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, 2020  

 

Or

 

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the transition period from   to    

 

Commission File No.     111596     

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 58-1954497
(State or other jurisdiction (IRS Employer
of incorporation or organization) 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)

 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class   Trading Symbol   Name of each exchange on which registered
         
Common Stock, $.001 Par Value   PESI   NASDAQ Capital Markets
Preferred Stock Purchase Rights       NASDAQ Capital Markets

 

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 November 4, 2020
Common Stock, $.001 Par Value   12,153,897 shares

 

 

 

   

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

 

INDEX

 

    Page No.
PART I FINANCIAL INFORMATION
     
  Item 1. Consolidated Financial Statements  3
       
    Consolidated Balance Sheets - September 30, 2020 and December 31, 2019  3
       
    Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2020 and 2019 5 
       
    Consolidated Statements of Comprehensive Income  - Three and Nine Months Ended September 30, 2020 and 2019 6 
       
    Consolidated Statement of Stockholders’ Equity - Nine Months Ended September 30, 2020 and 2019 7 
       
    Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2020 and 2019  8
       
    Notes to Consolidated Financial Statements  9
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 29 
       
  Item 3. Quantitative and Qualitative Disclosures  About Market Risk  45
       
  Item 4. Controls and Procedures  45
       
PART II OTHER INFORMATION  
     
  Item 1. Legal Proceedings  45
       
  Item 1A. Risk Factors  46
       
  Item 6. Exhibits  46

 

 2 

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. – Financial Statements

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets

 

   September 30,   December 31, 
   2020   2019 
(Amounts in Thousands, Except for Share and Per Share Amounts)  (Unaudited)   (Audited) 
         
ASSETS          
Current assets:          
Cash  $4,811   $390 
Accounts receivable, net of allowance for doubtful accounts of $432 and $487, respectively   13,442    13,178 
Unbilled receivables   14,366    7,984 
Inventories   525    487 
Prepaid and other assets   3,863    2,983 
Current assets related to discontinued operations   17    104 
Total current assets   37,024    25,126 
           
Property and equipment:          
Buildings and land   20,049    19,967 
Equipment   22,285    20,068 
Vehicles   456    410 
Leasehold improvements   23    23 
Office furniture and equipment   1,470    1,418 
Construction-in-progress   1,513    1,609 
Total property and equipment   45,796    43,495 
Less accumulated depreciation   (27,900)   (26,919)
Net property and equipment   17,896    16,576 
           
Property and equipment related to discontinued operations   81    81 
           
Operating lease right-of-use assets   2,353    2,545 
           
Intangibles and other long term assets:          
Permits   8,875    8,790 
Other intangible assets - net   923    1,065 
Finite risk sinking fund (restricted cash)   11,418    11,307 
Other assets   911    989 
Other assets related to discontinued operations       36 
Total assets  $79,481   $66,515 

 

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

 

 3 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Balance Sheets, Continued

 

   September 30,   December 31, 
   2020   2019 
(Amounts in Thousands, Except for Share and Per Share Amounts)  (Unaudited)   (Audited) 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $14,652   $9,277 
Accrued expenses   6,743    6,118 
Disposal/transportation accrual   1,041    1,156 
Deferred revenue   4,806    5,456 
Accrued closure costs - current   75    84 
Current portion of long-term debt   828    1,300 
Current portion of operating lease liabilities   265    244 
Current portion of finance lease liabilities   675    471 
Current liabilities related to discontinued operations   919    994 
Total current liabilities   30,004    25,100 
           
Accrued closure costs   6,207    5,957 
Deferred tax liabilities   588    590 
Long-term debt, less current portion   6,426    2,580 
Long-term operating lease liabilities, less current portion   2,141    2,342 
Long-term finance lease liabilities, less current portion   715    466 
Other long-term liabilities   838     
Long-term liabilities related to discontinued operations   250    244 
Total long-term liabilities   17,165    12,179 
           
Total liabilities   47,169    37,279 
           
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; 12,152,363 and 12,123,520 shares issued, respectively; 12,144,721 and 12,115,878 shares outstanding, respectively   12    12 
Additional paid-in capital   108,790    108,457 
Accumulated deficit   (74,445)   (77,315)
Accumulated other comprehensive loss   (251)   (211)
Less Common Stock in treasury, at cost; 7,642 shares   (88)   (88)
Total Perma-Fix Environmental Services, Inc. stockholders’ equity   34,018    30,855 
Non-controlling interest   (1,706)   (1,619)
Total stockholders’ equity   32,312    29,236 
           
Total liabilities and stockholders’ equity  $79,481   $66,515 

 

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

 

 4 

 

 

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)  2020   2019   2020   2019 
                 
Net revenues  $30,172   $22,535   $77,079   $51,378 
Cost of goods sold   25,422    17,378    64,379    40,449 
Gross profit   4,750    5,157    12,700    10,929 
                     
Selling, general and administrative expenses   3,308    2,945    8,935    8,548 
Research and development   157    165    598    615 
Loss on disposal of property and equipment       4    27    3 
Income from operations   1,285    2,043    3,140    1,763 
                     
Other income (expense):                    
Interest income   28    77    112    265 
Interest expense   (87)   (99)   (306)   (293)
Interest expense-financing fees   (58)   (69)   (187)   (139)
Other   180    (2)   189    222 
Loss on debt extinguishment of debt           (27)    
Income from continuing operations before taxes   1,348    1,950    2,921    1,818 
Income tax (benefit) expense   (133)   55    (128)   99 
Income from continuing operations, net of taxes   1,481    1,895    3,049    1,719 
                     
