10-K 1 perma20141231_10k.htm FORM 10-K perma20141231_10k.htm

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

or

[   ]

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

For the transition period from _____ to _____

 

Commission File No. 1-11596

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

58-1954497

State or other jurisdiction

of incorporation or organization

 

(IRS Employer Identification Number)

     

8302 Dunwoody Place, #250, Atlanta, GA

 

30350

(Address of principal executive offices)

 

(Zip Code)

 

(770) 587-9898

 
 

(Registrant's telephone number)

 

 

Securities registered pursuant to Section 12(b) of the Act:

   

Title of each class

 

Name of each exchange on which registered

     

Common Stock, $.001 Par Value

 

NASDAQ Capital Markets

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes     No X  

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes    No X  

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No    

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes XNo    

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐        Accelerated Filer ☐        Non-accelerated Filer ☐        Smaller reporting company ☒

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes    No X   

 

The aggregate market value of the Registrant's voting and non-voting common equity held by nonaffiliates of the Registrant computed by reference to the closing sale price of such stock as reported by NASDAQ as of the last business day of the most recently completed second fiscal quarter (June 30, 2014), was approximately $48,731,000. For the purposes of this calculation, all directors of the Registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, are, in fact, affiliates of the Registrant. The Company's Common Stock is listed on the NASDAQ Capital Markets.

 

As of March 6, 2015, there were 11,486,175 shares of the registrant's Common Stock, $.001 par value, outstanding.

 

Documents incorporated by reference: None

 



 
 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

 

INDEX 

Page No.

 

PART I      
       

Item 1.

Business

   1
       

Item 1A.

Risk Factors 

   7
       

Item 1B.

Unresolved Staff Comments

   16
       

Item 2.

Properties 

   16
       

Item 3.

Legal Proceedings 

   17
       

Item 4.

Mine Safety Disclosure

   17
       
PART II      
       

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

   17
       

Item 6.

Selected Financial Data

   18
       

Item 7.

Management's Discussion and Analysis of Financial Condition And Results of Operations

   18
       

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk  

   35
       
 

Special Note Regarding Forward-Looking Statements 

   35
       

Item 8.

Financial Statements and Supplementary Data 

   37
       

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 

   78
       

Item 9A.

Controls and Procedures

   78
       

Item 9B.

Other Information 

   80
       
PART III      
       

Item 10.

Directors, Executive Officers and Corporate Governance 

   80
       

Item 11.

Executive Compensation 

   88
       

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   102
       

Item 13.

Certain Relationships and Related Transactions, and Director Independence

   105
       

Item 14.

Principal Accountant Fees and Services

   107
       
PART IV      
       
Item 15. Exhibits and Financial Statement Schedules   108

 

 
 

 

 

 PART I

ITEM 1.    BUSINESS

Company Overview and Principal Products and Services

Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as we, us, or our), a Delaware corporation incorporated in December of 1990, is an environmental and environmental technology know-how company, which provides services through our two reportable segments as discussed below. The Company is also involved in the research and development (“R&D”) and marketing of medical isotope technology (“Technetium-99” or “Tc-99m”) by our Perma-Fix Medical S.A subsidiary.

 

We have grown through acquisitions and internal growth. Our goal is to continue to focus on the efficient operation of our facilities and on-site activities, to continue to evaluate strategic acquisitions, to continue the R&D of innovative technologies to expand company service offering and to treat nuclear waste, mixed waste, and industrial waste, and to continue R&D and marketing of medical isotope technology used in medical diagnostic testing by our Polish subsidiary, Perma-Fix Medical S.A. The Company is focusing on expansion into both commercial and international markets to help offset the uncertainties of government spending in the USA, from which a significant portion of the Company’s revenue is derived. This includes new services, new customers and increased market share in our current markets.

 

Segment Information and Foreign and Domestic Operations and Sales

The Company has two reportable segments. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, we define an operating segment as:

 

a business activity from which we may earn revenue and incur expenses;

whose operating results are regularly reviewed by the Chief Operating Officer to make decisions about resources to be allocated and assess its performance; and

for which discrete financial information is available.

 

TREATMENT SEGMENT reporting includes:

 

 

-

nuclear, low-level radioactive, mixed, hazardous and non-hazardous waste treatment, processing and disposal services primarily through four uniquely licensed (Nuclear Regulatory Commission or state equivalent) and permitted (Environmental Protection Agency (“EPA”) or state equivalent) treatment and storage facilities held by the following subsidiaries: Perma-Fix of Florida, Inc. (“PFF”), Diversified Scientific Services, Inc., (“DSSI”), Perma-Fix Northwest Richland, Inc. (“PFNWR”), and East Tennessee Materials & Energy Corporation (“M&EC”). The presence of nuclear and low-level radioactive constituents within the waste streams processed by this segment creates different and unique operational, processing and permitting/licensing requirements; and

 

-

R&D activities to identify, develop and implement innovative waste processing techniques for problematic waste streams.

 

For 2014, the Treatment Segment accounted for $42,343,000 or 74.2% of total revenue from continuing operations, as compared to $35,540,000 or 47.8% of total revenue from continuing operations for 2013. See “– Dependence Upon a Single or Few Customers” for further details and a discussion as to our Segments’ contracts with the federal government or with others as a subcontractor to the federal government.

 

SERVICES SEGMENT reporting 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; and

 

 
1

 

 

 

o

global technical services providing consulting, engineering, project management, waste management, environmental, and D&D field, technical, and management personnel and services to commercial and government customers;

 

-

Nuclear services, which include:

 

o

technology-based services including engineering, 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;

 

For 2014, the Services Segment accounted for $14,722,000 or 25.8% of total revenue from continuing operations, as compared to $38,873,000 or 52.2% of total revenue from continuing operations for 2013. See “ – Dependence Upon a Single or Few Customers” for further details and a discussion as to our Segments’ contracts with the federal government or with others as a subcontractor to the federal government

 

Our segments provide services to research institutions, commercial companies, public utilities, and governmental agencies nationwide, including the U.S. Department of Energy (“DOE”) and U.S. Department of Defense (“DOD”). The distribution channels for our services are through direct sales to customers or via intermediaries.

 

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 (“PF Medical”) organized by the Company (incorporated in January 2014). PF Medical’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 or “Tc-99m” for medical diagnostic applications. Since the acquired shell company (now named as Perma-Fix Medical S.A.) does not meet the definition of a business under Accounting Standards Codification (“ASC”) 805, “Business Combinations”, the transaction was accounted for as a capital transaction. The primary purpose of PF Medical S.A. (which we own 64%) is to provide a financing vehicle for the development and marketing of its medical isotope (“Tc-99m”) technology used in medical diagnostic testing for potential use throughout the world.

 

Our corporate office is located at 8302 Dunwoody Place, Suite 250, Atlanta, Georgia 30350.

 

Foreign Revenue

Our consolidated revenue from continuing operations for 2014 and 2013 included approximately $147,000 or 0.3% and $144,000 or 0.2%, respectively, from our United Kingdom operation, Perma-Fix UK Limited.

 

Our consolidated revenue from continuing operations for 2014 and 2013 included approximately $1,855,000 or 3.3% and $4,409,000 or 5.9%, respectively, from customers located in Canada.

 

Importance of Patents, Trademarks and Proprietary Technology

We do not believe we are dependent on any particular trademark in order to operate our business or any significant segment thereof. We have received registration to May 2022 and December 2020, for the service marks “Perma-Fix Environmental Services” and “Perma-Fix”, respectively. In addition, we have received registration for three service marks for our Safety & Ecology Holdings Corporation and its subsidiaries (collectively known as “Safety and Ecology Corporation” or “SEC”) to periods ranging from 2016 to 2017.

 

 
2

 

 

We are active in the R&D of technologies that allow us to address certain of our customers' environmental needs. To date, our R&D efforts have resulted in the granting of twelve active patents and the filing of several applications for which patents are pending. These twelve active patents have remaining lives ranging from approximately five to fourteen years. Our R&D efforts have also resulted in the granting of a patent for the new technology for the production of Technetium-99 (“Tc-99m”) for certain types of medical applications, which we have granted a worldwide exclusive license to our subsidiary, Perma-Fix Medical S.A. This patent is effective through March 2032.

 

Our flagship technology, the Perma-Fix Process, is a proprietary, cost effective, treatment technology that converts hazardous waste into non-hazardous material. We have also developed the Perma-Fix II process, a multi-step treatment process that converts hazardous organic components into non-hazardous material. The Perma-Fix II process is particularly important to our mixed waste strategy. The Perma-Fix II process is designed to remove certain types of organic hazardous constituents from soils or other solids and sludges (“Solids”) through a water-based system. Until development of this Perma-Fix II process, we were not aware of a relatively simple and inexpensive process that would remove the organic hazardous constituents from Solids without elaborate and expensive equipment or expensive treating agents. Due to the organic hazardous constituents involved, the disposal options for such materials are limited, resulting in high disposal cost when there is a disposal option available. By reducing the organic hazardous waste constituents in the Solids to a level where the Solids meet Land Disposal Requirements, the generator's disposal options for such waste are substantially increased, allowing the generator to dispose of such waste at substantially less cost. We began commercial use of the Perma-Fix II process in 2000. However, changes to current environmental laws and regulations could limit the use of the Perma-Fix II process or the disposal options available to the generator.

 

Permits and Licenses

Waste management service companies are subject to extensive, evolving and increasingly stringent federal, state, and local environmental laws and regulations. Such federal, state and local environmental laws and regulations govern our activities regarding the treatment, storage, processing, disposal and transportation of hazardous, non-hazardous and radioactive wastes, and require us to obtain and maintain permits, licenses and/or approvals in order to conduct certain of our waste activities. We are dependent on our permits and licenses discussed below in order to operate our businesses. Failure to obtain and maintain our permits or approvals would have a material adverse effect on us, our operations, and financial condition. The permits and licenses have terms ranging from one to ten years, and provided that we maintain a reasonable level of compliance, renew with minimal effort, and cost. Historically, there have been no compelling challenges to the permit and license renewals. We believe that these permit and license requirements represent a potential barrier to entry for possible competitors.

 

PFF, located in Gainesville, Florida, operates its hazardous, mixed and low-level radioactive waste activities under a RCRA (“Resource Conservation and Recovery Act”) Part B permit, Toxic Substances Control Act (“TSCA”) authorization, Restricted RX Drug Distributor-Destruction license, and a radioactive materials license issued by the State of Florida.

 

DSSI, located in Kingston, Tennessee, conducts mixed and low-level radioactive waste storage and treatment activities under RCRA Part B permits and a radioactive materials license issued by the State of Tennessee Department of Environment and Conservation.  Co-regulated TSCA Polychlorinated Biphenyl (“PCB”) wastes are also managed for PCB destruction under the U.S. EPA Approval effective June 2008.

 

M&EC, located in Oak Ridge, Tennessee, performs hazardous, low-level radioactive and mixed waste storage and treatment operations under a RCRA Part B permit and a radioactive materials license issued by the State of Tennessee Department of Environment and Conservation.  Co-regulated TSCA PCB wastes are also managed under EPA Approvals applicable to site-specific treatment units.

 

 
3

 

 

PFNWR, located in Richland, Washington, operates a low-level radioactive waste processing facility as well as a mixed waste processing facility. Radioactive material processing is authorized under radioactive materials licenses issued by the State of Washington and mixed waste processing is additionally authorized under a RCRA Part B permit with TSCA authorization issued jointly by the State of Washington and the EPA.

 

The combination of a RCRA Part B hazardous waste permit, TSCA authorization, and a radioactive materials license, as held by PFF, DSSI M&EC, and PFNWR are very difficult to obtain for a single facility and make these facilities unique.

 

Backlog

The Treatment Segment of our Company maintains a backlog of stored waste, which represents waste that has not been processed. The backlog is principally a result of the timing and complexity of the waste being brought into the facilities and the selling price per container. As of December 31, 2014, our Treatment Segment had a backlog of approximately $9,228,000, as compared to approximately $7,695,000 as of December 31, 2013. Additionally, the time it takes to process waste from the time it arrives may increase due to the types and complexities of the waste we are currently receiving. We typically process our backlog during periods of low waste receipts, which historically has been in the first or fourth quarter.

 

Dependence Upon a Single or Few Customers

Our segments have significant relationships with the federal government, and continue to enter into contracts, directly as the prime contractor or indirectly as a subcontractor, with the federal government. The contracts that we are a party to with the federal government or with others as a subcontractor to the federal government generally provide that the government may terminate or renegotiate the contracts on 30 days notice, at the government's election. Our inability to continue under existing contracts that we have with the federal government (directly or indirectly as a subcontractor) could have a material adverse effect on our operations and financial condition.

 

We performed services relating to waste generated by the federal government, either directly as a prime contractor or indirectly as a subcontractor to the federal government, representing approximately $34,780,000 or 60.9% of our total revenue from continuing operations during 2014, as compared to $47,557,000 or 63.9% of our total revenue from continuing operations during 2013.

 

The following customers accounted for 10% or more of the total revenues generated from continuing operations for twelve months ended December 31, 2014 and 2013:

 

       

Total

   

% of Total

 

Customer

 

Year

 

Revenue

   

Revenue

 

United States Enrichment Corporation ("USEC")

 

2014

  $ 10,272,000       18.0 %
   

2013

  $ 2,037,000       2.7 %
                     

CH Plateau Remediation Company ("CHPRC")

 

2014

  $ 5,762,000       10.1 %
   

2013

  $ 19,922,000       26.8 %

 

As our revenues are project/event based where the completion of one contract with a specific customer may be replaced by another contract with a different customer from year to year, we do not believe the loss of one specific customer from one year to the next will generally have a material adverse effect on our operations and financial condition.

 

Competitive Conditions

The Treatment Segment’s largest competitor is EnergySolutions that operates treatment and disposal facilities in Oak Ridge, TN and Clive, UT. Waste Control Specialists (“WCS”), which has newly licensed disposal capabilities in Andrews, TX, has recently emerged as a competitor in the treatment market and is gaining market share. Perma-Fix now has two options for disposal of treated nuclear waste and thus mitigates the prior risk of EnergySolutions providing the only outlet for disposal. The Treatment Segment treats and disposes of DOE generated wastes largely at DOE owned sites. Smaller competitors are also present in the market place; however, they do not present a significant challenge at this time. Our Treatment Segment currently solicits business primarily on a North American basis with both government and commercial clients; however, we are also focusing on emerging international markets for additional work.

 

 
4

 

 

We believe that the permitting and licensing requirements, and the cost to obtain such permits, are barriers to the entry of hazardous waste and radioactive and mixed waste activities as presently operated by our waste treatment subsidiaries. If the permit requirements for hazardous waste treatment, storage, and disposal (“TSD”) activities and/or the licensing requirements for the handling of low level radioactive matters are eliminated or if such licenses or permits were made less rigorous to obtain, such would allow companies to enter into these markets and provide greater competition.

 

Our Services Segment is engaged in highly competitive businesses in which a number of our government contracts and some of our commercial contracts are awarded through competitive bidding processes. The extent of such competition varies according to the industries and markets in which our customers operate as well as the geographic areas in which we operate. The degree and type of competition we face is also often influenced by the project specification being bid on and the different specialty skill sets of each bidder for which our Services Segment competes, especially projects subject to the governmental bid process. We also have the ability to prime federal government small business procurements (small business set asides). Large businesses are more willing to team with small businesses in order to be part of these often substantial procurements. There are a number of qualified small businesses in our market that will provide intense competition that may provide a challenge to our ability to maintain strong growth rates and acceptable profit margins. For international business there are additional competitors, many from within the country the work is to be performed, making winning work in foreign countries more challenging. If our Services Segment is unable to meet these competitive challenges, it could lose market share and experience an overall reduction in its profits.

