Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-looking Statements
Certain statements contained within this report may be deemed "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, the "Private Securities Litigation Reform Act of 1995"). All statements in this report other than a statement of historical fact are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the Company to differ materially from such statements. The words "believe," "expect," "anticipate," "intend," "will," and similar expressions identify forward-looking statements. Forward-looking statements contained herein relate to, among other things,
●
|
demand for our services;
|
●
|
reductions in the level of government funding in future years;
|
●
|
ability of our Medical Segment to fund its R&D program;
|
●
|
effect of Medical Segment not able to fund its R&D program;
|
●
|
reducing operating costs;
|
●
|
expect to meet our quarterly financial covenant requirements in remaining 2016;
|
●
|
cash flow requirements;
|
●
|
government funding for our services;
|
●
|
may not have liquidity to repay debt if our lender accelerates payment of our borrowings;
|
●
|
our cash flows from operations and our available liquidity from our Credit Facility are sufficient to service our Treatment and Services Segments’ obligations;
|
●
|
manner in which the government will be required to spend funding to remediate federal sites;
|
●
|
reducing operating costs to bring them in line with revenue level, when necessary;
|
●
|
fund capital expenditures from cash from operations and/or financing;
|
●
|
fund remediation expenditures for sites from funds generated internally;
|
●
|
expect to receive certain large waste treatment shipments in the fourth quarter of 2016;
|
●
|
compliance with environmental regulations;
|
●
|
capital expenditures;
|
●
|
potential effect of being a PRP;
|
●
|
definitive agreement for PF Medical;
|
●
|
receipt of restricted cash in connection with our PFNWR closure policy;
|
●
|
acceptance of new mechanism for financial assurance for our PFNWR subsidiary by Washington state authorities;
|
●
|
potential sites for violations of environmental laws and remediation of our facilities; and
|
●
|
financial results due to shut down of M&EC facility located in Oak Ridge, Tennessee.
|
While the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance such expectations will prove to have been correct. There are a variety of factors, which could cause future outcomes to differ materially from those described in this report, including, but not limited to:
●
|
general economic conditions;
|
●
|
material reduction in revenues;
|
●
|
ability to meet PNC covenant requirements;
|
●
|
inability to collect in a timely manner a material amount of receivables;
|
●
|
increased competitive pressures;
|
●
|
inability to maintain and obtain required permits and approvals to conduct operations;
|
●
|
public not accepting our new technology;
|
●
|
inability to develop new and existing technologies in the conduct of operations;
|
●
|
inability to maintain and obtain closure and operating insurance requirements;
|
●
|
inability to retain or renew certain required permits;
|
●
|
discovery of additional contamination or expanded contamination at any of the sites or facilities leased or owned by us or our subsidiaries which would result in a material increase in remediation expenditures;
|
●
|
delays at our third party disposal site can extend collection of our receivables greater than twelve months;
|
●
|
refusal of third party disposal sites to accept our waste;
|
●
|
changes in federal, state and local laws and regulations, especially environmental laws and regulations, or in interpretation of such;
|
●
|
requirements to obtain permits for TSD activities or licensing requirements to handle low level radioactive materials are limited or lessened;
|
●
|
failure to receive shipments of waste during the fourth quarter of 2016 that we anticipate receiving;
|
●
|
potential increases in equipment, maintenance, operating or labor costs;
|
●
|
management retention and development;
|
●
|
financial valuation of intangible assets is substantially more/less than expected;
|
●
|
failure to receive necessary regulatory approvals to cancel PFNWR closure policy and replace such with new financial assurance mechanism for our PFNWR subsidiary;
|
●
|
AIG’s failure to approve release of the finite sinking fund relating to the PFNWR facility;
|
●
|
the requirement to use internally generated funds for purposes not presently anticipated;
|
●
|
inability to be profitable on an annualized basis;
|
●
|
inability of the Company to maintain the listing of its Common Stock on the NASDAQ;
|
●
|
terminations of contracts with federal agencies or subcontracts involving federal agencies, or reduction in amount of waste delivered to the Company under the contracts or subcontracts;
|
●
|
renegotiation of contracts involving the federal government;
|
●
|
federal government’s inability or failure to provide necessary funding to remediate contaminated federal sites;
|
●
|
disposal expense accrual could prove to be inadequate in the event the waste requires re-treatment;
|
●
|
inability to raise capital on commercially reasonable terms;
|
●
|
inability to increase profitable revenue;
|
●
|
lender refuses to waive non-compliance or revises our covenant so that we are in compliance; and
|
●
|
Risk Factors and other factors set forth in “Special Note Regarding Forward-Looking Statements” contained in the Company’s 2015 Form 10-K and “Forward-Looking Statements” in Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.
|
As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company determined that the operations of its majority-owned Polish subsidiary, Perma-Fix Medical S.A. and its wholly-owned subsidiary, Perma-Fix Medical Corporation (“PFM Corporation”) (together known as “PF Medical”), which has not generated any revenues as it continues to be primarily in the research and development (“R&D”) stage, meet the definition of a reportable segment in accordance with Accounting Standards Codification (“ASC”) 280, “Segment Reporting.” Accordingly, all of the historical numbers presented in the consolidated financial statements have been recast to include the operations of PF Medical as a separate reportable segment (“Medical Segment”).
Overview
Revenue decreased $4,388,000 or 25.4% to $12,921,000 for the three months ended September 30, 2016 from $17,309,000 for the corresponding period of 2015. The decrease was primarily within our Treatment Segment where revenue decreased $3,223,000 or 29.7% primarily due to lower waste volume. Revenue from Services Segment decreased $1,165,000 or 18.1% for the three months ended September 30, 2016 primarily due to completion of certain projects. Total gross profit decreased $3,139,000 or 63.5% for the three months ended September 30, 2016 primarily due to the decrease in revenue in our Treatment Segment. Total Selling, General, and Administrative (“SG&A”) expenses decreased $155,000 or 5.4% for the three months ended September 30, 2016 as compared to the corresponding period of 2015.
Revenue decreased $9,496,000 or 20.1% to $37,768,000 for the nine months ended September 30, 2016 from $47,264,000 for the corresponding period of 2015. The decrease in revenue was primarily due to the decrease in revenue in our Treatment Segment of approximately $8,870,000 or 28.0% from lower waste volume. Total gross profit decreased $6,798,000 or 65.0% for the nine months ended September 30, 2016 as compared to the corresponding period of 2015 primarily due to lower revenue generated from our Treatment Segment. Total SG&A expenses decreased $501,000 or 5.8% for the nine months ended September 30, 2016 as compared to the corresponding period of 2015.
Our first nine months 2016 financial results were significantly impacted by certain large waste treatment shipments that we expected to receive but have been delayed by certain governmental customers. Although we still expect to receive certain of these shipments in the fourth quarter of 2016, there is no guarantee that these shipments will be received in the fourth quarter of 2016 as the receipt of these waste shipments can be further delayed into 2017.
