Notes
to Consolidated Financial Statements
March
31, 2019
(Unaudited)
Reference
is made herein to the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2018.
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 three months ended March 31, 2019 are not necessarily indicative of results
to be expected for the fiscal year ending December 31, 2019.
The
Company suggests that these consolidated financial statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Reclassification
Certain
prior year amounts have been reclassified to conform with the current year presentation. The Company has included finite risk
sinking funds (included in other long term assets of the Company’s Consolidated Balance Sheets) of $15,726,000 at March
31, 2018, as well as previously reported cash, when reconciling the beginning-of-period and end-of-period cash and restricted
cash on the accompanying Company’s Consolidated Statements of Cash Flows for three months ended March 31, 2018. The Company’s
finite risk sinking funds represents cash held as collateral under the Company’s financial assurance policy (see “Note
10 – Commitment and Contingencies – Insurance” for a discussion of the Company’s finite risk sinking funds).
This reclassification did not have a material impact to the Company’s financial position and results of operations.
2.
|
Summary
of Significant Accounting Policies
|
Our
accounting policies are as set forth in the notes to the December 31, 2018 consolidated financial statements referred to above.
Recently
Adopted Accounting Standards
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use (“ROU”) lease assets and
lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required
application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Targeted
Improvements,” to Topic 842 which included an option to not restate comparative periods in transition and elect to use the
effective date of Topic 842 as the date of initial application of transition, which the Company elected. As permitted under Topic
842, the Company adopted several practical expedients that permit us to not reassess (1) whether any expired or existing contract
as of the adoption date is or contain a lease, (2) lease classification for any expired or existing leases as of the adoption
date, and (3) initial direct costs for any existing leases as of the adoption date. As a result of the adoption of Topic 842 on
January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $2,602,000 and operating
lease liabilities of $2,622,000. The cumulative-effect adjustment is immaterial to its beginning accumulated deficit upon adoption
of ASU 2016-02 as the adjustment was considered immaterial. The adoption of Topic 842 had an immaterial impact on our Consolidated
Statements of Operations and Cash Flows for the three months ended March 31, 2019. The Company’s accounting for finance
leases remained substantially unchanged. The Company has expanded its consolidated financial statement disclosure upon adoption
of this standard (see “Note 4 – Leases”).
In
February 2018, FASB issued ASU 2018-02
, “
Income
Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income.”
This ASU allows
for the reclassification of certain income tax effects related to the new Tax Cuts and Jobs Act legislation between “Accumulated
other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to
deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”,
even in situations where the related items were originally recognized in “Other comprehensive income” (rather than
in “Income from continuing operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be
applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or
rates were recognized. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on
the Company’s financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for
acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions
in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards.
ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to
the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for
under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after
December 15, 2018, with early adoption permitted. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not
have a material impact on the Company’s financial statements.
Recently
Issued Accounting Standards – Not Yet Adopted
In
June 2016, the FASB issued ASU No. 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC
326”).”
The standard
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.
The
standard is effective for interim and annual reporting periods beginning after December 15, 2019.
Entities
are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning
of the first reporting period in which the guidance is adopted. The Company is currently assessing the impact that this standard
will have on its financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement.” ASU 2018-13 improves the disclosure requirements on fair value measurements. ASU
2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted for any removed or modified disclosures. The Company is currently assessing the impact that this standard
will have on its financial statements.
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
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Fixed price
|
|
$
|
9,905
|
|
|
$
|
428
|
|
|
$
|
10,333
|
|
|
$
|
8,959
|
|
|
$
|
90
|
|
|
$
|
9,049
|
|
Time and materials
|
|
|
―
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
―
|
|
|
|
3,609
|
|
|
|
3,609
|
|
Total
|
|
$
|
9,905
|
|
|
$
|
1,803
|
|
|
$
|
11,708
|
|
|
$
|
8,959
|
|
|
$
|
3,699
|
|
|
$
|
12,658
|
|
Revenue by generator
|
|
|
|
(In thousands)
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
|
Treatment
|
|
|
Services
|
|
|
Total
|
|
Domestic government
|
|
$
|
7,913
|
|
|
$
|
686
|
|
|
$
|
8,599
|
|
|
$
|
6,536
|
|
|
$
|
3,118
|
|
|
$
|
9,654
|
|
Domestic commercial
|
|
|
1,879
|
|
|
|
758
|
|
|
|
2,637
|
|
|
|
2,423
|
|
|
|
402
|
|
|
|
2,825
|
|
Foreign government
|
|
|
57
|
|
|
|
337
|
|
|
|
394
|
|
|
|
―
|
|
|
|
153
|
|
|
|
153
|
|
Foreign commercial
|
|
|
56
|
|
|
|
22
|
|
|
|
78
|
|
|
|
―
|
|
|
|
26
|
|
|
|
26
|
|
Total
|
|
$
|
9,905
|
|
|
$
|
1,803
|
|
|
$
|
11,708
|
|
|
$
|
8,959
|
|
|
$
|
3,699
|
|
|
$
|
12,658
|
|
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)
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Year-to-date
Change
($)
|
|
|
Year-to-date
Change
(%)
|
|
Contract
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivables,
net of allowance
|
|
$
|
7,341
|
|
|
$
|
7,735
|
|
|
$
|
(394
|
)
|
|
|
(5.1
|
)%
|
Unbilled receivables -
current
|
|
|
3,316
|
|
|
|
3,105
|
|
|
|
211
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
5,443
|
|
|
$
|
6,595
|
|
|
$
|
(1,152
|
)
|
|
|
(17.5
|
)%
|
Revenue
recognized for the three months ended March 31, 2019 and 2018 that was included in the contract liability balance at the beginning
of each year was $5,066,000 and $3,811,000, respectively. All revenue recognized in each period related to performance obligations
satisfied within the respective period.
