PERMA FIX ENVIRONMENTAL SERVICES INC - Quarter Report: 2015 September (Form 10-Q)

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		September 30,				December 31,
(Amounts in Thousands, Except for Share and per Share Amounts)		2015				2014
ASSETS
Current assets:
Cash		$	1,998			$	3,680
Restricted cash			102				85
Accounts receivable, net of allowance for doubtful accounts of $1,880 and $2,170, respectively			8,462				8,272
Unbilled receivables - current			5,732				7,177
Inventories			350				498
Prepaid and other assets			3,696				3,010
Deferred tax asset - current			385				385
Current assets related to discontinued operations			37				20
Total current assets			20,762				23,127
Property and equipment:
Buildings and land			20,196				20,362
Equipment			35,677				35,434
Vehicles			421				403
Leasehold improvements			11,628				11,613
Office furniture and equipment			1,832				1,799
Construction-in-progress			356				336
			70,110				69,947
Less accumulated depreciation and amortization			(49,575	)			(47,123	)
Net property and equipment			20,535				22,824
Property and equipment related to discontinued operations			531				681
Intangibles and other long term assets:
Permits			16,775				16,709
Other intangible assets - net			2,124				2,435
Unbilled receivables – non-current			364				273
Finite risk sinking fund			21,364				21,334
Other assets			1,141				1,253
Total assets		$	83,596			$	88,636

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		September 30,				December 31,
(Amounts in Thousands, Except for Share and per Share Amounts)		2015				2014
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	4,908			$	5,350
Accrued expenses			5,528				4,540
Disposal/transportation accrual			1,608				1,737
Deferred revenue			2,465				4,873
Current liabilities related to discontinued operations			1,491				2,137
Current portion of long-term debt			2,310				2,319
Current portion of long-term debt - related party			1,303				1,414
Total current liabilities			19,613				22,370
Accrued closure costs			5,248				5,508
Other long-term liabilities			851				803
Deferred tax liabilities			5,498				5,391
Long-term liabilities related to discontinued operations			1,184				590
Long-term debt, less current portion			5,264				6,690
Long-term debt, less current portion - related party			—				949
Total long-term liabilities			18,045				19,931
Total liabilities			37,658				42,301
Commitments and Contingencies (Note 8)
Series B Preferred Stock of subsidiary, $1.00 par value; 1,467,396 shares authorized, 1,284,730 shares issued and outstanding, liquidation value $1.00 per share plus accrued and unpaid dividends of $851 and $803, respectively			1,285				1,285
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding			—				—
Common Stock, $.001 par value; 30,000,000 shares authorized; 11,535,367 and 11,476,485 shares issued, respectively; 11,527,725 and 11,468,843 shares outstanding, respectively			11				11
Additional paid-in capital			104,057				103,765
Accumulated deficit			(60,906	)			(59,758	)
Accumulated other comprehensive (loss) income			(81	)			11
Less Common Stock in treasury, at cost; 7,642 shares			(88	)			(88	)
Total Perma-Fix Environmental Services, Inc. stockholders' equity			42,993				43,941
Non-controlling interest			1,660				1,109
Total stockholders' equity			44,653				45,050
Total liabilities and stockholders' equity		$	83,596			$	88,636