Our financial results for the nine months ended September 30, 2016 included certain non-cash impairment losses, write-offs and accruals which were recorded during the second quarter of 2016 in connection with our East Tennessee Materials and Energy Corporation (“M&EC”) subsidiary as discussed below.
During the second quarter of 2016, M&EC subsidiary was notified by the lessor that the lease agreement which M&EC currently operates its Oak Ridge, Tennessee facility would not be renewed at the end of the current lease term ending January 21, 2018. In light of this event and our strategic review of operations within our Treatment Segment, we are proceeding with a plan to shut down our M&EC facility located in Oak Ridge, Tennessee at the end of the lease term. Operations at the M&EC facility are continuing during the remaining term of the lease and the facility has begun the process of transitioning waste shipments and operational capabilities to our other Treatment Segment facilities, subject to customer requirements and regulatory approvals.
Simultaneously, we have begun required clean-up/maintenance procedures at M&EC’s Oak Ridge, Tennessee facility in accordance with M&EC’s Resource Conservation and Recovery Act (“RCRA”) permit requirements. As a result of this triggering event which occurred during the second quarter of 2016, we recorded non-cash impairment losses on our tangible and intangible assets of approximately $1,816,000 and $8,288,000, respectively, in the second quarter of 2016. We also recorded a write-off of approximately $587,000 in prepaid expenses in connection with certain tangible asset at our M&EC facility which was impaired. As a result of the intangible (permit) impairment losses discussed above, we recorded a
tax benefit in the amount of $3,203,000.
In addition, M&EC is required to complete certain clean-up/maintenance activities at its Oak Ridge, Tennessee facility pursuant to its RCRA permits. The extent and cost of these activities are determined by federal/state mandate requirements. We performed an analysis and related estimate of the cost to complete the RCRA portion of these activities during the second quarter of 2016 and based on this analysis, we recorded an additional $1,626,000,000 in closure liabilities during the second quarter of 2016 with the offset to capitalized asset retirement costs, as reported as a component of “Net Property and equipment” in the Consolidated Balance Sheet.”
During the first nine months of 2016 and the corresponding period of 2015, M&EC’s revenues were approximately $3,458,000 and $5,225,000, respectively.
Business Environment, Outlook and Liquidity
Our Treatment and Services Segments’ business continues to be heavily dependent on services that we provide to governmental customers directly as the contractor or indirectly as a subcontractor. We believe demand for our services will continue to be subject to fluctuations due to a variety of factors beyond our control, including the current economic conditions and the manner in which the government will be required to spend funding to remediate federal sites. In addition, our governmental contracts and subcontracts relating to activities at governmental sites are generally subject to termination or renegotiation on 30 days notice at the government’s option. We believe that significant reductions in the level of governmental funding or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows.
We believe that our cash flow requirements for remaining 2016 will consist primarily of general working capital needs, scheduled principal payments on our debt obligations and capital leases, remediation projects and planned capital expenditures which we plan to fund from operations and our credit facility availability (also see potential receipt of finite risk sinking fund related to our Perma-Fix Northwest Richland, Inc. (“PFNWR”) financial assurance policy in “Liquidity and Capital Resources – Investing Activities” in this “Management’s Discussion and Analysis”). Our Medical Segment continues to dedicate resources to the R&D of the new medical isotope production technology and to take the necessary steps for eventual submission of this technology for U.S. Food and Drug Administration (“FDA”) and other regulatory approval and commercialization of this technology. We believe that the need for capital by the Medical Segment in order to complete its R&D program and to submit its technology for governmental approval will require the Medical Segment to obtain such capital requirements through obtaining its own credit facility or additional equity raise. The Medical Segment has entered into a letter of intent (“LOI”) to raise capital, which is subject to the completion of a definitive agreement (see “Liquidity and Capital Resources - Financing Activities” in this “Management’s Discussion and Analysis” for further detail of this LOI). If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to reduce, delay or eliminate its R&D program.
Results of Operations
The reporting of financial results and pertinent discussions are tailored to three reportable segments: The Treatment, Services, and Medical Segments. Our Medical Segment encompasses the operations of our majority-owned Polish subsidiary, PF Medical, which has not generated any revenue and all costs incurred are included within R&D.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Consolidated (amounts in thousands)
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Net revenues
|
|
$
|
12,921
|
|
|
|
100.0
|
|
|
$
|
17,309
|
|
|
|
100.0
|
|
|
$
|
37,768
|
|
|
|
100.0
|
|
|
$
|
47,264
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
11,114
|
|
|
|
86.0
|
|
|
|
12,363
|
|
|
|
71.4
|
|
|
|
34,111
|
|
|
|
90.3
|
|
|
|
