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.
(3) The expected option life is based on historical exercises and post-vesting data.
The following table summarizes stock-based compensation recognized for the three and six months ended June 30, 2019 and 2018 for our employee and director stock options.
| Three Months Ended | Six Months Ended | |||||||||||||||
| Stock Options | June 30, | June 30, | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Employee Stock Options | $ | 36,000 | $ | 37,000 | $ | 79,000 | $ | 73,000 | ||||||||
| Director Stock Options | ― | 8,000 | 5,000 | 18,000 | ||||||||||||
| Total | $ | 36,000 | $ | 45,000 | $ | 84,000 | $ | 91,000 | ||||||||
At June 30, 2019, the Company has approximately $476,000 of total unrecognized compensation cost related to unvested options for employee and directors, of which $69,000 is expected to be recognized in remaining 2019, $139,000 in 2020, $139,000 in 2021, $100,000 in 2022, $28,000 in 2023, with the remaining $1,000 in 2024. At June 30, 2019, the Company has not recognized compensation costs (fair value of approximately $148,000 at June 30, 2019) for the remaining 90,000 Ferguson Stock Option discussed above since achievement of the performance obligation under each of the two remaining milestones is uncertain at June 30, 2019.
The summary of the Company’s total Stock Option Plans as of June 30, 2019 and June 30, 2018, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2010 and 2017 Stock Option Plans and the 2003 Outside Directors Stock Plan:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (2) | |||||||||||||
| Options outstanding January 1, 2019 | 616,000 | $ | 4.23 | |||||||||||||
| Granted | 105,000 | 3.15 | ||||||||||||||
| Exercised | ─ | ─ | ||||||||||||||
| Forfeited/expired | (13,000 | ) | 3.43 | |||||||||||||
| Options outstanding end of period (1) | 708,000 | $ | 4.08 | 4.4 | $ | 209,318 | ||||||||||
| Options exercisable as of June 30, 2019(1) | 430,000 | $ | 4.94 | 4.1 | $ | 43,518 | ||||||||||
| 13 |
| 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 | 6,000 | 4.05 | ||||||||||||||
| Exercised | (10,000 | ) | 3.65 | |||||||||||||
| Forfeited/expired | ─ | ─ | ||||||||||||||
| Options outstanding end of period (1) | 620,800 | $ | 4.43 | 5.0 | $ | 435,870 | ||||||||||
| Options exercisable as of June 30, 2018(1) | 198,133 | $ | 6.07 | 4.3 | $ | 78,836 | ||||||||||
(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 six months ended June 30, 2019, the Company issued a total of 42,866 shares of its Common Stock under the 2003 Outside Directors Stock Plan to its outside directors as compensation for serving on our Board. The Company has recorded approximately $123,000 in compensation expenses (included in selling, general and administration (“SG&A”) expenses) in connection with the issuance of shares of its Common Stock to outside directors.
| 14 |
7. Income (Loss) Per Share
Basic income (loss) per share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted income (loss) per share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. In periods where they are anti-dilutive, such amounts are excluded from the calculations of dilutive earnings 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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Amounts in Thousands, Except for Per | (Unaudited) | (Unaudited) | ||||||||||||||
| Share Amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net income (loss) attributable to Perma-Fix Environmental Services, Inc., common stockholders: | ||||||||||||||||
| Income (loss) from continuing operations, net of taxes | $ | 373 | $ | 788 | $ | (177 | ) | $ | 1,040 | |||||||
| Net loss attributable to non-controlling interest | (31 | ) | (28 | ) | (61 | ) | (68 | ) | ||||||||
| Income (loss) from continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders | 404 | 816 | (116 | ) | 1,108 | |||||||||||
| Loss from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders | (115 | ) | (206 | ) | (267 | ) | (363 | ) | ||||||||
| Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders | $ | 289 | $ | 610 | $ | (383 | ) | $ | 745 | |||||||
| Basic income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders | $ | .02 | $ | .05 | $ | (.03 | ) | $ | .06 | |||||||
| Diluted income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders | $ | .02 | $ | .05 | $ | (.03 | ) | $ | .06 | |||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 12,054 | 11,813 | 12,008 | 11,780 | ||||||||||||
| Add: dilutive effect of stock options | 68 | 100 | ─ | 69 | ||||||||||||
| Diluted weighted average shares outstanding | 12,122 | 11,913 | 12,008 | 11,849 | ||||||||||||
| Potential shares excluded from above weighted average share calcualtions due to their anti-dilutive effect include: | ||||||||||||||||
| Upon exercise of options | 113 | 100 | 186 | 100 | ||||||||||||
8. Long Term Debt
Long-term debt consists of the following at June 30, 2019 and December 31, 2018:
| (Amounts in Thousands) | June 30, 2019 | December 31, 2018 | ||||||
| Revolving Credit facility dated October 31, 2011, as amended, borrowings based upon eligible accounts receivable, subject to monthly borrowing base calculation, balance due March 24, 2021. Effective interest rate for the first six months of 2019 was 6.8%. (1) | $ | ─ | $ | 639 | ||||
| Term Loan dated October 31, 2011, as amended, payable in equal monthly installments of principal of $102, balance due on March 24, 2021. Effective interest rate for the first six months of 2019 was 6.2%. (1) | 2,021 | (2) | 2,663 | (2) | ||||
| Promissory Note with related party dated April 1, 2019, payable in twelve monthly installments of interest only, starting May 1, 2019 followed with twelve monthly installments of approximately $208 in principal plus accrued interest. Interest accrues at annual rate of 4.0%. (3) | 2,154 | (4) | ─ | |||||
| Total debt | 4,175 | 3,302 | ||||||
| Less current portion of long-term debt | 581 | 1,184 | ||||||
| Long-term debt | $ | 3,594 | $ | 2,118 | ||||
(1) Our revolving credit facility is collateralized by our accounts receivable and our term loan is collateralized by our property, plant, and equipment. Effective July 1, 2019, monthly installment principal payment on the Term Loan was amended to approximately $35,547 from approximately $101,600. See discussion of the amendment dated June 20, 2019 to the Company’s loan agreement below.
(2) Net of debt issuance costs of ($112,000) and ($80,000) at June 30, 2019 and December 31, 2018, respectively.
(3) Uncollateralized note.
(4) Net of debt discount/debt issuance of ($346,000) at June 30, 2019.
| 15 |
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.
On March 29, 2019, the Company entered into an amendment to its Revised Loan Agreement with its lender under the credit facility which provided the following:
| ● | waived the Company’s failure to meet the minimum quarterly fixed charge coverage ratio (“FCCR”) requirement for the fourth quarter of 2018; |
| ● | waived the quarterly FCCR testing requirement for the first quarter of 2019; |
| ● | revised the methodology to be used in calculating the FCCR in each of the second and third quarters of 2019 (with continued requirement to maintain a minimum 1.15:1 ratio in each of the quarters); |
| ● | revised the minimum Tangible Adjusted Net Worth requirement (as defined in the Revised Loan Agreement) from $26,000,000 to $25,000,000; |
| ● | eliminated the London InterBank Offer Rate (“LIBOR”) interest payment option of paying annual rate of interest due on our term loan and revolving credit until the Company becomes compliant with its FCCR requirement again. Prior to this amendment, the Company had the option of paying annual rate of interest due on the revolving credit at prime (5.50% at June 30, 2019) plus 2% or LIBOR plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%; |
