PERMA FIX ENVIRONMENTAL SERVICES INC 10-K

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. 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, the accounts of our majority-owned Polish subsidiary (which was sold in December 2021 – see a discussion below “PF Medical” for a discussion of this sale), and the account of a variable interest entity for which we are the primary beneficiary, 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. 18 COVID-19 Impact Our 2021 financial results continued to be impacted by COVID-19 with the emergence of new COVID variants. Our Treatment Segment’s revenue has been negatively impacted by continued waste shipment delays from certain customers since the latter part of the first quarter of 2020 at the start of the pandemic. However, we expect to see a gradual return in waste receipts from these customers starting in the second quarter of 2022 as we expect our customers to start easing up on COVID-19 restrictions, including reinstating return-to-work schedules in the upcoming months. Additionally, as a result of the constraint in supply chain, we experienced a delay in the delivery of a new technology waste processing unit from our supplier which negatively impacted our revenue as associated revenue was not able to be generated. Delivery of this unit had been expected during the third quarter of 2021 but did not occur until the first quarter of 2022. Within our Services Segment, we experienced delays in procurement actions and contract awards resulting primarily from the impact of COVID-19. However, since the end of the second quarter of 2021, we were awarded a number of new contracts, including a fixed price contract awarded to us at the end of the third quarter of 2021 with a value of approximately $40,000,000 for the decommissioning of a navy ship, with work expected to be completed over an eighteen to twenty-four month period. Due to customer administrative delay and/or continued COVID-19 impact experienced by certain customers, work under certain of our new awards was temporarily curtailed/delayed which negatively impacted our revenue. We expect to see a ramp-up in activities from certain of these new projects starting in the second quarter of 2022. Within our Treatment and Services Segments, we continue to have bids currently submitted and awaiting awards. Our management team continues to proactively update our ongoing business operations and safety plans in an effort to mitigate any potential impact of COVID-19. We continue to monitor government mandates and recommendations and remain focused on protecting the health and well-being of our employees and the communities in which we operate while assuring the continuity of our business operations. At this time, we believe we have sufficient liquidity on hand to continue business operations during the next twelve months. At December 31, 2021, we had borrowing availability under our revolving credit facility of approximately $8,692,000 which was based on a percentage of eligible receivables and subject to certain reserves and included our cash on hand of approximately $4,440,000. As a result of a recent amendment to our Loan Agreement, we are required to maintain a minimum of $3,000,000 in borrowing availability under our revolving credit until the minimum FCCR requirement for the quarter ended June 30, 2022 has been met and certified to our lender (see “Financing Activities” within this MD&A for a discussion of this amendment). We continue to assess the need in reducing operating costs during this volatile time, which may include curtailing certain capital expenditures and eliminating non-essential expenditures. We are closely monitoring our customers’ payment performance. However, since a significant portion of our revenues is derived from government related contracts, we do not expect our accounts receivable collections to be materially impacted due to COVID-19. As the situations surrounding COVID-19 continues to remain fluid, the full impact and extent of the pandemic on our financial results and liquidity cannot be estimated with any degree of certainty. We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. Review Our overall revenue decreased $33,235,000 or 31.5% to $72,191,000 for the twelve months ended December 31, 2021 from $105,426,000 for the corresponding period of 2020. The revenue decrease was entirely within our Services Segment where revenue decreased by approximately $36,084,000 or 47.9% to $39,199,000 for the twelve months ended December 31, 2021 from $75,283,000 for the corresponding period of 2020 primarily due to delays in contract awards resulting primarily from the impact of COVID-19 as discussed above which was further exacerbated by the completion of a certain large