10-K 1 form10-k.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, 2019

 

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   Trading symbol   Name of each exchange on which registered
Common Stock, $.001 Par Value   PESI   NASDAQ Capital Markets
Preferred Stock Purchase Rights     NASDAQ Capital Markets

 

Indicate by check mark 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes [X] No [  ]

 

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

 

Large accelerated filer [  ] Accelerated Filer [  ] Non-accelerated Filer [  ] Smaller reporting company [X] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the 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, 2019), was approximately $44,338,864. For the purposes of this calculation, all directors and executive officers of the Registrant (as indicated in Item 12) have been deemed to be affiliates. Such determination should not be deemed an admission that such directors and executive officers, are, in fact, affiliates of the Registrant. The Company’s Common Stock is listed on the NASDAQ Capital Markets.

 

As of February 18, 2020, there were 12,123,006 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 17
     
Item 2. Properties 17
     
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 18
     
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 34
     
  Special Note Regarding Forward-Looking Statements 34
     
Item 8. Financial Statements and Supplementary Data 37
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77
     
Item 9A. Controls and Procedures 77
     
Item 9B. Other Information 77
 
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 78
     
Item 11. Executive Compensation 86
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 110
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 112
     
Item 14. Principal Accountant Fees and Services 114
 
PART IV
     
Item 15. Exhibits and Financial Statement Schedules 115

 

 
 

 

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 1990, is an environmental and environmental technology know-how company.

 

We have grown through acquisitions and internal growth. Our goal is to continue to focus on the safe and efficient operation of our three waste treatment facilities and on-site activities, identify and pursue strategic acquisitions to expand our market base, and conduct research and development (“R&D”) of innovative technologies to solve complex waste management challenges providing increased value to our clients. The Company continues to focus on expansion into both commercial and international markets to supplement government spending in the United States of America (“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.

 

Our majority-owned subsidiary, Perma-Fix Medical S.A. and its wholly-owned subsidiary, Perma-Fix Medical Corporation (“PFM Corporation” – a Delaware corporation) (together known as “PF Medical” or our “Medical Segment”), has not generated any revenue but continues on a limited basis to evaluate strategic options to commercialize its medical isotope production. These options require substantial capital to fund R&D requirements, in addition to start-up and production costs. As a result, the Medical Segment has substantially reduced its R&D activities and is attempting to raise the necessary capital or to partner with others willing to finance its activities (see “Medical Segment” below for further information in connection with this segment).

 

Segment Information and Foreign and Domestic Operations and Sales

 

The Company has three reportable segments. In accordance with Financial Accounting Standards Board (“FASB”) 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 decision maker “(CODM”) 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 (waste containing both hazardous and low-level radioactive waste), hazardous and non-hazardous waste treatment, processing and disposal services primarily through three uniquely licensed (Nuclear Regulatory Commission or state equivalent) and permitted (U.S. 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”), and Perma-Fix Northwest Richland, Inc. (“PFNWR”). 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.

 

The Company completed the closure and decommissioning activities of its East Tennessee Materials and Energy Corporation (“M&EC”) facility (within our Treatment Segment and in closure status) in accordance with M&EC’s license and permit requirements in 2019.

 

For 2019, the Treatment Segment accounted for $40,364,000, or 54.9%, of total revenue, as compared to $36,271,000, or 73.2%, of total revenue for 2018. See “Dependence Upon a Single or Few Customers” for further details and a discussion as to our Segments’ contracts with government clients (domestic and foreign) or with others as a subcontractor to government clients.

 

1
 

 

SERVICES SEGMENT, which includes:

 

  - Technical services, which include:

 

  professional radiological measurement and site survey of large government and commercial installations using advanced methods, technology and engineering;
  integrated Occupational Safety and Health services including 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;
  global technical services providing consulting, engineering, project management, waste management, environmental, and decontamination and decommissioning field, technical, and management personnel and services to commercial and government customers; and
  on-site waste management services to commercial and governmental customers.

 

  - Nuclear services, which include:

 

  technology-based services including engineering, decontamination and decommissioning (“D&D”), specialty services, logistics, transportation, processing and disposal;
  remediation of nuclear licensed and federal facilities and the remediation cleanup of nuclear legacy sites. Such services capability includes: project investigation; radiological engineering; partial and total plant D&D; facility decontamination, dismantling, demolition, and planning; site restoration; logistics; transportation; and emergency response; and

 

  - A company owned equipment calibration and maintenance laboratory that services, maintains, calibrates, and sources (i.e., rental) health physics, IH and customized nuclear, environmental, and occupational safety and health (“NEOSH”) instrumentation.
  - A company owned gamma spectroscopy laboratory for the analysis of oil and gas industry solids and liquids.

 

For 2019, the Services Segment accounted for $33,095,000, or 45.1%, of total revenue, as compared to $13,268,000, or 26.8%, of total revenue for 2018. See “Dependence Upon a Single or Few Customers” for further details and a discussion as to our Segments’ contracts with government clients (domestic and foreign) or with others as a subcontractor to government clients.

 

MEDICAL SEGMENT reporting includes: R&D costs for the new medical isotope production technology from our majority-owned Polish subsidiary, PF Medical, of which we own approximately 60.5% at December 31, 2019. The Medical Segment has not generated any revenue as it remains in the R&D stage. The Company continues to scale down R&D costs for this segment which consist primarily of third party fees and other administrative related costs associated with the segment. As previously disclosed, our Medical Segment has substantially reduced its R&D activities due to the need for capital to fund these activities. The Company anticipates that the Medical Segment will not resume full R&D activities until the necessary capital is obtained through its own credit facility or additional equity raise or obtains partners willing to provide funding for its R&D.

 

Our Treatment and Services Segments provide services to research institutions, commercial companies, public utilities, and governmental agencies (domestic and foreign), 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.

 

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

 

Foreign Revenue

 

Our consolidated revenue for 2019 and 2018 included approximately $149,000, or 0.2%, and $98,000, or 0.2%, respectively, from United Kingdom customers (including revenues generated by our United Kingdom subsidiary, Perma-Fix UK Limited (“PF UK Limited”)).

 

2
 

 

Our consolidated revenue for 2019 and 2018 included approximately $5,488,000, or 7.5%, and $1,140,000, or 2.3%, respectively, from Canadian customers (including revenues generated by our Perma-Fix of Canada, Inc. (“PF Canada”) subsidiary).

 

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 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. 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 Resource Conservation and Recovery Act (“RCRA”) Part B permit, Toxic Substances Control Act (“TSCA”) authorization, Restricted RX Drug Distributor-Destruction license, biomedical, 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 EPA Approval.

 

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.

 

As previously discussed, the Company completed the closure and decommissioning activities of its M&EC facility (within our Treatment Segment) in accordance with M&EC’s license and permit requirements in 2019. The Company had previously fully impaired the permit value for our M&EC facility. The permits at M&EC have been terminated.

 

The combination of a RCRA Part B hazardous waste permit, TSCA authorization, and a radioactive materials license, as held by our Treatment Segment are very difficult to obtain for a single facility and make these facilities unique.

 

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, we believe such would allow companies to enter into these markets and provide greater competition.

 

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. At December 31, 2019, our Treatment Segment had a backlog of approximately $8,506,000, as compared to approximately $11,104,000 at December 31, 2018. 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 quarters.

 

3
 

 

Dependence Upon a Single or Few Customers

 

Our Treatment and Services Segments have significant relationships with the U.S and Canadian governmental authorities, and continue to enter into contracts, directly as the prime contractor or indirectly for others as a subcontractor, to government authorities. The U.S Department of Energy (“DOE”) and U.S. Department of Defense (“DOD”) represent major customers for our Treatment and Services Segments which may be a direct contractor for these two major customers or indirectly as a subcontractor for others to these two major customers. The contracts that we are a party to with the U.S federal government or with others as a subcontractor to the U.S federal government generally provide that the government may terminate or renegotiate the contracts on 30 days’ notice, at the government’s election. The contracts/task order agreements that we are a party to with Canadian governmental authorities generally provide that the government authorities may terminate the contracts/task order agreements at any time for any reason for convenience. Our inability to continue under existing contracts that we have with the U.S federal government and Canadian government authorities (directly or indirectly as a subcontractor) or significant reductions in the level of governmental funding in any given year could have a material adverse impact on our operations and financial condition.

 

We performed services relating to waste generated by government clients (domestic and foreign (primarily Canadian)), either directly as a prime contractor or indirectly for others as a subcontractor to government entities, representing approximately $59,985,000, or 81.7%, of our total revenue during 2019, as compared to $35,944,000, or 72.6%, of our total revenue during 2018.

 

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 (“ES”) which operates treatment facilities in Oak Ridge, TN and Erwin, TN and disposal facilities for low level radioactive waste in Clive, UT and Barnwell, SC. Waste Control Specialists (“WCS”), which has licensed disposal capabilities for low level radioactive waste in Andrews, TX, is also a competitor in the treatment market with increasing market share. These two competitors also provide us with options for disposal of our treated nuclear waste. The Treatment Segment treats and disposes of DOE generated wastes largely at DOE owned sites. Our Treatment Segment currently solicits business primarily on a North America basis with both government and commercial clients; however, we continue to focus on emerging international markets for additional work.

 

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). Based on past experience, we believe that 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. Our recently implemented strategic plan, which includes increasing our overall contract bid/win ratio and expansion into commercial and international markets, has thus far been successful. Since mid-2019, our wholly-owned subsidiary, PF Canada, entered into two Task Order Agreements (“TOA”) with the Canadian Nuclear Laboratories, LTD. (“CNL”), with an aggregate value of approximately $11,500,000 (U.S dollar), for remediation work at specific sites within Ontario, Canada. Work under these TOAs are expected to be completed by 2020. The TOAs with the Canadian government generally provide that the government may terminate a TOA at any time for convenience. If our Services Segment is unable to meet these competitive challenges, it could lose market share and experience an overall reduction in its profits.

 

4
 

 

Certain Environmental Expenditures and Potential Environmental Liabilities

 

Environmental Liabilities

 

We have three remediation projects, which are currently in progress at our Perma-Fix of Dayton, Inc. (“PFD”), Perma-Fix of Memphis, Inc. (“PFM”), 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. These remediation activities are closely reviewed and monitored by the applicable state regulators.

 

At December 31, 2019, we had total accrued environmental remediation liabilities of $927,000, an increase of $40,000 from the December 31, 2018 balance of $887,000. The net increase represents an increase of approximately $50,000 made to the reserve at our PFM subsidiary due to reassessment of the remediation reserve and payments of approximately $10,000 on remediation projects for our PFD subsidiary. At December 31, 2019, $817,000 of the total accrued environmental remediation liabilities was recorded as current.

 

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 properties, 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.

 

Research and Development (“R&D”)

 

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. Our competitors also devote resources to R&D and many such competitors have greater resources at their disposal than we do. As previously discussed, our Medical Segment has ceased a substantial portion of its R&D activities due to the need for substantial capital to fund such activities. We continue to explore ways to raise this capital. We anticipate that our Medical Segment will not restart its full-scale R&D activities until it obtains the necessary funding or find a partner willing to fund its R&D activities. During 2019 and 2018, we incurred approximately $750,000 and $1,370,000, respectively, in R&D activities, of which approximately $314,000 and $811,000, respectively, were spent by our Medical Segment.

 

Number of Employees

 

In our service-driven business, our employees are vital to our success. We believe we have good relationships with our employees. At December 31, 2019, we employed approximately 325 employees, of whom 308 are full-time employees and 17 are part-time/temporary employees.

 

5
 

 

Governmental Regulation

 

Environmental companies, such as us, and their customers are subject to extensive and evolving environmental laws and regulations by a number of federal, 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 companies, such as us, that treat, store or dispose of 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 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.

 

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 Department of Health (with the USNRC oversight), Office of Radiation Control, regulates the permitting and radiological program of the PFF facility, and the State of Tennessee (with the USNRC oversight), Tennessee Department of Radiological Health, regulates permitting and the radiological program of the DSSI facility. The State of Washington (with the USNRC oversight) Department of Health, regulates permitting and 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 TSCA. 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.

 

6
 

 

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.

 

We maintain finite risk insurance policies and bonding mechanisms 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. 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.

 

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 Treatment and Services Segments’ revenues are generated through various government contracts or subcontracts (domestic and foreign (primarily Canadian)). Our revenues from governmental contracts and subcontracts relating to governmental facilities within our segments were approximately $59,985,000, or 81.7%, and $35,944,000, or 72.6%, of our consolidated operating revenues for 2019 and 2018, 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 U.S federal government are terminable, or subject to renegotiation, by the applicable governmental agency on 30 days notice, at the option of the governmental agency. The contracts/task order agreements that we are a party to with Canadian governmental authorities generally provide that the government authorities may terminate the contracts/task order agreements at any time for any reason for convenience. 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.

 

7
 

 

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

 

A variety of factors may cause our existing or future customers (including government clients) to reduce or halt their spending on hazardous waste and 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 government to approve necessary budgets, or to reduce the amount of the budget necessary, to fund remediation sites, including 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 government.

 

These events could result in or cause government clients to terminate or cancel existing contracts involving us to treat, store or dispose of contaminated waste and/or to perform remediation projects, at one or more of government 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 and contracts/task order agreements that we are a party to with Canadian governmental authorities generally provide that the government authorities may terminate the contracts/task order agreements at any time for any reason for convenience. 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, reductions in government funding or other events beyond our control (such as the impact of the Coronavirus) 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, without limitation, 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, and/or the impact resulting from the Coronavirus (or Covid-19). During economic downturns, large budget deficits that the federal government and many states are experiencing, and other events beyond our control, including, but not limited to the Coronavirus, the ability of private and government entities to spend on waste services, including 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 or the government declaring an emergency for reasons beyond our control (such as the Coronavirus), resulting in the delay or termination of remediation projects at federal or other sites or delay or termination of waste shipments from our customers to us could have a material adverse impact on our business, financial position, results of operations and cash flows. As a result of the Coronavirus, we have been informed that certain field projects for remediation work are being suspended until further notice due to precautions associated with the risk of potential virus spread among staff and client. Additionally, at this time, certain customers have delayed waste shipments to us into the second quarter of 2020 that were originally scheduled for the first quarter of 2020. Additional remediation projects we are working on and/or waste shipments to us from our customers could be further delayed/suspended due to the Coronavirus.

 

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. 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.

 

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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 include significant amount from 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. 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.

 

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 nuclear waste. Currently, there are only three disposal sites, each site having different owners, for our low-level radioactive waste we receive from non-governmental sites, allowing us to take advantage of the pricing competition between the three sites. If any 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 have limited remaining site to dispose of our nuclear waste. With limited end disposal site to dispose of our waste, we could be subject to significantly increased costs which could negatively impact our results of operations.

 

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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;
  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.

 

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.

 

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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 (“PAA”) 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 PAA was extended through 2025 by the Energy Policy Act of 2005.

 

Under certain conditions, the PAA’s indemnification provisions may not apply to our processing of radioactive waste at governmental facilities, and may 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 PAA 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, international (primarily Canada currently) and regional firms with nuclear and/or hazardous waste 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 we believe we have 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. For international business, which we continue to focus on, there are additional competitors, many from within the country the work is to be performed, making winning work in foreign countries more challenging. Competition places downward pressure on our contract prices and profit margins. If we are unable to meet these competitive challenges, we could lose market share and experience on overall reduction in our profits.

 

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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 $20,548,000 and $57,809,000 in net operating loss carryforwards for federal and state income tax purposes, respectively, which will expire in various amounts starting in 2021 if not used against future federal and state income tax liabilities, respectively. Approximately $12,199,000 of our federal net operating loss carryforwards were generated after December 31, 2017 ad thus do not expire. 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 any of our permits, other intangible assets, and tangible assets becomes impaired, we may be required to record significant charges to earnings.

 

Under accounting principles generally accepted in the United States (“U.S. GAAP”), we review our intangible and tangible 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. Factors that may be considered a change in circumstances, indicating that the carrying value of our permit, other intangible assets, and tangible 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 impairment charges in our financial statements, in which any impairment of our permit, other intangible assets, and tangible 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 or maximum 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 laws or labor conditions, weather delays, cost of raw materials, our suppliers’ or subcontractors’ inability to perform, and/or other events beyond our control, such as the impact of the Coronavirus, 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.

 

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Adequate bonding is necessary for us to win certain types of new work and support facility closure requirements.

 

We are often required to provide performance bonds to customers under certain of our 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. In addition, we provide bonds to support financial assurance in the event of facility closure pursuant to state requirements. 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(a) 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. If we are unable to maintain adequate internal control over financial reporting or effectively remediate any material weakness identified in 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.