| ● | provided consent for the $2,500,000 loan that the Company entered into with Robert Ferguson on April 1, 2019 discussed below. The Company is not allowed to make any principal prepayment on this loan until it receives the restricted finite risk sinking funds of approximately $5,000,000 held as collateral by AIG Specialty Insurance Company (“AIG”) under our financial assurance policy resulting from the closure of the Company’s East Tennessee Material and Energy Corporation (“M&EC”) facility (see “Note 10 – Commitments and Contingencies – Insurance” for a discussion of restricted sinking funds held by AIG under our financial assurance policy and “Note 14 – Subsequent Events – 2003 Closure Policy” for the receipt of this $5,000,000 in restricted sinking funds); and |
| ● | revised the annual rate used to calculate the Facility Fee (as defined in the Revised Loan Agreement) (unused revolving credit line fee) from 0.250% to 0.375%. |
On June 20, 2019, the Company entered into another amendment to its Revised Loan Agreement with its lender under the credit facility which provided the following, among other things:
| ● | removed the FCCR calculation requirement for the second, third and fourth quarter of 2019. Starting in the first quarter of 2020, the Company will again be required to maintain a minimum FCCR of not less than 1.15 to 1.0 for the four quarter period ending March 31, 2020 and for each fiscal quarter thereafter; |
| ● | requires the Company to maintain a minimum Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA” as defined in the Amendment) of at least (i) $475,000 for the one quarter period ending June 30, 2019; (ii) $2,350,000 for the two quarter period ending September 30, 2019; and (iii) $3,750,000 for the three quarter period ending December 31, 2019; |
| 16 |
| ● | immediate release of $450,000 of the $1,000,000 indefinite reduction in borrowing availability that our lender had previously imposed. Our lender will release another $300,000 of the remaining $550,000 reduction in borrowing availability if the Company meets its minimum Adjusted EBITDA requirement for the quarter ending September 30, 2019 as discussed above, in addition to the Company having received no less than $4,000,000 of the restricted finite risk sinking funds held as collateral by AIG under our financial assurance policy. Our lender will release the final $250,000 reduction in borrowing availability if the Company meets its Adjusted EBITDA requirement for the three quarter period ending December 31, 2019; and |
| ● | reduce the term loan monthly principal payment starting July 1, 2019 from $101,600 to approximately $35,547, with the remaining balance of the term loan due at the maturity of the Revised Loan Agreement which is March 24, 2021. |
Most of the other terms of the Revised Loan Agreement, as amended, remain principally unchanged. In connection with amendment dated March 29, 2019 and June 20, 2019, the Company paid its lender a fee of $20,000 and $50,000, respectively.
Pursuant to the Revised Loan Agreement, as amended, the Company may terminate the Revised Loan Agreement, as amended, upon 90 days’ prior written notice upon payment in full of its obligations under the Revised Loan Agreement, as amended. No early termination fee shall apply if the Company pays off its obligations after March 23, 2019.
At June 30, 2019, the borrowing availability under our revolving credit was approximately $3,463,000, based on our eligible receivables and includes an indefinite reduction of borrowing availability of $550,000 that the Company’s lender has imposed. Our borrowing availability under our revolving credit was also reduced by outstanding standby letters of credit totaling approximately $2,639,000.
The Company’s credit facility with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. As discussed above, our lender waived/removed our FCCR testing requirement for each of the quarters in 2019. The Company met its “Adjusted EBITDA” minimum requirement in the second quarter of 2019 in accordance to the amendment dated June 20, 2019 discussed above. Additionally, the Company met its remaining financial covenant requirements in the first and second quarters of 2019 and expects to meet its financial covenants in each of the remaining quarters of 2019 and into the first nine months of 2020.