36,809
|
|
|
|
77.9
|
|
Gross profit
|
|
|
1,807
|
|
|
|
14.0
|
|
|
|
4,946
|
|
|
|
28.6
|
|
|
|
3,657
|
|
|
|
9.7
|
|
|
|
10,455
|
|
|
|
22.1
|
|
Selling, general and administrative
|
|
|
2,732
|
|
|
|
21.1
|
|
|
|
2,887
|
|
|
|
16.7
|
|
|
|
8,162
|
|
|
|
21.6
|
|
|
|
8,663
|
|
|
|
18.3
|
|
Research and development
|
|
|
441
|
|
|
|
3.4
|
|
|
|
583
|
|
|
|
3.4
|
|
|
|
1,570
|
|
|
|
4.3
|
|
|
|
1,500
|
|
|
|
3.1
|
|
Loss (gain) on disposal of property and
equipment
|
|
|
12
|
|
|
|
.1
|
|
|
|
(23
|
)
|
|
|
(.1
|
)
|
|
|
16
|
|
|
|
―
|
|
|
|
(23
|
)
|
|
|
―
|
|
Impairment loss on tangible assets
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
1,816
|
|
|
|
4.8
|
|
|
|
―
|
|
|
|
―
|
|
Impairment loss on intangible assets
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
8,288
|
|
|
|
21.9
|
|
|
|
―
|
|
|
|
―
|
|
(Loss) income from operations
|
|
|
(1,378
|
)
|
|
|
(10.6
|
)
|
|
|
1,499
|
|
|
|
8.6
|
|
|
|
(16,195
|
)
|
|
|
(42.9
|
)
|
|
|
315
|
|
|
|
.7
|
|
Interest income
|
|
|
31
|
|
|
|
.2
|
|
|
|
16
|
|
|
|
―
|
|
|
|
78
|
|
|
|
.2
|
|
|
|
36
|
|
|
|
―
|
|
Interest expense
|
|
|
(101
|
)
|
|
|
(.8
|
)
|
|
|
(124
|
)
|
|
|
(.7
|
)
|
|
|
(377
|
)
|
|
|
(1.0
|
)
|
|
|
(390
|
)
|
|
|
(.8
|
)
|
Interest expense-financing fees
|
|
|
(14
|
)
|
|
|
(.1
|
)
|
|
|
(56
|
)
|
|
|
(.2
|
)
|
|
|
(99
|
)
|
|
|
(.2
|
)
|
|
|
(171
|
)
|
|
|
(.3
|
)
|
Other
|
|
|
(1
|
)
|
|
|
―
|
|
|
|
2
|
|
|
|
―
|
|
|
|
20
|
|
|
|
―
|
|
|
|
12
|
|
|
|
―
|
|
(Loss) income from continuing operations
before taxes
|
|
|
(1,463
|
)
|
|
|
(11.3
|
)
|
|
|
1,337
|
|
|
|
7.7
|
|
|
|
(16,573
|
)
|
|
|
(43.9
|
)
|
|
|
(198
|
)
|
|
|
(.4
|
)
|
Income tax expense (benefit)
|
|
|
37
|
|
|
|
.3
|
|
|
|
53
|
|
|
|
.3
|
|
|
|
(3,093
|
)
|
|
|
(8.2
|
)
|
|
|
124
|
|
|
|
.3
|
|
(Loss) income from continuing operations
|
|
$
|
(1,500
|
)
|
|
|
(11.6
|
)
|
|
$
|
1,284
|
|
|
|
7.4
|
|
|
$
|
(13,480
|
)
|
|
|
(35.7
|
)
|
|
$
|
(322
|
)
|
|
|
(.7
|
)
|
Summary – Three and Nine Months Ended September 30, 2016 and 2015
Consolidated revenues decreased $4,388,000 for the three months ended September 30, 2016, compared to the three months ended September 30, 2015, as follows:
(In thousands)
|
|
2016
|
|
|
%
Revenue
|
|
|
2015
|
|
|
%
Revenue
|
|
|
Change
|
|
|
%
Change
|
|
Treatment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government waste
|
|
$
|
5,127
|
|
|
|
39.7
|
|
|
$
|
8,193
|
|
|
|
47.3
|
|
|
$
|
(3,066
|
)
|
|
|
(37.4
|
)
|
Hazardous/non-hazardous
|
|
|
1,307
|
|
|
|
10.1
|
|
|
|
1,044
|
|
|
|
6.0
|
|
|
|
263
|
|
|
|
25.2
|
|
Other nuclear waste
|
|
|
1,209
|
|
|
|
9.4
|
|
|
|
1,629
|
|
|
|
9.5
|
|
|
|
(420
|
)
|
|
|
(25.8
|
)
|
Total
|
|
|
7,643
|
|
|
|
59.2
|
|
|
|
10,866
|
|
|
|
62.8
|
|
|
|
(3,223
|
)
|
|
|
(29.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear services
|
|
|
4,829
|
|
|
|
37.3
|
|
|
|
6,001
|
|
|
|
34.6
|
|
|
|
(1,172
|
)
|
|
|
(19.5
|
)
|
Technical services
|
|
|
449
|
|
|
|
3.5
|
|
|
|
442
|
|
|
|
2.6
|
|
|
|
7
|
|
|
|
1.6
|
|
Total
|
|
|
5,278
|
|
|
|
40.8
|
|
|
|
6,443
|
|
|
|
37.2
|
|
|
|
(1,165
|
)
|
|
|
(18.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,921
|
|
|
|
100.0
|
|
|
$
|
17,309
|
|
|
|
100.0
|
|
|
$
|
(4,388
|
)
|
|
|
(25.4
|
)
|
Net Revenue
Treatment Segment revenue decreased $3,223,000 or 29.7% for the three months ended September 30, 2016 over the same period in 2015. The revenue decrease was primarily due to lower revenue generated from government customers of approximately $3,066,000 or 37.4% due to lower volume. Other nuclear revenue decreased approximately $420,000 or 25.8% primarily due to lower volume. The decrease in Services Segment revenue of $1,165,000 or 18.1% in the three months ended September 30, 2016 as compared to the corresponding period of 2015 was primarily the result of completion of certain projects. Our Services Segment revenues are project based; as such, the scope, duration and completion of each project varies. As a result, our Services Segment revenues are subject to differences relating to timing and project value.
Consolidated revenues decreased $9,496,000 for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, as follows:
(In thousands)
|
|
2016
|
|
|
% Revenue
|
|
|
2015
|
|
|
% Revenue
|
|
|
Change
|
|
|
% Change
|
|
Treatment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government waste
|
|
$
|
15,062
|
|
|
|
39.9
|
|
|
$
|
23,613
|
|
|
|
50.0
|
|
|
$
|
(8,551
|
)
|
|
|
(36.2
|
)
|
Hazardous/non-hazardous
|
|
|
3,544
|
|
|
|
9.4
|
|
|
|
3,317
|
|
|
|
7.0
|
|
|
|
227
|
|
|
|
6.8
|
|
Other nuclear waste
|
|
|
4,226
|
|
|
|
11.2
|
|
|
|
4,772
|
|
|
|
10.1
|
|
|
|
(546
|
)
|
|
|
(11.4
|
)
|
Total
|
|
|
22,832
|
|
|
|
60.5
|
|
|
|
31,702
|
|
|
|
67.1
|
|
|
|
(8,870
|
)
|
|
|
(28.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear services
|
|
|
13,671
|
|
|
|
36.2
|
|
|
|
13,670
|
|
|
|
28.9
|
|
|
|
1
|
|
|
|
0.0
|
|
Technical services
|
|
|
1,265
|
|
|
|
3.3
|
|
|
|
1,892
|
|
|
|
4.0
|
|
|
|
(627
|
)
|
|
|
(33.1
|
)
|
Total
|
|
|
14,936
|
|
|
|
39.5
|
|
|
|
15,562
|
|
|
|
32.9
|
|
|
|
(626
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,768
|
|
|
|
100.0
|
|
|
$
|
47,264
|
|
|
|
100.0
|
|
|
$
|
(9,496
|
)
|
|
|
(20.1
|
)
|
Net Revenue
Treatment Segment revenue decreased $8,870,000 or 28.0% for the nine months ended September 30, 2016 over the same period in 2015. The revenue decrease was primarily due to lower revenue generated from government customers of approximately $8,551,000 or 36.2% due to lower waste volume. Our Services Segment revenue decreased by $626,000 or 4.0%. Our Services Segment revenues are project based; as such, the scope, duration and completion of each project varies. As a result, our Services Segment revenues are subject to differences relating to timing and project value.