 

Systems failures, interruptions or breaches of security and other cyber security risks could have an adverse effect on our financial condition and results of operations.

 

We are subject to certain operational risks to our information systems. Because of efforts on the part of computer hackers and cyberterrorists to breach data security of companies, we face risk associated with potential failures to adequately protect critical corporate, customer and employee data. As part of our business, we develop and retain confidential data about us and our customers, including the U.S. government. We also rely on the services of a variety of vendors to meet our data processing and communications needs.

 

Despite our implemented security measures and established policies, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures or failures on the part of our employees to follow our established security measures and policies. Information security risks have increased significantly. Our technologies, systems, and networks may become the target of cyber-attacks, computer viruses, malicious code, or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information and the disruption of our business operations. A security breach could adversely impact our customer relationships, reputation and operation and result in violations of applicable privacy and other laws, financial loss to us or to our customers or to our employees, and litigation exposure. While we maintain a system of internal controls and procedures, any breach, attack, or failure as discussed above could have a material adverse impact on our business, financial condition, and results of operations or liquidity.

 

There is also an increasing attention on the importance of cybersecurity relating to infrastructure. This creates the potential for future developments in regulations relating to cybersecurity that may adversely impact us, our customers and how we offer our services to our customers.

 

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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.

 

Risks Relating to our Financial Position and Need for Financing

 

Breach of any of the covenants in our 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, when we failed to meet our minimum quarterly fixed charge coverage ratio (“FCCR”) requirement, our lender has either waived these instances of non-compliance or provided certain amendments to our FCCR requirements which enabled us to meet our quarterly FCCR requirements. Additionally, our lender has in the past waived our quarterly FCCR testing requirements. If we fail to meet any of our financial covenants going forward, including the minimum quarterly FCCR requirement, and our lender does not further waive the non-compliance or further revise our covenant requirement so that we are in compliance, our lender could accelerate 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 debt and borrowing availability under our credit facility could adversely affect our operations.

 

At December 31, 2019, our aggregate consolidated debt was approximately $3,880,000. Our Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011, as subsequently amended (“Revised Loan Agreement”) provides for a total credit facility commitment of approximately $18,100,000, consisting of a $12,000,000 revolving line of credit and a term loan of $6,100,000. 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 reduced by outstanding standby letters of credit and any borrowing reduction that our lender may impose from time to time. At December 31, 2019, we had borrowings under the revolving part of our credit facility of approximately $321,000 and borrowing availability of up to an additional $8,714,000. 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, to refinance indebtedness, and borrow under our credit facility 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 indebtedness could limit our financial and operating activities, and adversely affect our ability to incur additional debt to fund future needs.

 

As a result of our indebtedness, we could, among other things, be:

 

  required 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;

 

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  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.

 

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. At December 31, 2019, we had 12,115,878 shares of Common Stock outstanding.

 

In addition, at December 31, 2019, we had outstanding options to purchase 681,300 shares of our Common Stock at exercise prices ranging from $2.79 to $8.40 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 without prior approval from our lender.

 

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 our Common Stock or the availability of shares of our 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.

 

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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.

 

We have authorized and unissued 17,135,180 (which include shares issuable under outstanding options to purchase 681,300 shares of our Common Stock and shares issuable under an outstanding warrant to purchase 60,000 shares of our Common Stock) shares of our Common Stock and 2,000,000 shares of our Preferred Stock as of December 31, 2019 (which includes 50,000 shares of our Preferred Stock reserved for issuance under our new preferred share rights plan discussed below). These unissued shares could be used by our management to make it more difficult for, and thereby discourage an attempt to acquire control of us.

 

Our Preferred Share Rights Plan may adversely affect our stockholders.

 

In May 2018, the Company adopted a Preferred Share Purchase Rights Plan (“Rights Plan”). As part of the Rights Plan, the Company’s Board of Directors (“Board”) declared a dividend distribution of one Preferred Share Purchase Right (“Right”) on each outstanding share of the Company’s Common Stock to stockholders of record on May 12, 2018. The Rights Plan is designed to assure that all of the Company’s shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender abusive tactics to gain control of the Company. The Rights Plan, as amended, is to terminate the earliest of (1) close of business on May 2, 2021, (2) the time at which the Rights are redeemed, (3) the time at which the Rights are exchange, or (4) closing of any merger or acquisition of the Company which has been approved by the Board prior to any person becoming such an acquiring person.

 

In general, the Rights under the Rights Plan will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s Common Stock or announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Common Stock (with certain exceptions). Each Right under the Rights Plan (other than the Rights owned by such acquiring person or members of such group which are void) will entitle shareholders to buy one one-thousandth of a share of a new series of participating preferred stock at an exercise price of $20.00. Each one one-thousandth of a share of such new preferred stock purchasable upon exercise of a Right has economic terms designed to approximate the value of one share of Common Stock. Shareholders who have beneficial ownership of 15% or more at the adoption of the new Rights Plan are grandfathered in, but may not acquire additional shares without triggering the new Rights Plan.

 

If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder (other than Rights owned by such acquiring person or members of such group which are void) to purchase, at the Right’s then current exercise price, a number of the acquiring company’s common shares having a market value at the time of twice the Right’s exercise price.

 

In addition, if a person or group (with certain exceptions) acquires 15% or more of the Company’s outstanding Common Stock, each Right will entitle its holder (other than the Rights owned by such acquiring person or members of such group which are void) to purchase, in lieu of preferred stock, at the Right’s then current exercise price, a number of shares of the Company’s Common Stock having a market value of twice the Right’s exercise price.

 

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Following the acquisition by a person or group of beneficial ownership of 15% or more of the Company’s outstanding Common Stock (with certain exceptions), and prior to an acquisition of 50% or more of the Company’s Common Stock by such person or group, the Company’s Board may, at its option, exchange the Rights (other than Rights owned by such acquiring person or members of such group) in whole or in part, for shares of the Company’s Common Stock at an exchange ratio of one share of Common Stock (or one one-thousandth of a share of the new series of participating preferred stock) per Right.

 

Prior to the acquisition by a person or group of beneficial ownership of 15% or more of the Company’s Common Stock (with certain exceptions), the Rights are redeemable for $0.001 per Right at the option of the Board of Directors.

 

The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board. The Rights should not interfere with any merger or other business combination approved by our Board.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2. PROPERTIES

 

Our principal executive office is in Atlanta, Georgia. Our Business Center is located in Oak Ridge, Tennessee. Our Treatment Segment facilities are located in Gainesville, Florida; Kingston, Tennessee; and Richland, Washington. Our Services Segment maintains offices as noted below, which are all leased properties. We maintain properties in Valdosta, Georgia and Memphis, Tennessee, which are all non-operational and are included within our discontinued operations.

 

The properties where three of our facilities operate on (Kingston, Tennessee; Gainesville, Florida; and Richland, Washington) are held by our senior lender as collateral for our credit facility. The Company currently leases properties in the following locations for operations and administrative functions within our Treatment and Services Segments, including our corporate office and Business Center:

 

    Square Footage (SF)/    
Location   Acreage (AC)   Expiration of Lease
Oak Ridge, TN (Business Center)   14,932 SF   May 1, 2022
Oak Ridge, TN (Services)   5,000 SF   September 30, 2020
Blaydon On Tyne, England (Services)   1,000 SF   Monthly
New Brighton, PA (Services)   3,558 SF   June 30, 2022
Newport, KY (Services)   1,566 SF   Monthly
Pembroke, Ontario, Canada (Services)   800 SF   Monthly
Atlanta, GA (Corporate)   6,499 SF   February 28, 2021
Oak Ridge, TN (Treatment)   8.7 AC, including 17,400 SF   October 1, 2021

 

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

 

In the normal course of conducting our business, we may become involved in litigation or be subject to local, state and federal agency (government) proceedings. We are not a party to any litigation or governmental proceeding, which our management believes could result in any judgments or fines that would have a material adverse effect on our financial position, liquidity or results of future operations.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not Applicable.

 

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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.

 

   2019   2018 
   Low   High   Low   High 
Common Stock  1st Quarter  $2.50   $3.94   $3.29   $4.26 
   2nd Quarter   3.40    4.46    4.10    

5.15

 
   3rd Quarter   3.10    4.77    4.05    5.00 
   4th Quarter   4.30    9.98    1.90    4.57 

 

At February 18, 2020, there were approximately 170 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, we have been advised that the total number of beneficial stockholders at February 18, 2020 was approximately 2,231.

 

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

 

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 2019.

 

We adopted a preferred share rights plan (the “Rights Plan”), as amended, which is designed to protect us against certain creeping acquisitions, open market purchases, and certain mergers and other combinations with acquiring companies. The Rights Plan is to terminate at the earliest of (1) close of business on May 2, 2021 (the “Final Expiration Date”), (2) the time at which the Rights are redeemed, (3) the time at which the Rights are exchange, or (4) closing of any merger or acquisition of the Company approved by the Board prior to any person becoming acquiring person.

 

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 Rights Plan in addition to its termination date.

 

See Note 6 “Capital Stock, Stock Plans, Warrants, and Stock Based Compensation” in Part II, Item 8, “Financial Statements and Supplementary Data” and “Equity Compensation Plan” in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matter” for securities authorized for issuance under equity compensation plans which are incorporated herein by reference.

 

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” (“MD&A”) may be deemed “forward-looking statements” within the meaning of Section 27A of the Act, 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.

 

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Management’s discussion and analysis is based, among other things, upon our audited consolidated financial statements and includes our accounts, the accounts of our wholly-owned subsidiaries and the accounts of our majority-owned Polish subsidiary, 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.

 

Review

 

Revenue increased $23,920,000 or 48.3% to $73,459,000 for the twelve months ended December 31, 2019 from $49,539,000 for the corresponding period of 2018. The revenue increase was primarily in the Services Segments where revenue increased approximately $19,827,000 or 149.4%. The increase in revenue within our Services Segment was primarily due to awards of several contracts/task orders for project work since the latter part of the first quarter of 2019, the result of successful implementation of our strategic plan in winning contract bids. Treatment Segment revenue increased $4,093,000 or 11.3%. Total gross profit increased $7,123,000 or 84.2%. Gross profit for the twelve months of 2019 and 2018 included closure costs recorded in the amount of approximately $330,000 and $3,323,000, respectively, in connection with the closure of our East Tennessee Materials and Energy Corporation (“M&EC”) facility in 2019 which we have completed in accordance with M&EC’s license and permit requirements. SG&A expenses increased $1,121,000 or 10.4% for the twelve months ended December 31, 2019 as compared to the corresponding period of 2018.

 

As a result of the closure of our M&EC facility in 2019 as discussed above, on July 22, 2019, we received a release of $5,000,000 of finite risk sinking funds held as collateral under our financial assurance closure policy dated June 2003 from AIG Specialty Insurance Company (“AIG”) (see “Liquidity and Capital Resources – Insurance” within this MD&A for a discussion of the release of this finite risk sinking funds). Additionally, on April 1, 2019, we consummated a lending transaction with Mr. Robert Ferguson resulting in the receipt of $2,500,000 in loan proceeds (see “Liquidity and Capital Resources – Financing Activities” within this MD&A for a discussion of this loan transaction). Both of these transactions, along with our operation, have significantly improved our working capital. At December 31, 2019, we had working capital of approximately $26,000 as compared to working capital deficit of $6,753,000 at December 31, 2018.

 

Business Environment and Outlook

 

Our Treatment and Services Segments’ business continues to be heavily dependent on services that we provide to governmental clients directly as the contractor or indirectly as a subcontractor. We believe demand for our services will continue to be subject to fluctuations due to a variety of factors beyond our control, including, without limitation, the economic conditions, the manner in which the applicable government will be required to spend funding to remediate various sites, and/or the impact resulting from the Coronavirus. In addition, our governmental contracts and subcontracts relating to activities at governmental sites in the United States are generally subject to termination or renegotiation on 30 days’ notice at the government’s option, and our governmental contracts/task orders with the Canadian government authorities allow the authorities to terminate the contract/task orders at any time for convenience. Significant reductions in the level of governmental funding or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows. As previously disclosed, our Medical Segment continues to evaluate strategic options to commercialize its medical isotope production technology. These options generally require substantial capital to fund research and development (“R&D”) requirements, in addition to start-up and production costs. The Company’s Medical Segment has substantially reduced its R&D costs and activities due to the need for capital to fund such activities. The Company anticipates that its Medical Segment will not resume full R&D activities until it obtains the necessary funding through obtaining its own credit facility or additional equity raise or obtaining new partners willing to fund its R&D activities. If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to further reduce, delay or eliminate its R&D program.

 

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We are continually reviewing methods to raise additional capital to supplement our liquidity requirements, when needed, and reducing our operating costs. We are committed to further reducing operating costs to bring them in line with revenue levels, when needed. Further, our recently implemented strategic plan, which includes increasing our overall contract bid/win ratio and expansion into both commercial and international markets to increase revenues in our Treatment and Services Segments to offset the uncertainties of government spending in the United States, has thus far been successful. Since May 2019, our wholly-owned subsidiary, Perma-Fix Canada, Inc. (within our Services Segment) entered into two Task Order Agreements (“TOAs”) with the Canadian Nuclear Laboratories, LTD. (“CNL”), with a total value of approximately $11,500,000 (U.S dollar), for remediation work at specific sites within Ontario, Canada. Remediation work under these two TOAs are expected to be completed within 2020. We believe that the full implementation of our strategic plan should be accomplished over the next few years, and when fully implemented, we believe it should further improve our revenue and liquidity and increase our shareholder values.

 

Results of Operations

 

The reporting of financial results and pertinent discussions are tailored to our three reportable segments: The Treatment Segment (“Treatment”), the Services Segment (“Services”), and the Medical Segment (“Medical”). Our Medical Segment has not generated any revenue and all costs incurred are included within R&D:

 

Summary - Years Ended December 31, 2019 and 2018

 

Below are the results of continuing operations for years ended December 31, 2019 and 2018 (amounts in thousands):

 

(Consolidated)  2019   %   2018   % 
Net revenues  $73,459    100.0   $49,539    100.0 
Cost of goods sold   57,875    78.8    41,078    82.9 
Gross profit   15,584    21.2    8,461    17.1 
Selling, general and administrative   11,862    16.1    10,741    21.7 
Research and development   750    1.0    1,370    2.8 
Loss (gain) on disposal of property and equipment   3     —    (46)   (.1)
Loss from operations   2,969    4.0    (3,604)   (7.3)
Interest income   337    .5    295    .6 
Interest expense   (432)   (.6)   (251)   (.5)
Interest expense – financing fees   (208)   (.3)   (38)   (.1)
Other   223    .3    (8)    
Net gain on exchange offer of Series B Preferred Stock           1,596    3.2 
Income (loss) from continuing operations before taxes   2,889    3.9    (2,010)   (4.1)
Income tax expense (benefit)   157    .2    (936)   (1.9)
Income (loss) from continuing operations  $2,732    3.7   $(1,074)   (2.2)

 

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Revenue

 

Consolidated revenues increased $23,920,000 for the year ended December 31, 2019 compared to the year ended December 31, 2018, as follows:

 

(In thousands)  2019   % Revenue   2018   % Revenue   Change   % Change 
Treatment                              
Government waste  $27,277    37.1   $23,701    47.8   $3,576    15.1 
Hazardous/non-hazardous (1)   6,376    8.7    5,656    11.4    720    12.7 
Other nuclear waste   6,711    9.1    6,914    14.0    (203)   (2.9)
Total   40,364    54.9    36,271    73.2    4,093    11.3 
                               
Services                              
Nuclear   30,371    41.4    10,424    21.1    19,947    191.4 
Technical   2,724    3.7    2,844    5.7    (120)   (4.2)
Total   33,095    45.1    13,268    26.8    19,827    149.4 
                               
Total  $73,459    100.0   $49,539    100.0   $23,920    48.3 

 

1) Includes wastes generated by government clients of $2,422,000 and $1,594,000 for the twelve months ended December 31, 2019 and 2018, respectively.

 

Treatment Segment revenue increased $4,093,000 or 11.3 % for the twelve months ended December 31, 2019 over the same period in 2018. The revenue increase was primarily due to higher revenue generated from government clients due to higher averaged price waste resulting from revenue mix. The increase in hazardous/non-hazardous waste revenue was also primarily due to higher revenue generated from higher averaged price waste. Services Segment revenue increased by $19,827,000 or 149.4% in the twelve months ended December 31, 2019 from the corresponding period of 2018. As previously discussed, the increase in our Services Segment revenue was primarily due to awards of several contracts/task orders for project work since the latter part of the first quarter of 2019 resulting from the success of our implemented strategic plan in winning contract bids. Our Services Segment revenues are project based; as such, the scope, duration and completion of each project vary. As a result, our Services Segment revenues are subject to differences relating to timing and project value.