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Amounts in Thousands, Except for Per Share Amounts)		2015				2014				2015				2014
Net revenues		$	17,309			$	16,905			$	47,264			$	40,106
Cost of goods sold			12,363				11,324				36,809				32,874
Gross profit			4,946				5,581				10,455				7,232
Selling, general and administrative expenses			2,887				2,733				8,663				8,916
Research and development			583				253				1,500				941
Impairment loss on goodwill			—				—				—				380
Gain on disposal of property and equipment			(23	)			(25	)			(23	)			(41	)
Income (loss) from operations			1,499				2,620				315				(2,964	)
Other income (expense):
Interest income			16				7				36				20
Interest expense			(124	)			(138	)			(390	)			(505	)
Interest expense - financing fees			(56	)			(52	)			(171	)			(133	)
Foreign currency loss			(2	)			—				(7	)			—
Other			4				(63	)			19				(48	)
Income (loss) from continuing operations before taxes			1,337				2,374				(198	)			(3,630	)
Income tax expense			53				30				124				90
Income (loss) from continuing operations, net of taxes			1,284				2,344				(322	)			(3,720	)
(Loss) income from discontinued operations, net of taxes			(377	)			(473	)			(1,313	)			1,633
Net income (loss)			907				1,871				(1,635	)			(2,087	)
Net loss attributable to non-controlling interest			163				—				487				—
Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders		$	1,070			$	1,871			$	(1,148	)		$	(2,087	)
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic:
Continuing operations		$	.12			$	.20			$	.01			$	(.32	)
Discontinued operations			(.03	)			(.04	)			(.11	)			.14
Net income (loss) per common share		$	.09			$	.16			$	(.10	)		$	(.18	)
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - diluted:
Continuing operations		$	.12			$	.20			$	.01			$	(.32	)
Discontinued operations			(.03	)			(.04	)			(.11	)			.14
Net income (loss) per common share		$	.09			$	.16			$	(.10	)		$	(.18	)
Number of common shares used in computing net income (loss) per share:
Basic			11,526				11,449				11,506				11,434
Diluted			11,561				11,490				11,542				11,434

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		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(Amounts in Thousands)		2015				2014				2015				2014
Net income (loss)		$	907			$	1,871			$	(1,635	)		$	(2,087	)
Other comprehensive loss:
Foreign currency translation loss			(17	)			(2	)			(92	)			(8	)
Comprehensive income (loss)			890				1,869				(1,727	)			(2,095	)
Comprehensive loss attributable to non-controlling interest			163				—				487				—
Comprehensive income (loss) attributable to Perma-Fix Environmental Services, Inc. stockholders		$	1,053			$	1,869			$	(1,240	)		$	(2,095	)

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		Common Stock												Common				Accumulated				Non-
(Amounts in thousands, except for share amounts)		Shares				Amount				Additional Paid-In Capital				Stock Held In Treasury				Other Comprehensive Income (Loss)				controlling Interest in Subsidiary				Accumulated Deficit				Total Stockholders' Equity
Balance at December 31, 2014			11,476,485			$	11			$	103,765			$	(88	)		$	11			$	1,109			$	(59,758	)		$	45,050
Net loss			—				—				—				—				—				(487	)			(1,148	)			(1,635	)
Foreign currency translation			—				—				—				—				(92	)			—				—				(92	)
Perma-Fix Medical S.A. (proceeds from stock subscription, net of expenses of $29)			—				—				—				—				—				1,038				—				1,038
Issuance of Common Stock upon exercise of options			3,423				—				10				—				—				—				—				10
Issuance of Common Stock for services			55,459				—				220				—				—				—				—				220
Stock-Based Compensation			—				—				62				—				—				—				—				62
Balance at September 30, 2015			11,535,367			$	11			$	104,057			$	(88	)		$	(81	)		$	1,660			$	(60,906	)		$	44,653