Cost of Goods Sold
Cost of goods sold decreased $1,249,000 for the quarter ended September 30, 2016, as compared to the quarter ended September 30, 2015, as follows:
|
|
|
|
|
|
%
|
|
|
|
|
|
|
%
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
Change
|
|
Treatment
|
|
$
|
6,806
|
|
|
|
89.0
|
|
|
$
|
7,170
|
|
|
|
66.0
|
|
|
$
|
(364
|
)
|
Services
|
|
|
4,308
|
|
|
|
81.6
|
|
|
|
5,193
|
|
|
|
80.6
|
|
|
|
(885
|
)
|
Total
|
|
$
|
11,114
|
|
|
|
86.0
|
|
|
$
|
12,363
|
|
|
|
71.4
|
|
|
$
|
(1,249
|
)
|
Cost of goods sold for the Treatment Segment decreased by $364,000 or approximately 5.1% primarily due to lower revenue. We incurred lower disposal, transportation, lab, and material and supplies costs totaling approximately $452,000. Our overall fixed costs were higher by approximately $82,000 resulting from the following: depreciation expense was higher by approximately $290,000 primarily due to re-evaluation of the estimated useful lives of M&EC facility’s remaining tangible assets conducted during the second quarter of 2016 resulting from the pending shut-down of the facility. Such re-evaluation resulted in a reduction of the estimated useful lives ranging from 2 to 28 years to 1.6 years; payroll and healthcare costs were lower by approximately $99,000 from lower headcount; general expenses were lower by $77,000 in various categories as we continue to streamline our costs; and maintenance costs were lower by approximately $32,000. In the prior period of 2015, we incurred higher costs in connection with the maintenance of certain buildings and equipment. Services Segment cost of goods sold decreased $885,000 or 17.0% primarily due to the decrease in revenue as discussed above. The decrease was primarily from lower material and supplies and disposal expenses totaling approximately $610,000 with the remaining lower costs attributed primarily to lower labor and travel expenses. Included within cost of goods sold is depreciation and amortization expense of $1,158,000 and $879,000 for the three months ended September 30, 2016, and 2015, respectively.
Cost of goods sold decreased $2,698,000 for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, as follows:
|
|
|
|
|
|
%
|
|
|
|
|
|
|
%
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
Change
|
|
Treatment
|
|
$
|
21,552
|
|
|
|
94.4
|
|
|
$
|
23,437
|
|
|
|
73.9
|
|
|
$
|
(1,885
|
)
|
Services
|
|
|
12,559
|
|
|
|
84.1
|
|
|
|
13,372
|
|
|
|
85.9
|
|
|
|
(813
|
)
|
Total
|
|
$
|
34,111
|
|
|
|
90.3
|
|
|
$
|
36,809
|
|
|
|
77.9
|
|
|
$
|
(2,698
|
)
|
Cost of goods sold for the Treatment Segment decreased by $1,885,000 or 8.0%. Included in the cost of goods sold is a write-off of approximately $587,000 in prepaid fees recorded in the second quarter of 2016 resulting from the impairment of certain equipment at our M&EC facility. Such fees were incurred for emission performance testing certification requirements as mandated by the state
(see “Overview” under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details of transactions recorded during the second quarter of 2016 due to pending shut down of our M&EC facility).
Excluding this write-off, cost of goods sold for the Treatment Segment decreased by approximately $2,472,000 or 10.5% primarily due to lower revenue. We incurred lower disposal, transportation, lab, and material and supplies costs totaling approximately $1,765,000. Our overall fixed costs were lower by approximately $708,000 resulting from the following: salaries and payroll related expenses (including healthcare costs) were lower by approximately $462,000 resulting from lower headcount; general expenses were lower by approximately $217,000 in various categories as we continue to streamline our costs; maintenance costs were lower by approximately $232,000. In the prior period of 2015, we incurred higher costs in connection with the maintenance of certain buildings and equipment; and depreciation expense was higher by approximately $203,000 primarily due the re-evaluation of the estimated useful lives of M&EC facility’s remaining tangible assets conducted during the second quarter of 2016 due to the pending shut down of the facility. Services Segment cost of goods sold decreased $813,000 or 6.1% primarily due to lower labor and travel expenses totaling approximately $917,000 which was offset by higher material and supplies and disposal expenses totaling approximately of $113,000. Included within cost of goods sold is depreciation and amortization expense of $2,853,000 and $2,684,000 for the nine months ended September 30, 2016, and 2015, respectively.
Gross Profit
Gross profit for the quarter ended September 30, 2016 decreased $3,139,000 over the same period of 2015, as follows:
|
|
|
|
|
|
%
|
|
|
|
|
|
|
%
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
Change
|
|
Treatment
|
|
$
|
837
|
|
|
|
11.0
|
|
|
$
|
3,696
|
|
|
|
34.0
|
|
|
$
|
(2,859
|
)
|
Services
|
|
|
970
|
|
|
|
18.4
|
|
|
|
1,250
|
|
|
|
19.4
|
|
|
|
(280
|
)
|
Total
|
|
$
|
1,807
|
|
|
|
14.0
|
|
|
$
|
4,946
|
|
|
|
28.6
|
|
|
$
|
(3,139
|
)
|
Treatment Segment gross profit decreased $2,859,000 or 77.4% and gross margin decreased to 11.0% from 34.0% primarily due to lower revenue from lower waste volume and the impact of our fixed costs. In the Services Segment, the decrease in gross profit of $280,000 or approximately 22.4% was primarily due to reduced revenue. Gross margin reduced slightly to 18.4% from 19.4%. Our overall Services Segment gross margin is impacted by our current projects which are competitively bid on and will therefore, have varying margin structures.
Gross profit for the nine months ended September 30, 2016 decreased $6,798,000 over the same period in 2015, as follows:
|
|
|
|
|
|
%
|
|
|
|
|
|
|
%
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
|
Revenue
|
|
|
2015
|
|
|
Revenue
|
|
|
Change
|
|
Treatment
|
|
$
|
1,280
|
|
|
|
5.6
|
|
|
$
|
8,265
|
|
|
|
26.1
|
|
|
$
|
(6,985
|
)
|
Services
|
|
|
2,377
|
|
|
|
15.9
|
|
|
|
2,190
|
|
|
|
14.1
|
|
|
|
187
|
|
Total
|
|
$
|
3,657
|
|
|
|
9.7
|
|
|
$
|
10,455
|
|
|
|
22.1
|
|
|
$
|
(6,798
|
)
|
Treatment Segment gross profit decreased $6,985,000 or 84.5% and gross margin decreased to 5.6% from 26.1%. Excluding the write-off of the $587,000 in prepaid fees resulting from the impairment of certain equipment at our M&EC subsidiary as discussed above, Treatment Segment gross profit decreased $6,398,000 or 77.4% and gross margin decreased to 8.2% from 26.1% primarily due to decreased revenue from lower waste volume and the impact of our fixed costs. In the Services Segment, the increases in gross profit of $187,000 and gross margin were primarily due to certain higher margin projects that we are currently working on. As discussed previously, our overall Services Segment gross margin is impacted by our current projects which are competitively bid on and will therefore, have varying margin structures.