 

Certain Environmental Expenditures and Potential Environmental Liabilities

Environmental Liabilities

We have four remediation projects, which are currently in progress at our Perma-Fix of Dayton, Inc. (“PFD”), Perma-Fix of Memphis, Inc. (“PFM”), Perma-Fix of Michigan, Inc. (“PFMI”) and Perma-Fix South Georgia, Inc. (“PFSG”) subsidiaries, which are all included within our discontinued operations. These remediation projects principally entail the removal/remediation of contaminated soil and, in most cases, the remediation of surrounding ground water. All of the remedial clean-up projects were an issue for that facility for years prior to our acquisition of the facility and were recognized pursuant to a business combination and recorded as part of the purchase price allocation to assets acquired and liabilities assumed. Three of the facilities (PFD, PFM, and PFSG) are RCRA permitted facilities, and as a result, the remediation activities are closely reviewed and monitored by the applicable state regulators.

 

At December 31, 2014, we had total accrued environmental remediation liabilities of $1,016,000, of which $728,000 is recorded as a current liability, which reflects a decrease of $15,000 from the December 31, 2013 balance of $1,031,000. The net decrease of $15,000 represents payments on remediation projects at the PFSG location.  

 

No insurance or third party recovery was taken into account in determining our cost estimates or reserves. 

 

The nature of our business exposes us to significant cost to comply with governmental environmental laws, rules and regulations and risk of liability for damages. Such potential liability could involve, for example, claims for cleanup costs, personal injury or damage to the environment in cases where we are held responsible for the release of hazardous materials; claims of employees, customers or third parties for personal injury or property damage occurring in the course of our operations; and claims alleging negligence or professional errors or omissions in the planning or performance of our services. In addition, we could be deemed a responsible party for the costs of required cleanup of any property, which may be contaminated by hazardous substances generated or transported by us to a site we selected, including properties owned or leased by us. We could also be subject to fines and civil penalties in connection with violations of regulatory requirements.

 

 
5

 

 

Research and Development

Innovation and technical know-how by our operations is very important to the success of our business. Our goal is to discover, develop and bring to market innovative ways to process waste that address unmet environmental needs. We conduct research internally, and also through collaborations with other third parties. The majority of our research activities are performed as we receive new and unique waste to treat. We feel that our investments in research have been rewarded by the discovery of the Perma-Fix Process and the Perma-Fix II process. Our competitors also devote resources to research and development and many such competitors have greater resources at their disposal than we do. We have estimated that during 2014 and 2013, we spent approximately $1,315,000 and $1,764,000, respectively, in research and development activities, of which approximately $759,000 and $585,000, respectively, were related to the R&D of the medical isotope technology.

 

Number of Employees

In our service-driven business, our employees are vital to our success. We believe we have good relationships with our employees. As of December 31, 2014, we employed approximately 281 employees, of whom 275 are full-time employees, three are part-time employees, and three are temporary employees. Seven of the full time employees are unionized and covered by a collective bargaining agreement.

 

Governmental Regulation 

Environmental companies and their customers are subject to extensive and evolving environmental laws and regulations by a number of national, state and local environmental, safety and health agencies, the principal of which being the EPA. These laws and regulations largely contribute to the demand for our services. Although our customers remain responsible by law for their environmental problems, we must also comply with the requirements of those laws applicable to our services. We cannot predict the extent to which our operations may be affected by future enforcement policies as applied to existing laws or by the enactment of new environmental laws and regulations. Moreover, any predictions regarding possible liability are further complicated by the fact that under current environmental laws we could be jointly and severally liable for certain activities of third parties over whom we have little or no control. Although we believe that we are currently in substantial compliance with applicable laws and regulations, we could be subject to fines, penalties or other liabilities or could be adversely affected by existing or subsequently enacted laws or regulations. The principal environmental laws affecting our customers and us are briefly discussed below.

 

The Resource Conservation and Recovery Act of 1976, as amended (“RCRA”)

RCRA and its associated regulations establish a strict and comprehensive permitting and regulatory program applicable to hazardous waste. The EPA has promulgated regulations under RCRA for new and existing treatment, storage and disposal facilities including incinerators, storage and treatment tanks, storage containers, storage and treatment surface impoundments, waste piles and landfills. Every facility that treats, stores or disposes of hazardous waste must obtain a RCRA permit or must obtain interim status from the EPA, or a state agency, which has been authorized by the EPA to administer its program, and must comply with certain operating, financial responsibility and closure requirements.

 

The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA,” also referred to as the “Superfund Act”)

CERCLA governs the cleanup of sites at which hazardous substances are located or at which hazardous substances have been released or are threatened to be released into the environment. CERCLA authorizes the EPA to compel responsible parties to clean up sites and provides for punitive damages for noncompliance. CERCLA imposes joint and several liabilities for the costs of clean up and damages to natural resources.

 

Health and Safety Regulations

The operation of our environmental activities is subject to the requirements of the Occupational Safety and Health Act (“OSHA”) and comparable state laws. Regulations promulgated under OSHA by the Department of Labor require employers of persons in the transportation and environmental industries, including independent contractors, to implement hazard communications, work practices and personnel protection programs in order to protect employees from equipment safety hazards and exposure to hazardous chemicals.

 

 
6

 

 

Atomic Energy Act

The Atomic Energy Act of 1954 governs the safe handling and use of Source, Special Nuclear and Byproduct materials in the U.S. and its territories. This act authorized the Atomic Energy Commission (now the Nuclear Regulatory Commission “USNRC”) to enter into “Agreements with States to carry out those regulatory functions in those respective states except for Nuclear Power Plants and federal facilities like the VA hospitals and the DOE operations.” The State of Florida (with the USNRC oversight), Office of Radiation Control, regulates the radiological program of the PFF facility, and the State of Tennessee (with the USNRC oversight), Tennessee Department of Radiological Health, regulates the radiological program of the DSSI and M&EC facilities. The State of Washington (with the USNRC oversight) Department of Health, regulates the radiological operations of the PFNWR facility.

 

Other Laws

Our activities are subject to other federal environmental protection and similar laws, including, without limitation, the Clean Water Act, the Clean Air Act, the Hazardous Materials Transportation Act and the Toxic Substances Control Act. Many states have also adopted laws for the protection of the environment which may affect us, including laws governing the generation, handling, transportation and disposition of hazardous substances and laws governing the investigation and cleanup of, and liability for, contaminated sites. Some of these state provisions are broader and more stringent than existing federal law and regulations. Our failure to conform our services to the requirements of any of these other applicable federal or state laws could subject us to substantial liabilities which could have a material adverse effect on us, our operations and financial condition. In addition to various federal, state and local environmental regulations, our hazardous waste transportation activities are regulated by the U.S. Department of Transportation, the Interstate Commerce Commission and transportation regulatory bodies in the states in which we operate. We cannot predict the extent to which we may be affected by any law or rule that may be enacted or enforced in the future, or any new or different interpretations of existing laws or rules. 

 

ITEM 1A.     RISK FACTORS

 

The following are certain risk factors that could affect our business, financial performance, and results of operations. These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Form 10-K, as the forward-looking statements are based on current expectations, and actual results and conditions could differ materially from the current expectations. Investing in our securities involves a high degree of risk, and before making an investment decision, you should carefully consider these risk factors as well as other information we include or incorporate by reference in the other reports we file with the Securities and Exchange Commission (the “Commission”).

 

Risks Relating to our Operations

 

Failure to maintain our financial assurance coverage that we are required to have in order to operate our permitted treatment, storage and disposal facilities could have a material adverse effect on us.

American International Group (“AIG”) provides our finite risk insurance policies which provide financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure of those facilities. We are required to provide and to maintain financial assurance that guarantees to the state that in the event of closure, our permitted facilities will be closed in accordance with the regulations. Our initial policy provides a maximum of $39,000,000 of financial assurance coverage. We also maintain a financial assurance policy for our PFNWR facility, which provides a maximum coverage of $8,200,000. In the event that we are unable to obtain or maintain our financial assurance coverage for any reason, this could materially impact our operations and our permits which we are required to have in order to operate our treatment, storage, and disposal facilities

 

If we cannot maintain adequate insurance coverage, we will be unable to continue certain operations.

Our business exposes us to various risks, including claims for causing damage to property and injuries to persons that may involve allegations of negligence or professional errors or omissions in the performance of our services. Such claims could be substantial. We believe that our insurance coverage is presently adequate and similar to, or greater than, the coverage maintained by other companies in the industry of our size. If we are unable to obtain adequate or required insurance coverage in the future, or if our insurance is not available at affordable rates, we would violate our permit conditions and other requirements of the environmental laws, rules, and regulations under which we operate. Such violations would render us unable to continue certain of our operations. These events would have a material adverse effect on our financial condition.

 

 
7

 

 

The inability to maintain existing government contracts or win new government contracts over an extended period could have a material adverse effect on our operations and adversely affect our future revenues.

A material amount of our segments’ revenues are generated through various U.S. government contracts or subcontracts involving the U.S. government. Our revenues from governmental contracts and subcontracts relating to governmental facilities within our segments were approximately $34,780,000 or 60.9% and $47,557,000 or 63.9%, of our consolidated operating revenues from continuing operations for 2014 and 2013, respectively. Most of our government contracts or our subcontracts granted under government contracts are awarded through a regulated competitive bidding process. Some government contracts are awarded to multiple competitors, which increase overall competition and pricing pressure and may require us to make sustained post-award efforts to realize revenues under these government contracts. All contracts with, or subcontracts involving, the federal government are terminable, or subject to renegotiation, by the applicable governmental agency on 30 days notice, at the option of the governmental agency. If we fail to maintain or replace these relationships, or if a material contract is terminated or renegotiated in a manner that is materially adverse to us, our revenues and future operations could be materially adversely affected.

 

Our existing and future customers may reduce or halt their spending on nuclear services with outside vendors, including us.

A variety of factors may cause our existing or future customers (including the federal government) to reduce or halt their spending on nuclear services from outside vendors, including us. These factors include, but are not limited to:

 

 

accidents, terrorism, natural disasters or other incidents occurring at nuclear facilities or involving shipments of nuclear materials;

 

failure of the federal government to approve necessary budgets, or to reduce the amount of the budget necessary, to fund remediation of DOE and DOD sites;

 

civic opposition to or changes in government policies regarding nuclear operations;

 

a reduction in demand for nuclear generating capacity; or

 

failure to perform under existing contracts, directly or indirectly, with the federal government.

 

These events could result in or cause the federal government to terminate or cancel its existing contracts involving us to treat, store or dispose of contaminated waste and/or to perform remediation projects, at one or more of the federal sites since all contracts with, or subcontracts involving, the federal government are terminable upon or subject to renegotiation at the option of the government on 30 days notice. These events also could adversely affect us to the extent that they result in the reduction or elimination of contractual requirements, lower demand for nuclear services, burdensome regulation, disruptions of shipments or production, increased operational costs or difficulties or increased liability for actual or threatened property damage or personal injury.

 

Economic downturns and/or reductions in government funding could have a material negative impact on our businesses.

Demand for our services has been, and we expect that demand will continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions, reductions in the budget for spending to remediate federal sites due to numerous reasons, including, without limitation, the substantial deficits that the federal government has and is continuing to incur. During economic downturns and large budget deficits that the federal government and many states are experiencing, the ability of private and government entities to spend on nuclear services may decline significantly. Our operations depend, in large part, upon governmental funding, particularly funding levels at the DOE. Significant reductions in the level of governmental funding (for example, the annual budget of the DOE) or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows.

 

 
8

 

 

The loss of one or a few customers could have an adverse effect on us.

One or a few governmental customers or governmental related customers have in the past, and may in the future, account for a significant portion of our revenue in any one year or over a period of several consecutive years, such as our CH Plateau Remediation Company subcontract which was completed effective September 30, 2013. Because customers generally contract with us for specific projects, we may lose these significant customers from year to year as their projects with us are completed. Our inability to replace the business with other similar significant projects could have an adverse effect on our business and results of operations.

 

As a government contractor, we are subject to extensive government regulation, and our failure to comply with applicable regulations could subject us to penalties that may restrict our ability to conduct our business.

Our governmental contracts, which are primarily with the DOE or subcontracts relating to DOE sites, are a significant part of our business. Allowable costs under U.S. government contracts are subject to audit by the U.S. government. If these audits result in determinations that costs claimed as reimbursable are not allowed costs or were not allocated in accordance with applicable regulations, we could be required to reimburse the U.S. government for amounts previously received.

 

Governmental contracts or subcontracts involving governmental facilities are often subject to specific procurement regulations, contract provisions and a variety of other requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable regulations and contractual provisions. If we fail to comply with any regulations, requirements or statutes, our existing governmental contracts or subcontracts involving governmental facilities could be terminated or we could be suspended from government contracting or subcontracting. If one or more of our governmental contracts or subcontracts are terminated for any reason, or if we are suspended or debarred from government work, we could suffer a significant reduction in expected revenues and profits. Furthermore, as a result of our governmental contracts or subcontracts involving governmental facilities, claims for civil or criminal fraud may be brought by the government or violations of these regulations, requirements or statutes.

 

We are a holding company and depend, in large part, on receiving funds from our subsidiaries to fund our indebtedness.

Because we are a holding company and operations are conducted through our subsidiaries, our ability to meet our obligations depends, in large part, on the operating performance and cash flows of our subsidiaries.

 

Loss of certain key personnel could have a material adverse effect on us.

Our success depends on the contributions of our key management, environmental and engineering personnel, especially Dr. Louis F. Centofanti, President and Chief Executive Officer. The loss of Dr. Centofanti could have a material adverse effect on our operations, revenues, prospects, and our ability to raise additional funds. Our future success depends on our ability to retain and expand our staff of qualified personnel, including environmental specialists and technicians, sales personnel, and engineers. Without qualified personnel, we may incur delays in rendering our services or be unable to render certain services. We cannot be certain that we will be successful in our efforts to attract and retain qualified personnel as their availability is limited due to the demand for hazardous waste management services and the highly competitive nature of the hazardous waste management industry. We do not maintain key person insurance on any of our employees, officers, or directors.

 

Changes in environmental regulations and enforcement policies could subject us to additional liability and adversely affect our ability to continue certain operations.

We cannot predict the extent to which our operations may be affected by future governmental enforcement policies as applied to existing laws, by changes to current environmental laws and regulations, or by the enactment of new environmental laws and regulations. Any predictions regarding possible liability under such laws are complicated further by current environmental laws which provide that we could be liable, jointly and severally, for certain activities of third parties over whom we have limited or no control.

 

 
9

 

 

Our Treatment Segment has limited end disposal sites to utilize to dispose of its waste which could significantly impact our results of operations.

Our Treatment Segment has limited options available for disposal of its waste. Currently, there are only two disposal sites for our low level radioactive waste we receive from non-governmental sites. If either of these disposal sites ceases to accept waste or closes for any reason or refuses to accept the waste of our Treatment Segment, for any reason, we would be limited to only the one remaining site to dispose of our nuclear waste. With only one end disposal site to dispose of our waste, we could be subject to significantly increased costs which could negatively impact our results of operations.

 

Our businesses subject us to substantial potential environmental liability.