 

Cost of Goods Sold

 

Cost of goods sold increased $16,797,000 for the year ended December 31, 2019, as compared to the year ended December 31, 2018, as follows:

 

       %       %     
(In thousands)  2019   Revenue   2018   Revenue   Change 
Treatment  $28,116    69.7   $29,074    80.2   $(958)
Services   29,759    89.9    12,004    90.5    17,755 
Total  $57,875    78.8   $41,078    82.9   $16,797 

 

Cost of goods sold for the Treatment Segment decreased by $958,000 or approximately 3.3%. Treatment Segment costs of goods sold for the twelve months ended December 31, 2019 and 2018 included additional closure costs recorded in the amount of approximately $330,000 and $3,323,000, respectively, for our M&EC facility in connection with the closure of the facility. Excluding the closure costs recorded in both periods, Treatment Segment costs increased $2,035,000 or 7.9% due to higher revenue. Excluding the closure costs recorded, Treatment Segment’s variable costs increased by approximately $1,543,000 which included primarily higher disposal, transportation and material and supplies costs. Treatment Segment overall fixed costs were higher by approximately $492,000 resulting from the following: salaries and payroll related expenses were higher by approximately $1,029,000 resulting from higher headcount; travel expenses were higher by $66,000; depreciation expenses were higher by $62,000; general expenses were lower by approximately $505,000 in various categories; regulatory expenses were lower by $54,000; and maintenance expense was lower by approximately $106,000. Services Segment cost of goods sold increased $17,755,000 or 147.9% primarily due to higher revenue as discussed above. The increase in Services Segment’s cost of goods sold was primarily from the following: salaries and payroll related expenses, travel, and outside services expenses were higher by a total of approximately $16,726,000; material and supply expenses were higher by $781,000; regulatory expenses were higher by approximately $441,000 primarily due to bonding requirements on certain projects; general expenses were higher by $191,000 in various categories; disposal/transportation expenses were lower by $245,000; and depreciation expenses were lower by approximately $139,000 as a number of assets became fully depreciated by end of 2018. Included within cost of goods sold is depreciation and amortization expense of $1,301,000 and $1,378,000 for the twelve months ended December 31, 2019, and 2018, respectively.

 

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Gross Profit

 

Gross profit for the year ended December 31, 2019 was $7,123,000 higher than 2018 as follows:

 

       %       %     
(In thousands)  2019   Revenue   2018   Revenue   Change 
Treatment  $12,248    30.3   $7,197    19.8   $5,051 
Services   3,336    10.1    1,264    9.5    2,072 
Total  $15,584    21.2   $8,461    17.1   $7,123 

 

As discussed previously, Treatment Segment’s cost of goods sold for the twelve months ended December 31, 2019 and 2018 included $330,000 and $3,323,000 in closure costs recorded in connection with the closure of the M&EC facility, respectively. Excluding the closure costs recorded in each of the periods, our Treatment Segment had a gross profit increase of $2,058,000 or 19.6% and gross margin increased to 31.2% from 29.0% primarily due to higher revenue, revenue mix and the reduction in the segment’s fixed costs. In the Services Segment, gross profit increased $2,072,000 or 163.9% and gross margin increased to 10.1% from 9.5% primarily due to the increase in revenue. Our overall Services Segment gross margin is impacted by our current projects which are competitively bid on and will therefore, have varying margin structures.

 

SG&A

 

SG&A expenses increased $1,121,000 for the year ended December 31, 2019 as compared to the corresponding period for 2018 as follows:

 

(In thousands)  2019   % Revenue   2018   % Revenue   Change 
Administrative  $5,395       $4,947       $448 
Treatment   3,955    9.8    3,740    10.3    215 
Services   2,512    7.6    2,054    15.5    458 
Total  $11,862    16.1   $10,741    21.7   $1,121 

 

The increase in Administrative SG&A was primarily due to the following: salary/payroll related/healthcare costs were higher by approximately $398,000 which included accrual of approximately $332,000 related to the Company’s incentive plans (no accrual was recorded in the prior year); general expenses were higher by $113,000 in various categories; travel expenses were slightly higher by $9,000; depreciation expenses were lower by $23,000; and outside services costs were lower by approximately $49,000 from fewer consulting and business matters. Treatment SG&A was higher primarily due to the following: salaries and payroll related expenses were higher by approximately $185,000; travel expenses were higher by approximately $63,000; bad debt expenses were higher by $10,000; general expenses were higher by approximately $42,000 in various categories; and outside services expenses were lower by approximately $85,000 resulting from fewer consulting/subcontract matters. Services Segment SG&A increased by $458,000 primarily due to the following: general expenses were higher by approximately $132,000 in various categories; bad debt expenses were higher by $314,000 resulting primarily from the additional bad debt expense of $241,000 that we recorded in the fourth quarter of 2019 as a certain account receivable was determined not to be collectible at December 31, 2019; outside services expenses were higher by approximately $99,000 resulting from more consulting matters; and salaries and payroll related expenses were lower by approximately $87,000. Services Segment’s general expenses for the year ended 2018 included a reduction in rent expense recorded in the second quarter of 2018 resulting from the end of our lease term for our business center office in Knoxville, Tennessee (which was not renewed with the same lessor). Included in SG&A expenses is depreciation and amortization expense of $41,000 and $77,000 for the twelve months ended December 31, 2019 and 2018, respectively.

 

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R&D

 

R&D expenses decreased $620,000 for the year ended December 31, 2019 as compared to the corresponding period of 2018 as follows:

 

(In thousands)  2019   2018   Change 
Administrative  $23   $76   $(53)
Treatment   401    483    (82)
Services   12        12 
PF Medical   314    811    (497)
Total  $750   $1,370   $(620)

 

Research and development costs consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development of new technologies and technological enhancement of new potential waste treatment processes. The decrease in R&D costs for 2019 as compared to 2018 was primarily due to reduced R&D costs within our PF Medical Segment. The Company continues to scale down its R&D costs for this segment which consist primarily of third party fees and other administrative related costs associated with the segment. As discussed previously, our Medical Segment has ceased a substantial portion of its R&D costs and activities due to the need for substantial capital to fund such activities and we anticipate that our Medical Segment will not resume any substantial R&D activities until it obtains the necessary funding.

 

Interest Income

 

Interest income increased $42,000 for the twelve months ended December 31, 2019 as compared to the corresponding period of 2018 primarily due to higher interest earned on the finite risk sinking funds resulting from higher interest rates; however, the higher interest income earned from higher interest rates was partially reduced by the lower finite risk sinking fund balance resulting from the release of $5,000,000 in finite risk sinking funds in July 2019 in connection with the M&EC facility closure.

 

Interest Expense

 

Interest expense increased approximately $181,000 for the twelve months ended December 31, 2019 as compared to the corresponding period of 2018 primarily due to interest on new finance leases which we entered into in 2019 and interest incurred from the April 1, 2019 loan that we entered into with Robert Ferguson in the amount of $2,500,000 (see “Liquidity and Capital Resources – Financing Activities” for further information of this loan).

 

Interest Expense- Financing Fees

 

Interest expense-financing fees increased approximately $170,000 for the twelve months ended December 31, 2019 as compared to the corresponding period of 2018. The increase was primarily due to debt discount/debt issuance costs amortized as financing fees in connection with the issuance of our Common Stock and a purchase Warrant as consideration for the Company receiving the $2,500,000 loan from Robert Ferguson (See “Liquidity and Capital Resources – Financing Activities” for further information of this debt discount).

 

Income Taxes

 

We had income tax expense of $157,000 and income tax benefit of $936,000 for continuing operations for the years ended December 31, 2019 and 2018, respectively. The Company’s effective tax rates were approximately 5.4% and 46.6% for the twelve months ended December 31, 2019 and 2018, respectively. Our tax benefit for 2018 included a tax benefit of approximately $1,235,000 recorded in 2018 resulting from the release of a portion of the valuation allowance on deferred tax assets related to indefinite-lived net operating losses generated due to the closure of our M&EC facility. The tax expense for 2019 was comprised of state tax expense for separate company filing states and the increase in the deferred tax liability related to the amortization of indefinite lived intangible assets.

 

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Discontinued Operations

 

Our discontinued operations consist of all our subsidiaries included in our Industrial Segment which were divested in 2011 and prior, previously closed locations, and our Perma-Fix of South Georgia, Inc. (“PFSG”) facility which is in closure status, which final closure is subject to regulatory approval of necessary plans and permits.

 

Our discontinued operations had no revenue for the twelve months ended December 31, 2019 and 2018. We incurred net losses of $541,000 and $667,000 for our discontinued operations for the twelve months ended December 31, 2019 and 2018, respectively (net of taxes of $0 for each period). Our net loss for the year ended December 31, 2019 and 2018 included an increase of approximately $50,000 in each period in remediation reserve for our Perma-Fix of Memphis (“PFM”) and Perma-Fix of Dayton (“PFD”) subsidiaries, respectively, due to reassessment of the remediation reserve, with the remaining loss incurred primarily due to costs incurred in the administration and continued monitoring of our discontinued operations.

 

Liquidity and Capital Resources

 

Our cash flow requirements during 2019 were primarily financed by our operations, credit facility availability, loan proceeds of $2,500,000 from a loan that we consummated on April 1, 2019 (see “Financing Activities” below for further information of the agreement and note), and the receipt of the $5,000,000 in finite risk sinking funds in July 2019 from AIG resulting from the closure of our M&EC facility (see a discussion of this finite risk sinking in “Insurance” below). Our cash flow requirements for the next twelve months will consist primarily of general working capital needs, scheduled principal payments on our debt obligations, remediation projects, and planned capital expenditures. We plan to fund these requirements from our operations, credit facility availability, and cash on hand. We continue to explore all sources of increasing our capital to supplement our liquidity requirements, when needed, and to improve our revenue and working capital. We are continually reviewing operating costs and are committed to further reducing operating costs to bring them in line with revenue levels, when necessary. Although there are no assurances, we believe that our cash flows from operations, our available liquidity from our credit facility, and our cash on hand should be sufficient to fund our operations for the next twelve months. As previously discussed, our recently implemented strategic plan, which includes expansion into international markets and increasing our contract bid/win ratio, has thus far been successful, which we believe will continue to help improve our results and liquidity. We further anticipate that over the next few years, we should be able to fully implement our strategic plan. As previously disclosed, our Medical Segment substantially reduced its R&D costs and activities due to the need for capital to fund such activities. We continue to seek various sources of potential funding for our Medical Segment. We anticipate that our Medical Segment will not resume full R&D activities until it obtains the necessary funding through obtaining its own credit facility or additional equity raise or obtaining new partners willing to fund its R&D activities. If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to further reduce, delay or eliminate its R&D program.

 

The following table reflects the cash flow activity for the year ended December 31, 2019 and the corresponding period of 2018:

 

(In thousands)  2019   2018 
Cash (used in) provided by operating activities of continuing operations  $(4,023)  $2,578 
Cash used in operating activities of discontinued operations   (660)   (618)
Cash used in investing activities of continuing operations   (1,533)   (1,385)
Cash provided by investing activities of discontinued operations   121    67 
Cash provided by (used in) financing activities of continuing operations   992    (580)
Effect of exchange rate changes on cash   19    (20)
(Decrease) increase in cash and finite risk sinking fund (restricted cash)  $(5,084)  $42 

 

At December 31, 2019, we were in a net borrowing position (revolving credit) of approximately $321,000. At December 31, 2019, we had cash on hand of approximately $390,000, which reflects primarily account balances of our foreign subsidiaries totaling approximately $388,000. At December 31, 2019, we have finite risk sinking funds (restricted cash) of approximately $11,307,000, which represents cash held as collateral under the Company’s financial assurance policy (see “Insurance” below for a discussion of this restricted cash).

 

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Operating Activities

 

Accounts receivable, net of allowances for doubtful accounts, totaled $13,178,000 at December 31, 2019, an increase of $5,443,000 from the December 31, 2018 balance of $7,735,000. The increase was primarily due to higher revenue and the timing of invoicing and timing of accounts receivable collection. We provide a variety of payment terms to our customers; therefore, our accounts receivable are impacted by these terms and the related timing of accounts receivable collections.

 

Accounts payable, totaled $9,277,000 at December 31, 2019, an increase of $3,780,000 from the December 31, 2018 balance of $5,497,000. The increase in accounts payable was attributed to an increase in costs within our Services Segment resulting from the significant increase in revenue. Additionally, our accounts payable are impacted by the timing of payments as we are continually managing payment terms with our vendors to maximize our cash position throughout all segments.

 

We had working capital of $26,000 (which included working capital of our discontinued operations) at December 31, 2019, as compared to working capital deficit of $6,753,000 at December 31, 2018. The improvement in our working capital was primarily the result of the receipt of $5,000,000 of finite risk sinking funds on July 22, 2019 previously held as collateral under our 2003 Closure Policy resulting from the closure of our M&EC facility (see “Liquidity and Capital Resources – Insurance” below for a discussion of this finite risk sinking funds) and the $2,500,000 loan proceeds received from the consummation of the Robert Ferguson loan on April 1, 2019 (see “Financing Activities” below for a discussion of this loan). Also, the increases in our unbilled and accounts receivables resulting from the significant increase in our revenue have positively impacted our working capital. Additionally, the reduction in the monthly principal term loan payment from approximately $101,600 to $35,547 resulting from an amendment that we entered into with our lender on June 20, 2019 has improved our working capital (Liquidity and Capital Resources – Financing Activities” below for a discussion of this amendment to our loan agreement). Our working capital was negatively impacted by the reclassification of approximately $726,000 in remediation reserves for our PFSG subsidiary from long-term to current and an increase in current remediation reserves recorded in the fourth quarter of 2019 for our PFM subsidiary within our discontinued operations for anticipated spending within the next twelve months. Additionally, our working capital was negatively impacted by the current portion of principal payments due within the next twelve months on the Robert Ferguson loan.

 

Investing Activities

 

During 2019, our purchases of capital equipment totaled approximately $1,928,000, of which $393,000 was financed, with the remaining funded from cash from operations and our credit facility. These expenditures were made primarily for our Treatment Segment. We have budgeted approximately $2,000,000 for 2020 capital expenditures for our Treatment and Services Segments to maintain operations and regulatory compliance requirements and support revenue growth. Certain of these budgeted projects may either be delayed until later years or deferred altogether. 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

 

We entered into an Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated October 31, 2011 (“Amended Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Amended Loan Agreement, as subsequently amended (“Revised Loan Agreement”), provides us with the following credit facility with a maturity date of March 24, 2021: (a) up to $12,000,000 revolving credit (“revolving credit”) and (b) a term loan (“term loan”) of approximately $6,100,000, which requires monthly installments of approximately $101,600 (based on a seven-year amortization). The maximum that we can borrow under the revolving credit is based on a percentage of eligible receivables (as defined) at any one time reduced by outstanding standby letters of credit and borrowing reductions that our lender may impose from time to time.

 

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On March 29, 2019, we entered into an amendment to our Revised Loan Agreement with our lender under the credit facility which provided the following:

 

waived our failure to meet the minimum quarterly fixed charge coverage ratio (“FCCR”) requirement for the fourth quarter of 2018;
waived the quarterly FCCR testing requirement for the first quarter of 2019;
revised the methodology to be used in calculating the FCCR in each of the second and third quarters of 2019 (with continued requirement to maintain a minimum 1.15:1 ratio in each of the quarters);
revised the minimum Tangible Adjusted Net Worth requirement (as defined in the Revised Loan Agreement) from $26,000,000 to $25,000,000;
eliminated the London Inter Bank Offer Rate (“LIBOR”) interest payment option of paying annual rate of interest due on our term loan and revolving credit until we become compliant with our FCCR requirement again. Prior to this amendment, we had the option of paying annual rate of interest due on the revolving credit at prime (4.75% at December 31, 2019) plus 2% or LIBOR plus 3% and the term loan at prime plus 2.5% or LIBOR plus 3.5%;
provided consent for the $2,500,000 loan that we entered into with Robert Ferguson as discussed below. No principal prepayment on this loan was allowed until we received the restricted finite risk sinking funds of approximately $5,000,000 held as collateral by AIG under our financial assurance policy (see “Insurance” below for a discussion of the receipt of this $5,000,000 finite risk sinking funds below); and
revised the annual rate used to calculate the Facility Fee (as defined in the Revised Loan Agreement) (unused revolving credit line fee) from 0.250% to 0.375%.