Loss from discontinued operations, net of taxes of $0   (67)   (156)   (266)   (424)
Net income   1,414    1,739    2,783    1,295 
                     
Net loss attributable to non-controlling interest   (32)   (29)   (87)   (90)
                     
Net income attributable to Perma-Fix Environmental Services, Inc. common stockholders  $1,446   $1,768   $2,870   $1,385 
                    
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic:                    
Continuing operations  $.13   $.16   $.26   $.15 
Discontinued operations   (.01)   (.01)   (.02)   (.03)
Net income per common share  $.12   $.15   $.24   $.12 
                     
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - diluted:  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations  $.13   $.16   $.25   $.15 
Discontinued operations   (.01)   (.01)   (.02)   (.04)
Net income per common share  $.12   $.15   $.23   $.11 
                     
Number of common shares used in computing net income per share:                    
Basic   12,145    12,070    12,134    12,029 
Diluted   12,371    12,123    12,337    12,061 

 

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

 

 5 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Amounts in Thousands)  2020   2019   2020   2019 
                 
Net income  $1,414   $1,739   $2,783   $1,295 
Other comprehensive income (loss):                    
Foreign currency translation adjustment   11    4    (40)   12 
                     
Comprehensive income   1,425    1,743    2,743    1,307 
Comprehensive loss attributable to non-controlling interest   (32)   (29)   (87)   (90)
Comprehensive income attributable to Perma-Fix Environmental Services, Inc. stockholders  $1,457   $1,772   $2,830   $1,397 

 

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

 

 6 

 

 

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, 2019   12,123,520   $12   $108,457   $(88)  $(211)  $(1,619)  $(77,315)  $29,236 
Net Income (loss)            —     —     —    (26)   1,220    1,194 
Foreign currency translation            —     —    (79)    —     —    (79)
Issuance of Common Stock upon exercise of options   3,643        6     —     —     —     —    6 
Issuance of Common Stock for services   5,128        48     —     —     —     —    48 
Stock-Based Compensation           44     —     —     —     —    44 
Balance at March 31, 2020   12,132,291   $12   $108,555   $(88)  $(290)  $(1,645)  $(76,095)  $30,449 
Net Income (loss)            —     —     —    (29)   204    175 
Foreign currency translation            —     —    28     —     —    28 
Issuance of Common Stock upon exercise of options   241         —     —     —     —     —     — 
Issuance of Common Stock for services   10,239        56     —     —     —     —    56 
Stock-Based Compensation           48     —     —     —     —    48 
Balance at June 30, 2020   12,142,771   $12   $108,659   $(88)  $(262)  $(1,674)  $(75,891)  $30,756 
Net Income (loss)            —     —     —    (32)   1,446    1,414 
Foreign currency translation            —     —    11     —     —    11 
Issuance of Common Stock for services   9,592        62     —     —     —     —    62 
Stock-Based Compensation           69     —     —     —     —    69 
Balance at September 30, 2020   12,152,363   $12   $108,790   $(88)  $(251)  $(1,706)  $(74,445)  $32,312 
                                         
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 
Net income (loss)            —     —     —    (29)   1,768    1,739 
Foreign currency translation            —     —    4     —     —    4 
Issuance of Common Stock for services   15,337        60     —     —     —     —    60 
Stock-Based Compensation           45     —     —     —     —    45 
Balance at September 30, 2019   12,077,418   $12   $108,215   $(88)  $(202)  $(1,585)  $(78,245)  $28,107 

 

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

 

 7 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended 
   September 30, 
(Amounts in Thousands)  2020   2019 
Cash flows from operating activities:          
Net income  $2,783   $1,295 
Less: loss from discontinued operations, net of taxes of $0   (266)   (424)
           
Income from continuing operations, net of taxes   3,049    1,719 
Adjustments to reconcile income from continuing operations to cash provided by (used in) operating activities:          
Depreciation and amortization   1,189    968 
Interest on finance lease with purchase option   6     
Loss on extinguishment of debt   27     
Amortization of debt issuance/debt discount costs   187    139 
Deferred tax (benefit) expense   (2)   26 
(Recovery of) provision for bad debt reserves   (94)   147 
Loss on disposal of property and equipment   27    3 
Issuance of common stock for services   166    182 
Stock-based compensation   161    129 
Changes in operating assets and liabilities of continuing operations          
Accounts receivable   (170)   (3,193)
Unbilled receivables   (6,382)   (6,140)
Prepaid expenses, inventories and other assets   1,284    500 
Accounts payable, accrued expenses and unearned revenue   4,055    2,516 
Cash provided by (used in) continuing operations   3,503    (3,004)
Cash used in discontinued operations   (329)   (459)
Cash provided by (used in) operating activities   3,174    (3,463)
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,488)   (813)
Proceeds from sale of property and equipment   4    1 
Cash used in investing activities of continuing operations   (1,484)   (812)
Cash provided by investing activities of discontinued operations   118    100 
Cash used in investing activities   (1,366)   (712)
           
Cash flows from financing activities:          
Repayments of revolving credit borrowings   (72,601   (38,378) 
Borrowing on revolving credit   72,280    37,739 
Proceeds from issuance of long-term debt   5,666    2,500 
Proceeds from finance leases       405 
Principal repayments of finance lease liabilities   (411)   (174)
Principal repayments of long term debt   (2,127)   (925)
Payment of debt issuance costs   (85)   (112)
Proceeds from issuance of common stock upon exercise of options   6     
Cash provided by financing activities of continuing operations   2,728    1,055 
           
Effect of exchange rate changes on cash   (4)   16 
           
Increase (decrease) in cash and finite risk sinking fund (restricted cash)   4,532    (3,104)
Cash and finite risk sinking fund (restricted cash) at beginning of period   11,697    16,781 
Cash and finite risk sinking fund (restricted cash) at end of period  $16,229   $13,677 
           
Supplemental disclosure:          
Interest paid  $286   $284 
Income taxes paid   34    168 
Equipment purchase subject to finance lease   856    29 
Equipment purchase subject to financing   27     
Issuance of Common Stock with debt       263 
Issuance of Warrant with debt       93 

 

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

 

 8 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Notes to Consolidated Financial Statements

September 30, 2020

(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, 2019.