Selling, General and Administrative
Selling, general and administrative ("SG&
A")
expenses decreased $155,000 for the three months ended September 30, 2016, as compared to the corresponding period for 2015, as follows:
(In thousands)
|
|
2016
|
|
|
% Revenue
|
|
|
2015
|
|
|
% Revenue
|
|
|
Change
|
|
Administrative
|
|
$
|
1,311
|
|
|
|
—
|
|
|
$
|
1,198
|
|
|
|
—
|
|
|
$
|
113
|
|
Treatment
|
|
|
819
|
|
|
|
10.7
|
|
|
|
931
|
|
|
|
8.6
|
|
|
|
(112
|
)
|
Services
|
|
|
602
|
|
|
|
11.4
|
|
|
|
758
|
|
|
|
11.8
|
|
|
|
(156
|
)
|
Total
|
|
$
|
2,732
|
|
|
|
21.1
|
|
|
$
|
2,887
|
|
|
|
16.7
|
|
|
$
|
(155
|
)
|
Treatment SG&A was lower primarily due to lower marketing expenses by approximately $112,000 due to fewer tradeshows and lower general expenses by approximately $36,000 in various categories. The lower cost was partially offset by slightly higher payroll related expenses of $36,000. The decrease in SG&A in the Services Segment was primarily due to lower outside services expenses by approximately $73,000 resulting from fewer business/consulting/legal matters. General expenses were lower by approximately $63,000 in various categories and total travel and payroll related expenses were lower by approximately $20,000. The increase in administrative SG&A was primarily the result of higher salaries and payroll related expenses of approximately $87,000 resulting from the hiring of our new executive vice president in the second quarter of 2016 and higher outside services expenses by approximately $50,000 resulting from more legal/consulting matters. The increase was partially offset by lower travel expenses of $5,000 and lower general expenses of $20,000 in various categories. Included in SG&A expenses is depreciation and amortization expense of $31,000 and $33,000 for the three months ended September 30, 2016, and 2015, respectively.
SG&
A
expenses decreased $501,000 for the nine months ended September 30, 2016, as compared to the corresponding period for 2015, as follows:
(In thousands)
|
|
2016
|
|
|
%
Revenue
|
|
|
2015
|
|
|
%
Revenue
|
|
|
Change
|
|
Administrative
|
|
$
|
3,769
|
|
|
|
—
|
|
|
$
|
3,849
|
|
|
|
—
|
|
|
$
|
(80
|
)
|
Treatment
|
|
|
2,726
|
|
|
|
11.9
|
|
|
|
2,864
|
|
|
|
9.0
|
|
|
|
(138
|
)
|
Services
|
|
|
1,667
|
|
|
|
11.2
|
|
|
|
1,950
|
|
|
|
12.5
|
|
|
|
(283
|
)
|
Total
|
|
$
|
8,162
|
|
|
|
21.6
|
|
|
$
|
8,663
|
|
|
|
18.3
|
|
|
$
|
(501
|
)
|
The decrease in administrative SG&A was primarily the result of lower outside services expenses by approximately $231,000 resulting from fewer consulting/business/legal matters. The decrease was partially offset by higher amortization expense of approximately $34,000 resulting from the write-off of a patent and higher salaries and payroll related expenses of approximately $116,000 resulting from the hiring of our new executive vice president in the second quarter of 2016. Treatment SG&A was lower primarily due to lower marketing expenses by approximately $60,000 due to fewer tradeshows. Total payroll related and travel expenses were lower by approximately $30,000 and general expenses were lower by approximately $81,000 in various categories as we continue our efforts in reducing costs. The lower cost was partially offset by higher bad debt expense of $32,000. The decrease in SG&A in the Services Segment was primarily due to lower bad debt expense of approximately $341,000 resulting from a reduction in our allowance for doubtful account recorded in the second quarter of 2016 as a previously reserved amount for an uncertain account receivable was determined to be collectible. Amortization expense was lower by approximately $35,000 as a certain amortizable intangible asset became fully amortized in June 2015. Outside services expenses were lower by approximately $53,000 from fewer consulting/legal/business matters and general expenses were lower by approximately $60,000 in various categories. The decrease in SG&A was partially offset by higher payroll expenses of approximately $208,000 incurred primarily in the first half of 2016 related to bids and proposal work for potential projects. Included in SG&A expenses is depreciation and amortization expense of $133,000 and $137,000 for the nine months ended September 30, 2016 and 2015, respectively.
Research and Development
(“R&D”)
R&D expenses decreased $142,000 and increased $70,000 for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding period of 2015.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Administrative
|
|
$
|
—
|
|
|
$
|
7
|
|
|
|
(7
|
)
|
|
$
|
15
|
|
|
$
|
9
|
|
|
$
|
6
|
|
Treatment
|
|
|
95
|
|
|
|
49
|
|
|
|
46
|
|
|
|
321
|
|
|
|
137
|
|
|
|
184
|
|
Services
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
|
38
|
|
|
|
—
|
|
|
|
38
|
|
PF Medical
|
|
|
342
|
|
|
|
527
|
|
|
|
(185
|
)
|
|
|
1,196
|
|
|
|
1,354
|
|
|
|
(158
|
)
|
Total
|
|
$
|
441
|
|
|
$
|
583
|
|
|
$
|
(142
|
)
|
|
$
|
1,570
|
|
|
$
|
1,500
|
|
|
$
|
70
|
|
Research and development costs consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development of new technologies and technological enhancement of new potential waste treatment processes. The decrease in R&D costs for the three months ended September 30, 2016 as compared to the corresponding period of 2015 was primarily due to reduced R&D performed by our PF Medical Segment. The increase in R&D costs for the nine months was primarily in the Treatment Segment for enhancement of treatment processes.
Interest Expense
Interest expense decreased approximately $23,000 and $13,000 for the three and nine months ended September 30, 2016, respectively, as compared to the corresponding period of 2015. The decrease in the third quarter was primarily due to lower interest from our declining Term Loan balance and lower interest from the declining $3,000,000 loan dated August 2, 2013, which was paid in full by the Company in August 2016. The decrease was partially offset by higher interest from higher averaged revolver loan balance. The decrease in the nine months ended September 30, 2016 as compared to the corresponding period of 2015 was primarily due to the same reasons as discussed above for the three months ended September 30, 2016. The decrease was offset additionally by a $68,000 loss on debt extinguishment incurred in the first quarter of 2016 (which was included in interest expense) as a result of the amendment dated March 24, 2016 that we entered into with our lender which extended the due date of our credit facility, among other things, to March 24, 2021.
Interest Expense- Financing Fees
Interest expense-financing fees decreased approximately $42,000 and $72,000 for the three and nine months ended September 30 2016, respectively, as compared to the corresponding period of 2015. The decrease was primarily due to lower monthly amortized financing fees resulting from our revised credit facility pursuant to the amendment dated March 24, 2016 as discussed above.