 

On June 20, 2019, we entered into another amendment to our Revised Loan Agreement with our lender under the credit facility which provided the following, among other things:

 

removal of the FCCR calculation requirement for the second, third and fourth quarter of 2019. Starting in the first quarter of 2020, we will again be required to maintain a minimum FCCR of not less than 1.15 to 1.0 for the four quarter period ending March 31, 2020 and for each fiscal quarter thereafter;
requires us to maintain a minimum Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA” as defined in the Amendment) of at least (i) $475,000 for the one quarter period ending June 30, 2019; (ii) $2,350,000 for the two quarter period ending September 30, 2019; and (iii) $3,750,000 for the three quarter period ending December 31, 2019;
immediate release of $450,000 of the $1,000,000 indefinite reduction in borrowing availability that PNC had previously imposed; the release of another $300,000 of the remaining $550,000 reduction in borrowing availability if we meet our minimum Adjusted EBITDA requirement for the quarter ending September 30, 2019 as discussed above (which our lender released in November 2019), in addition to us having received no less than $4,000,000 of the restricted finite risk sinking funds held as collateral by AIG under our financial assurance policy (see “Insurance” below for a discussion of the receipt of this finite risk sinking funds below); and the release of the final $250,000 reduction in borrowing availability if we meet our Adjusted EBITDA requirement for the three quarter period ending December 31, 2019; and
reduce the term loan monthly principal payment starting July 1, 2019 from $101,600 to approximately $35,547, with the remaining balance of the term loan due at the maturity of the Revised Loan Agreement which is March 24, 2021.

 

Most of the other terms of the Revised Loan Agreement, as amended, remain principally unchanged. In connection with amendment dated March 29, 2019 and June 20, 2019, we paid our lender a fee of $20,000 and $50,000, respectively.

 

Pursuant to the Revised Loan Agreement, as amended, we may terminate the Revised Loan Agreement, as amended, upon 90 days’ prior written notice upon payment in full of its obligations under the Revised Loan Agreement, as amended. No early termination fee shall apply if we pay off our obligations after March 23, 2019.

 

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At December 31, 2019, the borrowing availability under our revolving credit was approximately $8,714,000, based on our eligible receivables and includes an indefinite reduction of borrowing availability of $250,000 that our lender has imposed. This $8,714,000 in borrowing availability under our revolving credit also included a reduction in borrowing availability of approximately $2,639,000 from outstanding standby letters of credit.

 

Our credit facility with our lender contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by our lender, 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. As discussed above, our lender waived/removed our FCCR testing requirement for each of the quarters in 2019. We met our “Adjusted EBITDA” minimum requirement in the second, third and fourth quarters of 2019 in accordance to the amendment dated June 20, 2019 as discussed above. Additionally, we met our remaining financial covenant requirements in each of the quarters of 2019. As a result of us meeting the “Adjusted EBITDA” minimum requirement for the fourth quarter of 2019, our lender is expected to release the remaining $250,000 reduction in borrowing availability subsequent to the filing of our 2019 Form 10-K. We expect to meet our financial covenant requirements in the next twelve months; however, if we fail to meet any of our financial covenant requirements and our lender does not further waive the non-compliance or 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.

 

On April 1, 2019, we completed a lending transaction with Robert Ferguson (the “Lender”), whereby we borrowed from the Lender the sum of $2,500,000 pursuant to the terms of a Loan and Security Purchase Agreement and promissory note (the “Loan”). The Lender is a shareholder of the Company. The Lender also currently serves as a consultant to the Company in connection with the Test Bed Initiatives at our Perma-Fix Northwest Richland, Inc. facility. The proceeds from the Loan were used for general working capital purposes. The Loan is unsecured, with a term of two years with interest payable at a fixed interest rate of 4.00% per annum. The Loan provides for monthly payments of accrued interest only during the first year of the Loan, with the first interest payment due May 1, 2019 and monthly payments of approximately $208,333 in principal plus accrued interest starting in the second year of the Loan. The Loan also provides for prepayment of principal payments over the term of the Loan without penalty with such prepayment of principal payments to be applied to the second year of the loan payments at our discretion. In 2019, we made total prepayments in principal of $520,000. In connection with the above Loan, the Lender agreed under the terms of the Loan and a Subordination Agreement with our credit facility lender, to subordinate payment under the Loan, and agreed that the Loan will be junior in right of payment to the credit facility in the event of default or bankruptcy or other insolvency proceeding by us. In connection with this capital raise transaction described above and consideration for us receiving the Loan, we issued a Warrant (the “Warrant”) to the Lender to purchase up to 60,000 shares of our Common Stock at an exercise price of $3.51 per share, which was the closing bid price for a share of our Common Stock on NASDAQ.com immediately preceding the execution of the Loan and Warrant. The Warrant is exercisable six months from April 1, 2019 and expires on April 1, 2024 and remains outstanding at December 31, 2019. The fair value of the Warrant was estimated to be approximately $93,000 using the Black-Scholes option pricing model with the following assumptions: 50.76% volatility, risk free interest rate of 2.31%, an expected life of five years and no dividends. As further consideration for this capital raise transaction relating to the Loan, we also issued 75,000 shares of our Common Stock to the Lender. We determined the fair value of the 75,000 shares of Common Stock to be approximately $263,000 which was based on the closing bid price for a share of our Common Stock on NASDAQ.com immediately preceding the execution of the Loan, pursuant to the Loan and Securities Purchase Agreement. The fair value of the Warrant and Common Stock and the related closing fees incurred totaling approximately $398,000 from the transaction was recorded as debt discount/debt issuance costs, which is being amortized over the term of the loan as interest expense – financing fees. The 75,000 shares of Common Stock, the Warrant and the 60,000 shares of Common Stock that may be purchased under the Warrant were and will be issued in a private placement that was and will be exempt from registration under Rule 506 and/or Sections 4(a)(2) and 4(a)(5) of the Securities Act of 1933, as amended (the “Act”) and bear a restrictive legend against resale except in a transaction registered under the Act or in a transaction exempt from registration thereunder.

 

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Upon default, the Lender will have the right to elect to receive in full and complete satisfaction of our obligations under the Loan either: (a) the cash amount equal to the sum of the unpaid principal balance owing under the loan and all accrued and unpaid interest thereon (the “Payoff Amount”) or (b) upon meeting certain conditions, the number of whole shares of our Common Stock (the “Payoff Shares”) determined by dividing the Payoff Amount by the dollar amount equal to the closing bid price of our Common Stock on the date immediately prior to the date of default, as reported or quoted on the primary nationally recognized exchange or automated quotation system on which our Common Stock is listed; provided however, that the dollar amount of such closing bid price shall not be less than $3.51, the closing bid price for our Common Stock as disclosed on NASDAQ.com immediately preceding the signing of this loan agreement.

 

If issued, the Payoff Shares will not be registered and the Lender will not be entitled to registration rights with respect to the Payoff Shares. The aggregate number of shares, warrant shares, and Payoff Shares that are or will be issued to the Lender pursuant to the Loan, together with the aggregate shares of our Common Stock and other voting securities owned by the Lender or which may be acquired by the Lender as of the date of issuance of the Payoff Shares, shall not exceed the number of shares of our Common Stock equal to 14.9% of the number of shares of our Common Stock issued and outstanding as of the date immediately prior to the default, less the number of shares of our Common Stock owned by the Lender immediately prior to the date of such default plus the number of shares of our Common Stock that may be acquired by the Lender under warrants and/or options outstanding immediately prior to the date of such default.

 

On May 13, 2019, we filed a shelf registration statement on Form S-3 with the U.S. Securities and Exchange Commission (the “Commission”), which was declared effective by the Commission on May 22, 2019 at 4:00 p.m. The shelf registration statement gives us the ability to sell up to 2,500,000 shares of our Common Stock from time to time and through one or more methods of distribution, subject to market conditions and the Company’s capital needs at that time. The terms of any offering under the registration statement will be established at the time of the offering and be set forth in an accompanying prospectus or prospectus supplement relating to the offering. At this time, the Company does not have any immediate plans or current commitments to issue shares under the registration statement. This is not an offer to sell or a solicitation of an offer to buy, nor shall there be a sale of securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction.

 

Insurance

 

We have a 25-year finite risk insurance policy entered into in June 2003 (“2003 Closure Policy”) with AIG, which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The 2003 Closure Policy, as amended, provided for a maximum allowable coverage of $39,000,000 which included available capacity to allow for annual inflation and other performance and surety bond requirements. As a result of the closure of the Company’s M&EC facility, on July 22, 2019, AIG released $5,000,000 of the finite risk sinking funds held as collateral under the 2003 Closure Policy to us. The finite risk sinking funds received by us are to be used for general working capital needs. In conjunction with the release of the finite risk sinking funds by AIG, total coverage under the 2003 Closure Policy was amended from $30,549,000 to $19,314,000. Additionally, the maximum allowable coverage under the 2003 Closure Policy was amended from $39,000,000 to approximately $28,177,000 which includes available capacity to allow for annual inflation and other performance and surety bond requirements. At December 31, 2019 and December 31, 2018, finite risk sinking funds contributed by us to the 2003 Closure Policy which is included in other long term assets on the accompanying Consolidated Balance Sheets totaled $11,307,000 and $15,971,000, respectively, which included interest earned of $1,836,000 and $1,500,000 on the finite risk sinking funds as of December 31, 2019 and December 31, 2018, respectively. Interest income for the years ended 2019 and 2018 was approximately $336,000 and $295,000, respectively. If we so elect, AIG is obligated to pay us an amount equal to 100% of the finite risk sinking fund account balance in return for complete release of liability from both us and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

 

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Off Balance Sheet Arrangements

 

From time to time, we are required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations, including facility closures. At December 30, 2019, the total amount of standby letters of credit outstanding was approximately $2,639,000 and the total amount of bonds outstanding was approximately $28,937,000. We also provide closure and post-closure requirements through a financial assurance policy for certain of our Treatment Segment facilities through AIG (See a discussion of this financial assurance policy above).

 

Critical Accounting Policies and Estimates

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), 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. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” followed by a series of related accounting standard updates (collectively referred to as “Topic 606”). Topic 606 provides a single, comprehensive revenue recognition model for all contracts with customers. Under Topic 606, a five-step process is utilized in order to determine revenue recognition, depicting the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under Topic 606, a performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract transaction price is allocated to each distinct performance obligation and recognized as revenues as the performance obligation is satisfied.

 

Treatment Segment Revenues:

 

Contracts in our Treatment Segment have a single performance obligation as the promise to receive, treat and dispose of waste is not separately identifiable in the contract and, therefore, not distinct. Performance obligations are generally satisfied over time using the input method. Under the input method, the Company uses a measure of progress divided into major phases which include receipt (generally ranging from 9.0% to 33%), treatment/processing (generally ranging from 15% to 79%) and shipment/final disposal (generally ranging from 9% to 52%). As major processing phases are completed and the costs are incurred, the proportional percentage of revenue is recognized. Transaction price for Treatment Segment contracts are determined by the stated fixed rate per unit price as stipulated in the contract.

 

Services Segment Revenues:

 

Revenues for our Services Segment are generated from time and materials, cost reimbursement or fixed price arrangements:

 

Our primary obligation to customers in time and materials contracts relate to the provision of services to the customer at the direction of the customer. This provision of services at the request of the customer is the performance obligation, which is satisfied over time. Revenue earned from time and materials contracts is determined using the input method and is based on contractually defined billing rates applied to services performed and materials delivered.

 

Our primary performance obligation to customers in cost reimbursement contracts is to complete certain tasks and work streams. Each specified work stream or task within the contract is considered to be a separate performance obligation. The transaction price is calculated using an estimated cost to complete the various scope items to achieve the performance obligation as stipulated in the contract. An estimate is prepared for each individual scope item in the contract and the transaction price is allocated on a time and materials basis as services are provided. Revenue from cost reimbursement contracts is recognized over time using the input method based on costs incurred, plus a proportionate amount of fee earned.

 

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Under fixed price contracts, the objective of the project is not attained unless all scope items within the contract are completed and all of the services promised within fixed fee contracts constitute a single performance obligation. Transaction price is estimated based upon the estimated cost to complete the overall project. Revenue from fixed price contracts is recognized over time using the output or input method. For the output method, revenue is recognized based on milestone attained on the project. For the input method, revenue is recognized based on costs incurred on the project relative to the total estimated costs of the project.

 

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 collection patterns, that allows us to calculate the total allowance required. This analysis excludes government related receivables due to our past successful experience in their collectability. Our allowance for doubtful accounts at December 31, 2019 was approximately 0.7% of revenue for 2019 and 3.6% of accounts receivable at December 31, 2019. Additionally, our allowance for doubtful accounts at December 31, 2018 was approximately 0.2% of revenue for 2018 and 1.3% of accounts receivable at December 31, 2018.

 

Intangible Assets. Intangible assets consist primarily of the recognized value of the permits required to operate our business. We continually monitor the propriety of the carrying amount of our permits 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 other factors, forecasted revenue, gross margin, growth rate, operating income, timing of expected future cash flows, and the determination of appropriate long-term discount rates.

 

Impairment testing of our permits related to our Treatment reporting unit as of October 1, 2019 and 2018 resulted in no impairment charges.

 

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. We had one definite-lived permit which was excluded from our annual impairment review as noted above. This definite-lived permit which had a net carrying value of approximately $7,000 at December 31, 2018 was fully amortized in the first quarter of 2019. 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, we 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 Statements 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 our depreciation policy.

 

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Accrued Environmental Liabilities. We have three remediation projects 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.

 

Stock-Based Compensation. We account for stock-based compensation granted to employees in accordance with ASC 718, “Compensation – Stock Compensation.” Stock-based payment transactions for acquiring goods and services from nonemployees (consultants) are also accounted for under ASC 718 resulting from the adoption of ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” by the Company effective January 1, 2019. ASC 718 requires stock-based payments to employees and nonemployees, including grant of options, to be recognized in the Statement of Operations based on their fair values. The Company uses 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-based awards include the exercise price of the award, the expected term, the expected volatility of our stock over the stock-based award’s expected term, the risk-free interest rate over the award’s expected term, and the expected annual dividend yield. The Company accounts for forfeitures when they occur.

 

Income Taxes. The provision for income tax is determined in accordance with ASC 740, “Income Taxes.” 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, 2019, we had net deferred tax assets of approximately $9,106,000 (which excludes a deferred tax liability relating to goodwill and indefinite lived intangible assets) which were primarily related to federal and state net NOL carryforwards, impairment charges, and closure costs. As of December 31, 2019, we concluded that it was more likely than not that $9,106,000 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.

 

As of December 31, 2019, we have approximately $20,548,000 and $57,809,000 in NOL carryforwards for federal and state income tax purposes, respectively, which will expire in various amounts starting in 2021 if not used against future federal and state income tax liabilities, respectively. Approximately $12,199,000 of our federal NOL carryforwards were generated after December 31, 2017 and thus do not expire. 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.

 

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Known Trends and Uncertainties

 

Economic Conditions. Our business continues to be heavily dependent on services that we provide to governmental clients (including the U.S. Department of Energy (“DOE”) and U.S. Department of Defense (“DOD”)) directly as the prime contractor or indirectly for others as a subcontractor to government authorities. We believe demand for our services will continue to be subject to fluctuations due to a variety of factors beyond our control, including the economic conditions and the manner in which the government entity will be required to spend funding to remediate various sites. In addition, our U.S. governmental contracts and subcontracts relating to activities at governmental sites are generally subject to termination or renegotiation on 30 days notice at the government’s option. The TOAs with the Canadian government generally provide that the government may terminate a TOA at any time for convenience. Significant reductions in the level of governmental funding or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows.

 

Significant Customers. Our Treatment and Services Segments have significant relationships with the U.S and Canadian governmental authorities, and continue to enter into contracts, directly as the prime contractor or indirectly for others as a subcontractor to government authorities. Our inability to continue under existing contracts that we have with the U.S federal government and Canadian government authorities (directly or indirectly as a subcontractor) or significant reductions in the level of governmental funding in any given year could have a material adverse impact on our operations and financial condition.

 

We performed services relating to waste generated by government clients (domestic and foreign (primarily Canadian)), either directly as a prime contractor or indirectly for others as a subcontractor to government entities, representing approximately $59,985,000, or 81.7%, of our total revenue during 2019, as compared to $35,944,000, or 72.6%, of our total revenue during 2018.

 

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.