Our business of rendering services in connection with management of waste, including certain types of hazardous waste, low-level radioactive waste, and mixed waste (waste containing both hazardous and low-level radioactive waste), subjects us to risks of liability for damages. Such liability could involve, without limitation:

 

 

claims for clean-up costs, personal injury or damage to the environment in cases in which we are held responsible for the release of hazardous or radioactive materials; and

  claims of employees, customers, or third parties for personal injury or property damage occurring in the course of our operations; and
  claims alleging negligence or professional errors or omissions in the planning or performance of our services.

 

Our operations are subject to numerous environmental laws and regulations. We have in the past, and could in the future, be subject to substantial fines, penalties, and sanctions for violations of environmental laws and substantial expenditures as a responsible party for the cost of remediating any property which may be contaminated by hazardous substances generated by us and disposed at such property, or transported by us to a site selected by us, including properties we own or lease.

 

As our operations expand, we may be subject to increased litigation, which could have a negative impact on our future financial results.

Our operations are highly regulated and we are subject to numerous laws and regulations regarding procedures for waste treatment, storage, recycling, transportation, and disposal activities, all of which may provide the basis for litigation against us. In recent years, the waste treatment industry has experienced a significant increase in so-called “toxic-tort” litigation as those injured by contamination seek to recover for personal injuries or property damage. We believe that, as our operations and activities expand, there will be a similar increase in the potential for litigation alleging that we have violated environmental laws or regulations or are responsible for contamination or pollution caused by our normal operations, negligence or other misconduct, or for accidents, which occur in the course of our business activities. Such litigation, if significant and not adequately insured against, could adversely affect our financial condition and our ability to fund our operations. Protracted litigation would likely cause us to spend significant amounts of our time, effort, and money. This could prevent our management from focusing on our operations and expansion.

 

Our operations are subject to seasonal factors, which cause our revenues to fluctuate.

We have historically experienced reduced revenues and losses during the first and fourth quarters of our fiscal years due to a seasonal slowdown in operations from poor weather conditions, overall reduced activities during these periods resulting from holiday periods, and finalization of government budgets during the fourth quarter of each year. During our second and third fiscal quarters there has historically been an increase in revenues and operating profits. If we do not continue to have increased revenues and profitability during the second and third fiscal quarters, this could have a material adverse effect on our results of operations and liquidity.

 

 
10

 

 

If environmental regulation or enforcement is relaxed, the demand for our services will decrease.

The demand for our services is substantially dependent upon the public's concern with, and the continuation and proliferation of, the laws and regulations governing the treatment, storage, recycling, and disposal of hazardous, non-hazardous, and low-level radioactive waste. A decrease in the level of public concern, the repeal or modification of these laws, or any significant relaxation of regulations relating to the treatment, storage, recycling, and disposal of hazardous waste and low-level radioactive waste would significantly reduce the demand for our services and could have a material adverse effect on our operations and financial condition. We are not aware of any current federal or state government or agency efforts in which a moratorium or limitation has been, or will be, placed upon the creation of new hazardous or radioactive waste regulations that would have a material adverse effect on us; however, no assurance can be made that such a moratorium or limitation will not be implemented in the future.

 

We and our customers operate in a politically sensitive environment, and the public perception of nuclear power and radioactive materials can affect our customers and us.

We and our customers operate in a politically sensitive environment. Opposition by third parties to particular projects can limit the handling and disposal of radioactive materials. Adverse public reaction to developments in the disposal of radioactive materials, including any high profile incident involving the discharge of radioactive materials, could directly affect our customers and indirectly affect our business. Adverse public reaction also could lead to increased regulation or outright prohibition, limitations on the activities of our customers, more onerous operating requirements or other conditions that could have a material adverse impact on our customers’ and our business.

 

We may be exposed to certain regulatory and financial risks related to climate change.

Climate change is receiving ever increasing attention from scientists and legislators alike. The debate is ongoing as to the extent to which our climate is changing, the potential causes of this change and its potential impacts. Some attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.

 

Presently there are no federally mandated greenhouse gas reduction requirements in the United States. However, there are a number of legislative and regulatory proposals to address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of federal and state actions to address global climate change could result in a variety of regulatory programs including potential new regulations. Any adoption by federal or state governments mandating a substantial reduction in greenhouse gas emissions could increase costs associated with our operations. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our financial position, operating results and cash flows.

 

We may not be successful in winning new business mandates from our government and commercial customers or international customers.

We must be successful in winning mandates from our government, commercial customers and international customers to replace revenues from projects that we have completed or that are nearing completion and to increase our revenues. Our business and operating results can be adversely affected by the size and timing of a single material contract.

 

The elimination or any modification of the Price-Anderson Acts indemnification authority could have adverse consequences for our business.

The Atomic Energy Act of 1954, as amended, or the AEA, comprehensively regulates the manufacture, use, and storage of radioactive materials. The Price-Anderson Act supports the nuclear services industry by offering broad indemnification to DOE contractors for liabilities arising out of nuclear incidents at DOE nuclear facilities. That indemnification protects DOE prime contractor, but also similar companies that work under contract or subcontract for a DOE prime contract or transporting radioactive material to or from a site. The indemnification authority of the DOE under the Price-Anderson Act was extended through 2025 by the Energy Policy Act of 2005.

 

 
11

 

 

Under certain conditions, the Price-Anderson Act’s indemnification provisions may not apply to our processing of radioactive waste at governmental facilities, and do not apply to liabilities that we might incur while performing services as a contractor for the DOE and the nuclear energy industry. If an incident or evacuation is not covered under Price-Anderson Act indemnification, we could be held liable for damages, regardless of fault, which could have an adverse effect on our results of operations and financial condition. If such indemnification authority is not applicable in the future, our business could be adversely affected if the owners and operators of new facilities fail to retain our services in the absence of commercial adequate insurance and indemnification.

 

We are engaged in highly competitive businesses and typically must bid against other competitors to obtain major contracts.

We are engaged in highly competitive business in which most of our government contracts and some of our commercial contracts are awarded through competitive bidding processes. We compete with national and regional firms with nuclear services practices, as well as small or local contractors. Some of our competitors have greater financial and other resources than we do, which can give them a competitive advantage. In addition, even if we are qualified to work on a new government contract, we might not be awarded the contract because of existing government policies designed to protect certain types of businesses and under-represented minority contractors. Although the Company has the ability to certify and bid government contract as a small business, there are a number of qualified small businesses in our market that will provide intense competition. Competition places downward pressure on our contract prices and profit margins. Intense competition is expected to continue for nuclear service contracts. If we are unable to meet these competitive challenges, we could lose market share and experience on overall reduction in our profits.

 

Our failure to maintain our safety record could have an adverse effect on our business.

Our safety record is critical to our reputation. In addition, many of our government and commercial customers require that we maintain certain specified safety record guidelines to be eligible to bid for contracts with these customers. Furthermore, contract terms may provide for automatic termination in the event that our safety record fails to adhere to agreed-upon guidelines during performance of the contract. As a result, our failure to maintain our safety record could have a material adverse effect on our business, financial condition and results of operations.

 

We may be unable to utilize loss carryforwards in the future.

We have approximately $5,553,000 and $50,224,000 in net operating loss carryforwards which will expire in various amounts starting in 2021 if not used against future federal and state income tax liabilities, respectively. Our net loss carryforwards are subject to various limitations. Our ability to use the net loss carryforwards depends on whether we are able to generate sufficient income in the future years. Further, our net loss carryforwards have not been audited or approved by the Internal Revenue Service.

 

If our permit or other intangible assets become further impaired, we may be required to record additional significant charge to earnings.

Under accounting principles generally accepted in the United States (“U.S. GAAP”), we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Our permits are tested for impairment at least annually (The Company has no goodwill as of December 31, 2014). Factors that may be considered a change in circumstances, indicating that the carrying value of our permit or other intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required, in the future, to record additional impairment charges in our financial statements, in which any impairment of our permit or other intangible assets is determined. Such impairment charges could negatively impact our results of operations.

 

We bear the risk of cost overruns in fixed-price contracts. We may experience reduced profits or, in some cases, losses under these contracts if costs increase above our estimates.

Our revenues may be earned under contracts that are fixed-price in nature. Fixed-price contracts expose us to a number of risks not inherent in cost-reimbursable contracts. Under fixed price and guaranteed maximum-price contracts, contract prices are established in part on cost and scheduling estimates which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of labor, equipment and materials, and other exigencies. If these estimates prove inaccurate, or if circumstances change such as unanticipated technical problems, difficulties in obtaining permits or approvals, changes in local laws or labor conditions, weather delays, cost of raw materials or our suppliers’ or subcontractors’ inability to perform, cost overruns may occur and we could experience reduced profits or, in some cases, a loss for that project. Errors or ambiguities as to contract specifications can also lead to cost-overruns.

 

 
12

 

 

Adequate bonding is necessary for us to win certain types of new work.

We are often required to provide performance bonds or other financial assurances to customers under fixed-price contracts, primarily within our Services Segment. These surety instruments indemnify the customer if we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain it due to insufficient liquidity or other reasons, we may not be able to pursue that project. We currently have a bonding facility but, the issuance of bonds under that facility is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new work could have a material adverse effect on our business, financial condition and results of operations.

 

Failure to maintain effective internal control over financial reporting or failure to remediate a material weakness in internal control over financial reporting could have a material adverse effect on our business, operating results, and stock price.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. We are required to satisfy the requirements of Section 404 of Sarbanes Oxley and the related rules of the Commission, which require, among other things, management to assess annually the effectiveness of our internal control over financial reporting. Management has determined that a material weakness, as described in Part II – Item 9A, “Controls and Procedures,” of this Annual Report, existed as of December 31, 2014. Accordingly, we have concluded that our internal control over financial reporting was not effective as of December 31, 2014. We are currently working to remediate this material weakness. If we are unable to effectively remediate this material weakness or we are otherwise unable to maintain adequate internal control over financial reporting, there is a reasonable possibility that a misstatement of our annual or interim financial statements will not be prevented or detected in a timely manner. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business, financial condition, and reputation could be harmed.

 

Risks Relating to our Intellectual Property

 

If we cannot maintain our governmental permits or cannot obtain required permits, we may not be able to continue or expand our operations.

We are a nuclear services and waste management company. Our business is subject to extensive, evolving, and increasingly stringent federal, state, and local environmental laws and regulations. Such federal, state, and local environmental laws and regulations govern our activities regarding the treatment, storage, recycling, disposal, and transportation of hazardous and non-hazardous waste and low-level radioactive waste. We must obtain and maintain permits or licenses to conduct these activities in compliance with such laws and regulations. Failure to obtain and maintain the required permits or licenses would have a material adverse effect on our operations and financial condition. If any of our facilities are unable to maintain currently held permits or licenses or obtain any additional permits or licenses which may be required to conduct its operations, we may not be able to continue those operations at these facilities, which could have a material adverse effect on us.

 

We believe our proprietary technology is important to us.

We believe that it is important that we maintain our proprietary technologies. There can be no assurance that the steps taken by us to protect our proprietary technologies will be adequate to prevent misappropriation of these technologies by third parties. Misappropriation of our proprietary technology could have an adverse effect on our operations and financial condition. Changes to current environmental laws and regulations also could limit the use of our proprietary technology.

 

 
13

 

 

Risks Relating to our Financial Position and Need for Financing

 

Breach of financial covenants in existing credit facility could result in a default, triggering repayment of outstanding debt under the credit facility.

Our credit facility with our bank contains financial covenants. A breach of any of these covenants could result in a default under our credit facility triggering our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. In the past, we had instances in which we failed to meet our quarterly fixed charge coverage ratio; however, these instances of non-compliance were waived by our lender. In the past, our lender also has amended the methodology in calculating the quarterly fixed charge coverage ratio and changed the minimum quarterly fixed charge coverage ratio requirement so we can meet our quarterly fixed charge coverage ratio. We met our fixed charge coverage ratio in each of the second to fourth quarters of 2014. Our lender waived the quarterly fixed charge coverage ratio testing requirement for the first quarter of 2014. If we fail to meet the minimum quarterly fixed charge coverage ratio requirement in the future and our lender does not waive the non-compliance or revise our covenant so that we are in compliance, our lender could accelerates the payment of our borrowings under our credit facility. In such event, we may not have sufficient liquidity to repay our debt under our credit facility and other indebtedness. 

 

Our amount of debt could adversely affect our operations.

At December 31, 2014, our aggregate consolidated debt was approximately $11,372,000 (net of debt discount of $137,000). Our Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011, as amended (“Amended Loan Agreement”) provides for a total Credit Facility commitment of $28,000,000, consisting of a $12,000,000 revolving line of credit and a term loan of $16,000,000. The maximum we can borrow under the revolving part of the Credit Facility is based on a percentage of the amount of our eligible receivables outstanding at any one time. As of December 31, 2014, we had no borrowings under the revolving part of our Credit Facility and borrowing availability of up to an additional $7,402,000 based on our outstanding eligible receivables. A lack of positive operating results could have material adverse consequences on our ability to operate our business. Our ability to make principal and interest payments, or to refinance indebtedness, will depend on both our and our subsidiaries' future operating performance and cash flow. Prevailing economic conditions, interest rate levels, and financial, competitive, business, and other factors affect us. Many of these factors are beyond our control.

 

Our substantial level of indebtedness could limit our financial and operating activities, and adversely affect our ability to incur additional debt to fund future needs.

We currently have a substantial amount of indebtedness. As a result, this level of indebtedness could, among other things:

 

require us to dedicate a substantial portion of our cash flow to the payment of principal and interest, thereby reducing the funds available for operations and future business opportunities;

 

make it more difficult for us to satisfy our obligations;

 

limit our ability to borrow additional money if needed for other purposes, including working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes, on satisfactory terms or at all;

 

limit our ability to adjust to changing economic, business and competitive conditions;

 

place us at a competitive disadvantage with competitors who may have less indebtedness or greater access to financing;

 

make us more vulnerable to an increase in interest rates, a downturn in our operating performance or a decline in general economic conditions; and

 

make us more susceptible to changes in credit ratings, which could impact our ability to obtain financing in the future and increase the cost of such financing.

 

 
14

 

 

Any of the foregoing could adversely impact our operating results, financial condition, and liquidity. Our ability to continue our operations depends on our ability to generate profitable operations or complete equity or debt financings to increase our capital.

 

Risks Relating to our Common Stock

 

Issuance of substantial amounts of our Common Stock could depress our stock price.

Any sales of substantial amounts of our Common Stock in the public market could cause an adverse effect on the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities. The issuance of our Common Stock will result in the dilution in the percentage membership interest of our stockholders and the dilution in ownership value. As of December 31, 2014, we had 11,468,843 shares of Common Stock outstanding.

 

In addition, as of December 31, 2014, we had outstanding options to purchase 239,023 shares of Common Stock at exercise prices from $2.79 to $14.75 per share and two outstanding warrants to purchase up to an aggregate 70,000 shares of Common Stock at exercise price of $2.23 per share. Further, our preferred share rights plan, if triggered, could result in the issuance of a substantial amount of our Common Stock. The existence of this quantity of rights to purchase our Common Stock under the preferred share rights plan could result in a significant dilution in the percentage ownership interest of our stockholders and the dilution in ownership value. Future sales of the shares issuable could also depress the market price of our Common Stock.

 

We do not intend to pay dividends on our Common Stock in the foreseeable future.

Since our inception, we have not paid cash dividends on our Common Stock, and we do not anticipate paying any cash dividends in the foreseeable future. Our Credit Facility prohibits us from paying cash dividends on our Common Stock.

 

The price of our Common Stock may fluctuate significantly, which may make it difficult for our stockholders to resell our Common Stock when a stockholder wants or at prices a stockholder finds attractive.