project in the Services Segment in the second quarter of 2021 and the near completion of another certain large project in 2021. As discussed above, although we were awarded a number of new contracts within the Services Segment since the end of the second quarter of 2021, work under certain of these new awards was temporarily curtailed/delayed due to customer administrative delay and/or COVID-19 impact experienced by the customer. However, we expect to see a ramp-up in activities from certain of these new projects starting in the second quarter of 2022. Treatment Segment revenue increased by $2,849,000 or 9.5% to $32,992,000 for the twelve months ended December 31, 2021 from $30,143,000 for the corresponding period of 2020. Our Treatment Segment revenue for the twelve months ended December 31, 2021 included approximately $1,286,000 recognized in the third quarter of 2021 from a request for equitable adjustment (“REA”) resulting from certain pricing provisions of a government related contract. The increase in revenue within our Treatment Segment in 2021 was also attributed to higher waste volume from commercial waste generators. Despite the increase in our Treatment Segment revenue, our Treatment Segment revenue has not returned to pre-pandemic level and has continued to be impacted by delays in waste shipments from certain customers resulting from the shutdown of waste generating activities in the field due to slow return-to-work schedules from the impact of COVID-19 since the start of the pandemic. However, we expect to see a gradual return in waste receipts from these customers starting in the second quarter of 2022. Additionally, delayed delivery of a new technology waste processing unit by our supplier due to supply chain issue as discussed above also negatively impacted our revenue as processing of associated revenue did not occur. Gross profit decreased $9,069,000 or 57.1% primarily due to the revenue decrease in the Services Segment. Selling, General, and Administrative (“SG&A”) expenses increased by approximately $1,071,000 or 9.1% for the twelve months ended December 31, 2021 as compared to the corresponding period of 2020. 19 PF Medical As previously disclosed, our Medical Segment business, conducted through our majority-owned Polish subsidiary, Perma-Fix Medical S.A (“PFM Poland”), and PFM Poland’s wholly-owned subsidiary, Perma-Fix Medical Corporation, a Delaware corporation (“PFMC”), had not generated any revenue and had substantially reduced R&D activities of our medical isotope production technology due to the need for capital to fund these activities. During December 2021, we made the strategic decision to cease all R&D activities under the Medical Segment and sold 100% of our interest in PFM Poland for a nominal amount. As a condition precent to the sale of PFM Poland, we acquired PFMC after its conversion to a Delaware limited liability company. Additionally, as further condition precedent to the sale of PFM Poland, we released PFM Poland from unsatisfied trade payables owed by PFM Poland to us totaling approximately $2,537,000 (USD). As a result of the sale of PFM Poland, we deconsolidated the entity from our consolidated financial statements and recorded a non-cash “Loss on deconsolidation of subsidiary” of approximately $1,062,000 on our Consolidated Statement of Operations for the year ended December 31, 2021. Business Environment Our Treatment and Services Segments’ business continues to be heavily dependent on services that we provide to governmental clients, primarily as subcontractors for others who are prime contractors to government entities or directly as the prime contractor. 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 COVID-19 as discussed above. In addition, our governmental contracts and subcontracts relating to activities at governmental sites in the United States are generally subject to termination for convenience at any time at the government’s option, and our governmental contracts/task orders with the Canadian government authorities also allow the authorities to terminate the contract/task orders at any time for convenience. Our work under contracts/task order agreements with Canadian government authorities has substantially been completed. See “Known Trends and Uncertainties – Perma-Fix Canada, Inc. (“PF Canada”)” for additional discussion as to a terminated Canadian task order agreement. Significant reductions in the level of governmental funding or specifically mandated levels for different programs that are important to our business could have a material adverse impact on our business, financial position, results of operations and cash flows. We are continually reviewing methods to raise additional capital to supplement our liquidity requirements, when needed, and reducing our operating costs. We continue to aggressively bid on various contracts, including potential contracts within the international markets. 