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		Nine Months Ended September 30,
(Amounts in Thousands)		2015				2014
Cash flows from operating activities:
Net loss		$	(1,635	)		$	(2,087	)
Less: (loss) income on discontinued operations			(1,313	)			1,633
Loss from continuing operations			(322	)			(3,720	)
Adjustments to reconcile net loss from continuing operations to cash provided by (used in) operations:
Depreciation and amortization			2,821				3,282
Amortization of debt discount			65				65
Deferred tax expense			107				90
(Recovery of) provision for bad debt reserves			(27	)			11
Impairment loss on goodwill			—				380
Gain on disposal of plant, property and equipment			(23	)			(41	)
Loss on sale of SYA subsidiary			—				48
Issuance of common stock for services			220				198
Stock-based compensation			62				(2	)
Changes in operating assets and liabilities of continuing operations:
Accounts receivable			(164	)			(1,960	)
Unbilled receivables			1,354				(1,246	)
Prepaid expenses, inventories and other assets			795				709
Accounts payable, accrued expenses and unearned revenue			(3,404	)			801
Cash provided by (used in) continuing operations			1,484				(1,385	)
Cash used in discontinued operations			(1,233	)			(1,959	)
Cash provided by (used in) operating activities			251				(3,344	)
Cash flows from investing activities:
Purchases of property and equipment			(338	)			(375	)
Proceeds from sale of property and equipment			27				133
Proceeds from sale of SYA subsidiary (Note 11)			50				1,218
Payment to finite risk sinking fund			(30	)			(19	)
Cash (used in) provided by investing activities of continuing operations			(291	)			957
Proceeds from property insurance claims of discontinued operations			—				5,727
Cash (used in) provided by investing activities			(291	)			6,684
Cash flows from financing activities:
Borrowing of revolving credit			49,783				60,899
Repayments of revolving credit borrowings			(49,476	)			(60,899	)
Principal repayments of long term debt			(1,742	)			(1,852	)
Principal repayments of long term debt - related party			(1,125	)			(125	)
Proceeds from stock subscription - Perma-Fix Medical S.A., net of expenses of $29			971				—
Proceeds from issuance of common stock			10				4
Cash used in financing activities of continuing operations			(1,579	)			(1,973	)
Principal repayments of long term debt for discontinued operations			—				(27	)
Cash used in financing activities			(1,579	)			(2,000	)
Effect of exchange rate changes on cash			(63	)			—
(Decrease) increase in cash			(1,682	)			1,340
Cash at beginning of period			3,680				333
Cash at end of period		$	1,998			$	1,673
Supplemental disclosure:
Interest paid		$	404			$	498
Income taxes paid			116				30
Proceeds from stock subscription for Perm-Fix Medical S.A. held in escrow			67				—

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1.	Basis of Presentation

 

The consolidated condensed 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 condensed financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2015.

 

The Company suggests that these consolidated condensed 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, 2014.

 

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

2.	Summary of Significant Accounting Policies

 

Our accounting policies are as set forth in the notes to the December 31, 2014 consolidated financial statements referred to above.

 

Recently Issued Accounting Standards – Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The ASU may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is still evaluating the potential impact of adopting this guidance on our financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Compensation Stock – Compensation (Topic 718).” ASU 2014-12 applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company has assessed the impact of adopting this guidance and concluded that it will not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. The Company is still evaluating the potential impact of adopting this guidance on our financial statements.

 

In January 2015, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual Items.” ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for annual reporting periods and interim periods, within those annual periods beginning after December 15, 2015.  The Company has assessed the impact of adopting this guidance and concluded that it will not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company has assessed the impact of adopting this guidance and concluded that it will not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” ASU 2015-11 requires that inventory within the scope of this update be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For all entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company is still evaluating the potential impact of adopting this guidance on our financial statements.

 

3.	Intangible Assets

 

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

 

 

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 has only one definite-lived permit that is subject to amortization.

 

 

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

 

 

Amortization expenses relating to the definite-lived intangible assets as discussed above were $108,000 and $360,000 for the three and nine months ended September 30, 2015, respectively, and $149,000 and $501,000 for the three and nine months ended September 30, 2014, respectively.

 

4.	Stock Plans and Stock Based Compensation

 

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

 

On September 17, 2015, the Company granted an aggregate of 12,000 non-qualified stock options (“NQSOs”) from the Company’s 2003 Outside Directors Stock Plan (“2003 Stock Plan”) to five of the seven re-elected directors at our Annual Meeting of Stockholders held on September 17, 2015. Two of the directors are not eligible to receive options under the 2003 Stock Plan as they are employees of the Company or its subsidiaries. Dr. Centofanti is the Company’s Chief Executive Officer and Mr. John Climaco is an Executive Vice President of Perma-Fix Medical S.A. (effective June 2, 2015), the Company’s majority-owned Polish subsidiary. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSOs was $4.19 per share, which was equal to the Company’s closing stock price the day preceding the grant date, pursuant to the 2003 Stock Plan.

 

As of September 30, 2015, the Company had an aggregate of 55,000 employee stock options outstanding (from the 2010 Stock Option Plans), of which 18,333 are vested. The weighted average exercise price of the 18,333 outstanding and fully vested employee stock options is $5.00 with a remaining weighted contractual life of 4.8 years. Additionally, the Company had an aggregate of 163,200 outstanding director stock options (from the 2003 Plans), of which 151,200 are vested. The weighted average exercise price of the 151,200 outstanding and fully vested director stock options is $8.89 with a remaining weighted contractual life of 4.8 years. 