The price of our Common Stock on the Nasdaq Capital Markets constantly changes. We expect that the market price of our Common Stock will continue to fluctuate. This may make it difficult for our stockholders to resell the Common Stock when a stockholder wants or at prices a stockholder finds attractive.

 

Future issuance of our Common Stock could adversely affect the price of our Common Stock, our ability to raise funds in new stock offerings and could dilute the percentage ownership of our common stockholders.

Future sales of substantial amounts of our Common Stock or equity-related securities in the public market, or the perception that such sales or conversions could occur, could adversely affect prevailing trading prices of our Common Stock and could dilute the value of Common Stock held by our existing stockholders. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock or the availability of shares of Common Stock for future sale will have on the trading price of our Common Stock. Such future sales or conversions could also significantly reduce the percentage ownership of our common stockholders.

 

Delaware law, certain of our charter provisions, our stock option plans, outstanding warrants and our Preferred Stock may inhibit a change of control under circumstances that could give you an opportunity to realize a premium over prevailing market prices.

We are a Delaware corporation governed, in part, by the provisions of Section 203 of the General Corporation Law of Delaware, an anti-takeover law. In general, Section 203 prohibits a Delaware public corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. As a result of Section 203, potential acquirers may be discouraged from attempting to effect acquisition transactions with us, thereby possibly depriving our security holders of certain opportunities to sell, or otherwise dispose of, such securities at above-market prices pursuant to such transactions. Further, certain of our option plans provide for the immediate acceleration of, and removal of restrictions from, options and other awards under such plans upon a “change of control” (as defined in the respective plans). Such provisions may also have the result of discouraging acquisition of us.

 

 
15

 

 

We have authorized and unissued 18,214,492 (which includes shares issuable under outstanding options to purchase 239,023 shares of our Common Stock and two warrants to purchase 70,000 shares of our Common Stock) shares of Common Stock and 2,000,000 shares of Preferred Stock as of December 31, 2013 (which includes 600,000 shares of our Preferred Stock reserved for issuance under our preferred share rights plan). These unissued shares could be used by our management to make it more difficult, and thereby discourage an attempt to acquire control of us.

 

Our Preferred Share Rights Plan may adversely affect our stockholders.

In May 2008, we adopted a preferred share rights plan (the “Rights Plan”), designed to ensure that all of our stockholders receive fair and equal treatment in the event of a proposed takeover or abusive tender offer. However, the Rights Plan may also have the effect of deterring, delaying, or preventing a change in control that might otherwise be in the best interests of our stockholders.

 

In general, under the terms of the Rights Plan, subject to certain limited exceptions, if a person or group acquires 20% or more of our Common Stock or a tender offer or exchange offer for 20% or more of our Common Stock is announced or commenced, our other stockholders may receive upon exercise of the rights (the “Rights”) issued under the Rights Plan the number of shares our Common Stock or of one-one hundredths of a share of our Series A Junior Participating Preferred Stock, par value $.001 per share, having a value equal to two times the purchase price of the Right. In addition, if we are acquired in a merger or other business combination transaction in which we are not the survivor or more than 50% of our assets or earning power is sold or transferred, then each holder of a Right (other than the acquirer) will thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the purchase price of the Right. The initial purchase price of each Right was $13, subject to adjustment and adjustment for the reverse stock split.

 

The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The Rights may be redeemed by us at $0.001 per Right at any time before any person or group acquires 20% or more of our outstanding common stock. The rights should not interfere with any merger or other business combination approved by our board of directors. The Rights expire on May 2, 2018. 

 

ITEM 1B.     UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2.        PROPERTIES

 

Our principal executive office is in Atlanta, Georgia. Our Business Center is located in Knoxville, Tennessee. Our Treatment Segment facilities are located in Gainesville, Florida; Kingston, Tennessee; Oak Ridge, Tennessee, and Richland, Washington. Our Services Segment operates subsidiaries located in Knoxville, Tennessee and Blaydon On Tyne, England, of which we lease all of the properties. We have a facility located in Valdosta, Georgia, which is included within our discontinued operations. On August 14, 2013, our Valdosta, Georgia facility incurred fire damage which has left it non-operational at this time. The Company is currently evaluating options regarding the future operation of this facility. We continue to market this facility for sale. We also maintain properties in Brownstown, Michigan and Memphis, Tennessee, which are all non-operational and are included within our discontinued operations.

 

Three of our facilities are subject to mortgages as granted to our senior lender (Kingston, Tennessee; Gainesville, Florida; and Richland, Washington).  

 

 
16

 

 

The Company currently leases properties in the following locations:

 

Location

 

Square Footage

 

Expiration of Lease

Knoxville, TN (Safety and Ecology Corporation or "SEC")

    20,850  

May 31, 2018

Knoxville, TN (SEC)

    5,000  

September 30, 2017

Blaydon On Tyne, England (Perma-Fix UK Limited)

    1,000  

Monthly

Pittsburgh, PA (SEC)

    640  

Monthly

Newport, KY (SEC)

    1,566  

Monthly

Oak Ridge, TN (M&EC)

    150,000  

January 31, 2018

Atlanta, GA (Corporate)

    6,499  

February 28, 2018

 

 

We believe that the above facilities currently provide adequate capacity for our operations and that additional facilities are readily available in the regions in which we operate, which could support and supplement our existing facilities.

 

ITEM 3.        LEGAL PROCEEDINGS

 

Perma-Fix of Northwest Richland, Inc. (“PFNWR”)

PFNWR filed suit (PFNWR vs. Philotechnics, Ltd.) in the U.S. District Court, Eastern District of Tennessee, asserting contract breach and seeking specific performance of the “return-of-waste clause” in the brokerage contract between a prior facility owner (now owned by PFNWR) and Philotechnics, Ltd. (“Philo”), as to certain non-conforming waste Philo delivered for treatment from Philo’s customer, El du Pont de Nemours and Company (“DuPont”), to the PFNWR facility, before PFNWR acquired the facility. Our complaint seeked an order that Philo: (A) specifically perform its obligations under the contract’s “return-of-waste” clause by physically taking custody of and by removing the nonconforming waste, (B) pay PFNWR all additional costs of maintaining and managing the waste, and (C) pay PFNWR the cost to treat and dispose of the nonconforming waste so as to allow PFNWR to compliantly dispose of that waste offsite. PFNWR has processed, packaged, transported from the facility, and disposed of the non-conforming waste. The case was mediated on October 7, 2014 and all parties agreed to dismiss any remaining claims with no further action pending. The case was officially resolved on October 14, 2014.

 

ITEM 4.        MINE SAFETY DISCLOSURE

 

Not Applicable.

 

PART II

 

ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our Common Stock is traded on the NASDAQ Capital Markets (“NASDAQ”) under the symbol “PESI”. The following table sets forth the high and low market trade prices quoted for the Common Stock during the periods shown. The source of such quotations and information is the NASDAQ online trading history reports.

 

      2014     2013  
     

Low

   

High

   

Low

   

High

 

Common Stock

1st Quarter

  $ 2.81     $ 5.15     $ 3.14     $ 5.25  
 

2nd Quarter

    3.74       5.86       1.80       4.30  
 

3rd Quarter

    3.56       5.19       1.96       4.00  
 

4th Quarter

    3.65       5.01       2.85       4.28  

 

As of March 2, 2015, there were approximately 228 stockholders of record of our Common Stock, including brokerage firms and/or clearing houses holding shares of our Common Stock for their clientele (with each brokerage house and/or clearing house being considered as one holder). However, the total number of beneficial stockholders as of March 2, 2015, was approximately 2,911.

 

 
17

 

 

Since our inception, we have not paid any cash dividends on our Common Stock and have no dividend policy. Our Amended Loan Agreement prohibits us from paying any cash dividends on our Common Stock without prior approval from the lender. We do not anticipate paying cash dividends on our outstanding Common Stock in the foreseeable future.

 

No sales of unregistered securities occurred during 2014. There were no purchases made by us or on behalf of us or any of our affiliated members of shares of our Common Stock during 2014.

 

We have adopted a preferred share rights plan, which is designed to protect us against certain creeping acquisitions, open market purchases, and certain mergers and other combinations with acquiring companies. See Item 1A. - Risk Factors – “Our Preferred Share Rights Plan may adversely affect our stockholders” as to further discussion relating to the terms of our preferred share rights plan.

 

Reverse Stock Split and Reduction in Authorized Shares

During September, 2013, our stockholders approved a reverse stock split within the range of 1-for-2 to 1-for-7 of our outstanding common stock and shares subject to outstanding options at any time prior to November 8, 2013, and authorized our Board of Directors, without further action of the stockholders, to amend our Restated Certificate of Incorporation to effect the reverse stock split, with the exact ratio and effective date to be determined by the Board. The Board approved the ratio of 1-for-5 for the reverse stock split, with the reverse stock split effective at 12:01 a.m. on October 15, 2013.

 

On September 18, 2014 at the Company’s 2014 Annual Meeting of Stockholders, the Company’s stockholders approved an amendment to the Company’s Restated Certificate of Incorporation to reduce the number of shares of Common Stock the Company is authorized to issue from 75,000,000 to 30,000,000. This amendment became effective on September 19, 2014.

 

ITEM 6.        SELECTED FINANCIAL DATA

 

Not required under Regulation S-K for smaller reporting companies.

 

ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained within this “Management's Discussion and Analysis of Financial Condition and Results of Operations” may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, the “Private Securities Litigation Reform Act of 1995”). See “Special Note regarding Forward-Looking Statements” contained in this report.

 

Management's discussion and analysis is based, among other things, upon our audited consolidated financial statements and includes our accounts and the accounts of our wholly-owned subsidiaries, after elimination of all significant intercompany balances and transactions.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 of this report.

 

Revision of Prior Period Financial Statements

During the Company’s preparation of the 2014 income tax provision, the Company determined that certain deferred tax liabilities related to acquired indefinite-lived permits from the Company’s acquisition of our DSSI subsidiary in 2000 and our M&EC subsidiary in 2001 were not recorded. Upon adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” by the Company in 2002 (now ASC 350, “Intangibles-Goodwill and Others”), the acquired permits were determined to be indefinite-lived intangible assets. As a result, deferred tax liabilities should have been established for these indefinite-lived intangible assets on January 1, 2002, with the offset being expense. Further, as these deferred tax liabilities relate to indefinite lived intangible assets, they cannot be utilized for purposes of offsetting deferred tax assets in evaluating the need for a deferred tax asset valuation allowance.

 

 
18

 

 

In order to correct these errors, we recorded an adjustment to increase the 2013 opening balance of accumulated deficit in our Consolidated Statements of Stockholders’ Equity by $3,455,000. Due to rules requiring an allocation of valuation allowance to deferred tax assets, the correction of this error also resulted in an increase to deferred tax liabilities (long-term) of $3,915,000 and an increase to deferred tax assets (current) of $460,000 for a net deferred tax liability of $3,455,000 as of December 31, 2013.

 

The Company considered the guidance in ASC 250, “Accounting Changes and Error Corrections; Staff Accounting Bulletin Topic 1:M, Materiality; and Topic 1:N, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and concluded that the error was not material to previously issued financial statements. The resulting revision had no impact on the Company’s previously reported cash, Consolidated Statement of Operations, Consolidated Statement of Comprehensive Loss, and Consolidated Statements of Cash Flows as of and for the year ended December 31, 2013.

 

For a detailed description and impact of the revision to the Consolidated Financial Statements, see “Note 3 – Revision of Prior Period Financial Statements” in “Notes to Consolidated Financial Statements” of Part II, Item 8 – “Financial Statements and Supplementary Data.”

 

Review

Revenue decreased $17,348,000 or 23.3% to $57,065,000 for the twelve months ended December 31, 2014 from $74,413,000 for the corresponding period of 2013. We saw a revenue decrease of approximately $24,151,000 or 62.1% within our Services Segment primarily resulting from the completion of certain large contracts with the U.S. Department of Energy (“DOE”) (under the nuclear services area) and the completion of the CH Plateau Remediation Company (“CHPRC”) subcontract (under the nuclear services area) effective September 30, 2013. The CHPRC subcontract was awarded to our East Tennessee Materials & Energy Corporation (“M&EC”) subsidiary in 2008 in connection with CH2M Hill Plateau Remediation Company’s prime contract with the DOE, relating to waste management and facility operations at the DOE’s Hanford, Washington site. Revenue generated under this subcontract was approximately $17,653,000 in 2013. Revenue from our Treatment Segment was higher by $6,803,000 or 19.1% primarily due to a higher priced waste mix. Gross profit increased $2,092,000 or 21.3%, primarily due to higher revenue generated from our Treatment Segment and the reduction in certain of our fixed costs as we continue to streamline costs. Selling, General, and Administrative (“SG&A”) expenses decreased $2,403,000 or 16.7% for the twelve months ended December 31, 2014 as compared to the corresponding period of 2013.

 

We had working capital of $757,000 at December 31, 2014, as compared to working capital deficit of $2,498,000 at December 31, 2013, an increase of $3,255,000.

 

Business Environment, Outlook and Liquidity

The Company achieved substantial improvements in financial position and liquidity in the twelve months ended December 31, 2014, as compared to the corresponding period of 2013. As of December 31, 2014, we had cash on hand of approximately $3,680,000 and no revolver balance. Our working capital for 2014 was positively impacted by the insurance settlement proceeds that we received from our insurance carriers due to a fire at our discontinued operation, Perma-Fix of South Georgia, Inc. subsidiary (“PFSG”), proceeds received from the sale of our Schreiber, Yonley, and Associates subsidiary (“SYA”), and the receipt of certain proceeds from our Polish subsidiary, Perma-Fix Medical S.A., that it received due to sale of certain equity (see – “Discontinued Operations”, “Divestiture of SYA” and “Liquidity and Capital Resources – Financing Activities” for further information of these proceeds). The first six months of 2014 began slow but improved dramatically in the second half of 2014, which was reflected in the net income that we generated from continuing operations during the second half of the year of approximately $3,083,000. We generated positive cash flow from continuing operations during the twelve months ended December 31, 2014 of approximately $661,000. As of December 31, 2014, our backlog was $9,228,000, an increase of $1,533,000, from the December 31, 2013 balance of $7,695,000.

 

 
19

 

 

The Company’s cash flow requirements during 2014 were financed by cash on hand, operations, credit facility, and the proceeds received as discussed above. The Company is continually reviewing operating costs and is committed to further reducing operating costs to bring them in line with revenue levels, when needed.

 

The Company continues to focus on expansion into both commercial and international markets to increase revenues to offset the uncertainties of government spending in the USA. This includes new services, new customers and increased market share in our current markets. Although no assurances can be given, we believe we will be able to successfully implement this plan and generate positive cash flow in 2015.