Discontinued Operations
and Divestitures
The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment: (1) subsidiaries divested in 2011 and prior, (2) two previously closed locations, and (3) our Perma-Fix of South Georgia, Inc. (“PFSG”) facility which is currently undergoing closure, subject to regulatory approval.
On May 2, 2016, Perma-Fix of Michigan, Inc. (“PFMI” – a closed location) entered into an Agreement for the sale of the property for a price of $450,000 The Agreement provides for a down payment of approximately $75,000. After certain closing and settlement costs, PFMI received approximately $46,000. The Agreement also provides for, among other things, the balance of the purchase price of $375,000 to be paid by the buyer in 60 equal monthly installments of approximately $7,250, with the first payment due June 15, 2016.
Our discontinued operations had no revenue for the three and nine months ended September 30, 2016 and the corresponding period of 2015. We incurred net losses of $191,000 and $622,000 for our discontinued operations for the three and nine months ended September 30, 2016, respectively. We had net losses of $377,000 and $1,313,000 for our discontinued operations for the three and nine months ended September 30, 2015, respectively. Our losses for the nine months ended September 30, 2015 included a penalty in the amount of approximately $201,000 recorded for PFSG in connection with a certain Consent Order from the Georgia Department of Natural Resources Environmental Protection Division and an asset impairment charge of $150,000 recorded for PFMI in connection with the sale of property as discussed above.
Liquidity and Capital Resources
Our cash flow requirements during the nine months ended September 30, 2016 were primarily financed by our operations and Credit Facility availability. Our Medical Segment continues to dedicate resources to the R&D of the new medical isotope production technology and to take the necessary steps for eventual submission of this technology for FDA and other regulatory approval and commercialization of this technology. We believe that the need for capital by our Medical Segment in order to complete its R&D program and to submit its technology for governmental approval will require the Medical Segment to obtain such capital requirements through obtaining its own credit facility or additional equity raise. The Medical Segment has entered into a letter of intent (“LOI”) to raise capital, which is subject to the completion of a definitive agreement (see “Financing Activities” below for further detail of this LOI). If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to reduce, delay or eliminate its R&D program. We continue to explore all sources of increasing revenue. We are continually reviewing operating costs and are committed to further reducing operating costs to bring them in line with revenue levels, when necessary. Our capital requirements consist of general working capital needs, scheduled principal payments on our debt obligations, remediation projects and planned capital expenditures. Although there are no assurances, we believe that our cash flows from operations and our available liquidity from our credit facility are sufficient to fund our Treatment and Services Segment operations (also see potential receipt of finite risk sinking fund related to our PFNWR financial assurance policy in “Liquidity and Capital Resources – Investing Activities” below)
The following table reflects the cash flow activities during the first nine months of 2016:
(In thousands)
|
|
2016
|
|
Cash used in operating activities of continuing operations
|
|
$
|
(1,313
|
)
|
Cash used in operating activities of discontinued operations
|
|
|
(710
|
)
|
Cash used in investing activities of continuing operations
|
|
|
(150
|
)
|
Proceeds from sale of property of discontinued operations
|
|
|
46
|
|
Cash provided by financing activities of continuing operations
|
|
|
838
|
|
Effect of exchange rate changes on cash
|
|
|
(1
|
)
|
Decrease in cash
|
|
$
|
(1,290
|
)
|
As of September 30, 2016, we were in a net borrowing position (Revolving Credit Facility) of approximately $5,263,000. At September 30, 2016, we had cash on hand of approximately $145,000, which presents primarily small account balances and minor petty cash used for miscellaneous services and supplies.
Operating Activities
Accounts Receivable (including Accounts receivable – non-current), net of allowances for doubtful accounts, totaled $10,148,000 at September 30, 2016, an increase of $475,000 from the December 31, 2015 balance of $9,673,000. The increase was primarily due to timing of accounts receivable collections. We provide a variety of payment terms to our customers; therefore, our accounts receivable are impacted by the timing of accounts receivable collections.
Accounts Payable, totaled $4,789,000 at September 30, 2016, a decrease of $1,320,000 from the December 31, 2015 balance of $6,109,000. The decrease was primarily due to reduced payables resulting from lower revenue and the pay down of our accounts payable. Also, we continue to manage payment terms with our vendors to maximize our cash position throughout all segments.
Disposal/transportation accrual as of September 30, 2016, totaled $1,354,000, an increase of $247,000 over the December 31, 2015 balance of $1,107,000. Our disposal accrual can vary based on revenue mix and the timing of waste shipments for final disposal. During the first nine months of 2016, we shipped less waste for disposal.
We had working capital of $1,473,000 (which included working capital of our discontinued operations) as of September 30, 2016, as compared to working capital of $2,966,000 as of December 31, 2015. Our working capital was negatively impacted primarily by reduced revenue and the net loss we incurred during the first nine months of 2016.
Financing Activities
We entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011 (“Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Loan Agreement, as subsequently amended prior to the March 24, 2016 amendment discussed below (“Amended Loan Agreement”), provided us with the following credit facility: (a) up to $12,000,000 revolving line of credit (“Revolving Credit”), subject to the amount of borrowings based on a percentage of eligible receivables (as defined) and (b) a term loan (“Term Loan”) of $16,000,000, which required monthly installments of approximately $190,000 (based on a seven-year amortization).
Under the Amended Loan Agreement, we had the option of paying an annual rate of interest due on the Revolving Credit at prime plus 2% or London Inter Bank Offer Rate (“LIBOR”) plus 3% and the Term Loan at prime plus 2.5% or LIBOR plus 3.5%.
On March 24, 2016, we entered into an amendment to the Amended Loan Agreement with PNC which provided, among other things, the following (the amendment, together with the Amended Loan Agreement is collectively known as the “Revised Loan Agreement”):
|
●
|
extended the due date of our credit facility from October 31, 2016 to March 24, 2021 (“maturity date”);
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amended the Term Loan to approximately $6,100,000, which requires monthly payments of $101,600 (based on a five-year amortization) and which approximated the term loan balance under the existing credit facility at the date of the amendment. The Revolving Credit remains at up to $12,000,000 (subject to the amount of borrowings based on a percentage of eligible receivables as previously defined under the Amended Loan Agreement);
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released $1,000,000 of the $1,500,000 borrowing availability restriction that the lender had previously placed on the Company in connection with the insurance settlement proceeds received on July 28, 2014 by our PFSG facility. The Company’s lender had authorized the Company to use such proceeds for working capital purposes but had placed an indefinite reduction on our borrowing availability of $1,500,000;
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revised the interest payment options to paying an annual rate of interest due on the Revolving Credit at prime plus 1.75% or LIBOR plus 2.75% and the Term Loan at prime plus 2.25% or LIBOR plus 3.25%; and
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revised our annual capital spending maximum limit from $6,000,000 to $3,000,000.