Remaining
Performance Obligations
The
Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance
obligations that have original expected durations of one year or less.
At
the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on facts and circumstances
present in that arrangement. Lease classifications, recognition, and measurement are then determined at the lease commencement
date.
The
Company’s operating lease ROU assets and operating lease liabilities represent primarily leases for office spaces used to
conduct our business. These leases have remaining terms of approximately 5 to 11 years which include one or more options to renew,
with renewal terms from 3 years to 8 years. Based on the Company’s reasonable certainty to exercise these renewal options,
the renewal to extend the lease terms are included in valuing our ROU assets and liabilities. As most of our operating leases
do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate when determining the present
value of the lease payments. The incremental borrowing rate is determined based on the Company’s secured borrowing rate,
lease terms and current economic environment. Some of our operating leases include both lease (rent payments) and non-lease components
(maintenance costs such as cleaning and landscaping services). The Company has elected the practical expedient to account for
lease component and non-lease component as a single component for all leases. Lease expense for operating leases is recognized
on a straight-line basis over the lease term.
Finance
leases primarily consist of processing and lab equipment for our facilities. The Company’s finance leases generally have
terms between two to three years and some of the leases include options to purchase the underlying assets at fair market value
at the conclusion of the lease term. At March 31, 2019, assets recorded under finance leases were $655,000 less accumulated depreciation
of $18,000, resulting in net fixed assets under finance leases of $637,000, which is recorded within net property and equipment
on the Consolidated Balance Sheets.
The
Company adopted the policy to not recognize ROU assets and liabilities for short term leases.
The
components of lease cost for the Company’s leases for the three months ended March 31, 2019 were (in thousands):
Operating Leases:
|
|
|
|
Lease
cost
|
|
$
|
104
|
|
|
|
|
|
|
Finance Leases:
|
|
|
|
|
Amortization
of ROU assets
|
|
|
9
|
|
Interest
on lease liablity
|
|
|
12
|
|
|
|
|
21
|
|
|
|
|
|
|
Short-term
lease rent expense
|
|
|
49
|
|
|
|
|
|
|
Total
lease cost
|
|
$
|
174
|
|
The
weighted average remaining lease term and the weighted average discount rate for operating and finance leases at March 31, 2019
was:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Weighted average
remaining lease terms (years)
|
|
|
9.7
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
8.0
|
%
|
|
|
11.1
|
%
|
The
following table reconciles the undiscounted cash flows for the operating and finance leases at March 31, 2019 to the operating
and finance lease liabilities recorded on the balance sheet (in thousands):
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2019 Remainder
|
|
$
|
298
|
|
|
$
|
213
|
|
2020
|
|
|
403
|
|
|
|
336
|
|
2021
|
|
|
411
|
|
|
|
27
|
|
2022
|
|
|
418
|
|
|
|
―
|
|
2023
|
|
|
425
|
|
|
|
―
|
|
2024
and thereafter
|
|
|
1,768
|
|
|
|
―
|
|
Total undiscounted lease
payments
|
|
|
3,723
|
|
|
|
576
|
|
Less:
Imputed interest
|
|
|
(1,147
|
)
|
|
|
(61
|
)
|
Present
value of lease payments
|
|
$
|
2,576
|
|
|
$
|
515
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating
lease obligations
|
|
$
|
199
|
|
|
$
|
―
|
|
Long-term operating lease
obligations, less current portion
|
|
$
|
2,377
|
|
|
$
|
―
|
|
Current portion of finance
lease obligations
|
|
$
|
―
|
|
|
$
|
239
|
|
Long-term finance lease
obligations, less current portion
|
|
$
|
―
|
|
|
$
|
276
|
|
Supplemental
cash flow and other information related to our leases were as follows for the period ended March 31, 2019 (in thousands):
Cash paid for amounts included in the measurement
of lease liabilities:
|
|
|
|
Operating
cash flow from operating leases
|
|
$
|
98
|
|
Operating
cash flow from finance leases
|
|
$
|
12
|
|
Financing
cash flow from finance leases
|
|
$
|
44
|
|
|
|
|
|
|
ROU assets obtained in
exchange for lease obligations for:
|
|
|
|
|
Finance
liabilities
|
|
$
|
138
|
|
Operating
liabilities
|
|
$
|
―
|
|
The
following table summarizes information relating to the Company’s definite-lived intangible assets:
|
|
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
Useful