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”) (see “PF Medical” above for a discussion of the cease of all R&D activities under the Medical Segment and the sale of 100% of PFM Poland which comprises the Medical Segment). 20 Summary - Years Ended December 31, 2021 and 2020 Below are the results of continuing operations for years ended December 31, 2021 and 2020 (amounts in thousands): (Consolidated) 2021 % 2020 % Net revenues $ 72,191 100.0 $ 105,426 100 % Cost of goods sold 65,367 90.5 89,533 84.9 Gross profit 6,824 9.5 15,893 15.1 Selling, general and administrative 12,845 17.8 11,774 11.2 Research and development 746 1.0 762 .7 Loss on disposal of property and equipment 2 — 29 — (Loss) income from operations (6,769 ) (9.3 ) 3,328 3.2 Interest income 26 — 140 .1 Interest expense (247 ) (.3 ) (398 ) (.4 ) Interest expense – financing fees (41 ) (.1 ) (294 ) (.3 ) Other (86 ) (.1 ) 211 .2 Gain (Loss) on extinguishment of debt 5,381 7.4 (27 ) — Loss on deconsolidation of subsidiary (1,062 ) (1.5 ) — — (Loss) income from continuing operations before taxes (2,798 ) (3.9 ) 2,960 2.8 Income tax benefit (3,890 ) (5.4 ) (189 ) (.2 ) Income from continuing operations $ 1,092 1.5 $ 3,149 3.0 Revenue Consolidated revenues decreased $33,235,000 for the year ended December 31, 2021 compared to the year ended December 31, 2020, as follows: (In thousands) 2021 % Revenue 2020 % Revenue Change % Change Treatment Government waste $ 20,816 28.8 $ 21,234 20.1 $ (418 ) (2.0 ) Hazardous/non-hazardous (1) 4,915 6.8 5,072 4.8 (157 ) (3.1 ) Other nuclear waste 7,261 10.1 3,837 3.7 3,424 89.2 Total 32,992 45.7 30,143 28.6 2,849 9.5 Services Nuclear 37,834 52.4 73,458 69.7 (35,624 ) (48.5 ) Technical 1,365 1.9 1,825 1.7 (460 ) (25.2 ) Total 39,199 54.3 75,283 71.4 (36,084 ) (47.9 ) Total $ 72,191 100.0 $ 105,426 100.0 $ (33,235 ) (31.5 ) 1) Includes wastes generated by government clients of $2,299,000 and $1,976,000 for the twelve months ended December 31, 2021 and 2020, respectively. Treatment Segment revenue increased $2,849,000 or 9.5% for the twelve months ended December 31, 2021 over the same period in 2020. The increase in Other nuclear waste was attributed to higher waste volume from commercial waste generators as our Treatment Segment continues its efforts to expand into the commercial market domestically and internationally. Revenue from government waste generators for the twelve months ended December 31, 2021 included approximately $1,286,000 recognized in the third quarter of 2021 from a REA resulting from certain pricing provisions of a contract. In 2021, revenue from government waste generators within our Treatment Segment continued to be impacted by delayed waste shipment from certain customers due to the impact of COVID-19. However, we expect to see a gradual return in waste receipts from these customers starting in the second quarter of 2022. As previously discussed, the delay in deployment of our new waste processing technology unit due to supply chain constraint also negatively impacted our Treatment Segment revenue in 2021. Services Segment revenue decreased $36,084,000 or 47.9% for the twelve months ended December 31, 2021 over the same period in 2020. As previously disclosed, our Services Segment revenue for the first half of 2021 was impacted primarily by delays in procurement actions and contract awards resulting from the impact of COVID-19 and the completion of a certain large contract in the second quarter of 2021 and the near completion of a certain other project. Since the end of the second quarter of 2021, our Services Segment was awarded a number of new contracts. However, due to COVID-19 impact and/or administrative delay by the customer under certain of these new awards, our Services Segment revenue was impacted by temporary curtailment/delay in work under certain of these new projects. Our Services Segment expects to see a ramp- up of activities from certain of these new projects starting in the second quarter of 2022. 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. 