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In connection with the amendment of March 24, 2016, we paid PNC total closing fees of approximately $72,000. As a result of the amendment dated March 24, 2016, we recorded approximately $68,000 in loss on extinguishment of debt in accordance with ASC 470-50, “Debt – Modifications and Extinguishments,” which was included in interest expense in the accompanying Consolidated Statements of Operations.
Pursuant to the Revised Loan Agreement, we may terminate the Revised Loan Agreement upon 90 days’ prior written notice upon payment in full of its obligations under the Revised Loan Agreement. We have agreed to pay PNC 1.0% of the total financing in the event we pay off our obligations on or before March 23, 2017, .50% of the total financing if we pay off our obligations after March 23, 2017 but prior to or on March 23, 2018, and .25% of the total financing if we pays off our obligations after March 23, 2018 but prior to or on March 23, 2019. No early termination fee shall apply if we pay off its obligations after March 23, 2019.
As of September 30, 2016, the availability under our revolving credit was $2,294,000, based on our eligible receivables and includes the remaining indefinite reduction of borrowing availability of $500,000 as discussed above. As of November 17, 2016, the indefinite reduction of borrowing availability will be increased by an additional $750,000 (see amendment that we entered into with our lender on November 17, 2016 below). Upon potential receipt of the finite risk sinking fund relating to our PFNWR facility as discussed below (see “Investing Activities” below), our indefinite reduction of borrowing availability will be increased by an additional $750,000.
Our credit facility with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. The following table illustrates the quarterly financial covenant requirements under our credit facility as of September 30, 2016.
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Quarterly
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1st Quarter
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2nd Quarter
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3rd Quarter
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(Dollars in thousands)
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Requirement
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Actual
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Actual
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Actual
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Senior Credit Facility
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Fixed charge coverage ratio
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1.15:1
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0.91:1
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0.64:1
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0.06:1
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Minimum tangible adjusted net worth
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$
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30,000
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(1)
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$
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40,539
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$
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32,150
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$
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30,706
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(1) Effective with the third quarter of 2016, minimum tangible adjusted net worth was reduced to $26,000
(see below for further details)
We failed to meet our minimum quarterly fixed charge coverage ratio (“FCCR”) requirement of 1.15:1 in the first quarter of 2016. On May 23, 2016, our lender waived this non-compliance. In connection with this waiver, we paid PNC a fee of $5,000. We met our financial covenant requirements in the second quarter of 2016 except for our quarterly FCCR requirement. On August 22, 2016, we entered into an amendment to the Revised Loan Agreement with our lender which waived our non-compliance with the minimum quarterly FCCR for the second quarter of 2016. In addition, the amendment revised the methodology used in calculating the FCCR in the third quarter of 2016 and to be used in the fourth quarter of 2016 and the first quarter of 2017. This amendment also revised our minimum Tangible Adjusted Net Worth requirement (as defined in the Revised Loan Agreement) from $30,000,000 to $26,000,000. We failed to meet our quarterly FCCR requirement for the third quarter of 2016 due in large part, to the decrease in revenues sustained by our Treatment Segment as a result of delays in certain waste shipments that we expected to receive during the third quarter of 2016. On November 17, 2016, we entered into another amendment to our Revised Loan Agreement with our lender. This amendment included the following:
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waived our non-compliance with the minimum quarterly FCCR for the third quarter of 2016;
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further revised the methodology to be used in calculating the FCCR as follows (with continue maintenance of a minimum 1:15:1 ratio in each of the quarters): FCCR for the fourth quarter of 2016 is to be calculated using the financial results for the three months period ending December 31, 2016; FCCR for first quarter of 2017 is to be calculated using financial results for the six months period ending March 31, 2017; FCCR for second quarter of 2017 is to be calculated using the financial results for the nine months period ending June 30, 2017; and FCCR for the third quarter of 2017 and each fiscal quarters thereafter is to be calculated using the financial results for a trailing twelve months period basis;
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placed an immediate additional restriction on our borrowing availability by $750,000, in addition to the restriction on our borrowing availability of $500,000 which had been previously placed by our lender; and
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revised the interest payment options to paying an annual rate of interest due on the Revolving Credit at prime plus 2% or LIBOR plus 3% and the Term Loan at Prime plus 2.5% or LIBOR plus 3.5%. Such interest payment option will automatically revert back to interest payment options as revised on the March 24, 2016 amendment (see the March 24, 2016 amendment the Company entered into with above) if the Company is able to attain minimally a FCCR of 1:15:1, as calculated using a trailing twelve months period, subsequent to any quarters after the third quarter of 2016.
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Pursuant to this amendment, our lender has also established a “Condition Subsequent” which requires the Company to receive restricted cash released from a finite risk sinking fund by December 31, 2016, in connection with our PFNWR subsidiary as discussed below (see “Investing Activities” below for further discussion of this finite risk sinking fund). Immediately upon the receipt of the funds, our lender will immediately place another $750,000 restriction on the Company’s borrowing availability resulting in a total of $2,000,000 restriction on the Company’s borrowing availability. In the event this finite risk sinking fund is not received by the Company by December 31, 2016, we will enter into discussions with our lender of possible further amendments to the Revised Loan Agreement.
All other terms of the Revised Loan Agreement remain principally unchanged. In connection with this amendment, the Company agreed to pay our lender a fee of $25,000. As a result of this amendment, we believe we will be able to meet our quarterly financial covenant requirements in the remaining quarter of 2016. If we fail to meet any of our quarterly financial covenant requirements in the remaining quarter of 2016 and PNC does not waive the non-compliance or further revise our covenant so that we are in compliance, our lender could accelerate the repayment of borrowings under our Credit Facility. In the event that our lender accelerates the payment of our borrowings, we may not have sufficient liquidity to repay our debt under our credit facility and other indebtedness.
We entered into a $3,000,000 loan dated August 2, 2013 with Messrs. Robert Ferguson and William Lampson (each known as the “Lender”) which was repaid in full by us in August 2016. The loan was unsecured with a term of three years with interest payable at a fixed interest rate of 2.99% per annum. The loan required monthly payments of accrued interest only during the first year of the loan and monthly payments of $125,000 in principal plus accrued interest for the second and third year of the loan. As consideration for us receiving the loan, we issued to each Lender a Warrant to purchase up to 35,000 shares of the Company’s Common at an exercise price of $2.23 per share. On August 2, 2016, each Lender exercised his Warrant for the purchase of 35,000 shares of our Common Stock, resulting in total proceeds paid to us of approximately $156,000. As further consideration for the loan, we had also issued to each Lender 45,000 shares of the Company’s Common Stock. The fair value of the Warrants and Common Stock and the related closing fees incurred from this transaction were recorded as a debt discount, which has been fully amortized using the effective interest method over the term of the loan as interest expense – financing fees.