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
Intangibles (amount
|
|
Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
in thousands)
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Patent
|
|
|
1-17
|
|
|
$
|
735
|
|
|
$
|
(344
|
)
|
|
$
|
391
|
|
|
$
|
728
|
|
|
$
|
(336
|
)
|
|
$
|
392
|
|
Software
|
|
|
3
|
|
|
|
412
|
|
|
|
(404
|
)
|
|
|
8
|
|
|
|
410
|
|
|
|
(403
|
)
|
|
|
7
|
|
Customer relationships
|
|
|
10
|
|
|
|
3,370
|
|
|
|
(2,546
|
)
|
|
|
824
|
|
|
|
3,370
|
|
|
|
(2,491
|
)
|
|
|
879
|
|
Permit
|
|
|
10
|
|
|
|
545
|
|
|
|
(545
|
)
|
|
|
-
|
|
|
|
545
|
|
|
|
(538
|
)
|
|
|
7
|
|
Total
|
|
|
|
|
|
$
|
5,062
|
|
|
$
|
(3,839
|
)
|
|
$
|
1,223
|
|
|
$
|
5,053
|
|
|
$
|
(3,768
|
)
|
|
$
|
1,285
|
|
The
intangible assets noted above are amortized on a straight-line basis over their useful lives with the exception of customer relationships
which are being amortized using an accelerated method. The Company had only one definite-lived permit that was subject to amortization.
This definite-lived permit was fully amortized in the first quarter of 2019.
The
following table summarizes the expected amortization over the next five years for our definite-lived intangible assets:
Year
|
|
Amount
(In thousands)
|
|
|
|
|
|
2019 (remaining)
|
|
$
|
183
|
|
2020
|
|
|
219
|
|
2121
|
|
|
198
|
|
2022
|
|
|
172
|
|
2023
|
|
|
132
|
|
Amortization
expenses relating to the definite-lived intangible assets as discussed above were $73,000 and $84,000 for the three months ended
March 31, 2019 and 2018, respectively.
6.
|
Capital
Stock, Stock Plans and Stock Based Compensation
|
The
Company has certain stock option plans under which it may awards incentive stock options (“ISOs”) and/or non-qualified
stock options (“NQSOs”) to employees, officers, outside directors, and outside consultants.
On
January 17, 2019 the Company granted 105,000 ISOs from the 2017 Stock Option Plan to certain employees, which included our named
executive officers as follows: 25,000 ISOs to our Chief Executive Officer (“CEO”), Mark Duff; 15,000 ISOs to our Chief
Financial Officer (“CFO”), Ben Naccarato; and 15,000 ISOs to our Executive Vice President (“EVP”) of Strategic
Initiatives, Dr. Louis Centofanti. The ISOs granted were for a contractual term of six years with one-fifth vesting annually over
a five year period. The exercise price of the ISO was $3.15 per share, which was equal to the fair market value of the Company’s
Common Stock on the date of grant.
On
January 18, 2018, the Company granted 6,000 NQSOs from the Company’s 2003 Outside Directors Stock Plan to a new director
elected by the Company’s Board of Directors (“Board”) to fill a vacancy on the Board. The NQSOs granted were
for a contractual term of ten years with a vesting period of six months. The exercise price of the options was $4.05 per share,
which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Outside Directors Stock Plan.
The
Company granted a NQSO to Robert Ferguson on July 27, 2017 from the Company’s 2017 Stock Option Plan for the purchase of
up to 100,000 shares of the Company’s Common Stock (“Ferguson Stock Option”) in connection with his work as
a consultant to the Company’s Test Bed Initiative (“TBI”) at our Perma-Fix Northwest Richland, Inc. (“PFNWR”)
facility. The vesting of the Ferguson Stock Option is subject to the achievement of three separate milestones by certain dates.
On January 17, 2019, the Company’s Compensation and Stock Option Committee (“Compensation Committee”) and Board
of Director (“Board”) approved an amendment to the Ferguson Stock Option whereby the vesting date for the second milestone
was extended to March 31, 2020 from January 27, 2019. The 10,000 options under the first milestone were vested and exercised by
Robert Ferguson in May 2018. The Company has not recorded expenses 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 March 31, 2019.
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 on January 17, 2019 and January 18, 2018 as discussed above and the
related assumptions used in the Black-Scholes option model used to value the options granted were as follows:
|
|
Employee
Stock Option Granted
|
|
|
Outside
Director Stock Options Granted
|
|
|
|
January
17, 2019
|
|
|
January
18, 2018
|
|
Weighted-average fair value per option
|
|
$
|
1.42
|
|
|
$
|
2.55
|
|
Risk -free interest
rate
(1)
|
|
|
2.58
|
%
|
|
|
2.62
|
%
|
Expected volatility
of stock
(2)
|
|
|
48.67
|
%
|
|
|
57.29
|
%
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
Expected option life
(3)
|
|
|
5.0
years
|
|
|
|
10.0
years
|
|
(1)
The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the
option.