21 Cost of Goods Sold Cost of goods sold decreased $24,166,000 for the year ended December 31, 2021, as compared to the year ended December 31, 2020, as follows: % % (In thousands) 2021 Revenue 2020 Revenue Change Treatment $ 26,274 79.6 $ 24,652 81.8 $ 1,622 Services 39,093 99.7 64,881 86.2 (25,788 ) Total $ 65,367 90.5 $ 89,533 84.9 $ (24,166 ) Cost of goods sold for the Treatment Segment increased by approximately $1,622,000 or 6.6%. Treatment Segment’s variable costs increased by approximately $894,000 primarily in disposal, transportation, material and supplies and lab services. Treatment Segment’s overall fixed costs were higher by approximately $728,000 resulting from the following: general expenses were higher by $235,000 in various categories; salaries and payroll related expenses were higher by approximately $430,000; depreciation expenses were higher by approximately $100,000; regulatory expenses were higher by approximately $64,000; travel expenses were higher by approximately $14,000; and maintenance expenses were lower by $115,000. Services Segment cost of goods sold decreased $25,788,000 or 39.7% primarily due to lower revenue. The decrease in cost of goods sold was primarily due to lower salaries/payroll related, travel, and outside services expenses totaling approximately $22,680,000 with the remaining lower costs in material and supplies, disposal, regulatory, and general expenses. Included within cost of goods sold is depreciation and amortization expense of $1,654,000 and $1,555,000 for the twelve months ended December 31, 2021, and 2020, respectively. Gross Profit Gross profit for the year ended December 31, 2021 was $9,069,000 lower than 2020 as follows: % % (In thousands) 2021 Revenue 2020 Revenue Change Treatment $ 6,718 20.4 $ 5,491 18.2 $ 1,227 Services 106 0.3 10,402 13.8 (10,296 ) Total $ 6,824 9.5 $ 15,893 15.1 $ (9,069 ) Treatment Segment gross profit increased by $1,227,000 or 22.3% and gross margin increased to 20.4% from 18.2% primarily due to higher revenue from the REA as discussed above. The decrease in gross profit and gross margin in the Services Segment was primarily due to lower revenue from fewer projects and overall lower margin projects. Our overall Services Segment gross margin is impacted by our current projects which are competitively bid on and will therefore, have varying margin structures. 22 SG&A SG& A expenses increased $1,071,000 for the year ended December 31, 2021 as compared to the corresponding period for 2020 as follows: (In thousands) 2021 % Revenue 2020 % Revenue Change Administrative $ 5,751 — $ 5,537 — $ 214 Treatment 4,030 12.2 3,819 12.7 211 Services 3,064 7.8 2,418 3.2 646 Total $ 12,845 17.8 $ 11,774 11.2 $ 1,071 Administrative SG&A expenses were higher primarily due to the following: director fees were higher by approximately $250,000 resulting from one additional director and fee increases that went into effect January 1, 2021; outside services expenses were higher by approximately $41,000 resulting from more consulting/subcontract matters; and salaries and payroll related expenses were lower by approximately $77,000 primarily due to lower expenses related to our incentive plans and forfeiture of 401(k) plan matching funds contributed by us for former employees which failed to meet the 401(k) plan vesting requirements, offset by higher salaries and other payroll related expenses. Treatment Segment SG&A expenses were higher due to the following: salaries and payroll related expenses were higher by approximately $255,000 as in 2020 more of the resources were supporting a large Services Segment project; outside services expenses were higher by approximately $49,000 resulting from more consulting/subcontract matters; and general expenses were lower by $93,000 in various categories. The increase in SG&A expenses within our Services Segment was primarily due to the following: salaries and payroll related expenses were higher by approximately $287,000 primarily due to increased resources for bid and proposals; outside services expenses were higher by approximately $178,000 due to more consulting matters related to bid and proposals; bad debt expenses were higher by approximately $80,000 as in the first quarter of 2020, certain customer accounts which had previously been reserved for were collected; travel expenses were higher by $20,000; and general expenses were higher by $81,000 in various categories. Included in SG&A expenses is depreciation and amortization expense of $33,000 and $41,000 for the twelve months ended December 31, 2021 and 2020, respectively. R&D R&D expenses decreased $16,000 for the year ended December 31, 2021 as compared to the corresponding period of 2020 as follows: (In thousands) 2021 2020 Change Administrative $ 40 $ 76 $ (36 ) Treatment 221 243 (22 ) Services 71 132 ( 61 ) PF Medical 414 311 103 Total $ 746 $ 762 $ (16 ) 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. See “PF Medical” above for a discussion of the strategic decision made by us to cease all R&D activities under the Medical Segment during the fourth quarter of 2021. Interest Income Interest income decreased by approximately $114,000 for the twelve months ended December 31 2021 as compared to the corresponding period of 2020 primarily due to lower interest earned from our finite risk sinking fund. Interest Expense Interest expense decreased by approximately $151,000 for the twelve months ended December 31, 2021 as compared to the corresponding period of 2020 primarily due to lower interest expense from our declining term loan balance outstanding. Also, interest expense was lower resulting from the payoff of the $2,500,000 loan at year end 2020 that we had previously entered into with Robert Ferguson on April 1, 2019. 