Loan and Securities Purchase Agreement, Promissory Note and Subordination Agreement
On April 1, 2019, the Company completed a lending transaction with Robert Ferguson (the “Lender”), whereby the Company borrowed from the Lender the sum of $2,500,000 pursuant to the terms of a Loan and Security Purchase Agreement and promissory note (the “Loan”). The Lender is a shareholder of the Company. The Lender also currently serves as a consultant to the Company in connection with the TBI at its PFNWR subsidiary. The proceeds from the Loan are being used for general working capital purposes. The Loan is unsecured, with a term of two years with interest payable at a fixed interest rate of 4.00% per annum. The Loan provides for monthly payments of accrued interest only during the first year of the Loan, with the first interest payment due May 1, 2019 and monthly payments of approximately $208,333 in principal plus accrued interest starting in the second year of the Loan. The Loan also allows for prepayment of principal payments over the term of the Loan without penalty. In connection with the above Loan, the Lender agreed under the terms of the Loan and a Subordination Agreement with our credit facility lender, to subordinate payment under the Loan, and agreed that the Loan will be junior in right of payment to the credit facility in the event of default or bankruptcy or other insolvency proceeding by us. In connection with this capital raise transaction described above and consideration for us receiving the Loan, the Company issued a Warrant (the “Warrant”) to the Lender to purchase up to 60,000 shares of our Common Stock at an exercise price of $3.51 per share, which was the closing bid price for a share of our Common Stock on NASDAQ.com immediately preceding the execution of the Loan and Warrant. The Warrant is exercisable six months from April 1, 2019 and expires on April 1, 2024. The fair value of the Warrant was estimated to be approximately $93,000 using the Black-Scholes option pricing model with the following assumptions: 50.76% volatility, risk free interest rate of 2.31%, an expected life of five years and no dividends. As further consideration for this capital raise transaction relating to the Loan, the Company issued 75,000 shares of its Common Stock to the Lender. The Company determined the fair value of the 75,000 shares of Common Stock to be approximately $263,000 which was based on the closing bid price for a share of the Company’s Common Stock on NASDAQ.com immediately preceding the execution of the Loan, pursuant to the Loan and Securities Purchase Agreement. The fair value of the Warrant and Common Stock and the related closing fees incurred totaling approximately $396,000 from the transaction was recorded as debt discount/debt issuance costs, which is being amortized over the term of the loan as interest expense – financing fees. The 75,000 shares of Common Stock, the Warrant and the 60,000 shares of Common Stock that may be purchased under the Warrant will be and was issued in a private placement that was exempt from registration under Rule 506 and/or Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “Act”) and bear a restrictive legend against resale except in a transaction registered under the Act or in a transaction exempt from registration thereunder.
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Upon default, the Lender will have the right to elect to receive in full and complete satisfaction of the Company’s obligations under the Loan either: (a) the cash amount equal to the sum of the unpaid principal balance owing under the loan and all accrued and unpaid interest thereon (the “Payoff Amount”) or (b) upon meeting certain conditions, the number of whole shares of the Company’s Common Stock (the “Payoff Shares”) determined by dividing the Payoff Amount by the dollar amount equal to the closing bid price of our Common Stock on the date immediately prior to the date of default, as reported or quoted on the primary nationally recognized exchange or automated quotation system on which our Common Stock is listed; provided however, that the dollar amount of such closing bid price shall not be less than $3.51, the closing bid price for our Common Stock as disclosed on NASDAQ.com immediately preceding the signing of this loan agreement.
If issued, the Payoff Shares will not be registered and the Lender will not be entitled to registration rights with respect to the Payoff Shares. The aggregate number of shares, warrant shares, and Payoff Shares that are or will be issued to the Lender pursuant to the Loan, together with the aggregate shares of the Company’s Common Stock and other voting securities owned by the Lender or which may be acquired by the Lender as of the date of issuance of the Payoff Shares, shall not exceed the number of shares of the Company’s Common Stock equal to 14.9% of the number of shares of the Company’s Common Stock issued and outstanding as of the date immediately prior to the default, less the number of shares of the Company’s Common Stock owned by the Lender immediately prior to the date of such default plus the number of shares of our Common Stock that may be acquired by the Lender under warrants and/or options outstanding immediately prior to the date of such default.
9. M&EC
The Company has completed the closure and decommissioning activities of its M&EC facility in accordance with M&EC’s license and permit requirements.
At June 30, 2019, total accrued closure liabilities for our M&EC subsidiary totaled approximately $156,000 which are recorded as current liabilities. The Company recorded an additional $330,000 in closure costs and current closure liabilities during the first six months of 2019 due to finalization of closure requirements, of which approximately $165,000 was recorded in the second quarter of 2019. The following reflects changes to the closure liabilities for the M&EC facility from year end 2018:
| Amounts in thousands | ||||
| Balance as of December 31, 2018 | $ | 1,142 | ||
| Adjustment to closure liability | 330 | |||
| Spending | (1,316 | ) | ||
| Balance as of June 30, 2019 | $ | 156 | ||
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10. Commitments and Contingencies
Hazardous Waste
In connection with our waste management services, we process both hazardous and non-hazardous waste, which we transport to our own, or other, facilities for destruction or disposal. As a result of disposing of hazardous substances, in the event any cleanup is required, we could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our part.