 

 

The summary of the Company’s total Stock Option Plans as of September 30, 2015, and 2014, and changes during the periods then ended, are presented below. The Company’s Plans consist of the 2004 and 2010 Stock Option Plans and the 2003 Stock Plans:

 

 

 

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 during the nine months ended September 30, 2015 and 2014 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows (No options were granted to employees during the nine months ended September 30, 2015):

 

 

 

⁽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, which is included in selling, general and administrative expenses (“SG&A”) in the accompanying Consolidated Statements of Operations, for the three and nine months ended September 30, 2015 and 2014 for our employee and director stock options.

  

 

The Company recognized stock-based compensation expense using a straight-line amortization method over the requisite service period, which is the vesting period of the stock option grant. ASC 718, “Compensation – Stock Compensation” requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has generally estimated forfeiture rates based on historical trends of actual forfeitures. When actual forfeitures vary from our estimates, the Company recognizes the difference in compensation expense in the period the actual forfeitures occur or when options vest. The total stock-based compensation expense for the nine months ended September 30, 2014 included a reduction in expense of approximately $54,000 resulting from the forfeiture of options by Mr. Jim Blankenhorn, our Chief Operating Officer (“COO”), who voluntarily resigned from the Company effective March 28, 2014. The COO was granted an option from the Company’s 2010 Stock Option Plan on July 25, 2011, to purchase up to 60,000 shares of the Company’s Common Stock at $7.85 per share. The options had a six year contractual term with one-third yearly vesting over a three year period.

 

As of September 30, 2015, the Company has approximately $117,000 of total unrecognized compensation cost related to unvested options, of which $30,000 is expected to be recognized in remaining 2015, $68,000 in 2016, with the remaining $19,000 in 2017.

 

During the nine months ended September 30, 2015, the Company issued a total of 55,459 shares of our Common Stock under our 2003 Plan to our outside directors as compensation for serving on our Board of Directors. The Company has recorded approximately $216,000 in compensation expenses (included in SG&A) in connection with the issuance of shares of our Common Stock to our outside directors. Also, an outside director exercised 3,423 options from the 2003 Stock Plan for the purchase of 3,423 shares of the Company’s Common Stock at $2.79 per share.

 

5.	Income (Loss) Per Share

 

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

 

 

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6.	Long Term Debt

 

Long-term debt consists of the following at September 30, 2015 and December 31, 2014:

 

 

⁽¹⁾ Our Revolving Credit facility is collateralized by our accounts receivable and our Term Loan is collateralized by our property, plant, and equipment.

 

⁽²⁾ Uncollateralized note.

 

⁽³⁾ Net of debt discount of ($72,000) and ($137,000) at September 30, 2015 and December 31, 2014, respectively. See “Promissory Notes and Installment Agreements” below for additional information.

 

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, (“Loan Agreement”), with PNC Bank, National Association (“PNC”), acting as agent and lender. The Loan Agreement, as amended (“Amended Loan Agreement”), provides us with the following Credit Facility: (a) up to $12,000,000 revolving credit facility (“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 requires monthly installments of approximately $190,000 (based on a seven-year amortization).

 

The Amended Loan Agreement matures on October 31, 2016, unless sooner terminated. We may terminate the Amended Loan Agreement upon 90 days’ prior written notice and upon payment in full of our obligations under the Amended Loan Agreement.

 

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 Company met its quarterly fixed charge coverage ratio and minimum tangible adjusted net worth requirements in each of the quarters as of September 30, 2015.

 

 

As of September 30, 2015, the availability under our revolving credit agreement was $4,284,000, based on our eligible receivables and is net of an indefinite reduction of borrowing availability of $1,500,000. On July 28, 2014, the Company entered into an amendment to the Amended Loan Agreement which among other things, authorized the Company to use the $3,850,000 insurance settlement proceeds received on June 30, 2014 by our Perma-Fix of South Georgia, Inc. (“PFSG”) subsidiary (which suffered a fire on August 14, 2013 and is included within our discontinued operations) for working capital purposes but placed an indefinite reduction on our borrowing availability by the $1,500,000 as discussed above.