23 Interest Expense- Financing Fees Interest expense-financing fees decreased by approximately $253,000 for the twelve months ended December 31, 2021 as compared to the corresponding period 2020 primarily due to debt discount/debt issuance costs that became fully amortized as financing fees at year end 2020 in connection with the issuance of our Common Stock and a Warrant as consideration for us receiving the $2,500,000 loan from Robert Ferguson dated April 1, 2019. Income Taxes We regularly assess the likelihood that the deferred tax asset will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies, then record 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. For the year ended December 31, 2020, we maintained a full valuation allowance against net deferred income tax assets because insufficient evidence existed to support the realization of any future income tax benefits. Since the end of the second quarter of 2021, however, we entered into a number of new contracts awarded to the Company’s Services Segment (including a contract award with a value of approximately $40,000,000 for the decommissioning of a navy ship). As a result of these new contracts, we expected future profitability and improved overall prospects of future business. As such, as of September 30, 2021, we determined that it was more likely than not that we would be able to realize a portion of the deferred income tax assets. As a result, a deferred income tax benefit in the amount of approximately $2,351,000 attributable to the valuation allowance release on beginning of year deferred tax assets primarily related to U.S. Federal income taxes was realized in the three months ended September 30, 2021. We continue to maintain a valuation allowance against certain state and foreign tax attributes that may not be realizable along with the capital loss carryover generated during 2021 that we do not expect to realize. We had income tax benefits of $3,890,000 and $189,000 for continuing operations for the twelve months ended December 31, 2021 and 2020, respectively. Our effective tax rates were approximately 139.0% and (6.4%) for the twelve months ended December 31, 2021 and 2020, respectively. Our effective tax rate for the twelve months ended December 31, 2021 was substantially impacted by the release of valuation allowance as discussed above. Our tax rate for the twelve months ended December 31, 2020 was impacted by the full valuation on our net deferred tax assets. For the twelve months ended December 31, 2021, the primary reasons for the differences between our effective tax rate and statutory tax rate were due to the aforementioned release of valuation allowance and the forgiveness of our PPP Loan which is included in our Consolidated Statement of Operations as “Gain on extinguishment of debt” but is exempt from income taxes. Backlog Our Treatment Segment 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, 2021, our Treatment Segment had a backlog of approximately $7,129,000, as compared to approximately $7,631,000 at December 31, 2020. 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. Discontinued Operations and Environmental Contingencies Our discontinued operations consist of all our subsidiaries included in our Industrial Segment which encompasses subsidiaries divested in 2011 and prior and three previously closed locations. Our discontinued operations had no revenue for the twelve months ended December 31, 2021 and 2020. We incurred net losses of $421,000 (net of tax benefit of $139,000) and $412,000 (net of tax expense of $0) for our discontinued operations for the twelve months ended December 31, 2021 and 2020, respectively. We have three environmental remediation projects, all within our discontinued operations, which principally entail the removal/remediation of contaminated soil, and, in most cases, the remediation of surrounding ground water. Our loss for fiscal year 2021 within our discontinued operations included an increase of $100,000 made to the remediation reserve for our PFSG subsidiary due to reassessment of the reserve. See a discussion of the environmental reserves and the related liabilities in “Part II - Item 8 – Financial Statements and Supplementary Data – Notes to Consolidate Financial Statements – Note 9 – Discontinued Operations – Environmental Liabilities.” 