 

Results of Operations

The reporting of financial results and pertinent discussions are tailored to our two reportable segments: The Treatment Segment (“Treatment”) and the Services Segment (“Services”):

 

Below are the results of continuing operations for our years ended December 31, 2014 and 2013 (amounts in thousands):

 

(Consolidated)

 

2014

   

%

   

2013

   

%

 

Net revenues

  $ 57,065       100.0     $ 74,413       100.0  

Cost of goods sold

    45,157       79.1       64,597       86.8  

Gross Profit

    11,908       20.9       9,816       13.2  

Selling, general and administrative

    11,973       21.0       14,376       19.3  

Research and development

    1,315       2.2       1,764       2.4  

Impairment of goodwill

    380       .7       27,856       37.4  

(Gain) loss on disposal of property and equipment

    (41 )           49        

Loss from operations

    (1,719 )     (3.0 )     (34,229 )     (45.9 )

Interest income

    27             35        

Interest expense

    (616 )     (1.1 )     (762 )     (1.0 )

Interest expense – financing fees

    (192 )     (.3 )     (132 )     (.2 )

Foreign exchange loss

    (24 )                  

Other

    (51 )     (.1 )     (8 )      

Loss from continuing operations before taxes

    (2,575 )     (4.5 )     (35,096 )     (47.1 )

Income tax expense (benefit)

    417       .7       (625 )     (.8 )

Loss from continuing operations

  $ (2,992 )     (5.2 )   $ (34,471 )     (46.3 )

 

 

 
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Summary - Years Ended December 31, 2014 and 2013

 

Net Revenue

Consolidated revenues from continuing operations decreased $17,348,000 for the year ended December 31, 2014, compared to the year ended December 31, 2013, as follows:

 

(In thousands)

 

2014

   

% Revenue

   

2013

   

% Revenue

   

Change

   

% Change

 

Treatment

                                               

Government waste

  $ 29,787       52.2     $ 20,188       27.1     $ 9,599       47.5  

Hazardous/non-hazardous

    4,498       7.9       4,439       6.0       59       1.3  

Other nuclear waste

    8,058       14.1       10,913       14.7       (2,855 )     (26.2 )

Total

    42,343       74.2       35,540       47.8       6,803       19.1  
                                                 

Services

                                               

Nuclear

    9,917       17.4       32,067       43.1       (22,150 )     (69.1 )

Technical

    4,805       8.4       6,806       9.1       (2,001 )     (29.4 )

Total

    14,722       25.8       38,873       52.2       (24,151 )     (62.1 )
                                                 

Total

  $ 57,065       100.0     $ 74,413       100.0     $ (17,348 )     (23.3 )

 

Net Revenue

Treatment Segment revenue increased $6,803,000 or 19.1% for the twelve months ended December 31, 2014 over the same period in 2013. The increase in revenue within the Treatment Segment was attributed primarily to a higher priced waste mix, with significant increase in revenue from government clients of approximately $9,599,000 or 47.5%. Other nuclear waste revenue decreased $2,855,000 or 26.2% primarily due to lower waste volume. Services Segment revenue decreased $24,151,000 or 62.1% for the twelve months ended December 31, 2014 from the corresponding period of 2013 primarily as a result of the completion of certain large contracts with the DOE (which accounted for approximately $3,700,000 of the decrease) and the completion of the CHPRC subcontract effective September 30, 2013 within the nuclear services area, and the completion of various other contracts within the Segment. We were not able to replace these completed contracts in a timely manner with new contracts. The CHPRC subcontract generated revenue of approximately $17,653,000 in 2013.

 

Cost of Goods Sold

Cost of goods sold decreased $19,440,000 for the year ended December 31, 2014, as compared to the year ended December 31, 2013, as follows:

 

(In thousands)

 

2014

   

% Revenue

   

2013

   

% Revenue

   

Change

 

Treatment

  $ 31,863       75.2     $ 29,966       84.3     $ 1,897  

Services

    13,294       90.3       34,631       89.1       (21,337 )

Total

  $ 45,157       79.1     $ 64,597       86.8     $ (19,440 )

 

Cost of goods sold for the Treatment Segment increased by $1,897,000 or 6.3% primarily due to higher revenue. We incurred higher material and supplies, lab, transportation and disposal costs, totaling approximately $2,700,000. Depreciation expense was also higher this year by approximately $370,000. This higher cost was partially offset by lower salaries and payroll related expenses from lower headcount of approximately $380,000 (as we continue to manage headcount to streamline costs), lower regulatory costs by $701,000 and lower outside services costs of approximately $120,000. In the prior year, Treatment Segment cost of goods sold included a reduction of approximately $1,007,000 in depreciation expense and an increase of approximately $559,000 in closure expense (included in regulatory costs) due to adjustments recorded to our asset retirement obligations for our M&EC, DSSI, PFF, and PFNWR facilities. The adjustments were made principally to record the asset retirement obligation using appropriate discount rates. The closure obligations were previously based on undiscounted values.  The associated assets were also adjusted to reflect this change. Services Segment cost of goods sold decreased $21,337,000 or 61.6% primarily due to reduced revenue as discussed above. We incurred lower costs throughout most categories within cost of goods sold. Salaries and payroll related expenses were lower by approximately $16,000,000 due to lower headcount resulting from the completion of the CHPRC subcontract effective September 30, 2013 and a reduction in workforce which occurred in early May 2014. The remaining reduction in costs of goods sold was primarily due to lower outside services costs, lower travel expenses, and lower general expenses in various categories resulting from fewer projects and the completion of the CHPRC subcontract. Included within cost of goods sold is depreciation and amortization expense of $3,826,000 and $3,486,000 for the twelve months ended December 31, 2014, and 2013, respectively.

 

 
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Gross Profit 

Gross profit for the year ended December 31, 2014, was $2,092,000 higher than 2013, as follows:

 

(In thousands)

 

2014

   

% Revenue

   

2013

   

% Revenue

   

Change

 

Treatment

  $ 10,480       24.8     $ 5,574       15.7     $ 4,906  

Services

    1,428       9.7       4,242       10.9       (2,814 )

Total

  $ 11,908       20.9     $ 9,816       13.2     $ 2,092  

 

The Treatment Segment gross profit increased $4,906,000 or 88.0% due to increased revenue from higher priced waste mix and gross margin increased to 24.8% from 15.7% primarily due to revenue mix and the reduction in certain of our fixed costs as discussed above. In the Services Segment, gross profit decreased $2,814,000 or 66.3% due to reduced revenue as discussed in the revenue section above. The decrease in gross margin from 10.9% to 9.7% was impacted by the completion of the CHPRC subcontract which was a higher margin subcontract; however, this decrease was partially offset by the reduction in headcount from a reduction in workforce which occurred in May 2014.    

 

Selling, General and Administrative (“SG&A”)

SG&A expenses decreased $2,403,000 for the year ended December 31, 2014, as compared to the corresponding period for 2013, as follows:

 

(In thousands)

 

2014

   

% Revenue

   

2013

   

% Revenue

   

Change

 

Administrative

  $ 5,017           $ 5,215           $ (198 )

Treatment

    3,849       9.1       4,253       12.0       (404 )

Services

    3,107       21.1       4,908       12.6       (1,801 )

Total

  $ 11,973       21.0     $ 14,376       19.3     $ (2,403 )

 

The primary reduction in SG&A was within the Services Segment. Services SG&A was lower in almost all categories, with the primary reduction in salaries and payroll related expenses of approximately $1,700,000 resulting from a reduction in workforce which occurred in May 2014. The remaining reduction of approximately $640,000 was in lower outside services expenses resulting from lower consulting, legal, and sub-contract expense and lower general expenses in various categories as we continue to streamline our costs. The lower cost was partially offset by higher bad debt expense of approximately $600,000. During the third quarter of 2013, we reversed approximately $380,000 in bad debt expense resulting from the collection of accounts receivable previously reserved in our allowance for doubtful account for a certain fixed price contract. During the fourth quarter of 2014, we reserved approximately $260,000 for an uncertain account receivable. The decrease in administrative SG&A was primarily the result of lower outside services expenses resulting from fewer business/legal matters, lower travel expenses, and lower salaries and payroll related expenses from lower headcount totaling approximately $320,000. The lower cost was partially offset by higher public company expenses of approximately $120,000 resulting from two additional outside directors elected in September 2013 and October 2013. Treatment SG&A was lower primarily due to lower salaries and payroll related expenses from lower headcount. Included in SG&A expenses is depreciation and amortization expense of $324,000 and $425,000 for the twelve months ended December 31, 2014 and 2013, respectively.

 

 
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Research and Development (“R&D”)

R&D costs decreased $449,000 for the year ended December 31, 2014, as compared to the corresponding period of 2013. Research and development costs consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development of new technologies to increase company offerings and technological enhancement of new potential waste treatment processes. The decrease for the twelve months ended December 31, 2014 as compared to the corresponding period of 2013 was primarily due to lower costs incurred for the R&D for our treatment processes. Our R&D costs included approximately $759,000 and $585,000 for the twelve months ended December 31, 2014 and the corresponding period of 2013, respectively for the R&D of the medical isotope (Technetium-99 or “Tc-99m”) technology (see “Financial Activities” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information of PF Medical S.A. whose primary purpose is the R&D of technology for the Medical Isotope project). Included in research and development expense is depreciation expense of $90,000 and $215,000 for the twelve months ended December 31, 2014 and 2013, respectively.

 

Goodwill Impairment

In 2014, the Company recorded an impairment charge of $380,000 in connection with the sale of our SYA subsidiary on July 29, 2014, in accordance with Accounting Standards Codification (“ASC”) Topic 350 “Intangible – Goodwill and Other”. In 2013, we recorded a total goodwill impairment charge of $27,856,000, which represented the total goodwill for each of the Treatment, Safety and Ecology Corporation (“SEC”), and CH Plateau Remediation Company (“CHPRC”) reporting units of $13,691,000, $13,016,000 and $1,149,000, respectively, in accordance with ASC 350. The impairment charges recorded were non-cash in nature and did not affect our liquidity or cash flows from operating activities. Additionally, the goodwill impairment had no effect on our borrowing availability or covenants under our credit facility agreement.

 

Interest Expense

Interest expense decreased $146,000 for the twelve months ended December 31, 2014, as compared to the corresponding periods of 2013. The decrease in interest expense was primarily due to lower interest from our reducing Term Loan balance and lower average Revolving Credit line balance. In addition, we recorded approximately $37,000 in loss on debt modification (in accordance with ASC 470-50, “Debt – Modification and Extinguishment”) during the second quarter of 2014 resulting from an amendment that we entered into with our lender which reduced our Revolving Credit line from $18,000,000 to $12,000,000 as compared to a $65,000 loss on debt modification recorded during the third quarter of 2013 which reduced our Revolving Credit line from $25,000,000 to $18,000,000.

 

Interest Expense- Financing Fees

Interest expense-financing fees increased approximately $60,000 for the twelve months ended December 31, 2014, as compared to the corresponding period of 2013. The increase was primarily due to debt discount amortized as financing fees in connection with the issuance of our Common Stock and two purchase Warrants as consideration for the Company receiving a $3,000,000 loan from Messrs. Ferguson and Lampson on August 2, 2013 (See “Liquidity and Capital Resources – Financing Activities” for further information of this debt discount).

 

Income Taxes

We recorded an income tax expense of $417,000 and income tax benefit of $625,000 for continuing operations for the years ended December 31, 2014 and 2013, respectively.  The Company’s effective tax rates were approximately 16.5% and 8.7% for the twelve months ended December 31, 2014 and 2013, respectively.  The differences in effective tax rate for the twelve months ended December 31, 2014 as compared to the twelve months ended December 31, 2013 was primarily due to the increase in tax expense associated with the recording of deferred tax liabilities on indefinite lived intangible assets and increases in the impact of permanent differences to the effective tax rate for 2014 as compared to 2013 due to a significant reduction in pre-tax losses from 2013 to 2014.

 

 
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Divestiture of SYA

On April 3, 2014, our Board of Directors approved management to pursue the sale of our wholly owned subsidiary, SYA. The sale was completed on July 29, 2014. SYA was a professional engineering and environmental consulting services company and was included in the Company’s Services Segment. We elected to early adopt Accounting Standards Update ("ASU") No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” during the second quarter of 2014. In accordance with ASU 2014-08, the divestiture of SYA has been reported in continuing operations for all periods presented. The sale of SYA did not represent a strategic shift that had or will have a major effect on our operations and financial results as defined by ASU 2014-08.

 

The purchaser of SYA paid approximately $1,300,000 for 100% of the capital stock and $60,000 as an adjustment to the purchase price for excess working capital with $50,000 of such consideration placed in escrow for a period of one year to cover any claims by the purchaser for indemnification for certain limited types of losses incurred by the purchaser following the closing.  The proceeds received were used to pay down our revolver and used for working capital. As of December 31, 2014, expenses related to the sale of SYA totaled approximately $96,000. We recorded a loss of approximately $53,000 (net of taxes of $0) on the sale of SYA, which included an additional final excess working capital of approximately $42,000. The loss recorded was included in “other” expense on our Consolidated Statements of Operations. In 2013, SYA had net revenues of $2,564,736 and a net loss of $621,288.

 

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 Perma-Fix of South Georgia, Inc. (“PFSG”) facility.

 

On August 14, 2013, our PFSG facility incurred fire damage which left it non-operational. Certain equipment and portions of the building structures were damaged, which resulted in the Company recognizing an impairment charge of fixed assets for approximately $130,000. The Company carries general liability, pollution, property and business interruption, and workers compensation insurance with a maximum deductible of approximately $300,000. Total incurred costs through December 31, 2013 relating to the fire, inclusive of the impairment charge, was $6,859,000. For the year ended December 31, 2013, the Company had received $3,664,000 of insurance proceeds and recorded an insurance recovery receivable of $2,995,000 as we had determined that receipt of reimbursement of these expenses from our insurer was probable in accordance with its insurance policies.

 

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, which was used to pay down the Company’s Revolving Credit facility. On November 10, 2014, the Company received approximately $391,000 from another insurance carrier. Additionally, $1,500,000 of insurance proceeds were paid directly to the vendors working on the clean-up of the facility.

 

The table below shows the total costs incurred and insurance proceeds received through December 31, 2014 relating to the fire:

 

   

Property & Equipment

   

Business Interruption and Other

   

Total

 

Costs incurred through December 31, 2014

  $ 4,507,000     $ 4,096,000     $ 8,603,000  

Insurance proceeds through December 31, 2014 (1)

    7,477,000       4,968,000       12,445,000  

Gain on insurance recoveries

  $ 2,970,000     $ 872,000     $ 3,842,000  

 

(1) Inclusive of $1,500,000 paid directly to vendors

 

In 2014, the Company elected not to rebuild the PFSG facility, which resulted in a triggering event under ASC 360. Based on our long-lived asset impairment test, the Company concluded that tangible asset impairments existed for PFSG and therefore recorded approximately $723,000 of asset impairment charges for the twelve months ended December 31, 2014, which is included in “Income (loss) from discontinued operations, net of taxes” in the Consolidated Statements of Operations. No remaining intangible assets exist at PFSG at December 31, 2014. The Company continues to market our PFSG facility for sale.

 

 
24

 

 

Our discontinued operations had net revenue of $0 for the twelve months ended December 31, 2014, as compared to $1,789,000 for the corresponding period of 2013. We had net income of $1,688,000 and net loss of $1,568,000 for our discontinued operations for the twelve months ended December 31, 2014 and 2013, respectively. Our net income for our discontinued operations for the twelve months ended December 31, 2014, included a gain on insurance settlement of approximately $3,842,000 in connection with the fire sustained at our PFSG subisidary and an asset impairment charge of approximately $723,000 as discussed above. Our net loss for our discontinued operations for 2013 included a charge to income tax expense of approximately $1,164,000 to provide a full valuation allowance on our net deferred tax assets.