 

Promissory Notes and Installment Agreements

On February 12, 2013, the Company entered into an unsecured promissory note (“the new note”) with Timios National Corporation (“TNC”) in the principal amount of approximately $230,000 as a result of a settlement with TNC in connection with certain claims that the Company asserted against TNC for breach of certain representations and covenant subsequent to our acquisition of Safety & Ecology Corporation (“SEC”) from TNC on October 31, 2011. The new note was entered into as a result of the settlement in which a previously issued promissory note that the Company entered into with TNC as partial consideration of the purchase price of SEC was cancelled and terminated and replaced with the new note. Final payment of approximately $10,000 on this note was made in January 2015.

 

On August 2, 2013, the Company completed a lending transaction with Messrs. Robert Ferguson (who serves as an advisor to the Company’s Board of Directors and is also a member of the Board of Directors for our majority-owned Polish subsidiary, Perma-Fix Medical S.A.) and William Lampson (“collectively, the “Lenders”), whereby the Company borrowed from the Lenders the sum of $3,000,000 pursuant to the terms of a Loan and Security Purchase Agreement and promissory note (the “Loan”) (See payment terms of this promissory note in the table above). In connection with this Loan, the Lenders entered into a Subordination Agreement dated August 2, 2013, with the Company’s Credit Facility lender, whereby the Lenders agreed 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 the Company. As consideration for the Company receiving the Loan, the Company issued a Warrant to each Lender to purchase up to 35,000 shares of the Company’s Common Stock at an exercise price based on the closing price of the Company’s Common Stock at the closing of the transaction which was determined to be $2.23. The Warrants are exercisable six months from August 2, 2013 and expire on August 2, 2016. The fair value of the Warrants was estimated to be approximately $59,000 using the Black-Scholes option pricing model. As further consideration for the Loan, the Company also issued an aggregate 90,000 shares of the Company’s Common Stock, with each Lender receiving 45,000 shares. The Company determined the fair value of the 90,000 shares of Common Stock to be approximately $200,000 which was based on the closing price of the stock of $2.23 per share on August 2, 2013. The fair value of the Warrants and Common Stock and the related closing fees incurred from the transaction were recorded as a debt discount, which is being amortized using the effective interest method over the term of the loan as interest expense – financing fees in the accompanying Consolidated Statements of Operations.

 

In the event of default of the promissory note by the Company, the Lenders have the option to receive a cash payment equal to the amount of the unpaid principal balance plus all accrued and unpaid interest (“Payoff Amount”), or the number of whole shares of the Company’s Common Stock equal to the Payoff Amount divided by the closing bid price of the Company’s Common Stock on the date immediately prior to the date of default of the promissory note, as reported by the primary national securities exchange on which the Company’s Common Stock is traded. The maximum number of payoff shares is restricted to less than 20% of the outstanding equity.

 

7.	Perma-Fix Medical S.A. (“PF Medical”)

 

On April 4, 2014, the Company completed the acquisition of a controlling interest in a Polish Company, a publicly traded shell company on the NewConnect (alternative share market run by the Warsaw Stock Exchange) in Poland and sold to the Polish shell all of the shares of Perma-Fix Medical Corporation, a Delaware corporation organized by the Company (incorporated in January 2014). Perma-Fix Medical Corporation’s only asset was and is a worldwide license granted by the Company to use, develop and market the new process and technology developed by the Company in the production of Technetium-99 (“Tc-99m”) for medical diagnostic applications. Since the acquired shell company (now named Perma-Fix Medical S.A. or “PF Medical”) did not meet the definition of a business under ASC 805, “Business Combinations”, the transaction was accounted for as a capital transaction. The primary purpose of PF Medical is to provide a financing vehicle for the research and development (“R&D”) and marketing of its medical isotope or Tc-99m technology used in medical diagnostic testing for potential use throughout the world.