 

Coronavirus Impact. As a result of the Coronavirus, we have been informed that certain field projects for remediation work are being suspended until further notice due to precautions associated with the risk of potential virus spread among staff and client. Additionally, at this time, certain customers have delayed waste shipments to us into the second quarter of 2020 that were originally scheduled for the first quarter of 2020. In the event that work is suspended or halted on further remediation projects and/or waste shipments from our clients are further suspended or halted, such impact could have a material impact to our results of operation. Additionally, the Company may, among other things, temporarily cease/limit waste treatment operations and/or temporarily cease/limit field project operations due to the Coronavirus.

 

Recent Accounting Pronouncements

 

See “Note 2 – Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” for the recent accounting pronouncements that have been adopted during the year ended December 31, 2019, or will be adopted in future periods.

 

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.

 

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We have three remediation projects, which are currently in progress at our PFD, PFM (closed location), and PFSG (in closure status) subsidiaries. We divested PFD in 2008; however, the environmental liability of PFD was retained by us upon the divestiture of PFD. These remediation projects principally entail the removal/remediation of contaminated soil and, in most cases, the remediation of surrounding ground water. The remediation activities are closely reviewed and monitored by the applicable state regulators. While no assurances can be made that we will be able to do so, we expect to fund the expenses to remediate these sites from funds generated internally.

 

At December 31, 2019, we had total accrued environmental remediation liabilities of $927,000, an increase of $40,000 from the December 31, 2018 balance of $887,000. The net increase represents an increase of approximately $50,000 made to the reserve at our PFM subsidiary due to reassessment of the remediation reserve and payments of approximately $10,000 on remediation projects for our PFD subsidiary. At December 31, 2019, $817,000 of the total accrued environmental liabilities was recorded as current.

 

Related Party Transactions

 

David Centofanti

 

David Centofanti serves as our Vice President of Information Systems. For such position, he received annual compensation of $177,000 and $173,000 for 2019 and 2018, respectively. David Centofanti is the son of Dr. Louis Centofanti, our Executive Vice President (“EVP”) of Strategic Initiatives and a Board of Director (“Board”) member. We believe the compensation received by David Centofanti for his technical expertise which he provides to us is competitive and comparable to compensation we would have to pay to an unaffiliated third party with the same technical expertise.

 

Employment Agreements

 

We entered into employment agreements with each of Mark Duff (President and Chief Executive Officer (“CEO”)), Ben Naccarato (Chief Financial Officer (“CFO”)), and Dr. Louis Centofanti, (EVP of Strategic Initiatives), with each employment dated September 8, 2017. Each of the employment agreements is effective for three years from September 8, 2017 (the “Initial Term”) unless earlier terminated by us or by the executive officer. At the end of the Initial Term of each employment agreement, each employment agreement will automatically be extended for one additional year, unless at least six months prior to the expiration of the Initial Term, we or the executive officer provides written notice not to extend the terms of the employment agreement. Each employment agreement provides for annual base salaries, performance bonuses (as provided in the Management Incentive Plan (“MIP”) as approved by our Board, and other benefits commonly found in such agreements. In addition, each employment agreement provides that in the event the executive officer terminates his employment for “good reason” (as defined in the agreements) or is terminated by us without cause (including the executive officer terminating his employment for “good reason” or is terminated by us without cause within 24 months after a Change in Control (as defined in the agreement)), we will pay the executive officer the following: (a) a sum equal to any unpaid base salary; (b) accrued unused vacation time and any employee benefits accrued as of termination but not yet been paid (“Accrued Amounts”); (c) two years of full base salary; and (d) two times the performance compensation (under the MIP) earned with respect to the fiscal year immediately preceding the date of termination provided the performance compensation earned with respect to the fiscal year immediately preceding the date of termination has not been paid. If performance compensation earned with respect to the fiscal year immediately preceding the date of termination has been made to the executive officer, the executive officer will be paid an additional year performance compensation earned with respect to the fiscal year immediately preceding the date of termination. If the executive terminates his employment for a reason other than for good reason, we will pay to the executive the amount equal to the Accrued Amounts plus any performance compensation payable pursuant to the MIP.

 

If there is a Change in Control (as defined in the agreements), all outstanding stock options to purchase our Common Stock held by the executive officer will immediately become exercisable in full commencing on the date of termination through the original term of the options. In the event of the death of an executive officer, all outstanding stock options to purchase our Common Stock held by the executive officer will immediately become exercisable in full commencing on the date of death, with such options exercisable for the lesser of the original option term or twelve months from the date of the executive officer’s death. In the event of an executive officer terminating his employment for “good reason” or is terminated by us without cause, all outstanding stock options to purchase our Common Stock held by the executive officer will immediately become exercisable in full commencing on the date of termination, with such options exercisable for the lesser of the original option term or within 60 days from the date of the executive’s date of termination.

 

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MIPs

 

On January 17, 2019, our Board and the Compensation and Stock Option Committee (the “Compensation Committee”) approved individual MIP for the CEO, CFO, and EVP of Strategic Initiatives. Each MIP is effective January 1, 2019 and applicable for the year ended December 31, 2019. Each MIP provides guidelines for the calculation of annual cash incentive-based compensation, subject to Compensation Committee oversight and modification. Each MIP awards cash compensation based on achievement of performance thresholds, with the amount of such compensation established as a percentage of the executive’s annual 2019 base salary on the approval date of the MIP. The potential target performance compensation ranges from 5% to 150% of the 2019 base salary for the CEO ($14,350 to $430,500), 5% to 100% of the 2019 base salary for the CFO ($11,762 to $235,231), and 5% to 100% of the 2019 base salary for the EVP of Strategic Initiatives ($11,449 to $228,985). The amount payable under the 2019 MIP was approximately $110,700, $81,100, and $78,900, for the CEO, CFO, and EVP of Strategic Initiatives, respectively, which we anticipate will be paid in April 2020.

 

On January 16, 2020, our Board and the Compensation Committee approved individual MIP for each Mark Duff, CEO and President, Ben Naccarato, CFO, and Dr. Louis Centofanti, EVP of Strategic Initiatives. Additionally, the Board and the Compensation Committee approved a MIP for Andy Lombardo, who was elected EVP of Nuclear and Technical Services and an executive officer of the Company. Mr. Lombardo previously held the position of Senior Vice President (“SVP”) of Nuclear and Technical Services. The MIPs are effective January 1, 2020 and applicable for year ended December 31, 2020. Each MIP provides guidelines for the calculation of annual cash incentive-based compensation, subject to Compensation Committee oversight and modification. Each MIP awards cash compensation based on achievement of performance thresholds, with the amount of such compensation established as a percentage of the executive’s 2020 annual base salary (see below for salary of each executive officers for 2020). The potential target performance compensation ranges from 5% to 150% of the base salary for the CEO ($17,220 to $516,600), 5% to 100% of the base salary for the CFO ($14,000 to $280,000), 5% to 100% of the base salary for the EVP of Strategic Initiatives ($11,667 to $233,336) and 5% to 100% of the base salary for the EVP of Nuclear and Technical Services ($14,000 to $280,000).

 

Salary

 

On January 16, 2020, the Board, with the approval of the Compensation Committee approved the following salary increase for the Company’s NEO effective January 1, 2020:

 

  Annual base salary for Mark Duff, CEO and President, was increased to $344,400 from $287,000.
  Annual base salary for Ben Naccarato, who was promoted to EVP and CFO from VP and CFO, was increased to $280,000 from $235,231; and
  Annual base salary for Andy Lombardo, who was elected to EVP of Nuclear and Technical Services as discussed above, was increased to $280,000 from $258,662, which was the annual base salary that Mr. Lombardo was paid as SVP of Nuclear and Technical Services and prior to his election as an executive officer of the Company by the Board.

 

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,

 

34
 

 

demand for our services;
continue to focus on expansion into both commercial and international markets to increase revenues;
Improve revenue and liquidity and increase shareholder values
reductions in the level of government funding in future years;
R&D activity of our Medical Segment;
reducing operating costs;
full implementation of our strategic plan;
expect to meet our financial covenant requirements in the next twelve months;
cash flow requirements;
release of remaining $250,000 reduction in borrowing availability by lender;
government funding for our services;
implementation of strategic plan to help improve our results and liquidity;
may not have liquidity to repay debt if our lender accelerates payment of our borrowings;
our cash flows from operations, our available liquidity from our credit facility, and cash on hand are sufficient to service our operations;
manner in which the government will be required to spend funding to remediate federal sites;
audit by the Internal Revenue Services of our net operating losses;
capital expenditures;
fund capital expenditures from cash from operations and/or financing;
fund remediation expenditures for sites from funds generated internally;
compliance with environmental regulations;
future environmental policies affecting operations;
potential effect of being a PRP;
subject to fines and civil penalties in connection with violations of regulatory requirements;
large businesses are more willing to team with small businesses;
permit and license requirements represent a potential barrier to entry for possible competitors;
process backlog during periods of low waste receipts,which historically has been in the first and fourth quarters;
potential sites for violations of environmental laws and remediation of our facilities;
continuation of contracts with government authorities;
loss of contracts;
net loss carryforwards;
temporarily cease/limit waste treatment operations and/or field project operations due to the Coronavirus;
suspend project work and wate shipments by clients;
necessary capital for Medical Segment; and
disposal of our waste;

 

While the Company believes the expectations reflected in such forward-looking statements are reasonable, it can give no assurance such expectations will prove to be 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;
inability 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;

 

35
 

 

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 government agencies (domestic and foreign) or subcontracts involving government agencies (domestic or foreign), or reduction in amount of waste delivered to the Company under the contracts or subcontracts;
renegotiation of contracts involving government agencies (domestic and foreign);
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;
impact of the Coronavirus;
lender refuses to waive non-compliance or revise 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.
Report of Independent Registered Public Accounting Firm   38
     
Consolidated Balance Sheets as of December 31, 2019 and 2018   39
     
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018   41
     
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019 and 2018   42
     
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019 and 2018   43
     
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018   44
     
Notes to Consolidated Financial Statements   45

 

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.

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheets of Perma-Fix Environmental Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Change in accounting principle

 

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Codification Topic 842, Leases.

 

Basis for opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2014.

 

Atlanta, Georgia

March 20, 2020

 

38
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31,

 

(Amounts in Thousands, Except for Share and Per Share Amounts)  2019   2018 
         
ASSETS          
Current assets:          
Cash  $390   $810 
Accounts receivable, net of allowance for doubtful accounts of $487 and $105, respectively   13,178    7,735 
Unbilled receivables   7,984    3,105 
Inventories   487    449 
Prepaid and other assets   2,983    2,552 
Current assets related to discontinued operations   104    107 
Total current assets   25,126    14,758 
           
Property and equipment:          
Buildings and land   19,967    19,782 
Equipment   20,068    19,157 
Vehicles   410    369 
Leasehold improvements   23    23 
Office furniture and equipment   1,418    1,551 
Construction-in-progress   1,609    1,389 
Total property and equipment   43,495    42,271 
Less accumulated depreciation   (26,919)   (26,532)
Net property and equipment   16,576    15,739 
           
Property and equipment related to discontinued operations   81    81 
           
Operating lease right-of-use assets   2,545     — 
           
Intangibles and other long term assets:          
Permits   8,790    8,443 
Other intangible assets - net   1,065    1,278 
Finite risk sinking fund (restricted cash)   11,307    15,971 
Other assets   989    1,054 
Other assets related to discontinued operations   36    118 
Total assets  $66,515   $57,442 

 

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

 

39
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS, CONTINUED

As of December 31,

 

(Amounts in Thousands, Except for Share and per Share Amounts)  2019   2018 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $9,277   $5,497 
Accrued expenses   6,118    5,014 
Disposal/transportation accrual   1,156    1,542 
Deferred revenue   5,456    6,595 
Accrued closure costs - current   84    1,142 
Current portion of long-term debt   1,300    1,184 
Current portion of operating lease liabilities   244     — 
Current portion of finance lease liabilities   471    181 
Current liabilities related to discontinued operations   994    356 
Total current liabilities   25,100    21,511 
           
Accrued closure costs   5,957    5,608 
Other long-term liabilities       255 
Deferred tax liabilities   590    586 
Long-term debt, less current portion   2,580    2,118 
Long-term operating lease liabilities, less current portion   2,342     
Long-term finance lease liabilities, less current portion   466    268 
Long-term liabilities related to discontinued operations   244    963 
Total long-term liabilities   12,179    9,798 
           
Total liabilities   37,279    31,309 
           
Commitments and Contingencies (Note 14)          
           
Stockholders’ Equity:          
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding        
Common Stock, $.001 par value; 30,000,000 shares authorized; 12,123,520 and 11,944,215 shares issued, respectively; 12,115,878 and 11,936,573 shares outstanding, respectively   12    12 
Additional paid-in capital   108,457    107,548 
Accumulated deficit   (77,315)   (79,630)
Accumulated other comprehensive loss   (211)   (214)
Less Common Stock in treasury, at cost; 7,642 shares   (88)   (88)
Total Perma-Fix Environmental Services, Inc. stockholders’ equity   30,855    27,628 
Non-controlling interest   (1,619)   (1,495)
Total stockholders’ equity   29,236    26,133 
           
Total liabilities and stockholders’ equity  $66,515   $57,442 

 

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

 

40
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31,

 

(Amounts in Thousands, Except for Per Share Amounts)  2019   2018 
         
Net revenues  $73,459   $49,539 
Cost of goods sold   57,875    41,078 
Gross profit   15,584    8,461 
           
Selling, general and administrative expenses   11,862    10,741 
Research and development   750    1,370 
Loss (gain) on disposal of property and equipment   3    (46)
Income (loss) from operations   2,969    (3,604)
           
Other income (expense):          
Interest income   337    295 
Interest expense   (432)   (251)
Interest expense-financing fees   (208)   (38)
Other   223    (8)
Net gain on exchange offer of Series B Preferred Stock of subsidiary (Note 8)    —    1,596 
Income (loss) from continuing operations before taxes   2,889    (2,010)
Income tax expense (benefit)   157    (936)
Income (loss) from continuing operations, net of taxes   2,732    (1,074)
           
Loss from discontinued operations, net of taxes of $0   (541)   (667)
Net income (loss)   2,191    (1,741)
           
Net loss attributable to non-controlling interest   (124)   (320)
          
Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders  $2,315   $(1,421)
          
Net income (loss) per common share attributable to Perma-Fix Environmental Services, Inc. stockholders - basic and diluted:          
Continuing operations  $.24   $(.06)
Discontinued operations   (.05)   (.06)
Net income (loss) per common share  $.19   $(.12)
           
Number of common shares used in computing net income (loss) per share:          
Basic   12,046    11,855 
Diluted   12,060    11,855 

 

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

 

41
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the years ended December 31,

 

         
(Amounts in Thousands)  2019   2018 
         
Net Income (loss)  $2,191   $(1,741)
Other comprehensive income (loss):          
Foreign currency translation adjustments   3    (102)
Total other comprehensive income (loss)   3    (102)
           
Comprehensive income (loss)   2,194    (1,843)
Comprehensive loss attributable to non-controlling interest   (124)   (320)
Comprehensive income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders  $2,318   $(1,523)

 

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

 

42
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the years ended December 31,

(Amounts in Thousands, Except for Share Amounts)

 

   Common Stock   Additional Paid-   Common Stock Held In   Accumulated Other Comprehensive   Non-controlling Interest in   Accumulated   Total Stockholders’ 
   Shares   Amount   In Capital   Treasury   Loss   Subsidiary   Deficit   Equity 
                                 
Balance at December 31, 2017   11,738,623   $12   $106,417   $(88)  $(112)  $(1,175)  $(77,893)  $27,161 
Adoption of accounting standards                           (316)   (316)
Net income (loss)                       (320)   (1,421)   (1,741)
Foreign currency translation                   (102)           (102)
Issuance of Common Stock upon exercise of options   10,000        36                    36 
Issuance of Common Stock from exchange offer of Series B Preferred Stock of subsidiary   134,994        648                    648 
Issuance of Common Stock for services   60,598        249                    249 
Stock-Based Compensation           198                    198 
Balance at December 31, 2018   11,944,215   $12   $107,548   $(88)  $(214)  $(1,495)  $(79,630)  $26,133 
Net income (loss)                       (124)   2,315    2,191 
Foreign currency translation                   3            3 
Issuance of Common Stock for services   71,905        241                    241 
Stock-Based Compensation           179                    179 
Issuance of Common Stock with debt   75,000        263                    263 
Issuance of warrant with debt           93                    93 
Issuance of Common Stock upon exercise of options   32,400        133                    133 
Balance at December 31, 2019   12,123,520   $12   $108,457   $(88)  $(211)  $(1,619)  $(77,315)  $29,236 

 

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

 

43
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31,

 