 

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 nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2020.

 

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, 2019.

 

The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries, and our majority-owned Polish subsidiary, Perma-Fix Medical. Additionally, the Company’s financial statements include the account of a variable interest entity (“VIE”), Perma-Fix ERRG for which we are the primary beneficiary (See “Note 14 - VIE” for a discussion of this VIE).

 

2. Summary of Significant Accounting Policies

 

Recently Adopted Accounting Standards

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. The adoption of ASU No. 2018-13 by the Company effective January 1, 2020 did not have a material impact on the Company’s financial statements or disclosures.

 

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (“ASU 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Interbank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 on March 12, 2020 by the Company did not have a material impact on the Company’s financial statements. The Company will continue to assess the potential impact of this ASU through the effective period.

 

 9 

 

 

Recently Issued Accounting Standards – Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, “Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses,” ASU 2019-04 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05 “Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-11 “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” and ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)” (collectively, “Topic 326”). Topic 326 introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables and loans. 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. These ASUs are effective January 1, 2023 for the Company as a smaller reporting company. The Company had expected to early adopt theses ASUs effective January 1, 2020; however, due to the need for reallocation of the Company’s resources to manage COVID-19 related matters, the Company has deferred adoption of theses ASUs effective January 1, 2020 and expect to adopt these ASUs by January 1, 2023.

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of this ASU will have a material impact on the Company’s financial statements.

 

In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This guidance addresses accounting for the transition into and out of the equity method and provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of this ASU will have a material impact on the Company’s financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity.” ASU 2020-06 simplifies the accounting for convertible instruments by removing major separation models and removing certain settlement condition qualifiers for the derivatives scope exception for contracts in an entity’s own equity, and simplifies the related diluted net income per share calculation for both Subtopics. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, for the Company as a smaller reporting company. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and disclosures.

 

3.    COVID-19 Impact

 

The spread of COVID-19 continues to result in significant volatility in the U.S. and international markets. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business. As previously reported, the COVID-19 pandemic did not result in a material impact to the Company’s first quarter 2020 results of operations. Starting in late March 2020, the Company’s operations were impacted by the shutdown of a number of projects and the delays of certain waste shipments that continued into the second quarter of 2020. Since the latter part of the second quarter of 2020, all of the projects that were previously shutdown within our Services Segment have restarted as stay-at-home orders and certain other restrictions resulting from the pandemic were lifted. Revenues within our Services Segment in the third quarter of 2020 exceeded the corresponding period of 2019 by approximately $10,652,000. The Company continues to experience delays in waste shipments from certain customers within our Treatment Segment directly related to the impact of COVID-19 including generator shutdowns and limited sustained operations, along with other factors. These waste shipment delays may impact the Company’s results of operations for the fourth quarter of 2020 and potentially the first quarter of 2021.

 

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At this time, the Company believes it has sufficient liquidity on hand to continue business operations during the next twelve months. At September 30, 2020, the Company had cash on hand of approximately $4,811,000 and borrowing availability under our revolving credit facility of approximately $16,404,000 based on a percentage of eligible receivables and subject to certain reserves. The Company continues to assess reducing operating costs during this volatile time, which include curtailing capital expenditures, eliminating non-essential expenditures and implementing a hiring freeze as needed.

 

The Company is closely monitoring our customers’ payment performance. However, as a significant portion of our revenues is derived from government related contracts, the Company does not expect its accounts receivable collections to be materially impacted due to COVID-19.

 

The situation surrounding COVID-19 continues to remain fluid. The potential for a material impact on the Company’s business increases the longer COVID-19 impacts the level of economic activities in the United States and globally as our customers may continue to delay waste shipments and project work may shut down again. For this reason, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on our results of operations, financial position, and liquidity which may impact our ability to meet our financial covenant requirements under our credit facility. Given the current economic environment and the market volatility from COVID-19, the Company considered whether these events or changes in circumstances triggered the need for an interim impairment analysis of our long-lived assets and intangible assets. Based on the Company’s assessment of the impact of these conditions on our business, the Company determined there was no triggering event as of September 30, 2020. However, as the effects of the COVID-19 pandemic continue to evolve, the Company will continue to assess the need to perform interim impairment tests of our long-lived assets and intangible assets.

 

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”) on June 5, 2020, provides the Company the option to defer the payment of its share of social security taxes beginning on March 27, 2020 through December 31, 2020. The Company elected to defer payment of its shares of social security taxes starting in April 2020 (see “Note 15 – Deferral of Employment Tax Deposits”). The Company also entered into a promissory note (“PPP Loan”) with its credit facility lender under the Paycheck Protection Program (“PPP”) that was established under the CARES Act, as amended (see “Note 9 – Long Term Debt – PPP Loan” for further detail of this loan).