On October 11, 2016, the Company, Perma-Fix Medical S.A and its wholly-owned subsidiary, Perma-Fix Medical Corporation (Perma-Fix Medical S.A. and Perma-Fix Medical Corporation (“PFM Corporation” – a Delaware corporation) are together known as PF Medical) entered into a letter of intent (“LOI”) with a private investor, subject to certain closing and other conditions, including , but not limited to, the execution of a definitive agreement within 90 days of the LOI, for the purchase of $10,000,000 of Preferred Shares in PFM Corporation at a price of $8.00 per share. Perma-Fix Medical S.A. is a Polish majority-owned subsidiary of the Company. Upon closing, the Preferred Shares of PFM Corporation would be voting securities and allow the investor to own approximately 48.6% of PFM Corporation’s issued and outstanding voting securities as of the closing. The LOI also provides that at closing, subject to certain terms and conditions, the investor would also receive a 36-month warrant to purchase three quarters (.75) of one share of PFM Corporation’s common stock for each share of Preferred Stock purchased by the investor at closing at an exercise price of $9.00 for each three quarters of one share. In addition, at closing, the Company would receive a 36 month warrant, subject to certain terms and conditions, to purchase up to 183,606 shares of PFM Corporation’s common stock at an exercise price of $14.00 per share. Further, under the terms of the LOI, the Company would be repaid $500,000 of the amounts owed to it by PF Medical within 30 days after closing and the balance within 120 days after the closing.
If the above-described funding transaction is consummated, the LOI provides that the Board of Directors of PFM Corporation shall consist of seven directors. Two of the directors shall be nominees of the investor, two of the directors shall be nominees of the Company, one director shall be a nominee of another stockholder of Perma-Fix Medical S.A. and two independent directors shall be nominees of the PFM Corporation board.
Investing Activities
For the nine months ended September 30, 2016, our purchases of capital equipment totaled approximately $104,000. These expenditures were primarily for improvements in our Treatment Segment. These capital expenditures were funded by cash from operations. We have budgeted approximately $1,200,000 for 2016 capital expenditures for our Treatment and Services Segments to maintain operations and regulatory compliance requirements. Certain of these budgeted projects may either be delayed until later years or deferred altogether. We have traditionally incurred actual capital spending totals for a given year at less than the initial budgeted amount. We plan to fund our capital expenditures from cash from operations and/or financing. The initiation and timing of projects are also determined by financing alternatives or funds available for such capital projects.
We have a closure policy for our PFNWR facility with American International Group, Inc. (“AIG”) (“PFNWR policy”) which provides financial assurance to the state of Washington in the event of closure of the PFNWR facility. As of September 30, 2016, our financial coverage under this policy stands at approximately $7,973,000 and this policy is collateralized by a finite risk sinking fund in the amount of approximately $5,900,000 which is recorded in other long term assets on our Consolidated Balance Sheets. The Company is currently working on other options in providing financial assurance coverage for our PFNWR facility, including acquiring a separate bonding mechanism, which would enable the Company to cancel the PFNWR policy, thereby allowing for the release of any of the funds not required to collateralize the new PFNWR closure mechanism. The acceptance of a new mechanism for financial assurance for our PFNWR facility is subject to final approval by Washington state authorities and the release of such finite risk sinking fund is subject to approval by AIG.
Off Balance Sheet Arrangements
We have a number of routine operating leases, primarily related to office space rental, office equipment rental and equipment rental for contract projects as of September 30, 2016, which total approximately $1,065,000, payable as follows: $187,000 in remainder of 2016; $700,000 in 2017; with the remaining $178,000 in 2018.
From time to time, we are required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations, including facility closures. As of September 30, 2016, the total amount of these bonds and letters of credit outstanding was approximately $1,514,000, of which the majority of the amount relates to various bonds. Our Treatment Segment facilities operate under licenses and permits that require financial assurance for closure and post-closure costs. We provide for these requirements through financial assurance policies. As of September 30, 2016, the closure and post-closure requirements for these facilities were approximately $46,847,000. We have recorded approximately $21,456,000 in a sinking fund related to these policies in other long term assets on the accompanying Consolidated Balance Sheets.
Critical Accounting
Policies and
Estimates
There were no significant changes in our accounting policies or critical accounting estimates that are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Known Trends and Uncertainties
Significant Customers
. Our Treatment and Services Segments have significant relationships with the federal government, and continue to enter into contracts, directly as the prime contractor or indirectly for others as a subcontractor, with the federal government. The U.S Department of Energy (“DOE”) and U.S. Department of Defense (“DOD”) represent major customers for our Treatment Segment and Services Segments. The contracts that we are a party to with the federal government or with others as a subcontractor to the federal government generally provide that the government may terminate or renegotiate the contracts on 30 days notice, at the government's election. Our inability to continue under existing contracts that we have with the federal government (directly or indirectly as a subcontractor) or significant reductions in the level of governmental funding in any given year could have a material adverse impact on our
operations and financial condition.
We performed services relating to waste generated by the federal government, either directly as a prime contractor or indirectly as a subcontractor to the federal government, representing approximately $6,568,000 or 50.8% and $19,508,000 or 51.7% of our total revenue from continuing operations during the three and nine months ended September 30, 2016, respectively, as compared to $9,460,000 or 54.7% and $27,261,000 or 57.7% of our total revenue from continuing operations during the corresponding period of 2015, respectively.
Environmental Contingencies
We are engaged in the waste management services segment of the pollution control industry. As a participant in the on-site treatment, storage and disposal market and the off-site treatment and services market, we are subject to rigorous federal, state and local regulations. These regulations mandate strict compliance and therefore are a cost and concern to us. Because of their integral role in providing quality environmental services, we make every reasonable attempt to maintain complete compliance with these regulations; however, even with a diligent commitment, we, along with many of our competitors, may be required to pay fines for violations or investigate and potentially remediate our waste management facilities.
We routinely use third party disposal companies, who ultimately destroy or secure landfill residual materials generated at our facilities or at a customer's site. In the past, numerous third party disposal sites have improperly managed waste and consequently require remedial action; consequently, any party utilizing these sites may be liable for some or all of the remedial costs. Despite our aggressive compliance and auditing procedures for disposal of wastes, we could further be notified, in the future, that we are a potentially responsible party (“PRP”) at a remedial action site, which could have a material adverse effect.
Our subsidiaries where remediation expenditures will be made are at three sites within our discontinued operations. While no assurances can be made that we will be able to do so, we expect to fund the expenses to remediate these sites from funds generated internally.
At September 30, 2016, we had total accrued environmental remediation liabilities of $900,000, of which $29,000 is recorded as a current liability. No material changes in remediation liabilities have occurred since December 31, 2015.