(2)
The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.
(3)
The expected option life is based on historical exercises and post-vesting data.
The
following table summarizes stock-based compensation recognized for the three months ended March 31, 2019 and 2018 for our employee
and director stock options.
|
|
Three Months Ended
|
|
|
|
March
31,
|
|
Stock Options
|
|
2019
|
|
|
2018
|
|
Employee Stock Options
|
|
$
|
43,000
|
|
|
$
|
10,000
|
|
Director Stock
Options
|
|
|
5,000
|
|
|
|
36,000
|
|
Total
|
|
$
|
48,000
|
|
|
$
|
46,000
|
|
At
March 31, 2019, the Company has approximately $534,000 of total unrecognized compensation cost related to unvested options, of
which $112,000 is expected to be recognized in remaining 2019, $144,000 in 2020, $144,000 in 2021, $104,000 in 2022, $29,000 in
2023, with the remaining $1,000 in 2024.
The
summary of the Company’s total Stock Option Plans as of March 31, 2019 and March 31, 2018, and changes during the periods
then ended, are presented below. The Company’s Plans consist of the 2010 and 2017 Stock Option Plans and the 2003 Outside
Directors Stock Plan:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic
Value
(2)
|
|
Options outstanding January 1, 2019
|
|
|
616,000
|
|
|
$
|
4.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
105,000
|
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
─
|
|
|
|
─
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
─
|
|
|
|
─
|
|
|
|
|
|
|
|
|
|
Options outstanding
end of period
(1)
|
|
|
721,000
|
|
|
$
|
4.07
|
|
|
|
4.7
|
|
|
$
|
48,360
|
|
Options exercisable
at March 31, 2019
(1)
|
|
|
261,333
|
|
|
$
|
5.00
|
|
|
|
4.4
|
|
|
$
|
10,560
|
|
Options exercisable
and expected to be vested as of March 31, 2019
|
|
|
721,000
|
|
|
$
|
4.07
|
|
|
|
4.7
|
|
|
$
|
48,360
|
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
|
Aggregate
Intrinsic
Value
(2)
|
|
Options outstanding January 1, 2018
|
|
|
624,800
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,000
|
|
|
|
4.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
─
|
|
|
|
─
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
─
|
|
|
|
─
|
|
|
|
|
|
|
|
|
|
Options outstanding
end of period
(1)
|
|
|
630,800
|
|
|
$
|
4.41
|
|
|
|
5.3
|
|
|
$
|
259,070
|
|
Options exercisable
at March 31, 2018
(1)
|
|
|
191,467
|
|
|
$
|
6.13
|
|
|
|
4.7
|
|
|
$
|
46,970
|
|
Options exercisable
and expected to be vested as of March 31, 2018
|
|
|
630,800
|
|
|
$
|
4.41
|
|
|
|
5.3
|
|
|
$
|
259,070
|
|
(1)
Options with exercise prices ranging from $2.79 to $13.35
(2)
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise
price of the option.
During
the three months ended March 31, 2018, the Company issued a total of 24,964 shares of its Common Stock under the 2003 Outside
Directors Stock Plan to its outside directors as compensation for serving on our Board. The Company has recorded approximately
$63,000 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.
7.
(Loss) Income Per Share
Basic
(loss) income per share is calculated based on the weighted-average number of outstanding common shares during the applicable
period. Diluted (loss) 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 shares. The following table reconciles the (loss) income and average share amounts used to compute both
basic and diluted (loss) income per share:
|
|
Three Months Ended
|
|
|
|
(Unaudited)
|
|
|
|
March
31,
|
|
(Amounts in Thousands,
Except for Per Share Amounts)
|
|
2019
|
|
|
2018
|
|
Net (loss) income attributable to Perma-Fix
Environmental Services, Inc., common stockholders:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations, net of taxes
|
|
$
|
(550
|
)
|
|
$
|
253
|
|
Net
loss attributable to non-controlling interest
|
|
|
(30
|
)
|
|
|
(40
|
)
|
(Loss) income from
continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
|
(520
|
)
|
|
|
293
|
|
Loss
from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
|
(152
|
)
|
|
|
(157
|
)
|
Net
(loss) income attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
(672
|
)
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)
income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
(.06
|
)
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss)
income per share attributable to Perma-Fix Environmental Services, Inc. common stockholders
|
|
$
|
(.06
|
)
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
11,961
|
|
|
|
11,747
|
|
Add:
dilutive effect of stock options
|
|
|
—
|
|
|
|
26
|
|
Diluted weighted average shares
outstanding
|
|
|
11,961
|
|
|
|
11,773
|
|
|
|
|
|
|
|
|
|
|
Potential shares excluded from above
weighted average share calcualtions due to their anti-dilutive effect include:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
598
|
|
|
|
168
|
|
8.