 

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4. 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 
   September 30, 2020   September 30, 2019 
   Treatment   Services   Total   Treatment   Services   Total 
Fixed price  $7,066   $10,303   $17,369   $10,081   $5,364   $15,445 
Time and materials    —    12,803    12,803        7,090    7,090 
Total  $7,066   $23,106   $30,172   $10,081   $12,454   $22,535 

 

Revenue by Contract Type

  Nine Months Ended   Nine Months Ended 
(In thousands)  September 30, 2020   September 30, 2019 
   Treatment   Services   Total   Treatment   Services   Total 
Fixed price  $24,469   $19,001   $43,470   $30,079   $9,231   $39,310 
Time and materials       33,609    33,609        12,068    12,068 
Total  $24,469   $52,610   $77,079   $30,079   $21,299   $51,378 

 

Revenue by generator  Three Months Ended   Three Months Ended 
(In thousands)  September 30, 2020   September 30, 2019 
   Treatment   Services   Total   Treatment   Services   Total 
Domestic government  $5,334   $21,660   $26,994   $7,537   $10,155   $17,692 
Domestic commercial   1,598    459    2,057    2,535    475    3,010 
Foreign government   134    966    1,100        1,804    1,804 
Foreign commercial       21    21    9    20    29 
Total  $7,066   $23,106   $30,172   $10,081   $12,454   $22,535 

 

Revenue by generator  Nine Months Ended   Nine Months Ended 
(In thousands)  September 30, 2020   September 30, 2019 
   Treatment   Services   Total   Treatment   Services   Total 
Domestic government  $19,079   $48,249   $67,328   $21,986   $15,683   $37,669 
Domestic commercial   5,256    1,352    6,608    7,809    2,088    9,897 
Foreign government   134    2,945    3,079    220    3,465    3,685 
Foreign commercial       64    64    64    63    127 
Total  $24,469   $52,610   $77,079   $30,079   $21,299   $51,378 

 

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:

 

(In thousands)  September 30, 2020   December 31, 2019   Year-to-date Change ($)   Year-to-date Change (%) 
Contract assets                    
Account receivables, net of allowance  $13,442   $13,178   $264    2.0%
Unbilled receivables - current   14,366    7,984    6,382    79.9%
                     
Contract liabilities                    
Deferred revenue  $4,806   $5,456   $(650)   (11.9)%

 

During the three and nine months ended September 30, 2020, the Company recognized revenue of $1,134,000 and $7,673,000, respectively, related to untreated waste that was in the Company’s control as of the beginning of the year. During the three and nine months ended September 30, 2019, the Company recognized revenue of $1,877,000 and $9,322,000, respectively, related to untreated waste that was in the Company’s control as of the beginning of the year. All revenue recognized in each period related to performance obligations satisfied within the respective period.

 

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Remaining Performance Obligations

 

The Company applies the practical expedient in FASB Accounting Standards Codification (“ASC”) 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

 

Within our Services Segment, there are service contracts which provide that the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date. For those contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, which allows the Company to recognize revenue in the amount for which we have the right to invoice; accordingly, the Company does not disclose the value of remaining performance obligations for those contracts.

 

5. Leases

 

The Company’s operating lease right-of-use (“ROU”) assets and operating lease liabilities represent primarily leases for office spaces used to conduct our business. These leases have remaining terms of approximately 3 to 10 years which include one or more options to renew (which 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. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

 

Finance leases primarily consist of processing and transport equipment used by our facilities’ operations. Our finance leases also include a building with land for our waste treatment operations. The Company’s finance leases generally have initial terms between one to six years and some of the leases include options to purchase the underlying assets at fair market value at the conclusion of the lease term. The lease for the building and land has a term of two years with an option to buy at the end of the lease term, which the Company is reasonably certain to exercise.

 

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 for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
                 
Operating Leases:                    
Lease cost  $114   $114   $342   $342 
                     
Finance Leases:                    
Amortization of ROU assets   109    20    161    39 
Interest on lease liability   47    15    97    40 
    156    35    258    79 
                     
Short-term lease rent expense   3    41    7    113 
                     
Total lease cost  $273   $190   $607   $534 

 

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The weighted average remaining lease term and the weighted average discount rate for operating and finance leases at September 30, 2020 were:

 

   Operating Leases   Finance Leases 
Weighted average remaining lease terms (years)   8.2    3.4 
           
Weighted average discount rate   8.0%   7.9%

 

The following table reconciles the undiscounted cash flows for the operating and finance leases at September 30, 2020 to the operating and finance lease liabilities recorded on the balance sheet (in thousands):

 

    Operating Leases   Finance Leases 
2020 Remainder   $112   $263 
2021    450    554 
2022    458    272 
2023    466    149 
2024    342    146 
2025 and thereafter    1,457    164 
Total undiscounted lease payments    3,285    1,548 
Less: Imputed interest    (879)   (158)
Present value of lease payments   $2,406   $1,390 
            
Current portion of operating lease obligations   $265   $ 
Long-term operating lease obligations, less current portion   $2,141   $ 
Current portion of finance lease obligations   $   $675 
Long-term finance lease obligations, less current portion   $   $715 

 

Supplemental cash flow and other information related to our leases were as follows for the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Cash paid for amounts included in the measurement of lease liabilities:                    
Operating cash flow used in operating leases  $111   $109   $331   $326 
Operating cash flow used in finance leases  $47   $15   $97   $40 
Financing cash flow used in finance leases  $182   $73   $411   $174 
                     
ROU assets obtained in exchange for lease obligations for:                    
Finance liabilities  $751   $390   $874   $528 
Operating liabilities  $            182 

 

6. Intangible Assets

 

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

 