(Amounts in Thousands)  2019   2018 
Cash flows from operating activities:          
Net income (loss)  $2,191   $(1,741)
Less: loss on discontinued operations, net of taxes of $0 (Note 9)   (541)   (667)
           
Income (loss) from continuing operations   2,732    (1,074)
Adjustments to reconcile net income (loss) from continuing operations to cash provided by operating activities:          
Depreciation and amortization   1,342    1,455 
Interest on finance lease with purchase option   3     ── 
Amortization of debt issuance/debt discount costs   208    35 
Deferred tax expense (benefit)   4    (1,108)
Provision for bad debt reserves   386    66 
Loss (gain) on disposal of property and equipment   3    (46)
Gain on exchange offer of Series B Preferred Stock of subsidiary (Note 8)    ──    (1,659)
Issuance of common stock for services   241    249 
Stock-based compensation   179    198 
Changes in operating assets and liabilities of continuing operations:          
Accounts receivable   (5,829)   139 
Unbilled receivables   (4,879)   1,626 
Prepaid expenses, inventories and other assets   923    1,932 
Accounts payable, accrued expenses and unearned revenue   664    765 
Cash (used in) provided by continuing operations   (4,023)   2,578 
Cash used in discontinued operations   (660)   (618)
Cash (used in) provided by operating activities   (4,683)   1,960 
           
Cash flows from investing activities:          
Purchases of property and equipment   (1,535)   (1,432)
Proceeds from sale of property and equipment   2    47 
Cash used in investing activities of continuing operations   (1,533)   (1,385)
Cash provided by investing activities of discontinued operations   121    67 
Cash used in investing activities   (1,412)   (1,318)
           
Cash flows from financing activities:          
Borrowing on revolving credit   59,333    54,714 
Repayments of revolving credit borrowings   (59,651)   (54,075)
Proceeds from issuance of long-term debt   2,500    ── 
Proceeds from finance leases   405    ── 
Principal repayment of finance lease liabilities   (272)   (36)
Principal repayments of long term debt   (1,344)   (1,219)
Payment of debt issuance costs   (112)   ── 
Proceeds from issuance of common stock upon exercise of options   133    36 
Cash provided by (used in) financing activities of continuing operations   992    (580)
           
Effect of exchange rate changes on cash   19    (20)
           
(Decrease) increase in cash and finite risk sinking fund (restricted cash) (Note 2)   (5,084)   42 
Cash and finite risk sinking fund (restricted cash) at beginning of period (Note 2)   16,781    16,739 
Cash and finite risk sinking fund (restricted cash) at end of period (Note 2)  $11,697   $16,781 
           
Supplemental disclosure:          
Interest paid  $422   $248 
Income taxes paid   245    160 
Non-cash investing and financing activities:          
Purchase of equipment through finance lease obligation   393    545 
Common stock issued in exchange offer of Series B Preferred Stock of subsidiary (Note 8)   ──    648 
Issuance of Common Stock with debt   263    ── 
Issuance of Warrant with debt   93    ── 

 

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

 

44
 

 

PERMA-FIX ENVIRONMENTAL SERVICES, INC.

Notes to Consolidated Financial Statements

December 31, 2019 and 2018

 

NOTE 1

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as we, us, or our), an environmental and technology know-how company, is a Delaware corporation, engaged through its subsidiaries, in three reportable segments:

 

TREATMENT SEGMENT, which includes:

 

- nuclear, low-level radioactive, mixed waste (containing both hazardous and low-level radioactive constituents), hazardous and non-hazardous waste treatment, processing and disposal services primarily through three uniquely licensed and permitted treatment and storage facilities; and
  - Research and Development (“R&D”) activities to identify, develop and implement innovative waste processing techniques for problematic waste streams.

 

SERVICES SEGMENT, which includes:

 

- Technical services, which include:

 

  o professional radiological measurement and site survey of large government and commercial installations using advanced methods, technology and engineering;
  o integrated Occupational Safety and Health services including industrial hygiene (“IH”) assessments; hazardous materials surveys, e.g., exposure monitoring; lead and asbestos management/abatement oversight; indoor air quality evaluations; health risk and exposure assessments; health & safety plan/program development, compliance auditing and training services; and Occupational Safety and Health Administration (“OSHA”) citation assistance;
  o global technical services providing consulting, engineering, project management, waste management, environmental, and decontamination and decommissioning field, technical, and management personnel and services to commercial and government customers; and
  o on-site waste management services to commercial and governmental customers.

 

- Nuclear services, which include:

 

  o technology-based services including engineering, decontamination and decommissioning (“D&D”), specialty services and construction, logistics, transportation, processing and disposal;
  o remediation of nuclear licensed and federal facilities and the remediation cleanup of nuclear legacy sites. Such services capability includes: project investigation; radiological engineering; partial and total plant D&D; facility decontamination, dismantling, demolition, and planning; site restoration; logistics; transportation; and emergency response; and

 

  - A company owned equipment calibration and maintenance laboratory that services, maintains, calibrates, and sources (i.e., rental) health physics, IH and customized nuclear, environmental, and occupational safety and health (“NEOSH”) instrumentation.
  - A company owned gamma spectroscopy laboratory for the analysis of oil and gas industry solids and liquids.

 

MEDICAL SEGMENT, which includes: R&D of the Company’s medical isotope production technology by our majority-owned Polish subsidiary, Perma-Fix Medical S.A. and its wholly-owned subsidiary Perma-Fix Medical Corporation (“PFM Corporation”) (together known as “PF Medical” or the Medical Segment). The Company’s Medical Segment has not generated any revenue as it remains in the R&D stage and has substantially reduced its R&D costs and activities due to the need for capital to fund these activities. All costs incurred by the Medical Segment are reflected within R&D in the accompanying consolidated financial statements (see “Financial Position and Liquidity” below for further discussion of Medical Segment’s significant curtailment of its R&D costs and activities).

 

45
 

 

The Company’s continuing operations consist of Diversified Scientific Services, Inc. (“DSSI”), Perma-Fix of Florida, Inc. (“PFF”), Perma-Fix of Northwest Richland, Inc. (“PFNWR”), Safety & Ecology Corporation (“SEC”), Perma-Fix Environmental Services UK Limited (“PF UK Limited”), Perma-Fix of Canada, Inc. (“PF Canada”), PF Medical and East Tennessee Materials & Energy Corporation (“M&EC”) (facility closure completed in 2019).

 

The Company’s discontinued operations (see Note 9) consist of all our subsidiaries included in our Industrial Segment which were divested in 2011 and prior, previously closed locations, and our Perma-Fix of South Georgia, Inc. (“PFSG”) facility which is in closure status.

 

Financial Position and Liquidity

 

The Company’s cash flow requirements during 2019 were primarily financed by our operations, credit facility availability, loan proceeds of $2,500,000 from a loan that we consummated on April 1, 2019 (see “Note 10 – Long Term Debt” for further information of this loan), and the receipt of the $5,000,000 in finite risk sinking funds from AIG Specialty Insurance Company (“AIG”) in July 2019 resulting from the closure of our M&EC facility (see a discussion of this finite risk sinking funds in “Note 14 – Commitment and Contingencies - Insurance”). The Company’s working capital at December 31, 2019 was approximately $26,000 as compared to a working capital deficit of $6,753,000 at December 31, 2018.

 

The Company’s cash flow requirements for 2020 and into the first quarter of 2021 will consist primarily of general working capital needs, scheduled principal payments on our debt obligations, remediation projects, and planned capital expenditures. The Company plans to fund these requirements from our operations, credit facility availability, and cash on hand. The Company is continually reviewing operating costs and is committed to further reducing operating costs to bring them in line with revenue levels, when necessary. As previously disclosed, the Company’s Medical Segment has not generated any revenue but continues on a limited basis to evaluate strategic options to commercialize its medical isotope production technology. These options require substantial capital to fund research and development (“R&D”) requirements, in addition to start-up and production costs. The Company’s Medical Segment has substantially reduced its R&D costs and activities due to the need for capital to fund such activities. The Company anticipates that its Medical Segment will not resume full R&D activities until it obtains the necessary funding through obtaining its own credit facility or additional equity raise or obtaining new partners willing to fund its R&D activities. If the Medical Segment is unable to raise the necessary capital, the Medical Segment could be required to further reduce, delay or eliminate its R&D program.

 

NOTE 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

Our consolidated financial statements include our accounts, those of our wholly-owned subsidiaries, and our majority-owned Polish subsidiary, PF Medical, after elimination of all significant intercompany accounts and transactions.

 

On May 24, 2019, the Company and Engineering/Remediation Resources Group, Inc. (“ERRG”) entered into an unpopulated joint venture agreement for project work bids within the Company’s Services Segment. The joint venture is doing business as Perma-Fix ERRG, a general partnership. Perma-Fix has a 51% partnership interest in the joint venture and ERRG has a 49% partnership interest in the joint venture. At December 31, 2019, no activities have occurred under the Perma-Fix ERRG joint venture. Once activities commence under the joint venture, Perma-Fix will consolidate the operations of Perma-Fix ERRG into the Company’s financial statements.

 

Use of Estimates

 

The Company prepares financial statements in conformity with accounting standards generally accepted in the United States of America (“US GAAP”), which may require 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. Actual results could differ from those estimates. See Notes 9, 12, 13 and 14 for estimates of discontinued operations and environmental liabilities, closure costs, income taxes and contingencies for details on significant estimates.

 

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Cash and Finite Risk Sinking Fund (Restricted Cash)

 

At December 31, 2019, we had cash on hand of approximately $390,000, which reflects primarily account balances of our foreign subsidiaries totaling approximately $388,000. At December 31, 2018, the Company had cash on hand of approximately $810,000, which reflects primarily account balances of our foreign subsidiaries totaling approximately $806,000. At December 31, 2019 and 2018, the Company has finite risk sinking funds of approximately $11,307,000 and $15,971,000, respectively, which represents cash held as collateral under the Company’s financial assurance policy (see “Note 14 – Commitment and Contingencies – Insurance” for a discussion of this fund).

 

Accounts Receivable

 

Accounts receivable are customer obligations due under normal trade terms requiring payment within 30 or 60 days from the invoice date based on the customer type (government, broker, or commercial). 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 will not be collected. The Company regularly reviews all accounts receivable balances that exceed 60 days from the invoice date and based on an assessment of current credit worthiness, estimates the portion, if any, of the balance that will not be collected. This analysis excludes government related receivables due to our past successful experience in their collectability. 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, based on historical experience that allows us to calculate the total allowance required. Once the Company has exhausted all options in the collection of a delinquent accounts receivable balance, which includes collection letters, demands for payment, collection agencies and attorneys, the account is deemed uncollectible and subsequently written off. The write off process involves approvals from senior management based on required approval thresholds.

 

The following table sets forth the activity in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018 (in thousands):

 

   Year Ended December 31, 
   2019   2018 
Allowance for doubtful accounts - beginning of year  $105   $720 
Provision for bad debt reserve   386    66 
Write-off   (4)   (681)
Allowance for doubtful accounts - end of year  $487   $105 

 

Unbilled Receivables

 

Unbilled receivables are generated by differences between invoicing timing and our proportional performance-based methodology used for revenue recognition purposes. As major processing and contract completion phases are completed and the costs are incurred, the Company recognizes the corresponding percentage of revenue. Within our Treatment Segment, the facilities experience delays in processing invoices due to the complexity of the documentation that is required for invoicing, as well as the difference between completion of revenue recognition milestones and agreed upon invoicing terms, which results in unbilled receivables. The timing differences occur for several reasons which include: partially from delays in the final processing of all wastes associated with certain work orders and partially from delays for analytical testing that is required after the facilities have processed waste but prior to our release of waste for disposal. The tasks relating to these delays can take months to complete but are generally completed within twelve months.

 

Unbilled receivables within our Services Segment can result from: (1) revenue recognized by our Earned Value Management program (a program which integrates project scope, schedule, and cost to provide an objective measure of project progress) but invoice milestones have not yet been met and/or (2) contract claims and pending change orders, including Requests for Equitable Adjustments (“REAs”) when work has been performed and collection of revenue is reasonably assured.

 

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Inventories

 

Inventories consist of treatment chemicals, saleable used oils, and certain supplies. Additionally, the Company has replacement parts in inventory, which are deemed critical to the operating equipment and may also have extended lead times should the part fail and need to be replaced. Inventories are valued at the lower of cost or market with cost determined by the first-in, first-out method.

 

Property and Equipment

 

Property and equipment expenditures are capitalized and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes, while accelerated depreciation methods are principally used for income tax purposes. Generally, asset lives range from ten to forty years for buildings (including improvements and asset retirement costs) and three to seven years for office furniture and equipment, vehicles, and decontamination and processing equipment. Leasehold improvements are capitalized and amortized over the lesser of the term of the lease or the life of the asset. Maintenance and repairs are charged directly to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any gain or loss from sale or retirement is recognized in the accompanying Consolidated Statements of Operations. Renewals and improvements, which extend the useful lives of the assets, are capitalized.

 

Certain property and equipment expenditures are financed through the use of leases. Amortization of financed leased assets is computed using the straight-line method over the estimated useful lives of the assets. At December 31, 2019, assets recorded under finance leases were $1,410,000 less accumulated depreciation of $71,000, resulting in net fixed assets under finance leases of $1,339,000. At December 31, 2018, assets recorded under finance leases were approximately $517,000 less accumulated depreciation of $8,000 resulting in net fixed assets under finance leases of $509,000. These assets are recorded within net property and equipment on the Consolidated Balance Sheets.

 

Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

 

Our depreciation expense totaled approximately $1,086,000 and $1,105,000 in 2019 and 2018, respectively.

 

Leases

 

The Company account for leases in accordance with Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” which the Company adopted effective January 1, 2019 (see “Recently Adopted Accounting Standards” below for a discussion of this standard). At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on facts and circumstances present in that arrangement. Lease classifications, recognition, and measurement are then determined at the lease commencement date.

 

The Company’s operating lease right-of-use (“ROU”) assets and operating lease liabilities represent primarily leases for office/warehouse spaces used to conduct our business. These leases have remaining terms of approximately 4 to 10 years. The majority of the Company’s leases includes one or more options to renew, with renewal terms ranging from 3 years to 8 years. The Company includes renewal options in valuing its ROU assets and liabilities when it determines that it is reasonably certain to exercise these renewal options. Based on conditions of the Company’s existing leases, historical trend and its overall business strategies, the Company has included the renewal options in all of its operating leases in valuing its ROU assets and liabilities. As most of our operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate when determining the present value of the lease payments. The incremental borrowing rate is determined based on the Company’s secured borrowing rate, lease terms and current economic environment. Some of our operating leases include both lease (rent payments) and non-lease components (maintenance costs such as cleaning and landscaping services). The Company has elected the practical expedient to account for lease component and non-lease component as a single component for all leases under ASU 2016-02. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

 

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Finance leases primarily consist of processing and lab equipment for our facilities as well as a building with land for our waste treatment operations. The Company’s finance leases for processing and lab equipment generally have terms between two to three years and some of the leases include options to purchase the underlying assets at fair market value at the conclusion of the lease term. The lease for the building and land has a term of two year with option to buy at the end of the lease term which the Company is reasonably certain exercise. See “Property and Equipment” above for assets recorded under financed leases.

 

The Company adopted the policy to not recognize ROU assets and liabilities for short term leases.

 

Capitalized Interest

 

The Company’s policy is to capitalize interest cost incurred on debt during the construction of projects for its use. A reconciliation of our total interest cost to “Interest Expense” as reported on our Consolidated Statements of Operations for 2019 and 2018 is as follows:

 

(Amounts in Thousands)  2019   2018 
Interest cost capitalized  $29   $70 
Interest cost charged to expense   432    251 
Total interest  $461   $321 

 

Intangible Assets

 

Intangible assets consist primarily of the recognized value of the permits required to operate our business. 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, a quantitative test is performed 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 other factors, forecasted revenue, gross margin, growth rate, operating income, timing of expected future cash flows, and the determination of appropriate long-term discount rates. Impairment testing of our permits related to our Treatment reporting unit as of October 1, 2019 and 2018 resulted in no impairment charges.

 

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 had one definite-lived permit which was excluded from our annual impairment review as noted above. This definite-lived permit which had a net carrying value of approximately $7,000 at December 31, 2018 was fully amortized in the first quarter of 2019. Definite-lived intangible assets are also tested for impairment whenever events or changes in circumstances suggest impairment might exist.