24 Liquidity and Capital Resources Our cash flow requirements during the twelve months ended December 31, 2021 were primarily financed by our operations, credit facility availability and an equity raise that was consummated at the end of the third quarter of 2021 which we received gross proceeds of approximately $6,200,000 from subscription agreements that we entered into with certain institutional and retail investors for the sale and issuance of 1,000,000 shares of our Common Stock in a registered direct offering (see “Financing Activities” below for additional information on this equity raise). At December 31, 2021, we had cash on hand of approximately $4,440,000. As previously disclosed, we have ceased all R&D activities under our Medical Segment and sold our majority-owned subsidiary, PFM Poland. Subject to the impact of COVID-19 as discussed above, 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, our capital expenditure line, and cash on hand. We are continually reviewing operating costs and reviewing the possibility of further reducing operating costs and non-essential expenditures to bring them in line with revenue levels, when necessary. At this time, we believe that our cash flows from operations, our available liquidity from our credit facility, our capital expenditure line and our cash on hand should be sufficient to fund our operations for the next twelve months. However, due to the uncertainty of COVID-19, there are no assurances such will be the case. See discussion under “Liquidity and Capital Resources – Investing Activities” as to potential funding of an investment under the joint venture term sheet. The following table reflects the cash flow activity for the year ended December 31, 2021 and the corresponding period of 2020: (In thousands) 2021 2020 Cash (used in) provided by operating activities of continuing operations $ (6,316 ) $ 7,867 Cash used in operating activities of discontinued operations (521 ) (499 ) Cash used in investing activities of continuing operations (1,564 ) (1,711 ) Cash provided by investing activities of discontinued operations — 118 Cash provided by financing activities of continuing operations 4,943 1,892 Effect of exchange rate changes on cash (1 ) 6 (Decrease) increase in cash and finite risk sinking fund (restricted cash) $ (3,459 ) $ 7,673 At December 31, 2021, we were in a positive cash position with no revolving credit balance. At December 31, 2021, we had cash on hand of approximately $4,440,000, which includes account balances of our foreign subsidiaries totaling approximately $26,000. Operating Activities Accounts receivable, net of allowances for doubtful accounts, totaled $11,372,000 at December 31, 2021, an increase of $1,713,000 from the December 31, 2020 balance of $9,659,000. The increase was primarily due to timing of accounts receivable collection and timing of invoicing. Our contracts with our customers are subject to various payment terms and conditions; therefore, our accounts receivable are impacted by these terms and conditions and the related timing of accounts receivable collections. Additionally, contracts with our customers may sometimes result in modifications which can cause delays in collections. Unbilled receivables totaled $8,995,000 at December 31, 2021, a decrease of $5,458,000 from the December 31, 2020 balance of $14,453,000. The decrease in unbilled receivables was primarily within our Services Segment due to invoicing and collection of accounts receivable on certain large projects which have been completed or are near completion. Accounts payable, totaled $11,975,000 at December 31, 2021, a decrease of $3,407,000 from the December 31, 2020 balance of $15,382,000. 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. 25 We had working capital of $4,060,000 (which included working capital of our discontinued operations) at December 31, 2021, as compared to working capital of $3,672,000 at December 31, 2020. Our working capital was positively impacted by the forgiveness of the entire balance of our Paycheck Protection Program (“PPP”) Loan, along with accrued interest, by the U.S. Small Business Administration (“SBA”) effective June 15, 2021 (see “CARES Act – PPP Loan” for information on this loan”) and the proceeds that we received from subscription agreements that we entered into with certain institutional and retail investors, for the sale and issuance of 1,000,000 shares of our Common Stock in a registered direct offering (see “Financing Activities” below for a discussion of this direct offering). The positive impact was reduced by our results of operations which were heavily impacted from COVID-19 as discussed above. Investing Activities During 2021, our