   Weighted Average   September 30, 2020       December 31, 2019     
   Amortization   Gross       Net   Gross       Net 
   Period   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
Intangibles (amount in thousands)  (Years)   Amount   Amortization   Amount   Amount   Amortization   Amount 
                             
Patent   9.7   $785   $(375)  $410   $760   $(358)  $402 
Software   3    414    (410)   4    414    (408)   6 
Customer relationships   10    3,370    (2,861)   509    3,370    (2,713)   657 
Total       $4,569   $(3,646)  $923   $4,544   $(3,479)  $1,065 

 

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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 following table summarizes the expected amortization over the next five years for our definite-lived intangible assets:

 

    Amount 
Year   (In thousands) 
      
2020 (remaining)   $56 
2021    202 
2022    176 
2023    135 
2024    13 

 

Amortization expense relating to the definite-lived intangible assets as discussed above was $58,000 and $167,000 for the three and nine months ended September 30, 2020, respectively, and $60,000 and $194,000 for the three and nine months ended September 30, 2019, respectively.

 

7. 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 August 10, 2020, 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 $7.29 per share, which was equal to the Company’s closing stock price per share the day preceding the grant date, pursuant to the 2003 Plan.

 

On July 22, 2020, 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 Company’s Annual Meeting of Stockholders held on July 22, 2020. Dr. Louis F. Centofanti, the Company’s Executive Vice President (“EVP”) of Strategic Initiatives and also 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 $6.70 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On February 4, 2020, 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 $7.00 per share, which was equal to the Company’s closing stock price per share the day preceding the grant date, pursuant to the 2003 Plan.

 

On August 29, 2019 the Company granted an aggregate of 12,500 ISOs from the 2017 Stock Option Plan (“2017 Plan”) to certain employees. 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 $3.90 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

 

On July 25, 2019, 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 Company’s Annual Meeting of Stockholders held on July 25, 2019. 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 $3.31 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On January 17, 2019 the Company granted 105,000 ISOs from the 2017 Plan to certain employees, which included an aggregate of 55,000 ISOs to certain of our executive officers. 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.

 

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The Company granted a NQSO to Robert Ferguson on July 27, 2017 from the Company’s 2017 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 at an exercise price of $3.65 per share, which was the fair market value of the Company’s Common Stock on the date of grant. The term of the Ferguson Stock Option is seven years from the grant date. 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 for the purchase of up to 30,000 shares of the Company’s Common Stock was extended to March 31, 2020 from January 27, 2019. On March 27, 2020, the Compensation Committee and the Board approved another amendment to the Ferguson Stock Option whereby the vesting date for the second milestone was further extended to December 31, 2021 from March 31, 2020 and the vesting date for the third milestone for the purchase of up to 60,000 shares of the Company’s Common Stock was extended to December 31, 2022 from January 27, 2021. The 10,000 options under the first milestone were exercised by Robert Ferguson in May 2018. The Company has not recognized compensation costs (fair value of approximately $262,000 at September 30, 2020) for the remaining 90,000 Ferguson Stock Option under the remaining two milestones since achievement of the performance obligation under each of the two remaining milestones is uncertain at September 30, 2020. All other terms of the Ferguson Stock Option remain unchanged.

 

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 for the nine months ended September 30, 2020 and 2019 were as follows:

 

   Employee Stock Option Granted 
   Nine Months Ended September 30, 
   2019 
Weighted-average fair value per share  $1.46 
Risk -free interest rate (1)   1.4%-2.58%
Expected volatility of stock (2)   48.67%-51.38%
Dividend yield   None 
Expected option life (3)   5.0 years 

 

   Outside Director Stock Option Granted 
   Nine Months Ended September 30, 
   2020   2019 
Weighted-average fair value per share  $4.66   $2.27 
Risk -free interest rate (1)   0.59%-1.61%   2.08%
Expected volatility of stock (2)   55.83%-56.68%   54.28%
Dividend yield   None    None 
Expected option life (3)   10.0 years    10.0 years 

 

(1) The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.
   
(2) The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.
   
(3)   The expected option life is based on historical exercises and post-vesting data.

 

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The following table summarizes stock-based compensation recognized for the three and nine months ended September 30, 2020 and 2019 for our employee and director stock options.

 

   Three Months Ended   Nine Months Ended 
Stock Options  September 30,   September 30, 
   2020   2019   2020   2019 
Employee Stock Options  $34,000   $35,000   $99,000   $114,000 
Director Stock Options   35,000    10,000    62,000    15,000 
Total  $69,000   $45,000   $161,000   $129,000 

 

At September 30, 2020, the Company has approximately $349,000 of total unrecognized compensation costs related to unvested options for employee and directors. The weighted average period over which the unrecognized compensation costs are expected to be recognized is approximately 2.1 years.

 

The summary of the Company’s total Stock Option Plans as of September 30, 2020 and September 30, 2019, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2010 Stock Option Plan, the 2017 Plans and the 2003 Plan:

 

    Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (4) 
Options outstanding January 1, 2020    681,300   $3.84           
Granted     24,000   $6.92           
Exercised    (12,500)  $3.47        $16,060 
Forfeited/expired    (34,400)  $5.52           
Options outstanding end of period (1)    658,400   $3.87    3.7   $2,096,355 
Options exercisable at September 30, 2020(2)    340,400   $4.01    3.6   $1,036,255 

 

    Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (4) 
Options outstanding January 1, 2019    616,000   $4.23           
Granted     129,500   $3.24            
Exercised       $           
Forfeited/expired    (31,800)  $8.68           
Options outstanding end of period (3)    713,700   $3.85    4.4   $611,942 
Options exercisable as of September 30, 2019(3)    299,200   $4.30    4.0   $188,082 

 

(1) Options with exercise prices ranging from $2.79 to $7.29

(2) Options with exercise prices ranging from $2.79 to $7.05

(3) Options with exercise prices ranging from $2.79 to $13.35

(4) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price.