 

 

During August 2014, PF Medical executed stock subscription agreements totaling approximately $2,357,000 for 250,000 shares of its Series E Common Stock to non-U.S. persons in an offshore private placement under Regulation S promulgated under the Securities Act of 1933, as amended (“Securities Act”). In connection with this transaction, PF Medical has received approximately $1,545,000 in proceeds, of which approximately $67,000 was received in the first nine months of 2015, for the 250,000 shares (before deduction for commissions and legal expenses relating to this offering of approximately $242,000). The $67,000 is being held in an escrow account as the proceeds will be used to pay for potential future expenses related to the medical isotope project. The Company has recorded the amount held in escrow as restricted cash on the accompanying Consolidated Balance Sheets. PF Medical expects to receive the remaining proceeds for the stock subscription receivables in the amount of approximately $751,000 by December 2015. The remaining stock subscription receivables are offset against non-controlling interest. If PF Medical does not receive approximately $591,000 of the remaining stock subscription receivables, which represents approximately 68,181 shares, PF Medical has the option to have the purchaser of such shares transfer all of its rights, title and interest in such shares to PF Medical or for PF Medical to be paid for the 68,161 shares with shares of another publicly traded company.

 

On July 24, 2015, PF Medical and Digirad Corporation, a Delaware corporation (“Digirad”), Nasdaq: DRAD, entered into a multi-year Tc-99m Supplier Agreement (the “Supplier Agreement”) and a Series F Stock Subscription Agreement (the “Subscription Agreement”), (together, the “Digirad Agreements”). The Supplier Agreement became effective upon the completion of the Subscription Agreement. Pursuant to the terms of the Digirad Agreements, Digirad purchased, in a private placement and pursuant to Regulation S under the Securities Act, 71,429 shares of PF Medical’s restricted Series F Stock for an aggregate purchase price of $1,000,000. The issuance of the shares has been approved by the Polish authority. As of September 30, 2015, legal expenses incurred for this offering totaled approximately $29,000. The net proceeds of $971,000 in stock subscription were recorded as non-controlling interest in the accompanying Consolidated Balance Sheets. The 71,429 share investment made by Digirad constituted approximately 5.4% of the outstanding common shares of PF Medical. As a result of this transaction, the Company’s ownership interest in PF Medical diluted from approximately 64.0% to approximately 60.5%. The Supplier Agreement provides, among other things, that upon PF Medical’s commercialization of certain Tc99m generators, Digirad will purchase agreed upon quantities of Tc-99m for its nuclear imaging operations either directly or in conjunction with its preferred nuclear pharmacy supplier and PF Medical will supply Digirad, or its preferred nuclear pharmacy supplier, with Tc-99m at a preferred pricing, subject to certain conditions.

 

8.	Commitments and Contingencies

 

Hazardous Waste

In connection with our waste management services, we treat 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 considered 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 with American International Group, Inc. (“AIG”), which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The policy, as amended, provides for a maximum allowable coverage of $39,000,000 and has available capacity to allow for annual inflation and other performance and surety bond requirements. All of the required payments for this finite risk insurance policy, as amended, were made by 2012. As of September 30, 2015, our financial assurance coverage amount under this policy totaled approximately $38,454,000. The Company has recorded $15,452,000 in our sinking fund related to the policy noted above in other long term assets on the accompanying consolidated balance sheets, which includes interest earned of $980,000 on the sinking fund as of September 30, 2015. Interest income for the three and nine month periods ended September 30, 2015, was approximately $9,000 and $23,000, respectively. Interest income for the three and nine month periods ended September 30, 2014, was approximately $5,000 and $15,000, respectively. If the Company so elects, AIG is obligated to pay us an amount equal to 100% of the sinking fund account balance in return for complete release of liability from both us and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

 

In August 2007, the Company entered into a second finite risk insurance policy for our Perma-Fix Northwest Richland, Inc. (“PFNWR”) facility with AIG. The policy provided an initial $7,800,000 of financial assurance coverage with an annual growth rate of 1.5%, which at the end of the four year term policy, provides maximum coverage of $8,200,000. The Company has made all of the required payments on this policy. As of September 30, 2015, the Company has recorded $5,912,000 in our sinking fund related to this policy in other long term assets on the accompanying consolidated balance sheets, which includes interest earned of $212,000 on the sinking fund as of September 30, 2015. Interest income for the three and nine month periods ended September 30, 2015, was approximately $4,000 and $7,000, respectively. Interest income for the three and nine month periods ended September 30, 2014, was approximately $1,000 and $4,000, respectively. This policy is renewed annually at the end of the four year term with a nominal fee for the variance between the coverage requirement and the sinking fund balance. The Company has renewed this policy annually from 2011 to 2015 (with fees ranging from $41,000 to $46,000 annually). All other terms of the policy remain substantially unchanged.