 

Liquidity and Capital Resources

The Company achieved substantial improvements in financial position and liquidity in the twelve months ended December 31, 2014 as compared to the corresponding period of 2013. As of December 31, 2014, we had cash on hand of approximately $3,680,000, no revolver balance, and working capital of approximately $757,000 as compared to working capital deficit of $2,498,000 as of December 31, 2013. Our working capital for 2014 was positively impacted by the insurance settlement proceeds that we received from our insurance carriers for our PFSG subsidiary, proceeds received from the sale of our SYA subsidiary, and the receipt of certain proceeds from our Polish subsidiary, Perma-Fix Medical S.A., that it received due to sale of certain equity (see – “Discontinued Operations”, “Divestiture of SYA” and “Liquidity and Capital Resources – Financing Activities” for further information of these proceeds). The first six months of 2014 began slow but improved dramatically in the second half of 2014, which was reflected in the net income that we generated from continuing operations during the second half of the year of approximately $3,083,000. We generated positive cash flow from continuing operations during the twelve months ended December 31, 2014 of approximately $661,000. As of December 31, 2014, our backlog was $9,228,000, an increase of $1,533,000, from the December 31, 2013 balance of $7,695,000.

 

The Company’s cash flow requirements during 2014 were financed by cash on hand, operations, credit facility and the proceeds received as discussed above. The Company is continually reviewing operating costs and is committed to further reducing operating costs to bring them in line with revenue levels, when needed.

 

The following table reflects the cash flow activities during the twelve months ended December 31, 2014 and the corresponding period of 2013:

 

(In thousands)

 

2014

   

2013

 

Cash provided by (used in) operating activities of continuing operations

  $ 661     $ (1,696 )

Cash used in operating activities of discontinued operations

    (2,093 )     (1,020 )

Cash provided by (used in) investing activities of continuing operations

    856       (1,487 )

Proceeds from property insurance claims of discontinued operations

    5,727        

Cash (used in) provided by financing activities of continuing operations

    (1,769 )     204  

Principal repayment of long-term debt for discontinued operations

    (35 )     (36 )

Increase (decrease) in cash

  $ 3,347     $ (4,035 )

 

As of December 31, 2014, we were in a positive cash position primarily as a result of the proceeds as discussed above. We move all excess cash into a Money Market Sweep account in accordance with our Amended Loan Agreement (with the exception of proceeds from Perma-Fix Medical S.A. which is not a credit party under our Amended Loan Agreement). When we are in a net borrowing position, we move all excess cash balances immediately to the revolving credit facility, so as to reduce debt and interest expense. We utilize a centralized cash management system, which includes a remittance lock box and is structured to accelerate collection activities and reduce cash balances, as idle cash is moved without delay to the revolving credit facility or the Money Market account, if applicable. The cash balance at December 31, 2014, primarily represents cash received as discussed above.

 

Operating Activities

Accounts Receivable, net of allowances for doubtful accounts, totaled $8,272,000 at December 31, 2014, an increase of $31,000 from the December 31, 2013 balance of $8,241,000. The increase was primarily due to higher billing primarily within our Treatment Segment partially offset by increased cash receipts.

 

 
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Accounts Payable, totaled $5,350,000 at December 31, 2014, a decrease of $112,000 from the December 31, 2013 balance of $5,462,000. We utilized our accounts receivable cash receipts, proceeds from the divestiture of SYA and insurance settlement to pay down our accounts payables. We continue to manage payment terms with our vendors to maximize our cash position throughout all segments.

 

As of December 31, 2014, unbilled receivables totaled $7,450,000, an increase of $2,231,000 from the December 31, 2013 balance of $5,219,000. Treatment unbilled receivables increased $1,758,000 from $4,198,000 as of December 31, 2013 to $5,956,000 as of December 31, 2014. Services Segment unbilled receivables increased $473,000 from a balance of $1,021,000 as of December 31, 2013 to $1,494,000 as of December 31, 2014. The increase was primarily due to higher waste shipments received in the latter half of 2014. 

 

Disposal/transportation accrual as of December 31, 2014, totaled $1,737,000, an increase of $352,000 over the December 31, 2013 balance of $1,385,000. Our disposal accrual can vary based on revenue mix and the timing of waste shipments for final disposal. As the majority of the disposal accrual is impacted by on-site waste inventory, during 2014, we shipped less waste for disposal (due to pending approval from the disposal site) which is reflected in a higher inventory on-site as compared to year end 2013.

 

We had working capital of $757,000 (which included working capital of our discontinued operations) as of December 31, 2014, as compared to working capital deficit of $2,498,000 as of December 31, 2013. Our working capital was primarily impacted by insurance proceeds received from our insurance company for our PFSG facility and proceeds received from the sale of our SYA subsidiary, which were used to pay down our revolving credit facility (which is classified as long term debt). In addition, the increase in our unbilled receivables and the cash from equity financing at PF Medical S.A. positively impacted our working capital (see “Financing Activities below for further information of PF Medical S.A.).

 

Investing Activities

During 2014, our purchases of capital equipment totaled approximately $464,000. These expenditures were primarily for improvements in our Treatment Segment. These capital expenditures were funded by cash from operations. We have budgeted approximately $1,100,000 for 2015 capital expenditures for our Segments to maintain operations and regulatory compliance requirements. Certain of these budgeted projects may either be delayed until later years or deferred altogether. We have traditionally incurred actual capital spending totals for a given year at less than the initial budgeted amount. We plan to fund our capital expenditures from cash from operations and/or financing. The initiation and timing of projects are also determined by financing alternatives or funds available for such capital projects.

 

Financing Activities

The Company entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011, (“Agreement”), with PNC Bank, National Association (“PNC”), acting as agent and lender. The Agreement, as amended (“Amended Loan Agreement”), provides us with the following credit facilities: (a) up to $12,000,000 revolving credit facility (which was reduced from $18,000,000 pursuant to an amendment dated April 14, 2014.) (“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). As a result of the reduction in the maximum borrowing Revolving Credit noted above, the Company recorded approximately $37,000 in loss on debt modification (included in interest expense) during the second quarter of 2014 in accordance with ASC 470-50, “Debt – Modification and Extinguishment.”

 

 
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On July 25, 2014, the Company entered into Amendment 5 to the Amended Loan Agreement with PNC. This Amendment added our Perma-Fix of Canada, Inc. subsidiary as a guarantor under our credit facility. On July 28, 2014, the Company entered into Amendment 6 to the Amended Loan Agreement. This Amendment authorized the Company to sell our SYA subsidiary, released a hold by PNC which allows the Company to use the $3,850,000 insurance settlement proceeds received on June 30, 2014 by our PFSG subsidiary for working capital purposes but placed an indefinite reduction on our borrowing availability by $1,500,000. As a condition of Amendment 6, we agreed to pay PNC a fee of $15,000, which is being amortized over the term of the Amended Loan Agreement. All other terms of the Amended Loan Agreement remain principally unchanged.

 

Our credit facility with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. The following table illustrates the most significant financial covenants under our credit facility and reflects the quarterly compliance required by the terms of our senior credit facility as of December 31, 2014. Pursuant to the amendment dated April 14, 2014 as noted above, the fixed charge coverage ratio testing requirement for the first quarter of 2014 was waived by PNC. This amendment also revised the methodology in calculating our quarterly fixed charge coverage ratio for the second to fourth quarters of 2014 and changed the minimum quarterly fixed charge coverage ratio requirement of 1:25 to 1:00 to 1:15 to 1:00 for 2014:

 

   

Quarterly

   

1st Quarter

   

2nd Quarter

   

3rd Quarter

   

4th Quarter

 

(Dollars in thousands)

 

Requirement

   

Actual

   

Actual

   

Actual

   

Actual

 

Senior Credit Facility

                                       

Fixed charge coverage ratio

 

1.15:1

   

Not Required

   

3.74:1

   

3.89:1

   

3.34:1

 

Minimum tangible adjusted net worth

  $ 30,000     $ 43,033     $ 43,499     $ 47,653     $ 45,050  

 

We met our quarterly fixed charge coverage ratio requirement in each of the second to fourth quarters of 2014 and we expect to meet the quarterly fixed charge ratio in 2015; however, if we fail to meet the minimum quarterly fixed charge coverage ratio requirement in any of the quarters in 2015 and PNC does not waive the non-compliance or further revise our covenant so that we are in compliance, our lender could accelerate the repayment of borrowings under our credit facility. In the event that our lender accelerates the payment of our borrowings, we may not have sufficient liquidity to repay our debt under our credit facility and other indebtedness. We have also met the minimum tangible adjusted net worth requirement in each of the quarters in 2014.

 

The Amended Loan Agreement terminates as of 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. No early termination fee shall apply if we pay off our obligations under the Amended Loan Agreement after October 31, 2013.

 

As of December 31, 2014, the availability under our revolving credit was $7,402,000, based on our eligible receivables and includes the indefinite reduction of borrowing availability of $1,500,000 as discussed above.

 

On February 12, 2013, the Company entered into an unsecured promissory note (“the new note”) with Timios National Corporation (“TNC” and formerly known as Homeland Capital Security Corporation) in the principal amount of approximately $230,000 as a result of a settlement with TNC in connection with certain claims that we asserted against TNC for breach of certain representations and covenant subsequent to our acquisition of Safety and Ecology Corporation and its subsidiaries (“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 (with principal balance of $1,460,000 at February 12, 2013) 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. The outstanding principal balance of the new note as of December 31, 2014 was approximately $10,000. The new note bears an annual interest rate of 6%, payable in 24 monthly installments of principal and interest of approximately $10,000, with the first payment due February 28, 2013, as agreed by us and TNC after entering into the new note, with subsequent payments due on the last day of each month thereafter. The new note provides us the right to prepay such at any time without interest or penalty.  

 
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On August 2, 2013, the Company completed a lending transaction with Messrs. Robert Ferguson 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”). The Lenders are stockholders of the Company, having received shares of our Common Stock in connection with the acquisition of Perma-Fix Northwest Richland, Inc. subsidiary (“PFNWR”) in June 2007. The proceeds from the Loan were used for general working capital purposes. The promissory note is unsecured, with a term of three years with interest payable at a fixed interest rate of 2.99% per annum. The promissory note provides for monthly payments of accrued interest only during the first year of the Loan with the first interest payment due September 1, 2013 and monthly payments of $125,000 in principal plus accrued interest for the second and third year of the Loan. In connection with the above 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, we 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 per share. The Warrants are exercisable six months from August 2, 2013 and expire on August 2, 2016. We estimated the fair value of the Warrants to be approximately $59,000 using the Black-Scholes option pricing model. As further consideration for the Loan, the Company issued an aggregate 90,000 shares of the Company’s Common Stock, with each Lender receiving 45,000 shares. The 90,000 shares of Common Stock and 70,000 Common Stock purchase warrants were issued in a private placement and bear a restrictive legend against resale except in a transaction registered under the Securities Act or in a transaction exempt from registration thereunder. We 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 over the term of the loan as interest expense – financing fees. Mr. Robert Ferguson serves as an advisor to our Board of Directors (see “Related Party Transactions – Robert L. Ferguson” in this section for further information on Mr. Ferguson).

 

During August, 2014, the Company’s Polish subsidiary, PF Medical S.A. (which we own approximately 64%) 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, as of December 31, 2014, PF Medical S.A. has received approximately $1,478,000 for 155,839 shares (before deduction for commissions and legal expenses relating to this offering of approximately $242,000). PF Medical S.A. further expects to receive approximately $636,000, prior to any commission, on or prior to July 31, 2015, for payment of 68,161 of such shares and another $243,000 by December 2015, for payment of the remaining 26,000 of such shares. The unpaid shares as of December 31, 2014 in this transaction were accounted for as subscription receivables and are offset against non-controlling interest. If PF Medical S.A. is not paid for the 68,161 shares on or prior to July 31, 2015, PF Medical S.A. has the option to have the purchaser of such shares transfer all of its rights, title and interest in such shares to PF Medical S.A. or for PF Medical S.A. be paid for the 68,161 shares with shares in another publicly traded company. In addition, during January 2015, Perma-Fix Medical, S.A. entered into a preliminary Letter of Intent (“LOI”) to form a strategic partnership and secure investment from a U.S company which is one of the largest national providers of in-office nuclear cardiology imaging services. This company uses Tc-99m in its nuclear imaging services business and provides imaging expertise to the medical community. Under the LOI, this company would, if the LOI is completed and definitive agreements are executed, invest $1,000,000 into Perma-Fix Medical S.A. The investment, when completed, would constitute approximately 5.4% of the outstanding common shares of Perma-Fix Medical S.A. When completed, this company will have the right to appoint one member to Perma-Fix Medical S.A.’s Supervisory Board, and a second appointee to either the Supervisory Board or the management team. The investment and agreements with this company are subject to numerous conditions, including, but not limited to, entering into definitive supply, stock purchase and other agreements, approval by each of the parties Boards and obtaining required approvals by Polish regulatory authorities as to issuance of the shares to this company. These arrangements are neither an offer to sell nor a solicitation of an offer to buy PF Medical S.A.’s Common Stock or any other securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful. PF Medical S.A.’s Common Stock is not registered under the Securities Act or any state securities laws and may not be offered or sold in the U.S. absent registration or applicable exemption from registration from the registration requirements under the Securities Act and applicable state securities laws. As a result, the share certificate or purchase confirmation issued in connection with such private placements of PF Medical S.A.’s Common Stock will be required to bear restrictive legends describing the applicable restrictions of transferring such shares in the U.S. or to U.S. persons unless in compliance with the Securities Act.

 

 
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During January 2015, a consortium led by Perma-Fix Medical S.A. received an official notification from the National Centre for Research and Development in Poland for certain grant funding to further develop and commercialize a novel prototype generator for the production of Tc-99m for use in cancer and cardiac imaging (“Generator Project”). The total Generator Project budget is approximately $3,700,000, of which, Generator Project grant subsidies allocated to the project team will be approximately $2,800,000. Of the $2,800,000 grant allocation, Perma-Fix Medical S.A. will directly receive approximately $800,000 and the remaining amount will be allocated to other members of the Generator Project team to support technology development and testing. The Generator Project team will be under the leadership and supervision of Perma-Fix Medical S.A. and consists of four additional entities from Poland, including: the National Centre for Nuclear Research - Radioisotope Centre POLATOM in Otwock; the Institute for Biopolymers and Chemical Fibers - Department of Biopolymers in £ódz; Warsaw Medical University - Department of Nuclear Administration; and the Institute of Industrial Organic Chemistry Branch in Pszczyna. The goal of the Generator Project is to develop a novel prototype generator utilizing Perma-Fix Medical S.A.’s microporous resin to produce molybdenum-derived Tc-99m, test the chemical and radionuclide purities of Tc-99m eluent and verify the performance of the final product, which will be the cancer and cardiac pharmaceutical kits used during animal and human imaging to fulfill both Polish and European Pharmacopoeia standards. The funding of this grant is subject to execution of agreements by Perma-Fix Medical S.A. with the project team partners and formal acceptance of the grant by Perma-Fix Medical S.A, which is expected to occur during the second quarter of 2015.

 

In summary, we achieved substantial improvements in our financial results for the twelve months ended December 31, 2014 resulting from a number of sizable projects awarded in both of our Segments. As of December 31, 2014, we were in a positive cash position primarily as a result of the proceeds we received from the sale of our SYA subsidiary, the insurance settlement proceeds, and proceeds received from the equity financing related to our Perma-Fix Medical S.A. subsidiary. As of December 31, 2014, our backlog was $9,228,000, an increase of $1,533,000, from the December 31, 2013 balance of $7,695,000. We continue to take steps to improve our operations and liquidity and to invest working capital into our facilities to fund capital additions in our segments. Although there are no assurances, we believe that our cash flows from operations and our available liquidity from the amended and restated line of credit are sufficient to service the Company’s obligations.