 

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During the nine months ended September 30, 2020, the Company issued a total of 24,959 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 $179,000 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.

 

During the nine months ended September 30, 2020, the Company issued 2,000 shares of its Common Stock resulting from the exercise of options from the Company’s 2017 Plan for total proceeds of $6,300. Additionally, the Company issued 1,884 shares of its Common Stock from cashless exercises of 8,000 and 2,500 options at $3.60 per share and $3.15 per share, respectively.

 

8. Income Per Share

 

Basic income per share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted income 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 per share:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(Amounts in Thousands,  (Unaudited)   (Unaudited) 
Except for Per Share Amounts)  2020   2019   2020   2019 
                    
Net income attributable to Perma-Fix Environmental Services, Inc., common stockholders:                    
Income from continuing operations, net of taxes  $1,481    1,895    3,049    1,719 
Net loss attributable to non-controlling interest   (32)   (29)   (87)   (90)
Income from continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders  $1,513   $1,924   $3,136   $1,809 
Loss from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders   (67)   (156)   (266)   (424)
Net income attributable to Perma-Fix Environmental Services, Inc. common stockholders  $1,446   $1,768   $2,870   $1,385 
                     
Basic income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.12   $.15   $.24   $.12 
                     
Diluted income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.12   $.15   $.23   $.11 
                     
Weighted average shares outstanding:                    
Basic weighted average shares outstanding   12,145    12,070    12,134    12,029 
Add: dilutive effect of stock options   201    47    181    29 
Add: dilutive effect of warrant   25    6    22    3 
Diluted weighted average shares outstanding   12,371    12,123    12,337    12,061 
                    
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:                    
Stock options   30    159    42    165 
Warrant                

 

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9. Long Term Debt

 

Long-term debt consists of the following at September 30, 2020 and December 31, 2019:

 

(Amounts in Thousands)  September 30, 2020   December 31, 2019 
Revolving Credit facility dated May 8, 2020, borrowings based upon eligible accounts receivable, subject to monthly borrowing base calculation, balance due on May 15, 2024. Effective interest rate for the first nine months of 2020 was 6.1%. (1)   $   $321 
Term Loan dated May 8, 2020, payable in equal monthly installments of principal, balance due on May 15, 2024. Effective interest rate for the first nine months of 2020 was 5.5%. (1)    1,487(2)   1,827(2)
Promissory Note 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)   424(4)   1,732(4)
Promissory Note dated April 14, 2020, subject to loan forgiveness, balance due April 14, 2022. Interest accrues at annual rate of 1.0%. (3)   5,318(5)    
Note Payable dated June 10, 2020, payable in 36 monthly installments, starting in July 2020 at annual interest rate of $5.64%.   25     
Total debt   7,254    3,880 
Less current portion of long-term debt   828(4)   1,300(4)
Long-term debt  $6,426   $2,580 

 

(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 $35,500 from approximately $101,600. See “Revolving Credit and Term Loan Agreement” below for terms of the Company’s credit facility prior to the New Loan Agreement dated May 8, 2020.

 

(2) Net of debt issuance costs of ($113,000) and ($92,000) at September 30, 2020 and December 31, 2019, respectively.

 

(3) Uncollateralized note.

 

(4) Net of debt discount/debt issuance costs of ($99,000) and ($248,000) at September 30, 2020 and December 31, 2019, respectively. The Promissory Note provides for prepayment of principal over the term of the Note without penalty. In 2019, the Company made total prepayment of principal of $520,000 which was reflected in the current portion of the debt. During the first nine months of 2020, the Company made total principal repayment of $1,457,000 of which $416,000 was prepaid. At September 30, 2020, the outstanding balance of the loan is current.

 

(5) Entered into with the Company’s credit facility lender under the Paycheck Protection Program (see “PPP Loan” below for further information on this loan).

 

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 had been amended from time to time since the execution of the Amended Loan Agreement. The Amended Loan Agreement, as subsequently amended (“Revised Loan Agreement”), provided 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. The maximum that the Company can borrow under the revolving credit was 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.

 

Payment of annual rate of interest due on the revolving credit under the Revised Loan Agreement was at prime (3.25% at September 30, 2020) plus 2% and the term loan at prime plus 2.5%.

 

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On May 8, 2020, the Company entered into a Second Amended and Restated Revolving Credit, Term Loan and Security Agreement (the “New Loan Agreement”) with PNC, replacing our previous Revised Loan Agreement with PNC. The New Loan Agreement provides the Company with the following credit facility:

 

  up to $18,000,000 revolving credit facility, subject to the amount of borrowings based on a percentage of eligible receivables and subject to certain reserves; and
     
  a term loan of $1,741,818, which requires monthly installments of $35,547.

 

The New Loan Agreement terminates as of May 15, 2024, unless sooner terminated.

 

Similar to our Revised Loan Agreement, the New Loan Agreement requires the Company to meet certain customary financial covenants, including, among other things, a minimum Tangible Adjusted Net Worth requirement of $27,000,000 at all times; maximum capital spending of $6,000,000 annually; and a minimum fixed charge coverage ratio (“FCCR”) requirement of 1.15:1.