Long Term Debt
Long-term
debt consists of the following at March 31, 2019 and December 31, 2018:
(Amounts in Thousands)
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Revolving
Credit
facility dated October 31, 2011, as amended, borrowings based upon eligible accounts receivable, subject to monthly
borrowing base calculation, balance due March 24, 2021. Effective interest rate for the first quarter of 2019 was 7.6%.
(1)
|
|
$
|
1,004
|
|
|
$
|
639
|
|
Term
Loan
dated October 31, 2011, as amended, payable in equal monthly installments of principal of $102, balance due on March
24, 2021. Effective interest rate for the first quarter of 2019 was 5.7%.
(1)
|
|
|
2,367
|
(2)
|
|
|
2,663
|
(2)
|
Total debt
|
|
|
3,371
|
|
|
|
3,302
|
|
Less current portion of long-term debt
|
|
|
1,184
|
|
|
|
1,184
|
|
Long-term debt
|
|
$
|
2,187
|
|
|
$
|
2,118
|
|
(1)
Our revolving credit facility is collateralized by our accounts receivable and our term loan is collateralized by our property,
plant, and equipment.
(2)
Net of debt issuance costs of ($72,000) and ($80,000) at March 31, 2019 and December 31, 2018, respectively.
Revolving
Credit and Term Loan Agreement
The
Company entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011 (“Amended
Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Amended Loan Agreement
has been amended from time to time since the execution of the Amended Loan Agreement. The Amended Loan Agreement, as subsequently
amended (“Revised Loan Agreement”), provides the Company with the following credit facility with a maturity date of
March 24, 2021: (a) up to $12,000,000 revolving credit (“revolving credit”) and (b) a term loan (“term loan”)
of approximately $6,100,000, which requires monthly installments of approximately $101,600 (based on a seven-year amortization).
The maximum that we can borrow under the revolving credit is based on a percentage of eligible receivables (as defined) at any
one time reduced by outstanding standby letters of credit and borrowing reductions that our lender may impose from time to time.
On
March 29, 2019, the Company entered into an amendment to its Revised Loan Agreement with its lender under the credit facility
which provided the following:
●
|
waived
the Company’s failure to meet the minimum quarterly fixed charge coverage ratio (“FCCR”) requirement for
the fourth quarter of 2018;
|
●
|
waived
the quarterly FCCR testing requirement for the first quarter of 2019;
|
●
|
revised
the methodology to be used in calculating the FCCR in each of the second and third quarters of 2019 (with continued requirement
to maintain a minimum 1.15:1 ratio in each of the quarters);
|
●
|
revised
the minimum Tangible Adjusted Net Worth requirement (as defined in the Revised Loan Agreement) from $26,000,000 to $25,000,000;
|
●
|
eliminated
the London InterBank Offer Rate (“LIBOR”) interest payment option of paying annual rate of interest due on our
term loan and revolving credit until the Company becomes compliant with its FCCR requirement again. Prior to this amendment,
the Company had the option of paying annual rate of interest due on the revolving credit at prime (5.50% at March 31, 2019)
plus 2% or LIBOR plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%;
|
●
|
provided
consent for the $2,500,000 loan that the Company entered into with Robert Ferguson on April 1, 2019 (see “Note 15 –
Subsequent Events – Loan and Securities Purchase Agreement, Promissory Note and Subordinate Agreement” for a discussion
of this loan). The Company is not allowed to make any principal prepayment on this loan until it receives the restricted finite
risk sinking funds of approximately $5,000,000 held as collateral by American International Group, Inc. (“AIG”)
under our financial assurance policy. The Company expects to receive this restricted funds resulting from the closure of our
M&EC facility by the end of the second quarter of 2019 (see “Note 10 – Commitments and Contingencies –
Insurance” for a discussion of restricted sinking funds held by AIG under our financial assurance policy); and
|
●
|
revised
the annual rate used to calculate the Facility Fee (as defined in the Revised Loan Agreement) (unused revolving credit line
fee) from 0.250% to 0.375%.
|
Most
of the other terms of the Revised Loan Agreement remain principally unchanged. In connection with this amendment, the Company
paid its lender a fee of $20,000.
Pursuant
to the Revised Loan Agreement, as amended, the Company may terminate the Revised Loan Agreement, upon 90 days’ prior written
notice upon payment in full of its obligations under the Revised Loan Agreement. No early termination fee shall apply if the Company
pays off its obligations after March 23, 2019.
At
March 31, 2019, the borrowing availability under our revolving credit was approximately $1,860,000, based on our eligible receivables
and includes an indefinite reduction of borrowing availability of $1,000,000 that the Company’s lender has imposed. Our
borrowing availability under our revolving credit was also reduced by outstanding standby letters of credit totaling approximately
$2,639,000.
The
Company’s credit facility with PNC contains certain financial covenants, along with customary representations and warranties.