purchases of capital equipment totaled approximately $2,162,000, of which $585,000 was subject to financing, with the remaining funded from cash from operations and our credit facility. We have budgeted approximately $2,000,000 for 2022 capital expenditures primarily 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. During March 2022, we signed a joint venture term sheet addressing plans to partner with Springfields Fuels Limited (“SFL”), an affiliate of Westinghouse Electric Company LLC, to develop and manage a nuclear waste-materials treatment facility (the “Facility”) in the United Kingdom. The Facility is for the purpose of expanding the partners’ waste treatment capabilities for the European nuclear market. It is expected that upon finalization of a partnership agreement, SFL will have an ownership interest of fifty-five (55) percent and our interest will be forty-five (45) percent. The finalization, form and capitalization of this unpopulated partnership is subject to numerous conditions, including but not limited to, completion and execution of a definitive agreement and facility design and the granting of required regulatory, lender or permitting approvals. Upon finalization of this venture, we will be required to make an investment in this venture. The amount of our investment, the period of which it is to be made and the method of funding are to be determined. Financing Activities We entered into a Second Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated May 8, 2020 (“Loan Agreement”), with PNC National Association (“PNC”), acting as agent and lender. The Loan Agreement provides us with the following credit facility with a maturity date of March 15, 2024: (a) up to $18,000,000 revolving credit (“revolving credit”) and (b) a term loan (“term loan”) of approximately $1,742,000, requiring monthly installments of $35,547. 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. During 2021, we entered into several amendments to our Loan Agreement with our lender, which provided the following, among other things: ● revised our fixed charge coverage ratio (“FCCR”) calculation requirement which allows for the add-back of approximately $5,318,000 in eligible expenses that were incurred and covered by the PPP Loan that we received in 2020. The add-back is to be applied retroactively to the second and third quarters of 2020. (see below for a discussion of the PPP Loan); ● a capital expenditure line of up to $1,000,000 with advances on the line, subject to certain limitations, permitted for up to twelve months starting May 4, 2021 (the “Borrowing Period”). Only interest is payable on advances during the Borrowing Period (see annual rate of interest below on the capital expenditure line). At the end of the Borrowing Period, the total amount advanced under the line will amortize equally based on a five-year amortization schedule with principal payment due monthly plus interest. At the maturity date of the Loan Agreement, any unpaid principal balance plus interest, if any, will become due. No advance on the capital line has been made as of December 31, 2021. 26 ● waived our failure to meet the minimum quarterly FCCR requirement for the second quarter of 2021; ● removed the quarterly FCCR testing requirement for the third quarter of 2021; ● reinstated the quarterly FCCR testing requirement starting for the fourth quarter of 2021 and revised the methodology to be used in calculating the FCCR for the quarters ending December 31, 2021, March 31, 2022, and June 30, 2022 (with no change to the minimum 1.15:1 ratio requirement for each quarter); and ● required maintenance of a minimum of $3,000,000 in borrowing availability under the revolving credit until the minimum FCCR requirement for the quarter ended December 31, 2021 has been met and certified to the lender. On March 29, 2022, we entered into an amendment to our Loan Agreement with our lender which provided, among other things, the following: ● waived our failure to meet the minimum quarterly FCCR requirement for the fourth quarter of 2021; ● removes the quarterly FCCR testing requirement for the first quarter of 2022; ● reinstates the quarterly FCCR testing requirement starting for the second quarter of 2022 and revises the methodology to be used in calculating the FCCR for the quarters ending June 30, 2022, September 30, 2022, and December 31, 2022 (with no change to the minimum 1.15:1 ratio requirement for each quarter); ● requires maintenance of a minimum of $3,000,000 in borrowing availability under the revolving credit until the minimum FCCR requirement for the quarter ended June 30, 2022 has been met and certified to the lender; and ● revises the annual rate used to calculate the Facility Fee (as defined in the Loan Agreement) on