 

Off Balance Sheet Arrangements

We have a number of routine operating leases, primarily related to office space rental, office equipment rental and equipment rental for contract projects as of December 31, 2014, which total approximately $2,223,000, payable as follows: $679,000 in 2015; $680,000 in 2016; $670,000 in 2017; with the remaining $194,000 in 2018.

 

From time to time, we are required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations. As of December 31, 2014, the total amount of these bonds and letters of credit outstanding was approximately $1,127,000, of which the majority of the amount relates to various bonds. Our Treatment Segment facilities operate under licenses and permits that require financial assurance for closure and post-closure costs. We provide for these requirements through financial assurance policies. As of December 31, 2014, the closure and post-closure requirements for our facilities were approximately $46,608,000. We have recorded approximately $21,334,000 in a sinking fund related to these policies in other long term assets within our balance sheets.

 

Strategic Planning

During the third quarter of 2014, we retained an investment banking firm to assist us with our strategic planning and transactions. We agreed to pay the investment banker a monthly retainer of $15,000 for a period of ten months, and an additional amount if during the term of this engagement and under certain other conditions certain transactions are completed or we enter into an agreement which subsequently results in a certain transaction being consummated, less the amount of retainer paid by us to the investment banker, or an additional amount under certain other conditions. The engagement of the investment banker shall continue until July 30, 2015, unless terminated prior thereto in accordance with the engagement.

 

 
29

 

 

Critical Accounting Policies

In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as, the reported amounts of revenues and expenses during the reporting period. We believe the following critical accounting policies affect the more significant estimates used in preparation of the consolidated financial statements:

 

Revenue Recognition Estimates. We utilize a performance based methodology for purposes of revenue recognition in our Treatment Segment. As we accept more complex waste streams in this segment, the treatment of those waste streams become more complicated and time consuming. We have continued to enhance our waste tracking capabilities and systems, which has enabled us to better match the revenue earned to the processing phases achieved using a proportional performance method. The major processing phases are receipt, treatment/processing and shipment/final disposition. Upon receiving various wastes we recognize a certain percentage (ranging from 9.0% to 33%) of revenue as we incur costs for transportation, analytical and labor associated with the receipt of mixed waste. As the waste is processed, shipped and disposed of, we recognize the remaining revenue and the associated costs of transportation and burial. We review and evaluate our revenue recognition estimates and policies on an annual basis.

 

For our Services Segment, revenues on services are performed under time and material, fixed price, and cost-reimbursement contracts. Revenues and costs associated with fixed price contracts are recognized using the percentage of completion (efforts expended) method. We estimate our percentage of completion based on attainment of project milestones. Revenues and costs associated with time and material contracts are recognized as revenue when earned and costs are incurred.

 

Under cost-reimbursement contracts, we are reimbursed for costs incurred plus a certain percentage markup for indirect costs, in accordance with contract provisions. Costs incurred in excess of contract funding may be renegotiated for reimbursement. We also earn a fee based on the approved costs to complete the contract. We recognize this fee using the proportion of costs incurred to total estimated contract costs.

 

Contract costs include all direct labor, material and other non-labor costs and those indirect costs related to contract support, such as depreciation, fringe benefits, overhead labor, supplies, tools, repairs and equipment rental. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

 

Allowance for Doubtful Accounts. The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts, which is a valuation allowance that reflects management's best estimate of the amounts that are uncollectible. We regularly review all accounts receivable balances that exceed 60 days from the invoice date and, based on an assessment of current credit worthiness, estimate the portion, if any, of the balances that are uncollectible. Specific accounts that are deemed to be uncollectible are reserved at 100% of their outstanding balance. The remaining balances aged over 60 days have a percentage applied by aging category (5% for balances 61-90 days, 20% for balances 91-120 days and 40% for balances over 120 days aged), based on a historical valuation, that allows us to calculate the total reserve required. This allowance was approximately 3.8% of revenue for 2014 and 20.8% of accounts receivable as of December 31, 2014. Additionally, this allowance was approximately 2.6% of revenue for 2013 and 19.0% of accounts receivable as of December 31, 2013.

 

 
30

 

 

Intangible Assets. Intangible assets consist primarily of the recognized value of the permits required to operate our business and goodwill (as in previous years), or the cost of purchased businesses in excess of the estimated fair value of net identifiable assets acquired. As of December 31, 2014, we have no goodwill remaining. In connection with the sale of our SYA subsidiary on July 29, 2014, the Company recorded a goodwill impairment charge of $380,000 during the second quarter of 2014 for the SYA reporting unit. The Company fully impaired the goodwill for each of our Treatment, SEC, and CHPRC reporting units, totaling approximately $27,856,000, during 2013. We continually reevaluate the propriety of the carrying amount of permits and goodwill (when applicable) to determine whether current events and circumstances warrant adjustments to the carrying value.

 

Indefinite-lived intangible assets are not amortized but are reviewed for impairment annually as of October 1, or when events or changes in the business environment indicate that the carrying value may be impaired. If the fair value of the asset is less than the carrying amount, we perform a quantitative test to determine the fair value. The impairment loss, if any, is measured as the excess of the carrying value of the asset over its fair value. Significant judgments are inherent in these analyses and include assumptions for, among others factors, forecasted revenue, gross margin, growth rate, operating income, timing of expected future cash flows, and the determination of appropriate long term discount rates.

 

We performed impairment testing of our permits related to our Treatment reporting unit as of October 1, 2014 and 2013 and determined no impairment existed.

 

Intangible assets that have definite useful lives are amortized using the straight-line method over the estimated useful lives (with the exception of customer relationships which are amortized using an accelerated method) and are excluded from our annual intangible asset valuation review as of October 1. The Company has one definite-lived permit which was excluded from our annual impairment review as noted above. The net carrying value of this one definite-lived permit as of December 31, 2014, was approximately $227,000. Intangible assets with definite useful lives are also tested for impairment whenever events or changes in circumstances indicate that the asset’s carrying value may not be recoverable.

 

Accrued Closure Costs and Asset Retirement Obligations (“ARO”). Accrued closure costs represent our estimated environmental liability to clean up our facilities as required by our permits, in the event of closure. ASC 410, “Asset Retirement and Environmental Obligations” requires that the discounted fair value of a liability for an ARO be recognized in the period in which it is incurred with the associated ARO capitalized as part of the carrying cost of the asset. The recognition of an ARO requires that management make numerous estimates, assumptions and judgments regarding such factors as estimated probabilities, timing of settlements, material and service costs, current technology, laws and regulations, and credit adjusted risk-free rate to be used. This estimate is inflated, using an inflation rate, to the expected time at which the closure will occur, and then discounted back, using a credit adjusted risk free rate, to the present value. ARO’s are included within buildings as part of property and equipment and are depreciated over the estimated useful life of the property. In periods subsequent to initial measurement of the ARO, the Company must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flow. Increases in the ARO liability due to passage of time impact net income as accretion expense and are included in cost of goods sold in the Consolidated Statement of Operations. Changes in the estimated future cash flows costs underlying the obligations (resulting from changes or expansion at the facilities) require adjustment to the ARO liability calculated and are capitalized and charged as depreciation expense, in accordance with the Company’s depreciation policy.

 

Accrued Environmental Liabilities. We have four remediation projects currently in progress (all within discontinued operations). The current and long-term accrual amounts for the projects are our best estimates based on proposed or approved processes for clean-up. The circumstances that could affect the outcome range from new technologies that are being developed every day to reduce our overall costs, to increased contamination levels that could arise as we complete remediation which could increase our costs, neither of which we anticipate at this time. In addition, significant changes in regulations could adversely or favorably affect our costs to remediate existing sites or potential future sites, which cannot be reasonably quantified (See “Environmental Contingencies” below for further information of these liabilities).

 

Disposal/Transportation Costs. We accrue for waste disposal based upon a physical count of the waste at each facility at the end of each accounting period. Current market prices for transportation and disposal costs are applied to the end of period waste inventories to calculate the disposal accrual. Costs are calculated using current costs for disposal, but economic trends could materially affect our actual costs for disposal. As there are limited disposal sites available to us, a change in the number of available sites or an increase or decrease in demand for the existing disposal areas could significantly affect the actual disposal costs either positively or negatively.

 

 
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Stock-Based Compensation. We account for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. We use the Black-Scholes option-pricing model to determine the fair-value of stock-based awards which requires subjective assumptions. 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. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited.

 

Income Taxes. The provision for income tax is determined in accordance with ASC 740, “Income Taxes.” As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe recovery is not likely, we establish a valuation allowance. As of December 31, 2014, we had net deferred tax assets of approximately $7,896,000 (which excludes a deferred tax liability relating to goodwill and indefinite lived intangible assets), which were primarily related to federal and state net operating loss (“NOL”) carryforwards, impairment charges, and closure costs. As of December 31, 2014 and 2013, we concluded that it was more likely than not that $7,896,000 and $8,182,000 of our deferred income tax assets would not be realized, and as such, a full valuation allowance was applied against those deferred income tax assets. Our net operating losses are subject to audit by the Internal Revenue Services, and, as a result, the amounts could be reduced.

 

Known Trends and Uncertainties 

Economic Conditions. The DOE and U.S. Department of Defense (“DOD”) represent major customers for our Treatment Segment and Services Segment. Although in 2014, we saw significant improvement in revenues generated from wastes from governmental clients or their subcontractors (primarily in our Treatment Segment), revenue were still below our expectations as federal clients have operated in recent years under reduced budgets due to sequestration, general economic conditions, and the large budget deficit that has and continues to face the government. In addition, our government contracts and subcontracts relating to activities at governmental sites are generally subject to termination or renegotiation on 30 days notice at the government’s option. Significant reductions in the level of governmental funding in future years could have a material adverse impact on our business, financial position, results of operations and cash flows. See “Management’s Discussion and Analysis – Business Environment, Outlook and Liquidity” for a discussion of our business outlook.

 

Significant Customers. Our segments have significant relationships with the federal government, and continue to enter into contracts, directly as the prime contractor or indirectly as a subcontractor, with the federal government. The contracts that we are a party to with the federal government or with others as a subcontractor to the federal government generally provide that the government may terminate or renegotiate the contracts on 30 days notice, at the government's election. Our inability to continue under existing contracts that we have with the federal government (directly or indirectly as a subcontractor) could have a material adverse effect on our operations and financial condition.

 

We performed services relating to waste generated by the federal government, either directly as a prime contractor or indirectly as a subcontractor to the federal government, representing approximately $34,780,000 or 60.9% of our total revenue from continuing operations during 2014, as compared to $47,557,000 or 63.9% of our total revenue from continuing operations during 2013.

 

 
32

 

 

The following customers accounted for 10% or more of the total revenues generated from continuing operations for twelve months ended December 31, 2014 and 2013:

 

       

Total

   

% of Total

 

Customer

 

Year

 

Revenue

   

Revenue

 

United States Enrichment Corporation ("USEC")

 

2014

  $ 10,272,000       18.0 %
   

2013

  $ 2,037,000       2.7 %
                     

CH Plateau Remediation Company ("CHPRC")

 

2014

  $ 5,762,000       10.1 %
   

2013

  $ 19,922,000       26.8 %

 

As our revenues are event/project based where the completion of one contract with a specific customer may be replaced by another contract with a different customer from year to year, we do not believe the loss of one specific customer from one year to the next will generally have a material adverse effect on our operations and financial.

 

Environmental Contingencies

We are engaged in the waste management services segment of the pollution control industry. As a participant in the on-site treatment, storage and disposal market and the off-site treatment and services market, we are subject to rigorous federal, state and local regulations. These regulations mandate strict compliance and therefore are a cost and concern to us. Because of their integral role in providing quality environmental services, we make every reasonable attempt to maintain complete compliance with these regulations; however, even with a diligent commitment, we, along with many of our competitors, may be required to pay fines for violations or investigate and potentially remediate our waste management facilities.

 

We routinely use third party disposal companies, who ultimately destroy or secure landfill residual materials generated at our facilities or at a client's site. In the past, numerous third party disposal sites have improperly managed waste and consequently require remedial action; consequently, any party utilizing these sites may be liable for some or all of the remedial costs. Despite our aggressive compliance and auditing procedures for disposal of wastes, we could further be notified, in the future, that we are a potentially responsible party (“PRP”) at a remedial action site, which could have a material adverse effect.

 

Our subsidiaries where the remediation expenditures will be made are the Leased Property in Dayton, Ohio, a former RCRA storage facility as operated by the former owners of Perma-Fix Dayton, Inc. (“PFD”), Perma-Fix of Memphis Inc.’s (“PFM” – closed location) site in Memphis, Tennessee, PFSG facility in Valdosta, Georgia, and Perma-Fix Michigan, Inc.’s (“PFMI” – closed location) site in Brownstown, Michigan. The environmental liability of PFD (as it relates to the remediation of the storage facility site assumed by the Company as a result of the original acquisition of the PFD facility) was retained by the Company upon the sale of PFD in March 2008. PFSG is non-operational as it suffered a fire on August 14, 2013) All of the reserves are within our discontinued operations. While no assurances can be made that we will be able to do so, we expect to fund the expenses to remediate these sites from funds generated internally.

 

 
33

 

 

At December 31, 2014, we had total accrued environmental remediation liabilities of $1,016,000, of which $728,000 is recorded as a current liability, which reflects a decrease of $15,000 from the December 31, 2013 balance of $1,031,000. The net decrease of $15,000 represents payments on remediation projects at the PFSG location. The December 31, 2014 current and long-term accrued environmental liability at December 31, 2014 is summarized as follows (in thousands):

 

   

Current

   

Long-term

       
   

Accrual

   

Accrual

    Total  

PFD

  $ 3     $ 66     $ 69  

PFM

    30       15       45  

PFSG

    618       207       825  

PFMI

    77       -       77  

Total Liability

  $ 728     $ 288     $ 1,016  

 

Related Party Transactions

Mr. Robert Schreiber, Jr.

During March 2011, we entered into a five-year lease with Lawrence Properties LLC for certain office and warehouse space used and occupied by SYA, a wholly owned subsidiary of the Company until its sale by the Company on July 29, 2014. Lawrence Properties is owned by Robert Schreiber, Jr., the President of SYA until his resignation on July 29, 2014, and Mr. Schreiber’s spouse. Under the lease, which commenced June 1, 2011, we paid monthly rent of approximately $11,400, which we believe was lower than costs charged by unrelated third party landlords. Rent payment under this lease was approximately $124,000 and $72,000 for the years ended December 31, 2014 and 2013, respectively. In connection with the Company’s sale of SYA, the lease was terminated on July 29, 2014.

 

Mr. David Centofanti

Mr. David Centofanti serves as our Director of Information Services. For such services, he received yearly compensation of $163,000 in 2014 and 2013. Mr. David Centofanti is the son of our Chief Executive Officer, President and a Board member, Dr. Louis F. Centofanti. We believe the compensation received by Mr. Centofanti for his technical expertise which he provides to the Company is competitive and comparable to compensation we would have to pay to an unaffiliated third party with the same technical expertise.

 

Mr. Robert L. Ferguson

Mr. Robert L. Ferguson serves as an advisor to the Company’s Board of Directors (“Board”). Mr. Ferguson previously served as a Board member from June 2007 to February 2010 and again from August 2011 to September 2012. As an advisor to the Company’s Board, Mr. Ferguson is paid $4,000 monthly plus reasonable expenses. For such services, Mr. Ferguson received compensation of approximately $56,000 and $52,000 for the years ended December 31, 2014 and 2013, respectively. On August 2, 2013, the Company completed a lending transaction with Messrs. Robert Ferguson 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 further details and terms of this Loan in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Financing Activities”).