 

R&D

 

Operational innovation and technical know-how are 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 and to develop new company service offerings. The Company conducts research internally and also through collaborations with other third parties. R&D costs consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development and enhancement of new potential waste treatment processes and new technology and are charged to expense when incurred in accordance with ASC Topic 730, “Research and Development.” The Company’s R&D expenses included approximately $314,000 and $811,000 for the years ended December 31, 2019 and 2018, respectively, incurred by our Medical Segment.

 

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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 flows. Increases in the ARO liability due to passage of time impact net income as accretion expense, which is included in cost of goods sold. Changes in costs resulting from changes or expansion at the facilities require adjustment to the ARO liability and are capitalized and charged as depreciation expense, in accordance with the Company’s depreciation policy.

 

Income Taxes

 

Income taxes are accounted for in accordance with ASC 740, “Income Taxes.” Under ASC 740, the provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to the temporary differences between financial reporting carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company regularly assesses the likelihood that the deferred tax asset will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred income taxes to an amount that is more likely than not to be realized.

 

ASC 740 sets out a consistent framework for preparers to use to determine the appropriate recognition and measurement of uncertain tax positions. ASC 740 uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than 50% likely to be realized. ASC 740 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense.

 

The Company reassesses the validity of our conclusions regarding uncertain income tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit.

 

Foreign Currency

 

The Company’s foreign subsidiaries include PF UK Limited, PF Canada and PF Medical. Assets and liabilities are translated to U.S. dollars at the exchange rate in effect at the balance sheet date and revenue and expenses at the average exchange rate for the period. Foreign currency translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Gains and losses resulting from foreign currency transactions are recognized in the Consolidated Statements of Operations.

 

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Concentration Risk

 

The Company performed services relating to waste generated by government clients (domestic and foreign (primarily Canadian)), either directly as a prime contractor or indirectly for others as a subcontractor to government entities, representing approximately $59,985,000, or 81.7%, of our total revenue during 2019, as compared to $35,944,000, or 72.6%, of our total revenue during 2018.

 

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, the Company does 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.

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains cash with high quality financial institutions, which may exceed Federal Deposit Insurance Corporation (“FDIC”) insured amounts from time to time. Concentration of credit risk with respect to accounts receivable is limited due to the Company’s large number of customers and their dispersion throughout the United States as well as with the significant amount of work that we perform for the federal and Canadian government.

 

The Company had two government related customers whose total unbilled and net outstanding receivable balances represented 12.5% and 34.3% of the Company’s total consolidated unbilled and net accounts receivable at December 31, 2019. The Company had a government and a government related customers whose total unbilled and net outstanding receivable balances represented 10.7% and 10.5%, respectively of the Company’s total consolidated unbilled and net accounts receivable at December 31, 2018.

 

Revenue Recognition and Related Policies

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers” followed by a series of related accounting standard updates (collectively referred to as “Topic 606”) which superseded nearly all existing revenue recognition guidance. Under the new standard, a five-step process is utilized in order to determine revenue recognition, depicting the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company adopted Topic 606 under the modified retrospective approach to all contracts as of the date of adoption. The Company recognized the cumulative effect of initially adopting Topic 606 as an increase of approximately $316,000 to the opening balance of accumulated deficit at January 1, 2018. The adoption of Topic 606 did not result in significant changes to our revenues within our Treatment and Services Segments. The cumulative impact to the opening balance of accumulated deficit at January 1, 2018 was primarily driven by changes to the timing of revenue recognition in certain immaterial waste streams within our Treatment Segment. Under Topic 606, a performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract transaction price is allocated to each distinct performance obligation and recognized as revenues as the performance obligation is satisfied.

 

Treatment Segment Revenues:

 

Contracts in our Treatment Segment have a single performance obligation as the promise to receive, treat and dispose of waste is not separately identifiable in the contract and, therefore, not distinct. Performance obligations are generally satisfied over time using the input method. Under the input method, the Company uses a measure of progress divided into major phases which include receipt (generally ranging from 9.0% to 33%), treatment/processing (generally ranging from 15% to 79%) and shipment/final disposal (generally ranging from 9% to 52%). As major processing phases are completed and the costs are incurred, the proportional percentage of revenue is recognized. Transaction price for Treatment Segment contracts are determined by the stated fixed rate per unit price as stipulated in the contract.

 

Services Segment Revenues:

 

Revenues for our Services Segment are generated from time and materials, cost reimbursement or fixed price arrangements:

 

Our primary obligation to customers in time and materials contracts relate to the provision of services to the customer at the direction of the customer. This provision of services at the request of the customer is the performance obligation, which is satisfied over time. Revenue earned from time and materials contracts is determined using the input method and is based on contractually defined billing rates applied to services performed and materials delivered.

 

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Our primary performance obligation to customers in cost reimbursement contracts is to complete certain tasks and work streams. Each specified work stream or task within the contract is considered to be a separate performance obligation. The transaction price is calculated using an estimated cost to complete the various scope items to achieve the performance obligation as stipulated in the contract. An estimate is prepared for each individual scope item in the contract and the transaction price is allocated on a time and materials basis as services are provided. Revenue from cost reimbursement contracts is recognized over time using the input method based on costs incurred, plus a proportionate amount of fee earned.

 

Under fixed price contracts, the objective of the project is not attained unless all scope items within the contract are completed and all of the services promised within fixed fee contracts constitute a single performance obligation. Transaction price is estimated based upon the estimated cost to complete the overall project. Revenue from fixed price contracts is recognized over time using the output or input method. For the output method, revenue is recognized based on milestone attained on the project. For the input method, revenue is recognized based on costs incurred on the project relative to the total estimated costs of the project.

 

The majority of our revenue is derived from short term contracts with an original expected length of one year or less. Also, the nature of our contracts does not give rise to variable consideration.

 

Significant Payment Terms

 

Invoicing is based on schedules established in customer contracts. Payment terms vary by customers but are generally established at 30 days from invoicing.

 

Incremental Costs to Obtain a Contract

 

Costs incurred to obtain contracts with our customers are immaterial and as a result, the Company expenses (within selling, general and administration expenses (“SG&A”)) incremental costs incurred in obtaining contracts with our customer as incurred.

 

Remaining Performance Obligations

 

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

 

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

 

Stock-Based Compensation

 

Stock-based compensation granted to employees are accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” Stock-based payment transactions for acquiring goods and services from nonemployees (consultants) are also accounted for under ASC 718 resulting from the adoption of ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” by the Company effective January 1, 2019. ASC 718 requires stock-based payments to employees and nonemployees, including grant of options, to be recognized in the Statement of Operations based on their fair values. The Company uses 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-based awards include the exercise price of the award, the expected term, the expected volatility of our stock over the stock-based award’s expected term, the risk-free interest rate over the award’s expected term, and the expected annual dividend yield. The Company accounts for forfeitures when they occur.

 

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Comprehensive Income (Loss)

 

The components of comprehensive income (loss) are net income (loss) and the effects of foreign currency translation adjustments.

 

Income (Loss) Per Share

 

Basic income (loss) per share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted income (loss) per share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. In periods where they are anti-dilutive, such amounts are excluded from the calculations of dilutive earnings per share. Income (loss) per share is computed separately for each period presented.

 

Fair Value of Financial Instruments

 

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:

 

Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

 

Financial instruments include cash (Level 1), accounts receivable, accounts payable, and debt obligations (Level 3). Credit is extended to customers based on an evaluation of a customer’s financial condition and, generally, collateral is not required. At December 31, 2019 and December 31, 2018, the fair value of the Company’s financial instruments approximated their carrying values. The fair value of the Company’s revolving credit and term loan approximate its carrying value due to the variable interest rate.

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires the recognition of ROU lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In July 2018, the FASB issued ASU 2018-11, “Targeted Improvements,” to Topic 842 which included an option to not restate comparative periods in transition and elect to use the effective date of Topic 842 as the date of initial application of transition, which the Company elected. As permitted under Topic 842, the Company adopted several practical expedients that permit us to not reassess (1) whether any expired or existing contract as of the adoption date is or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, and (3) initial direct costs for any existing leases as of the adoption date. As a result of the adoption of Topic 842 on January 1, 2019, the Company recorded both operating ROU assets of $2,602,000 and operating lease liabilities of $2,622,000. The cumulative-effect adjustment was immaterial to our beginning accumulated deficit upon adoption of ASU 2016-02. The adoption of Topic 842 had an immaterial impact on our Consolidated Statements of Operations and Cash Flows for the year 2019. The Company’s accounting for finance leases remained substantially unchanged.

 

In February 2018, FASB issued ASU 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for the reclassification of certain income tax effects related to the new Tax Cuts and Jobs Act legislation between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive income” (rather than in “Income from continuing operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on the Company’s financial statements.

 

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In June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-09 by the Company effective January 1, 2019 did not have a material impact on the Company’s financial statements.

 

Recently Issued Accounting Standards – Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”),” which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses is permitted. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” which, with respect to credit losses, among other things, clarifies and addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable interest rates. Additionally, in May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” which allows entities to irrevocably elect the fair value option on certain financial instruments. These standards are effective for interim and annual reporting periods beginning after December 15, 2019. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. These ASUs are effective January 1, 2020 for the Company. The Company does not expect the adoption of these ASUs will have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 improves the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This ASU is effective January 1, 2020 for the Company. The Company does not expect the adoption of this ASU will have a material impact on the Company’s financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

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NOTE 3

REVENUE

 

Disaggregation of Revenue

 

In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of our services and provides meaningful disaggregation of each business segment’s results of operations. The following tables present further disaggregation of our revenues by different categories for our Services and Treatment Segments:

 

Revenue by Contract Type  Twelve Months Ended   Tweleve Months Ended 
(In thousands)  December 31, 2019   December 31, 2018 
   Treatment   Services   Total   Treatment   Services   Total 
Fixed price  $40,364   $12,162   $52,526   $36,271   $1,575   $37,846 
Time and materials    ―    20,788    20,788        11,693    11,693 
Cost reimbursement    ―    145    145             
Total  $40,364   $33,095   $73,459   $36,271   $13,268   $49,539 

 

Revenue by generator  Twelve Months Ended   Twelve Months Ended 
(In thousands)  December 31, 2019   December 31, 2018 
   Treatment   Services   Total   Treatment   Services   Total 
Domestic government  $29,420   $25,077   $54,497   $25,181   $9,630   $34,811 
Domestic commercial   10,601    2,724    13,325    10,969    2,521    13,490 
Foreign government   279    5,209    5,488    114    1,019    1,133 
Foreign commercial   64    85    149    7    98    105 
Total  $40,364   $33,095   $73,459   $36,271   $13,268   $49,539 

 

Contract Balances

 

The timing of revenue recognition, billings, and cash collections results in accounts receivable and unbilled receivables (contract assets). The Company’s contract liabilities consist of deferred revenues which represents advance payment from customers in advance of the completion of our performance obligation.

 

The following table represents changes in our contract assets and contract liabilities balances:

 

           Year-to-date   Year-to-date 
(In thousands)  December 31, 2019   December 31, 2018   Change ($)   Change (%) 
Contract assets                    
Account receivables, net of allowance  $13,178   $7,735   $5,443    70.4%
Unbilled receivables - current   7,894    3,105    4,789    154.2%
                     
Contract liabilities                    
Deferred revenue  $5,456   $6,595   $(1,139)   (17.3)%

 

During the twelve months ended December 31, 2019 and 2018, the Company recognized revenue of $10,354,000 and $8,052,000, respectively, related to untreated waste that was in the Company’s control as of the beginning of each respective year. Revenue recognized in each period related to performance obligations satisfied within the respective period.

 

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NOTE 4

LEASES

 

The components of lease cost for the Company’s leases were as follows (in thousands):

 

   Twelve Months Ended 
   December 31, 2019 
     
Operating Leases:     
Lease cost  $456 
      
Finance Leases:     
Amortization of ROU assets   63 
Interest on lease liability   63 
    126 
      
Short-term lease rent expense   43 
      
Total lease cost  $625 

 

The weighted average remaining lease term and the weighted average discount rate for operating and finance leases at December 31, 2019 was:

 

   Operating Leases   Finance Leases 
Weighted average remaining lease terms (years)   8.8    2.0 
           
Weighted average discount rate   8.0%   9.3%

 

The following table reconciles the undiscounted cash flows for the operating and finance leases at December 31, 2019 to the operating and finance lease liabilities recorded on the balance sheet (in thousands):

 

   Operating Leases   Finance Leases 
2020  $442   $529 
2021   450    396 
2022   458    113 
2023   466     ― 
2024   342     ― 
2025 and thereafter   1,458     ― 
Total undiscounted lease payments   3,616    1,038 
Less: Imputed interest   (1,030)   (101)
Present value of lease payments  $2,586   $937 

 

Current portion of operating lease obligations $244   $ 
Long-term operating lease obligations, less current portion  $2,342   $ 
Current portion of finance lease obligations  $   $471 
Long-term finance lease obligations, less current portion  $   $466 

 

Supplemental cash flow and other information related to our leases were as follows (in thousands):

 

   Twelve Months Ended 
   December 31, 2019 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flow used in operating leases  $434 
Operating cash flow used in finance leases  $63 
Financing cash flow used in finance leases  $272 
      
ROU assets obtained in exchange for lease obligations for:     
Finance liabilities  $893 
Operating liabilities  $182 

 

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NOTE 5

PERMIT AND OTHER INTANGIBLE ASSETS

 

The following table summarizes changes in the carrying value of permits. No permit exists at our Services and Medical Segments.

 

Permit (amount in thousands)  Treatment 
Balance as of December 31, 2017  $8,419 
PCB permit amortized (1)   (55)
Permit in progress   79 
Balance as of December 31, 2018   8,443 
PCB permit amortized (1)   (7)
Permit in progress   354 
Balance as of December 31, 2019  $8,790 

 

(1) Amortization for the one definite-lived permit capitalized in 2009 that was fully amortized in the first quarter of 2019. This permit was amortized over a ten-year period in accordance with its estimated useful life.

 

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

 

   Weighted Average   December 31, 2019   December 31, 2018 
   Amortization   Gross       Net   Gross       Net 
   Period   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   (Years)   Amount   Amortization   Amount   Amount   Amortization   Amount 
Intangibles (amount in thousands)                            
Patent   11   $760   $(358)  $402   $728   $(336)  $392 
Software   3    414    (408)   6    410    (403)   7 
Customer relationships   10    3,370    (2,713)   657    3,370    (2,491)   879 
Permit   10    545    (545)    ―    545    (538)   7 
Total       $5,089   $(4,024)  $1,065   $5,053   $(3,768)  $1,285 

 

The intangible assets noted above are amortized on a straight-line basis over their useful lives with the exception of customer relationships which are being amortized using an accelerated method.

 

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

 

   Amount 
Year  (In thousands) 
     
2020   219 
2121   199 
2022   173 
2023   132 
2024   10 

 

Amortization expense recorded for definite-lived intangible assets was approximately $256,000 and $350,000, for the years ended December 31, 2019 and 2018, respectively.

 

NOTE 6

CAPITAL STOCK, STOCK PLANS, WARRANTS, AND STOCK BASED COMPENSATION

 

Stock Option Plans

 

The Company adopted the 2003 Outside Directors Stock Plan (the “2003 Plan”), which was approved by our stockholders at the Company’s July 29, 2003 Annual Meeting of Stockholders. Non-Qualified Stock Options (“NQSOs”) granted under the 2003 Plan generally have a vesting period of six months from the date of grant and a term of 10 years, with an exercise price equal to the closing trade price on the date prior to grant date. The 2003 Plan also provides for the issuance to each outside director a number of shares of the Company’s Common Stock in lieu of 65% or 100% (based on option elected by each director) of the fee payable to the eligible director for services rendered as a member of the Board of Directors (“Board”). The number of shares issued is determined at 75% of the market value as defined in the plan (the Company recognizes 100% of the market value of the shares issued). The 2003 Plan, as amended, also provides for the grant of an NQSO to purchase up to 6,000 shares of our Common Stock for each outside director upon initial election to the Board, and the grant of an NQSO to purchase 2,400 shares of our Common Stock upon each re-election. The number of shares of the Company’s Common Stock authorized under the 2003 Plan was 1,100,000. At December 31, 2019, the 2003 Plan had available for issuance 262,312 shares.

 

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The Company’s 2010 Stock Option Plan (“2010 Plan”) authorized an aggregate grant of 200,000 NQSOs and Incentive Stock Options (“ISOs”) to officers and employees of the Company for the purchase of up to 200,000 shares of the Company’s Common Stock. The term of each stock option granted was to be fixed by the Compensation and Stock Option Committee (the “Compensation Committee”), but no stock option was exercisable more than ten years after the grant date, or in the case of an incentive stock option granted to a 10% stockholder, five years after the grant date. As a result of the approval of the 2017 Stock Option Plan (“2017 Plan” – see below) at the Company’s 2017 Annual Meeting, no further options remained available for issuance under the 2010 Plan immediately upon the approval of the 2017 Plan; however, the 2010 Plan remains in full force and effect with respect to the outstanding options issued and unexercised at the date of the approval of the 2017 Plan. At December 31, 2019, the 2010 Plan had an option for the purchase of up to 50,000 shares of our Common Stock at $3.97 per share with expiration date of May 15, 2022.