A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing
our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments
to extend further credit. The Company’s lender waived the fixed charge coverage ratio testing requirement for the first
quarter of 2019. The Company met all of its other financial covenants in the first quarter of 2019 and expects to meet its financial
covenants in each of the remaining quarters of 2019 and into the first half of 2020.
9.
East Tennessee Materials and Energy Corporation (“M&EC”)
The
Company has completed the physical on-site closure and decommissioning activities at its M&EC facility (in closure status)
in accordance with M&EC’s license and permit requirements, with final closure of the facility subject to completion
of final surveys and regulatory approvals.
At
March 31, 2019, total accrued closure liabilities for our M&EC subsidiary totaled approximately $281,000 which are recorded
as current liabilities. The Company recorded an additional $165,000 in closure costs and current closure liabilities due to finalization
of closure requirements. The following reflects changes to the closure liabilities for the M&EC facility from year end 2018:
Amounts in thousands
|
|
|
|
Balance as of December
31, 2018
|
|
$
|
1,142
|
|
Adjustment to closure liability
|
|
|
165
|
|
Spending
|
|
|
(1,026
|
)
|
Balance as of March 31, 2019
|
|
$
|
281
|
|
10.
Commitments and Contingencies
Hazardous
Waste
In
connection with our waste management services, we process both hazardous and non-hazardous waste, which we transport to our own,
or other, facilities for destruction or disposal. As a result of disposing of hazardous substances, in the event any cleanup is
required, we could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our
part.
Legal
Matters
In
the normal course of conducting our business, we are involved in various litigation. We are not a party to any litigation or governmental
proceeding which our management believes could result in any judgments or fines against us that would have a material adverse
effect on our financial position, liquidity or results of future operations.
Insurance
The
Company has a 25-year finite risk insurance policy entered into in June 2003 (“2003 Closure Policy”) with AIG, which
provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The 2003
Closure Policy, as amended, provides for a maximum allowable coverage of $39,000,000 and has available capacity to allow for annual
inflation and other performance and surety bond requirements. At March 31, 2019, our financial assurance coverage amount under
this 2003 Closure Policy totaled approximately $30,549,000. The Company has contributed $16,052,000 and $15,971,000 in sinking
fund related to this policy in other long term assets on the accompanying Consolidated Balance Sheets at March 31, 2019 and December
31, 2018, respectively, which includes interest earned of $1,581,000 and $1,500,000 on the sinking fund as of March 31, 2019 and
December 31, 2018, respectively. Interest income for the three months ended March 31, 2019 and 2018 was approximately $81,000
and $50,000, respectively. If the Company so elects, AIG is obligated to pay the Company an amount equal to 100% of the sinking
fund account balance in return for complete release of liability from both us and any applicable regulatory agency using this
policy as an instrument to comply with financial assurance requirements.
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 March 31, 2019, the total amount of standby letters of credit
outstanding totaled approximately $2,639,000 and the total amount of bonds outstanding totaled approximately $18,782,000.
11.
Discontinued Operations
The
Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment: (1) subsidiaries divested
in 2011 and prior, (2) two previously closed locations, and (3) our PFSG facility is in closure status, which final closure is
subject to regulatory approval of necessary plans and permits.
The
Company’s discontinued operations had net losses of $152,000 and $157,000 for the three months ended March 31, 2019 and
2018 (net of taxes of $0 for each period). The losses were primarily due to costs incurred in the administration and continued
monitoring of our discontinued operations. The Company’s discontinued operations had no revenues for each of the periods
noted above.
The
following table presents the major class of assets of discontinued operations as of March 31, 2019 and December 31, 2018. No assets
and liabilities were held for sale at each of the periods noted.
|
|
March 31,
|
|
|
December 31,
|
|
(Amounts in Thousands)
|
|
2019
|
|
|
2018
|
|
Current assets
|
|
|
|
|
|
|
|
|
Other
assets
|
|
$
|
99
|
|
|
$
|
107
|
|
Total current assets
|
|
|
99
|
|
|
|
107
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Property, plant and
equipment, net
(1)
|
|
|
81
|
|
|
|
81
|
|
Other assets
|
|
|
98
|
|
|
|
118
|
|
Total
long-term assets
|
|
|
179
|
|
|
|
199
|
|
Total
assets
|
|
$
|
278
|
|
|
$
|
306
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26
|
|
|
$
|
10
|
|
Accrued expenses and other liabilities
|
|
|
256
|
|
|
|
296
|
|
Environmental
liabilities
|
|
|
40
|
|
|
|
50
|
|
Total current liabilities
|
|
|
322
|
|
|
|
356
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Closure liabilities
|
|
|
127
|
|
|
|
126
|
|
Environmental
liabilities
|
|
|
837
|
|
|
|
837
|
|
Total
long-term liabilities
|
|
|
964
|
|
|
|
963
|
|
Total
liabilities
|
|
$
|
1,286
|
|
|
$
|
1,319
|
|
(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. subsidiary. This note requires 60 equal monthly
installment payments by the buyer of approximately $7,250 (which includes interest). At March 31, 2019, the outstanding amount
on this note receivable totaled approximately $176,000, of which approximately $78,000 is included in “Current assets related
to discontinued operations” and approximately $98,000 is included in “Other assets related to discontinued operations”
in the accompanying Consolidated Balance Sheets.