 

Under the New Loan Agreement, payment of annual rate of interest due on the credit facility is as follows:

 

  revolving credit at prime plus 2.50% or LIBOR plus 3.50% and the term loan at prime plus 3.00% or LIBOR plus 4.00%. The Company can only elect to use the LIBOR interest payment option after it becomes compliant with meeting the minimum FCCR of 1.15:1; and
     
    Upon the achievement of a FCCR of greater than 1.25:1, the Company has the option of paying an annual rate of interest due on the revolving credit at prime plus 2.00% or LIBOR plus 3.00% and the term loan at prime plus 2.50% or LIBOR plus 3.50%. The Company met this FCCR in the first, second and third quarters of 2020. Upon meeting the FCCR of 1.25:1, this interest payment option will remain in place in the event that the Company’s future FCCR falls below 1.25:1.  

 

Under the LIBOR option of interest payment noted above, a LIBOR floor of 0.75% shall apply in the event that LIBOR falls below 0.75% at any point in time.

 

Pursuant to the New Loan Agreement, the Company may terminate the New Loan Agreement upon 90 days’ prior written notice upon payment in full of our obligations under the New Loan Agreement. The Company has agreed to pay PNC 1.0% of the total financing in the event we pay off our obligations on or before May 7, 2021 and 0.5% of the total financing if we pay off our obligations after May 7, 2021 but prior to or on May 7, 2022. No early termination fee shall apply if we pay off our obligations under the New Loan Agreement after May 7, 2022.

 

In connection with New Loan Agreement, the Company paid its lender a fee of $50,000 and incurred other direct costs of approximately $35,000, which are being amortized over the term of the New Loan Agreement as interest expense-financing fees. As a result of the termination of the Revised Loan Agreement, the Company recorded approximately $27,000 in loss on extinguishment of debt in accordance with ASC 470-50, “Debt – Modifications and Extinguishment.”

 

At September 30, 2020, the borrowing availability under our revolving credit was approximately $16,404,000, based on our eligible receivables and includes a reduction in borrowing availability of approximately $3,026,000 from outstanding standby letters of credit.

 

The Company’s credit facility under its Revised and New Loan Agreement 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 FCCR requirement in the first, second and third quarters of 2020. Additionally, the Company met its remaining financial covenant requirements in the first, second and third quarters of 2020.

 

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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 and also serves as a consultant to the Company in connection with the Company’s TBI at its PFNWR subsidiary. The proceeds from the Loan were 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 with such prepayment of principal payments to be applied to the second year of the loan payments at the Company’s discretion. Since inception of the loan, the Company has made total prepayments in principal of $936,000, of which $416,000 was made in the first nine months of 2020. 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 expires on April 1, 2024 and remains outstanding at September 30, 2020. As further consideration for this capital raise transaction relating to the Loan, the Company also issued 75,000 shares of its Common Stock to the Lender. The fair value of the Warrant and Common Stock and the related closing fees incurred from the transaction totaled approximately $398,000 and 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 were and will be issued in a private placement that was and will be 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.

 

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 of the Company 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.

 

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PPP Loan

 

On April 14, 2020, the Company entered into a promissory note with PNC, our credit facility lender, in the amount of approximately $5,666,000 (“PPP Loan”) under the PPP. The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration (“SBA”). On June 5, 2020, the Flexibility Act was signed into law which amended the CARES Act. The note evidencing the PPP Loan contains events of default relating to, among other things, payment defaults, breach of representations and warranties, and provisions of the promissory note. During the third quarter of 2020, the Company repaid approximately $348,000 of the PPP Loan to PNC resulting from clarification made in the loan calculation at the time of the loan origination.

 

Under the terms of the Flexibility Act, the Company can apply for and be granted forgiveness for all or a portion of the PPP Loan. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds by the Company for eligible payroll costs, mortgage interest, rent and utility costs and the maintenance of employee and compensation levels for the covered period (which is defined as a 24 week period, beginning April 14, 2020, the date in which proceeds from the PPP Loan was disbursed to the Company by PNC). At least 60% of such forgiven amount must be used for eligible payroll costs. On October 5, 2020, the Company applied for forgiveness on repayment of the loan balance as permitted under the program, which is subject to the review and approval of our lender and the SBA. The approval of the loan forgiveness allows for a maximum period of 150 days from the submittal of a complete loan forgiveness application. If all or a portion of the PPP Loan is not forgiven, all or the remaining portion of the loan will be for a term of two years but can be prepaid at any time prior to maturity without any prepayment penalties. The annual interest rate on the PPP Loan is 1.0% and no payments of principal or interest are due until the date that the SBA remits the loan forgiveness amount to our lender. While the Company’s PPP Loan currently has a two year maturity, the Flexibility Act permits the Company to request a five year maturity with our lender which the Company does not expect to request at this time.

 

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 could would have a material adverse effect on our financial position, liquidity or results of future operations.

 

During July 2020, Tetra Tech EC, Inc. (“Tetra Tech”) filed a complaint in the United States District Court for the Northern District of California against CH2M Hill, Inc. (“CH2M”) and four subcontractors of CH2M, including the Company (“defendants”). The complaint alleges claims for negligence, negligent misrepresentation and equitable indemnification against all defendants related to alleged damages suffered by Tetra Tech in respect of certain draft reports prepared by defendants at the request of the U.S. Navy as part of an investigation and review of certain whistleblower complaints about Tetra Tech’s environmental restoration at the Hunter’s Point Naval Shipyard in San Francisco.

 

CH2M was hired by the Navy in 2016 to review Tetra Tech’s work. CH2M subcontracted with environmental consulting and cleanup firms Battelle Memorial Institute, Cabrera Services, Inc., SC&A, Inc. and the Company to assist with the review, according to the complaint.