 

The Company’s 2017 Stock Option Plan (“2017 Plan”) authorizes the grant of options to officers and employees of the Company, including any employee who is also a member of the Board, as well as to consultants of the Company. The 2017 Plan authorizes an aggregate grant of 540,000 NQSOs and ISOs, which includes a rollover of 140,000 shares that remained available for issuance under the 2010 Plan immediately upon the approval of the 2017 Plan. Consultants of the Company can only be granted NQSOs. The term of each stock option granted under the 2017 Plan shall be fixed by the Compensation Committee, but no stock options will be exercisable more than ten years after the grant date, or in the case of an ISO granted to a 10% stockholder, five years after the grant date. The exercise price of any ISO granted under the 2017 Plan to an individual who is not a 10% stockholder at the time of the grant shall not be less than the fair market value of the shares at the time of the grant, and the exercise price of any ISO granted to a 10% stockholder shall not be less than 110% of the fair market value at the time of grant. The exercise price of any NQSOs granted under the plan shall not be less than the fair market value of the shares at the time of grant. At December 31, 2019, the 2017 Plan had available for issuance 27,500 shares.

 

Stock Options to Employees and Outside Director

 

On January 17, 2019 the Company granted 105,000 ISOs from the 2017 Plan to certain employees, which included our named executive officers as follows: 25,000 ISOs to our Chief Executive Officer (“CEO”); 15,000 ISOs to our Chief Financial Officer (“CFO”); and 15,000 ISOs to our Executive Vice President (“EVP”) of Strategic Initiatives. The ISOs granted were for a contractual term of six years with one-fifth vesting annually over a five-year period. The exercise price of the ISO was $3.15 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

 

On July 25, 2019, the Company granted an aggregate of 12,000 NQSOs from the Company’s 2003 Plan to five of the six re-elected directors at the Company’s Annual Meeting of Stockholders held on July 25, 2019. Dr. Louis F. Centofanti (a Board member) was not eligible to receive options under the 2003 Plan as an employee of the Company, pursuant to the 2003 Plan. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSO was $3.31 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On August 29, 2019 the Company granted an aggregate of 12,500 ISOs from the 2017 Plan to certain employees. The ISOs granted were for a contractual term of six years with one-fifth vesting annually over a five-year period. The exercise price of the ISO was $3.90 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

 

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On January 18, 2018, the Company granted 6,000 NQSOs from the Company’s 2003 Plan to a new director elected by the Company’s Board to fill a vacancy on the Board. The options granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the options was $4.05 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

On July 26, 2018, the Company granted an aggregate of 12,000 NQSOs from the Company’s 2003 Plan to five of the six re-elected directors at the Company’s July 26, 2018 Annual Meeting of Stockholders. Dr. Louis F. Centofanti (a Board member) was not eligible to receive options under the 2003 Plan as an employee of the Company, pursuant to the 2003 Plan. The NQSOs granted were for a contractual term of ten years with a vesting period of six months. The exercise price of the NQSO was $4.30 per share, which was equal to our closing stock price the day preceding the grant date, pursuant to the 2003 Plan.

 

The Company issued an aggregate of 14,400 shares of Common Stock to two previous retired outside directors resulting from the exercise of options from the 2003 Plan for a total proceed of approximately $54,000 in the fourth quarter of 2019. The Company also issued an aggregate of 18,000 shares of Common Stock to an employee resulting from exercise of options for a total proceed of approximately $79,000 in the fourth quarter of 2019.

 

The Company estimates fair value of stock options using the Black-Scholes valuation model. Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The fair value of the options granted during 2019 and 2018 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows. No options were granted to employees in 2018:

 

    Employee Stock
    Option Granted
    2019
Weighted-average fair value per share   $1.46
Risk -free interest rate (1)   1.40%-2.58%
Expected volatility of stock (2)   48.67%-51.38%
Dividend yield   None
Expected option life (3)   5.0 years

 

   Outside Director Stock Options Granted 
   2019   2018 
Weighted-average fair value per share  $2.27   $2.87 
Risk -free interest rate (1)   2.08%   2.62%-2.98% 
Expected volatility of stock (2)   54.28%   55.34%-57.29% 
Dividend yield   None    None 
Expected option life (3)   10.0 years    10.0 years 

 

(1) The risk-free interest rate is based on the U.S. Treasury yield in effect at the grant date over the expected term of the option.

 

(2) The expected volatility is based on historical volatility from our traded Common Stock over the expected term of the option.

 

(3) The expected option life is based on historical exercises and post-vesting data.

 

The following table summarizes stock-based compensation recognized for fiscal years 2019 and 2018.

 

   Year Ended 
   2019   2018 
Employee Stock Options  $150,000   $147,000 
Director Stock Options   29,000    51,000 
Total  $179,000   $198,000 

 

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At December 31, 2019, the Company has approximately $431,000 of total unrecognized compensation costs related to unvested options for employee and directors. The weighted average period over which the unrecognized compensation costs are expected to be recognized is approximately 2.1 years.

 

Stock Options to Consultant

 

Robert Ferguson is a consultant to the Company in connection with the Company’s Test Bed Initiative (“TBI”) at its PFNWR facility. For Robert Ferguson’s consulting work in connection with the Company’s TBI, on July 27, 2017 (“grant date”), the Company granted Robert Ferguson a NQSO from the Company’s 2017 Plan for the purchase of up to 100,000 shares of the Company’s Common Stock at an exercise price of $3.65 a share, which was the fair market value of the Company’s Common Stock on the date of grant (“Ferguson Stock Option”). The vesting of the Ferguson Stock Option is subject to the achievement of the following milestones (“waste” as noted below is defined as liquid LAW (“low activity waste”) and/or liquid TRU (“transuranic waste”)):

 

  ●  Upon treatment and disposal of three gallons of waste at the PFNWR facility by January 27, 2018, 10,000 shares of the Ferguson Stock Option shall become exercisable;
   
  Upon treatment and disposal of 2,000 gallons of waste at the PFNWR facility by January 27, 2019, 30,000 shares of the Ferguson Stock Option shall become exercisable; and
     
  Upon treatment and disposal of 50,000 gallons of waste at the PFNWR facility and assistance, on terms satisfactory to the Company, in preparing certain justifications of cost and pricing data for the waste and obtaining a long-term commercial contract relating to the treatment, storage and disposal of waste by January 27, 2021, 60,000 shares of the Ferguson Stock Option shall become exercisable.

 

The term of the Ferguson Stock Option is seven (7) years from the grant date. Each of the milestones is exclusive of each other; therefore, achievement of any of the milestones above by Robert Ferguson by the designated date will provide Robert Ferguson the right to exercise the number of options in accordance with the milestone attained. On January 17, 2019, the Ferguson Stock Option was amended whereby the vesting date of the Ferguson Stock Option for the second milestone as discussed above was amended from “by January 27, 2019” to “by March 31, 2020.” All other terms of the Ferguson Stock Option remain unchanged.

 

On May 1, 2018, Robert Ferguson exercised the 10,000 options which became vested by Mr. Ferguson in December 2017 for the purchase of 10,000 shares of the Company’s Common Stock, resulting in total proceeds paid to the Company of approximately $36,500.

 

At December 31, 2019, the Company has not recognized compensation costs (fair value of approximately $123,000 at December 31, 2019) for the remaining Ferguson Stock Option discussed above since achievement of the performance obligation under the second milestone is unlikely and achievement of the performance obligation under the third milestone is uncertain at December 31, 2019.

 

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Summary of Stock Option Plans

 

The summary of the Company’s total plans as of December 31, 2019 and 2018, and changes during the period then ended are presented as follows:

 

   Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (3) 
Options outstanding January 1, 2019   616,000   $4.23           
Granted   129,500    3.24           
Exercised   (32,400)   4.10        $93,000 
Forfeited/expired   (31,800)   8.68           
Options outstanding end of period (1)   681,300   $3.84    4.2   $3,587,000 
Options exercisable as of December 31, 2019(1)   286,800   $4.28    3.8   $1,383,000 

 

   Shares   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (years)   Aggregate Intrinsic Value (3) 
Options outstanding January 1, 2018   624,800   $4.42            
Granted   18,000    4.22            
Exercised   (10,000)   3.65         $8,000 
Forfeited/expired   (16,800)   11.70            
Options outstanding end of period (2)   616,000   $4.23    4.7    $ 
Options exercisable at December 31, 2018(2)   249,333   $5.04    4.4    $ 

 

(1) Options with exercise prices ranging from $2.79 to $8.40

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

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

 

The summary of the Company’s nonvested options as of December 31, 2019 and changes during the period then ended are presented as follows:

 

       Weighted Average 
       Grant-Date 
   Shares   Fair Value 
Non-vested options January 1, 2019   366,667   $1.91 
Granted   129,500    1.53 
Vested   (90,667)   2.02 
Forfeited   (11,000)   1.60 
Non-vested options at December 31, 2019   394,500   $1.77 

 

Warrant

 

In connection with a $2,500,000 loan that the Company executed April 1, 2019 with Mr. Robert Ferguson, the Company issued a Warrant to Mr. Ferguson for the purchase of up to 60,000 shares of our Common Stock at an exercise price of $3.51 per share. The Warrant is exercisable six months from April 1, 2019 and expires on April 1, 2024 and remains outstanding at December 31, 2019 (see “Note 10 – Long Term Debt” for further information of this Warrant).

 

Common Stock Issued for Services

 

The Company issued a total of 71,905 and 60,598 shares of our Common Stock in 2019 and 2018, respectively, under our 2003 Plan to our outside directors as compensation for serving on our Board. As a member of the Board, each director elects to receive either 65% or 100% of the director’s fee in shares of our Common Stock. The number of shares received is calculated based on 75% of the fair market value of our Common Stock determined on the business day immediately preceding the date that the quarterly fee is due. The balance of each director’s fee, if any, is payable in cash. The Company recorded approximately $232,000 and $249,000 in compensation expense (included in Selling, General &Administrative (“SG&A”) expenses) for the twelve months ended December 31, 2019 and 2018, respectively, for the portion of director fees earned in the Company’s Common Stock.

 

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Shares Reserved

 

At December 31, 2019, the Company has reserved approximately 681,300 shares of our Common Stock for future issuance under all of the option arrangements.

 

NOTE 7

INCOME (LOSS) PER SHARE

 

The following table reconciles the income (loss) and average share amounts used to compute both basic and diluted loss per share:

 

   Years Ended 
   December 31, 
(Amounts in Thousands, Except for Per Share Amounts)  2019   2018 
Net income (loss) attributable to Perma-Fix Environmental Services, Inc., common stockholders:          
Income (loss) from continuing operations, net of taxes  $2,732   $(1,074)
Net loss attributable to non-controlling interest   (124)   (320)
Income (loss) from continuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders  $2,856   $(754)
Loss from discontinuing operations attributable to Perma-Fix Environmental Services, Inc. common stockholders   (541)   (667)
Net income (loss) attributable to Perma-Fix Environmental Services, Inc. common stockholders  $2,315   $(1,421)
           
Basic income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.19   $(.12)
          
Diluted income (loss) per share attributable to Perma-Fix Environmental Services, Inc. common stockholders  $.19   $(.12)
           
Weighted average shares outstanding:          
Basic weighted average shares outstanding   12,046    11,855 
Add: dilutive effect of stock options   14     ─ 
Add: dilutive effect of warrants    ─     ─ 
Diluted weighted average shares outstanding   12,060    11,855 
           
Potential shares excluded from above weighted average share calculations due to their anti-dilutive effect include:          
Stock options   482    107 
Warrant   60     ─ 

 

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NOTE 8

SERIES B PREFERRED STOCK

 

The 1,284,730 shares of the Series B Preferred Stock (the “Series B Preferred Stock”) of the Company’s wholly-owned consolidated subsidiary, M&EC, were non-voting and non-convertible, had a $1.00 liquidation preference per share and were redeemable at the option and sole discretion of M&EC at any time, and from time to time, from and after one year from the date of issuance (June 25, 2001) of the Series B Preferred Stock for the purchase price of $1.00 per share. As previously disclosed, the Company completed the closure of its M&EC facility in 2019 in accordance with M&EC’s license and permit requirements. Holders of shares of M&EC Series B Preferred Stock were entitled to receive, when, as and if declared by M&EC’s Board out of funds legally available for payment, cumulative dividends at the rate per annum of 5% per share on the liquidation preference of $1.00 per share of Series B Preferred Stock. Dividends on the Series B Preferred Stock accrued without interest beginning one year from the date of original issuance (June 25, 2001), and was payable in cash, if, when, and as declared by M&EC Board, quarterly each year commencing on the first dividend due date following the expiration of one year from the date of original issuance. On April 24, 2018, the Company announced a private exchange offer (“Exchange Offer”), to all 13 holders of the M&EC Series B Preferred Stock, to exchange in a private placement exempt from registration, for every share of Series B Preferred Stock tendered, (a) 0.1050805 shares of newly issued Common Stock of the Company, par value $.001 per share (“Common Stock”), and (b) cash in lieu of fractional shares of Common Stock that would otherwise be issuable to the tendering holder of Series B Preferred Stock, in an amount equal to such fractional share of Common Stock multiplied by the closing price per share of the Common Stock on the last trading day immediately preceding the expiration date of the Exchange Offer. The Exchange Offer was made on an all-or-none basis, for all 1,284,730 shares of Series B Preferred Stock outstanding and had an expiration date of May 30, 2018. The Company owns 100% of the voting capital stock of M&EC. On May 30, 2018, the Exchange Offer was consummated, resulting in the issuance of an aggregate 134,994 unregistered shares of the Company’s Common Stock in exchange for the 1,284,730 shares of Series B Preferred Stock and the payment of an aggregate of approximately $29.00 in cash in lieu of the fractional shares of the Company’s Common Stock that would otherwise have been issuable to the tendering holders of the Series B Preferred Stock. The fair value of the 134,994 shares of the Company’s Common Stock issued was determined to be approximately $648,000 which was based on the closing price of the Company’s Common Stock on May 30, 2018 of $4.80 per share. Upon the consummation of the Exchange Offer, the previous holders of the M&EC Series B Preferred Stock forfeited all rights of a holder of Series B Preferred Shares, including the right to receive quarterly cash dividends, and the rights to the cumulative accrued and unpaid dividends with M&EC Series B Preferred Stock in the amount of approximately $1,022,000 at May 30, 2018. The M&EC Board never declared dividends on the Series B Preferred Stock and our credit facility prohibits the payment of cash dividends without the lender’s consent. After the Exchange Offer, the 1,284,730 shares of the Series B Preferred Stock acquired by the Company were contributed by the Company to M&EC and the Series B Preferred Stock was no longer outstanding. The Company recorded a gain of approximately $1,596,000 in 2018, which was net of approximately $63,000 in legal costs incurred for the completion of the transaction.

 

The shares of Company Common Stock issued in exchange for shares of M&EC’s Series B Preferred Stock were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), and, as a result, were considered restricted securities when issued.

 

NOTE 9

DISCONTINUED OPERATIONS

 

The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment: (1) subsidiaries divested in 2011 and prior, (2) two previously closed locations, and (3) our PFSG facility which is in closure status and which final closure is subject to regulatory approval of necessary plans and permits.

 

The Company incurred losses from discontinued operations of $541,000 and $667,000 for the years ended December 31, 2019 and 2018 (net of taxes of $0 for each period), respectively. The loss for the year ended 2019 included an increase of approximately $50,000 in remediation reserve for our Perma-Fix of Memphis, Inc. (“PFM”) due to reassessment of the remediation reserve. The loss for the year ended 2018 included an increase of approximately $50,000 in remediation reserve for our Perma-Fix of Dayton (“PFD”) subsidiary due to reassessment of the remediation reserve. The remaining loss for each of the periods noted above was primarily due to costs incurred in the administration and continued monitoring of our discontinued operations.

 

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The following table presents the major class of assets of discontinued operations at December 31, 2019 and December 31, 2018. No assets and liabilities were held for sale at each of the periods noted.

 

(Amounts in Thousands)  December 31, 2019   December 31, 2018 
Current assets          
Other assets  $104   $107 
Total current assets   104    107