 

Mr. John Climaco

On October 17, 2014, the Company’s Compensation Committee and the Board of Directors, with Mr. Climaco abstaining, approved a consulting agreement with John Climaco (a director of the Company). The Company and Mr. Climaco entered into the consulting agreement on October 17, 2014. Mr. Climaco is also is a member of the Strategic Advisory Committee of the Board of Directors.

 

Pursuant to the consulting agreement, the services to be provided by the Consultant shall include, among other things, the following:

 

 

Review the Company’s operations to restructure costs to render the Company more competitive;

 

Evaluate all functions, including but not limited to sales, marketing, accounting, operations, and executive management as well as cost structures for each facility;

 

Assist in the development of the Company’s strategy opportunity and other initiatives, including but not limited to the development of the Company’s medical isotope technology; and

 

Other assignments as determined by the Board.

 

 
34

 

 

In his capacity as a consultant under the consulting agreement, Mr. Climaco shall be paid $22,000 per month (starting September 2014) plus reasonable expenses. The agreement shall continue unless terminated by either party for any reason or no reason by providing thirty (30) days written notice to the other party. For his services under the consulting agreement, Mr. Climaco received approximately $107,000 in 2014.

 

Employment Agreements

We have an employment agreement (each dated July 10, 2014) with each of Dr. Centofanti (our President and Chief Executive Officer or “CEO”), Ben Naccarato (our Chief Financial Officer or “CFO”), and John Lash (our Chief Operating Officer or “COO” – hired on March 20, 2014). Each employment agreement provides for annual base salaries, bonuses, and other benefits commonly found in such agreements. In addition, each employment agreement provides that in the event of termination of such officer without cause or termination by the officer for good reason (as such terms are defined in the employment agreement), the terminated officer shall receive payments of an amount equal to benefits that have accrued as of the termination but had not yet been paid, plus an amount equal to one year’s base salary at the time of termination. In addition, the employment agreements provide that in the event of a change in control (as defined in the employment agreements), all outstanding stock options to purchase our Common Stock granted to, and held by, the officer covered by the employment agreement to be immediately vested and exercisable. The Company had an employment agreement dated August 24, 2011 with Mr. James A. Blankenhorn. On March 20, 2014, the Company accepted the resignation of Mr. James A. Blankenhorn, as Vice President and COO of the Company. The resignation was effective March 28, 2014. When Mr. Blankenhorn’s resignation as the COO became effective, his employment agreement also terminated. Each Dr. Centofanti and Ben Naccarato also had an employment agreement dated August 24, 2011 which were terminated upon execution of the employment agreement dated July 10, 2014.

 

 

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required under Regulation S-K for smaller reporting companies.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Forward-looking Statements

Certain statements contained within this report may be deemed "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, the "Private Securities Litigation Reform Act of 1995"). All statements in this report other than a statement of historical fact are forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the Company to differ materially from such statements. The words "believe," "expect," "anticipate," "intend," "will," and similar expressions identify forward-looking statements. Forward-looking statements contained herein relate to, among other things,

losses of specific customer from one year to the next will not generally have a material effect on us;

significant reductions in the level of government funding in future years could have a material adverse impact on our business, financial position, results of operations and cash flows;

expect to meet our quarterly financial covenants in 2015;

expand into both commercial and international markets to increase revenues;

ability to improve operations and liquidity;

permit and license requirements represent a potential barrier to entry for possible competitors;

failure to obtain and maintain our permit or approvals would have a material adverse effect on us;

potential effect on our operations with the adoption of programs by federal or state government mandating a substantial reduction in greenhouse gas emissions;

ability to fund budgeted capital expenditures during 2015 through our operations and lease financing;

continue focus on efficient operations of facilities and on-site activities, continue to evaluating strategic acquisition, continue the R&D of innovative technologies to expand company service offering and to treat nuclear waste, mixed waste, and industrial waste, and to continue R&D and marketing of medical isotope technology;

 

 
35

 

 

our cash flows from operations and our available liquidity from our amended and restated line of credit are sufficient to service the Company’s current obligations;

continue to take steps to improve our operations and liquidity and to invest working capital into our facilities to fund capital additions to our segments;

ability to continue under existing contracts that we have with the federal government (directly or indirectly as a subcontractor);

process our backlog during periods of low waste receipts, which historically has been in the first or fourth quarter;

future enforcement policies as applied to existing laws or by the enactment of new environmental laws and regulations;

subject to fines, penalties or other liabilities or could be adversely affected by existing or subsequently enacted laws or regulations;

we could become a PRP at a remedial action site, which could have a material adverse effect;

ability to remediate material weakness in internal control over financial reporting; and

we could be deemed responsible for part for the cleanup of certain properties and be subject to fines and civil penalties in connection with violations of regulatory requirements.

 

While the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance such expectations will prove to have been correct. There are a variety of factors, which could cause future outcomes to differ materially from those described in this report, including, but not limited to:

 

general economic conditions;

material reduction in revenues;

ability to meet PNC covenant requirements;

inability to collect in a timely manner a material amount of receivables;

increased competitive pressures;

inability to maintain and obtain required permits and approvals to conduct operations;

public not accepting our new technology;

 

inability to develop new and existing technologies in the conduct of operations;

inability to maintain and obtain closure and operating insurance requirements;

inability to retain or renew certain required permits;

discovery of additional contamination or expanded contamination at any of the sites or facilities leased or owned by us or our subsidiaries which would result in a material increase in remediation expenditures;

delays at our third party disposal site can extend collection of our receivables greater than twelve months;

refusal of third party disposal sites to accept our waste;

changes in federal, state and local laws and regulations, especially environmental laws and regulations, or in interpretation of such;

requirements to obtain permits for TSD activities or licensing requirements to handle low level radioactive materials are limited or lessened;

potential increases in equipment, maintenance, operating or labor costs;

management retention and development;

financial valuation of intangible assets is substantially more/less than expected;

the requirement to use internally generated funds for purposes not presently anticipated;

inability to continue to be profitable on an annualized basis;

inability of the Company to maintain the listing of its Common Stock on the NASDAQ;

terminations of contracts with federal agencies or subcontracts involving federal agencies, or reduction in amount of waste delivered to the Company under the contracts or subcontracts;

renegotiation of contracts involving the federal government;

federal government’s inability or failure to provide necessary funding to remediate contaminated federal sites;

disposal expense accrual could prove to be inadequate in the event the waste requires re-treatment;

inability to raise capital on commercially reasonable terms;

inability to increase profitable revenue;

lender refuses to waive non-compliance or revises our covenant so that we are in compliance; and

Risk factors contained in Item 1A of this report.

 

 
36

 

 

 

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Index to Consolidated Financial Statements

   
     

Consolidated Financial Statements

 

Page No.

Reports of Independent Registered Public Accounting Firms

38

   

Consolidated Balance Sheets as of December 31, 2014 and 2013 (Revised)

40

   

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

42

   

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2014 and 2013

43

   

Consolidated Statements of Stockholders’ Equity for the years December 31, 2014 and 2013 (Revised)

44

   

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

45

   

Notes to Consolidated Financial Statements

46

   

Financial Statement Schedules

In accordance with the rules of Regulation S-X, schedules are not submitted because they are not applicable to or required by the Company.

 

 
37

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Perma-Fix Environmental Services, Inc.

 

We have audited the accompanying consolidated balance sheet of Perma-Fix Environmental Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statement of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perma-Fix Environmental Services, Inc. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ GRANT THORNTON LLP

Atlanta, Georgia

March 31, 2015

 

 
38

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

Board of Directors and Stockholders

Perma-Fix Environmental Services, Inc.

Atlanta, Georgia

 

We have audited the accompanying consolidated balance sheet of Perma-Fix Environmental Services, Inc. and subsidiaries as of December 31, 2013 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perma-Fix Environmental Services, Inc. and subsidiaries at December 31, 2013 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 (to the 2013 consolidated financial statements), the Company has suffered declining revenues, recurring losses from operations and has a net working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 (to the 2013 consolidated financial statements). The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

 

/s/BDO USA, LLP

 

Atlanta, Georgia

 

April 15, 2014, except for Notes 3, 12, and 17 as to which the date is March 31, 2015

 

 
39

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31,

 

           

(Revised)

 

(Amounts in Thousands, Except for Share and per Share Amounts)

 

2014

   

2013

 
                 

ASSETS

               

Current assets:

               

Cash

  $ 3,680     $ 333  

Restricted cash

    85       35  

Accounts receivable, net of allowance for doubtful accounts of $2,170 and $1,932, respectively

    8,272       8,241  

Unbilled receivables - current

    7,177       4,917  

Inventories

    498       520  

Prepaid and other assets

    3,010       2,949  

Deferred tax asset - current

    385       460  

Current assets related to discontinued operations

    20       3,114  

Total current assets

    23,127       20,569  
                 

Property and equipment:

               

Buildings and land

    19,863       19,486  

Equipment

    35,933       35,279  

Vehicles

    403       610  

Leasehold improvements

    11,613       11,625  

Office furniture and equipment

    1,799       2,046  

Construction-in-progress

    336       630  
      69,947       69,676  

Less accumulated depreciation and amortization

    (47,123 )     (43,616 )

Net property and equipment

    22,824       26,060  
                 

Property and equipment related to discontinued operations

    681       1,367  
                 

Intangibles and other long term assets:

               

Permits

    16,709       16,744  

Goodwill

          1,330  

Other intangible assets - net

    2,435       2,980  

Unbilled receivables – non-current

    273       302  

Finite risk sinking fund

    21,334       21,307  

Other assets

    1,253       1,401  

Total assets

  $ 88,636     $ 92,060  

 

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

 

 
40

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS, CONTINUED

As of December 31,

 

           

(Revised)

 

(Amounts in Thousands, Except for Share and per Share Amounts)

 

2014

   

2013

 
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 5,350     $ 5,462  

Accrued expenses

    4,540       5,201  

Disposal/transportation accrual

    1,737       1,385  

Unearned revenue

    4,873       4,149  

Current liabilities related to discontinued operations

    2,137       3,994  

Current portion of long-term debt

    2,319       2,462  

Current portion of long-term debt - related party

    1,414       414  

Total current liabilities

    22,370       23,067  
                 

Accrued closure costs

    5,508       5,222  

Other long-term liabilities

    803       739  

Deferred tax liabilities

    5,391       4,927  

Long-term liabilities related to discontinued operations

    590       602  

Long-term debt, less current portion

    6,690       9,009  

Long-term debt, less current portion - related party

    949       2,363  

Total long-term liabilities

    19,931       22,862  
                 

Total liabilities

    42,301       45,929  
                 

Commitments and Contingencies (Note 13)

               
                 

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 $803 and $739, 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 and 75,000,000 shares authorized, respectively; 11,476,485 and 11,406,573 shares issued, respectively; 11,468,843 and 11,398,931 shares outstanding, respectively

    11       11  

Additional paid-in capital

    103,765       103,454  

Accumulated deficit

    (59,758 )     (58,533 )

Accumulated other comprehensive income

    11       2  

Less Common Stock in treasury, at cost; 7,642 shares

    (88 )     (88 )

Total Perma-Fix Environmental Services, Inc. stockholders' equity

    43,941       44,846  

Non-controlling interest

    1,109        

Total stockholders' equity

    45,050       44,846  
                 

Total liabilities and stockholders' equity

  $ 88,636     $ 92,060  

 

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

 

 
41

 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31,

 

(Amounts in Thousands, Except for Per Share Amounts)

 

2014

   

2013

 
                 

Net revenues

  $ 57,065     $ 74,413  

Cost of goods sold

    45,157       64,597  

Gross profit

    11,908       9,816  
                 

Selling, general and administrative expenses

    11,973       14,376  

Research and development

    1,315       1,764  

Impairment loss on goodwill

    380       27,856  

(Gain) loss on disposal of property and equipment

    (41 )     49  

Loss from operations

    (1,719 )     (34,229 )
                 

Other income (expense):

               

Interest income

    27       35  

Interest expense

    (616 )     (762 )

Interest expense-financing fees

    (192 )     (132 )

Foreign currency loss

    (24 )      

Other

    (51 )     (8 )

Loss from continuing operations before taxes

    (2,575 )     (35,096 )

Income tax expense (benefit)

    417       (625 )

Loss from continuing operations, net of taxes

    (2,992 )     (34,471 )
                 

Income (loss) from discontinued operations, net of taxes

    1,688       (1,568 )

Net Loss

    (1,304 )     (36,039 )
                 

Net loss attributable to non-controlling interest

    (79 )     (64 )
                 

Net loss attributable to Perma-Fix Environmental Services, Inc. common stockholders

  $ (1,225 )   $ (35,975 )
                 

Net (loss) income per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic and diluted:

               

Continuing operations

  $ (.26 )   $ (3.04 )

Discontinued operations

    .15       (.14 )

Net loss per common share

  $ (.11 )   $ (3.18 )
                 
                 

Number of common shares used in computing net (loss) income per share:

               

Basic

    11,443       11,319  

Diluted

    11,443       11,319  

 

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

 

 
42

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the years ended December 31,

 

(Amounts in Thousands)

 

2014

   

2013

 
                 

Net loss

  $ (1,304 )   $ (36,039 )

Other comprehensive income:

               

Foreign currency translation gain

    9       4  

Total other comprehensive income

    9       4  
                 

Comprehensive loss

    (1,295 )     (36,035 )

Comprehensive loss attributable to non-controlling interest

    (79 )     (64 )

Comprehensive loss attributable to Perma-Fix

               

Environmental Services, Inc. common stockholders

  $ (1,216 )   $ (35,971 )

 

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

 

 
43

 

 

 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the years ended December 31,

(Amounts in Thousands, Except for Share Amounts)

 

                                           
                Common     Accumulated     Non-           (Revised)  
          Additional     Stock     Other     controlling     (Revised)     Total  
   

Common Stock

    Paid-In      Held In      Comprehensive       Interest in     Accumulated      Stockholders'   
   

Shares

   

Amount

    Capital     Treasury     (Loss) Income     Subsidiary     Deficit     Equity  
                                                                 

Balance at December 31, 2012 (As previously reported)

    11,247,642     $ 11     $ 102,864     $ (88 )   $ (2 )   $ 572     $ (19,103 )   $ 84,254  

Prior period adjustment resulting from revision (see Note 3)

                                        (3,455 )     (3,455 )

Balance at December 31, 2012 (As revised)

    11,247,642       11       102,864       (88 )     (2 )     572       (22,558 )     80,799  

Net loss

                                  (64 )     (35,975 )     (36,039 )

Foreign currency translation

                            4                   4  

Distribution to non-controlling interest

                                  (490 )           (490 )

Redemption of non-controlling interest

                                  (18 )           (18 )

Issuance of Common Stock for services

    69,041             206                               206  

Issuance of Common Stock for debt

    90,000             200                               200  

Issuance of warrants for debt

                59                               59  

Cash in lieu - reverse stock split

    (110 )                                          

Stock-Based Compensation

                125                               125  

Balance at December 31, 2013

    11,406,573     $ 11     $ 103,454     $ (88 )   $ 2     $     $ (58,533 )   $ 44,846  

Net loss

                                  (79 )     (1,225 )     (1,304 )

Foreign currency translation

                            9                   9  

Issuance of stock - Perma-Fix Medical S.A., net of expenses of $242

                                  1,188             1,188  

Issuance of Common Stock upon exercise of options

    2,577             7                               7  

Issuance of Common Stock for services

    67,335             270                               270  

Stock-Based Compensation

                34