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;
|
|
○
|
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: Research and Development (“R&D”) of the Company’s medical isotope production technology
by our 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” or the Medical Segment). The Company’s Medical
Segment has not generated any revenue as it remains in the R&D stage. The Medical Segment has substantially reduced its R&D
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. All costs incurred by the Medical Segment are reflected within R&D
in the accompanying consolidated financial statements.
Our
reporting segments exclude our corporate headquarters and our discontinued operations (see “Note 11 – Discontinued
Operations”) which do not generate revenues.
The
table below presents certain financial information of our operating segments for the three months ended March 31, 2019 and 2018
(in thousands):
Segment
Reporting for the Quarter Ended March 31, 2019
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue from external customers
|
|
$
|
9,905
|
|
|
$
|
1,803
|
|
|
|
—
|
|
|
$
|
11,708
|
|
|
$
|
—
|
|
|
$
|
11,708
|
|
Intercompany revenues
|
|
|
2
|
|
|
|
21
|
|
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
|
|
—
|
|
(Negative) gross profit
|
|
|
2,957
|
|
|
|
(456
|
)
|
|
|
—
|
|
|
|
2,501
|
|
|
|
—
|
|
|
|
2,501
|
|
Research and development
|
|
|
147
|
|
|
|
—
|
|
|
|
74
|
|
|
|
221
|
|
|
|
6
|
|
|
|
227
|
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
81
|
|
|
|
81
|
|
Interest expense
|
|
|
(17
|
)
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
(61
|
)
|
|
|
(87
|
)
|
Interest expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Depreciation and amortization
|
|
|
237
|
|
|
|
78
|
|
|
|
—
|
|
|
|
315
|
|
|
|
8
|
|
|
|
323
|
|
Segment income (loss) before income
taxes
|
|
|
1,875
|
|
|
|
(1,012
|
)
|
|
|
(74
|
)
|
|
|
789
|
|
|
|
(1,300
|
)
|
|
|
(511
|
)
|
Income tax expense
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
—
|
|
|
|
(39
|
)
|
Segment income (loss)
|
|
|
1,836
|
|
|
|
(1,012
|
)
|
|
|
(74
|
)
|
|
|
750
|
|
|
|
(1,300
|
)
|
|
|
(550
|
)
|
Expenditures for segment assets
|
|
|
222
|
|
|
|
2
|
|
|
|
—
|
|
|
|
224
|
|
|
|
—
|
|
|
|
224
|
|
Segment Reporting for the Quarter Ended March
31, 2018
|
|
Treatment
|
|
|
Services
|
|
|
Medical
|
|
|
Segments
Total
|
|
|
Corporate
(1)
|
|
|
Consolidated
Total
|
|
Revenue from external customers
|
|
$
|
8,959
|
|
|
$
|
3,699
|
|
|
|
—
|
|
|
$
|
12,658
|
|
|
$
|
—
|
|
|
$
|
12,658
|
|
Intercompany revenues
|
|
|
213
|
|
|
|
14
|
|
|
|
—
|
|
|
|
227
|
|
|
|
—
|
|
|
|
—
|
|
Gross profit
|
|
|
2,780
|
|
|
|
541
|
|
|
|
—
|
|
|
|
3,321
|
|
|
|
—
|
|
|
|
3,321
|
|
Research and development
|
|
|
114
|
|
|
|
—
|
|
|
|
100
|
|
|
|
214
|
|
|
|
18
|
|
|
|
232
|
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
49
|
|
|
|
49
|
|
Interest expense
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(52
|
)
|
|
|
(53
|
)
|
Interest expense-financing fees
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Depreciation and amortization
|
|
|
240
|
|
|
|
123
|
|
|
|
—
|
|
|
|
363
|
|
|
|
9
|
|
|
|
372
|
|
Segment income (loss) before income
taxes
|
|
|
1,744
|
|
|
|
(86
|
)
|
|
|
(100
|
)
|
|
|
1,558
|
|
|
|
(1,254
|
)
|
|
|
304
|
|
Income tax expense
|
|
|
(51
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
—
|
|
|
|
(51
|
)
|
Segment income (loss)
|
|
|
1,693
|
|
|
|
(86
|
)
|
|
|
(100
|
)
|
|
|
1,507
|
|
|
|
(1,254
|
)
|
|
|
253
|
|
Expenditures for segment assets
|
|
|
220
|
|
|
|
25
|
|
|
|
—
|
|
|
|
245
|
|
|
|
3
|
|
|
|
248
|
|
(1)
Amounts reflect the activity for corporate headquarters not included in the segment information.
13.
Income Taxes
The
Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning
opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income
taxes.