Legal Matters
In the normal course of conducting our business, we are involved in various litigation. We are not a party to any litigation or governmental proceeding which our management believes could result in any judgments or fines against us that would have a material adverse effect on our financial position, liquidity or results of future operations.
Insurance
The Company has a 25-year finite risk insurance policy entered into in June 2003 (“2003 Closure Policy”) with AIG, which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The 2003 Closure Policy, as amended, 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 June 30, 2019, our financial assurance coverage amount under this 2003 Closure Policy totaled approximately $30,549,000. The Company had contributed $16,159,000 and $15,971,000 in finite risk sinking funds (“sinking funds”) related to this policy in other long term assets on the accompanying Consolidated Balance Sheets at June 30, 2019 and December 31, 2018, respectively, which includes interest earned of $1,688,000 and $1,500,000 on the sinking funds as of June 30, 2019 and December 31, 2018, respectively (see a discussion of the subsequent reclassification of $5,000,000 in sinking funds at June 30, 2019 to sinking funds receivable in current assets on the accompanying Consolidated Balance Sheets at June 30, 2019 below). Interest income for the three and six months ended June 30, 2019 was approximately $107,000 and $188,000, respectively. Interest income for the three and six months ended June 30, 2018 was approximately $81,000 and $131,000, respectively. If the Company so elects, AIG is obligated to pay the Company 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.
As previously discussed, the Company had been working with AIG and certain government regulators which would allow for the release of approximately $5,000,000 of the sinking funds held as collateral under the 2003 Closure Policy upon closure of the M&EC facility. On July 22, 2019, the Company received $5,000,000 of the sinking funds. Accordingly, at June 30, 2019, the Company reclassified $5,000,000 of the $16,159,000 in sinking funds initially included in other long term assets on the accompanying Consolidated Balance Sheets to sinking funds (restricted cash) included in current assets on the accompanying Consolidated Balance Sheets (See “Note 14 – Subsequent Events – 2003 Closure Policy” for a discussion of the release of the sinking funds by AIG and certain amendment made to the 2003 Closure Policy).
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 June 30, 2019, the total amount of standby letters of credit outstanding totaled approximately $2,639,000 and the total amount of bonds outstanding totaled approximately $29,465,000.
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11. Discontinued Operations
The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment: (1) subsidiaries divested in 2011 and prior, (2) two previously closed locations, and (3) our PFSG facility is in closure status, which final closure is subject to regulatory approval of necessary plans and permits.
The Company’s discontinued operations had net losses of $115,000 and $206,000 for the three months ended June 30, 2019 and 2018, respectively (net of taxes of $0 for each period) and net losses of $267,000 and $363,000 for the six months ended June 30, 2019 and 2018, respectively, (net of taxes of $0 for each period). The losses were primarily due to costs incurred in the administration and continued monitoring of our discontinued operations. The Company’s discontinued operations had no revenues for each of the periods noted above.
The following table presents the major class of assets of discontinued operations as of June 30, 2019 and December 31, 2018. No assets and liabilities were held for sale at each of the periods noted.
| (Amounts in Thousands) | June 30, 2019 | December 31, 2018 | ||||||
| Current assets | ||||||||
| Other assets | $ | 98 | $ | 107 | ||||
| Total current assets | 98 | 107 | ||||||
| Long-term assets | ||||||||
| Property, plant and equipment, net (1) | 81 | 81 | ||||||
| Other assets | 78 | 118 | ||||||
| Total long-term assets | 159 | 199 | ||||||
| Total assets | $ | 257 | $ | 306 | ||||
| Current liabilities | ||||||||
| Accounts payable | $ | 9 | $ | 10 | ||||
| Accrued expenses and other liabilities | 262 | 296 | ||||||
| Environmental liabilities | 40 | 50 | ||||||
| Total current liabilities | 311 | 356 | ||||||
| Long-term liabilities | ||||||||
| Closure liabilities | 130 | 126 | ||||||
| Environmental liabilities | 837 | 837 | ||||||
| Total long-term liabilities | 967 | |||||||