 

Letter of Credits and Bonding Requirements

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, 2015, the total amount of these bonds and letters of credit outstanding was approximately $1,773,000, of which the majority of the amount relates to various bonding requirements.

 

9.	Discontinued Operations

 

The Company’s discontinued operations consist of subsidiaries included in our Industrial Segment: (1) subsidiaries divested in 2011 and prior, (2) two previously closed locations, and (3) our PFSG facility. On August 14, 2013, our PFSG facility incurred fire damage which left it non-operational. In 2014, the Company elected not to rebuild the PFSG facility. The Company carried general liability, pollution, property and business interruption, and workers compensation insurance with a maximum deductible of approximately $300,000. On June 20, 2014, the Company entered into a settlement agreement and release with one of its insurance carriers resulting in receipt of approximately $3,850,000 in insurance settlement proceeds on June 30, 2014, which was used for working capital purposes.

 

On May 11, 2015, PFSG received a Notice of Violation and proposed Consent Order (“CO”) from the Georgia Department of Natural Resources Environmental Protection Division (“GAEPD”), which alleged certain violations of Georgia hazardous waste management regulations and PFSG hazardous waste management permit. The proposed CO also established the process for formerly closing the PFSG hazardous waste management facilities, should PFSG elect to do so; and proposed the assessment of a civil penalty. The final terms of the CO, including a $201,200 civil penalty, were executed on July 1, 2015. The civil penalty was paid by the Company and recorded in the three months ended June 30, 2015. On August 28, 2015, the Company notified GAEPD its intent to close the PFSG facility; and on September 29, 2015, the Company submitted a draft Post-Closure Plan for review and approval by the GAEPD.

 

 

On June 4, 2015, the Perma-Fix of Michigan, Inc. (“PFMI”) entered into a letter of intent (“LOI”) to sell the property PFMI formerly operated for a sale price of approximately $450,000. PFMI is a closed location. As required by ASC 360, the Company concluded that tangible asset impairment existed for PFMI and recorded approximately $150,000 in asset impairment charge in the second quarter of 2015. On September 29, 2015, PFMI entered into a Purchase Agreement (the “Agreement”) for the sale of the property for a sale price of $450,000, which is subject to completion of a due diligence within 45 days of the Agreement. Upon execution of the Agreement, PFMI received $20,000 deposit which is being held in an escrow account (recorded as restricted cash within discontinued operations). Upon closing of the transaction, PFMI is to receive an additional $55,000 in cash in addition to the $20,000 held in escrow and PFMI and the seller will execute a Land Contract (“Contract”) which will provide for, among other things, the remaining balance of the sales price of $375,000 to be paid by the seller in 60 equal monthly installment payments of approximately $7,250, due on or before the 15^th of each month immediately following the execution of the Contract. PFMI retains legal title to the property until the buyer fulfills the obligations under the Contract.

 

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2015 and 2014. Operating loss for the nine months ended September 30, 2015 included the civil penalty recorded for PFSG and the asset impairment charge recorded for PFMI during the second quarter of 2015 as discussed above. Operating loss for the nine months ended September 30, 2014 included a tangible asset impairment charge of approximately $723,000 (of which $38,000 was recorded during the third quarter of 2014) for PFSG. Remaining operating losses for the periods reflected below were primarily due to costs incurred in the administration and continued monitoring of our discontinued operations, primarily for the PFSG site. 

 

 

The following table presents the major class of assets of discontinued operations that are classified as held for sale as of September 30, 2015 and December 31, 2014. The held for sale assets may differ at the closing of a sale transaction from the reported balances as of September 30, 2015. Assets and liabilities previously classified as held for sale for PFSG for as of December 31, 2014 have been reclassified to assets and liabilities not held for sale (see charts below) due to the Company’s decision to close PFSG as discussed above.