 

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The complaint alleges that the subject draft reports were prepared negligently and in a biased manner, made public, and caused damage to Tetra Tech’s reputation; triggering related lawsuits and costing it opportunities for both government and commercial contracts.

 

At this time, the Company does not believe it has any liability to Tetra Tech. The Company has provided notice of this lawsuit to our insurance carrier. Our insurance carrier is providing a defense on our behalf in connection with this lawsuit, subject to a $100,000 self-insured retention and the terms and limitations contained in the insurance policy.

 

Insurance

 

The Company has a 25-year finite risk insurance policy entered into in June 2003 (“2003 Closure Policy”) with AIG Specialty Insurance Company (“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 $28,177,000 which includes available capacity to allow for annual inflation and other performance and surety bond requirements. Total coverage under the 2003 Closure Policy, as amended, was $19,651,000 at September 30, 2020. At September 30, 2020 and December 31, 2019, finite risk sinking funds contributed by the Company related to the 2003 Closure Policy which is included in other long term assets on the accompanying Consolidated Balance Sheets totaled $11,418,000 and $11,307,000, respectively, which included interest earned of $1,947,000 and $1,836,000 on the finite risk sinking funds as of September 30, 2020 and December 31, 2019, respectively. Interest income for the three and nine months ended September 30, 2020 was approximately $28,000 and $111,000, respectively. Interest income for the three and nine months ended September 30, 2019 was approximately $77,000 and $265,000, respectively. If the Company so elects, AIG is obligated to pay us an amount equal to 100% of the finite risk 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, 2020, the total amount of standby letters of credit outstanding was approximately $3,026,000 and the total amount of bonds outstanding was approximately $45,814,000.

 

11. Discontinued Operations

 

The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment which encompasses subsidiaries divested in 2011 and prior and three previously closed locations.

 

The Company’s discontinued operations had net losses of $67,000 and $156,000 for the three months ended September 30, 2020 and 2019, respectively (net of taxes of $0 for each period) and net losses of $266,000 and $424,000 for the nine months ended September 30, 2020 and 2019, 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 any of the periods noted above.

 

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The following table presents the major class of assets of discontinued operations at September 30, 2020 and December 31, 2019. No assets and liabilities were held for sale at each of the periods noted.

 

   September 30,   December 31, 
(Amounts in Thousands)  2020   2019 
Current assets          
Other assets  $17   $104 
Total current assets   17    104 
Long-term assets          
Property, plant and equipment, net (1)   81    81 
Other assets       36 
Total long-term assets   81    117 
Total assets  $98   $221 
Current liabilities          
Accounts payable  $8   $8 
Accrued expenses and other liabilities   167    169 
Environmental liabilities   744    817 
Total current liabilities   919    994 
Long-term liabilities          
Closure liabilities   140    134 
Environmental liabilities   110    110 
Total long-term liabilities   250    244 
Total liabilities  $1,169   $1,238 

 

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

 

The Company’s discontinued operations included a note receivable in the original amount of approximately $375,000 recorded in May 2016 resulting from the sale of property at our Perma-Fix of Michigan, Inc. (“PFMI”) subsidiary. This note required 60 equal monthly installment payments by the buyer of approximately $7,250 (which includes interest). On July 24, 2020, the purchaser of the property paid off the outstanding note receivable balance of approximately $105,000.

 

12. Operating Segments

 

In accordance with ASC 280, “Segment Reporting”, the Company defines an operating segment as a business activity: (1) from which we may earn revenue and incur expenses; (2) whose operating results are regularly reviewed by the chief operating decision maker (“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
  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 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 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 and construction, 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 NIOSH instrumentation.
  A company owned gamma spectroscopy laboratory for the analysis of oil and gas industry solids and liquids.

 

MEDICAL SEGMENT, which includes: R&D of the Company’s medical isotope production technology by our majority-owned Polish subsidiary, Perma-Fix of Medical or the Medical Segment. The Medical Segment has not generated any revenues and all costs incurred are reflected within R&D in the accompanying consolidated financial statements. As previously disclosed, the Medical Segment has substantially reduced its R&D costs and activities due to the need for capital to fund these activities. The Company anticipates that the Medical Segment will not resume full R&D activities until the necessary capital is obtained through its own credit facility or additional equity raise, or obtains partners willing to provide funding for its R&D.

 

Our reporting segments exclude our corporate headquarters and our discontinued operations (see “Note 11 – Discontinued Operations”) which do not generate revenues.

 

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The table below presents certain financial information of our operating segments for the three and nine months ended September 30, 2020 and 2019 (in thousands).

 

Segment Reporting for the Quarter Ended September 30, 2020

 

   Treatment   Services   Medical   Segments Total   Corporate (1)   Consolidated Total 
Revenue from external customers  $7,066   $23,106       $30,172   $   $30,172 
Intercompany revenues   226    6        232         
Gross profit   1,094    3,656        4,750        4,750 
Research and development   49    7    81    137    20    157 
Interest income                   28    28 
Interest expense   (34)   (3)       (37)   (50)   (87)
Interest expense-financing fees                   (58)   (58)
Depreciation and amortization   373    97        470    8    478 
Segment income (loss) before income taxes   280    2,813    (81)   3,012    (1,664)   1,348 
Income tax (benefit) expense   (170)   2        (168)   35    (133)
Segment income (loss)   450    2,811    (81)   3,180    (1,699)   1,481 
Expenditures for segment assets   95    24        119    3