Income
tax expenses were $39,000 and $51,000 for continuing operations for the three months ended March 31, 2019 and the corresponding
period of 2018, respectively. The Company’s effective tax rate was approximately 7.6% and 16.8% for the three months ended
March 31, 2019 and the corresponding period of 2018, respectively. The Company’s tax rate for each of the periods discussed
above was impacted by the Company’s full valuation on its net deferred tax assets.
14.
Management Incentive Plans (“MIPs”)
On
January 17, 2019, the Company’s Board and Compensation Committee approved individual MIPs for the CEO, CFO, and EVP of Strategic
Initiatives. Each MIP is effective January 1, 2019 and applicable for the year ended December 31, 2019. Each MIP provides guidelines
for the calculation of annual cash incentive based compensation, subject to Compensation Committee oversight and modification.
Each MIP awards cash compensation based on achievement of performance thresholds, with the amount of such compensation established
as a percentage of the executive’s annual 2019 base salary on the approval date of the MIP. The potential target performance
compensation ranges from 5% to 150% of the 2019 base salary for the CEO ($14,350 to $430,500), 5% to 100% of the 2019 base salary
for the CFO ($11,762 to $235,231), and 5% to 100% of the 2019 base salary for the EVP of Strategic Initiatives ($11,449 to $228,985).
15.
Subsequent Events
Loan
and Securities Purchase Agreement, Promissory Note and Subordination Agreement
On
April 1, 2019, the Company completed a lending transaction with Robert Ferguson (the “Lender”), whereby the Company
borrowed from the Lender the sum of $2,500,000 pursuant to the terms of a Loan and Security Purchase Agreement and promissory
note (the “Loan”). The Lender is a shareholder of the Company. The Lender also currently serves as a consultant to
the Company in connection with the TBI at its PFNWR subsidiary. The proceeds from the Loan are to be used for general working
capital purposes. The Loan is unsecured, with a term of two years with interest payable at a fixed interest rate of 4.00% per
annum. The Loan provides for monthly payments of accrued interest only during the first year of the Loan, with the first interest
payment due May 1, 2019 and monthly payments of approximately $208,333 in principal plus accrued interest starting in the second
year of the Loan. The Loan also allows for prepayment of principal payments over the term of the Loan without penalty. In connection
with the above Loan, the Lender agreed under the terms of the Loan and a Subordination Agreement with our credit facility lender,
to subordinate payment under the Loan, and agreed that the Loan will be junior in right of payment to the credit facility in the
event of default or bankruptcy or other insolvency proceeding by us. In connection with this capital raise transaction described
above and consideration for us receiving the Loan, the Company issued a Warrant (the “Warrant”) to the Lender to purchase
up to 60,000 shares of our Common Stock at an exercise price of $3.51 per share, which was the closing bid price for a share of
our Common Stock on NASDAQ.com immediately preceding the execution of the Loan and Warrant. The Warrant is exercisable six months
from April 1, 2019 and expires on April 1, 2024. As further consideration for this capital raise transaction relating to the Loan,
the Company issued 75,000 shares of our Common Stock to the Lender. The 75,000 shares of Common Stock, the Warrant and the 60,000
shares of Common Stock that may be purchased under the Warrant will be and was issued in a private placement that was exempt from
registration under Rule 506 and/or Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “Act”)
and bear a restrictive legend against resale except in a transaction registered under the Act or in a transaction exempt from
registration thereunder.
Upon
default, the Lender will have the right to elect to receive in full and complete satisfaction of the Company’s obligations
under the Loan either: (a) the cash amount equal to the sum of the unpaid principal balance owing under the loan and all accrued
and unpaid interest thereon (the “Payoff Amount”) or (b) upon meeting certain conditions, the number of whole shares
of the Company’s Common Stock (the “Payoff Shares”) determined by dividing the Payoff Amount by the dollar amount
equal to the closing bid price of our Common Stock on the date immediately prior to the date of default, as reported or quoted
on the primary nationally recognized exchange or automated quotation system on which our Common Stock is listed; provided however,
that the dollar amount of such closing bid price shall not be less than $3.51, the closing bid price for our Common Stock as disclosed
on NASDAQ.com immediately preceding the signing of this loan agreement.
If
issued, the Payoff Shares will not be registered and the Lender will not be entitled to registration rights with respect to the
Payoff Shares. The aggregate number of shares, warrant shares, and Payoff Shares that are or will be issued to the Lender pursuant
to the Loan, together with the aggregate shares of the Company’s Common Stock and other voting securities owned by the Lender
or which may be acquired by the Lender as of the date of issuance of the Payoff Shares, shall not exceed the number of shares
of the Company’s Common Stock equal to 14.9% of the number of shares of the Company’s Common Stock issued and outstanding
as of the date immediately prior to the default, less the number of shares of the Company’s Common Stock owned by the Lender
immediately prior to the date of such default plus the number of shares of our Common Stock that may be acquired by the Lender
under warrants and/or options outstanding immediately prior to the date of such default.
The
Company is currently evaluating the accounting treatment of this transaction and the impact to our financial statements.