 

  

  

The following table presents the major classes of assets and liabilities of discontinued operations that are not held for sale as of September 30, 2015 and December 31, 2014:

  

 

(1)	net of accumulated depreciation of $10,000 for

each period presented.

 

10.	Operating Segments

 

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

 

We currently have two reporting segments, Treatment and Services Segments, which are based on a service offering approach. This, however, excludes corporate headquarters, which do not generate revenue, our discontinued operations (see Note 9 – “Discontinued Operations”), and PF Medical, a developmental entity whose primary purpose at this time is the R&D and marketing of medical isotope technology used in the medical diagnostic testing and is not generating any revenues (see Note 7 – “Perma-Fix Medical S.A. (“PF Medical”)” for further information of this entity).

 

Our reporting segments are defined as below:

 

TREATMENT SEGMENT reporting includes:

-

nuclear, low-level radioactive, mixed, hazardous and non-hazardous waste treatment, processing and disposal services primarily through four 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:

-

On-site waste management services to commercial and government customers;

-

Technical services, which include:

o

professional radiological measurement and site survey of large government and commercial installations using advanced methods, technology and engineering;

o

integrated Occupational Safety and Health services including industrial hygiene (“IH”) assessments; hazardous materials surveys, e.g., exposure monitoring; lead and asbestos management/abatement oversight; indoor air quality evaluations; health risk and exposure assessments; health & safety plan/program development, compliance auditing and training services; and Occupational Safety and Health Administration (“OSHA”) citation assistance;

o

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;

-

Nuclear services, which include:

o

technology-based services including engineering, decontamination and decommissioning (“D&D”), specialty services and construction, logistics, transportation, processing and disposal;

o

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; site construction; logistics; transportation; and emergency response; and

-

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

 

 

The table below presents certain financial information of our operating segments as of and for the three and nine months ended September 30, 2015 and 2014 (in thousands).

 

 

 

 

 

⁽¹⁾ Amounts reflect the activity for corporate headquarters and PF Medical not included in the segment information.

 

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11.	Escrow Release (Divestiture of Schreiber, Yonley and Associates, Inc. (“SYA”)

 

On August 4, 2015, the Company received $50,000 which represented the portion of the proceeds from the divestiture of the Company’s wholly-owned subsidiary, SYA, on July 29, 2014 which was placed in an escrow account to cover any potential claims which the purchaser of SYA may have made for indemnification for certain limited types of losses incurred by the purchaser for a period of one year following the closing of the sale of SYA. The $50,000 was previously recorded as restricted cash on the Company’s Consolidated Balance Sheets.

 

12.	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.

 

The Company had income tax expenses of $53,000 and $30,000 from continuing operations for the three months ended September 30, 2015 and the corresponding period of 2014, respectively, and income tax expenses of $124,000 and $90,000 for the nine months ended September 30, 2015 and the corresponding period of 2014, respectively. The Company’s effective tax rates were approximately 3.5% and 1.3% for the three months ended September 30, 2015 and 2014, respectively, and 42.9% and (2.8%) for the nine months ended September 30, 2015 and 2014, respectively.  The Company has provided a full valuation allowance on its net deferred tax assets.

 

13.	Related Party Transaction

 

As previously disclosed, Mr. John Climaco, who currently serves as a member of the Company’s Board of Directors, is also Executive Vice-President of PF Medical, the Company’s majority-owned Polish subsidiary. Mr. Climaco is also a director of Digirad Corporation. On July 24, 2015 PF Medical and Digirad entered into a multi-year Tc-99 Supplier Agreement and a Subscription Agreement (see Note 7 – “Perma-Fix Medical S.A. (“PF Medical”) for further information of this transaction with Digirad). Mr. Climaco entered into a consulting agreement with the Company dated October 17, 2014 which provided for payment of approximately $22,000 per month for his services of certain consulting functions. This consulting agreement was terminated effective June 2, 2015, upon Mr. Climaco’s election as Executive Vice-President of PF Medical as noted above. As Executive Vice-President of PF Medical, Mr. Climaco’s annual compensation has been set at $150,000.

 

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