the revolving credit, with addition of the capital expenditure line, from 0.375% to 0.500%. Upon meeting the minimum FCCR requirement of 1;15:1 on a twelve month trailing basis, the Facility Fee rate of 0.375% will be reinstated. In connection with the amendment, we paid our lender a fee of $15,000. Pursuant to our Loan Agreement, as amended, payment of annual rate of interest due on the revolving credit is at prime (3.25% at December 31, 2021) plus 2% or London InterBank Offer Rate (“LIBOR”) plus 3.00% and the term loan and capital expenditure line at prime plus 2.50% or LIBOR plus 3.50%. Under the LIBOR option of interest payment, a LIBOR floor of 0.75% applies in the event that LIBOR falls below 0.75% at any point in time. We may terminate our Loan Agreement, as amended, upon 90 days’ prior written notice upon payment in full of our obligations under the Loan Agreement. We agreed to pay PNC 1.0% of the total financing had we paid off our obligations on or before May 7, 2021 and 0.5% of the total financing if we pay off our obligations after May 7, 2021 but prior to or on May 7, 2022. No early termination fee will apply if we pay off our obligations under the Loan Agreement after May 7, 2022. Our credit facility under our Loan Agreement, as amended, with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. We met our financial covenant requirements in the first quarter of 2021. Our FCCR calculation in the first quarter of 2021 included the add-back of approximately $5,318,000 in eligible expenses that were incurred and covered by the PPP Loan that we received in 2020 as permitted by the amendment dated May 4, 2021 as discussed above. We did not meet our FCCR requirement in the second quarter of 2021; however, this non-compliance was waived by our lender as discussed above. Testing of our FCCR was not required for the third quarter 2021 pursuant to the August 10, 2021 amendment to the Loan Agreement as discussed above. We met our financial covenant requirements for the fourth quarter of 2021, with the exception of our FCCR requirement; however, this non-compliance of our FCCR requirement was waived by our lender pursuant to an amendment to our Loan Agreement as discussed above. Additionally, testing of the FCCR requirement is not required for the first quarter of 2022 pursuant to this same amendment. We expect to meet our quarterly financial covenant requirements for the next twelve months under our Loan Agreement, subject to no FCCR testing requirement for the first quarter of 2022. 27 On September 30, 2021, we entered into subscription agreements with certain institutional and retail investors, pursuant to which we sold and issued, in a registered direct offering, an aggregate of 1,000,000 shares of our Common Stock, at a negotiated purchase price per share of $6.20, for aggregate gross proceeds to us of approximately $6,200,000. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) PPP Loan On April 14, 2020, we entered into a promissory note under the PPP with PNC, our credit facility lender, which had a balance of approximately $5,318,000 (the “PPP Loan”). The PPP was established under the CARES Act and is administered by the SBA. The CARES Act was subsequently amended by the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). Proceeds from the promissory note was used by us for eligible payroll costs, mortgage interest, rent and utility costs as permitted under the Flexibility Act. The annual interest rate on the PPP Loan is 1.0% On October 5, 2020, we applied for forgiveness on repayment of the PPP Loan as permitted under the Flexibility Act. On July 1, 2021, we were notified by PNC that the entire balance of the PPP Loan of approximately $5,318,000, along with accrued interest of approximately $63,000 was forgiven by the SBA, effective June 15, 2021. Accordingly, we recorded the entire forgiven PPP Loan balance, along with accrued interest, totaling approximately $5,381,000 as “Gain on extinguishment of debt” on our Consolidated Statement of Operations for the year ended 2021. Deferral of Employment Tax Deposits The Flexibility Act provides employers the option to defer the payment of an employer’s share of social security taxes beginning on March 27, 2020 through December 31, 2020, with 50% of the amount of social security taxes deferred to become due on December 31, 2021 with the remaining 50% due on December 31, 2022. Our deferment of such taxes totaled approximately $1,252,000 of which approximately $626,000 was paid in December 2021. At December 31, 2021, the remaining $626,000 in deferred social security taxes was included in “Accrued expenses” within current liabilities in our Consolidated Balance Sheets. 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 31, 2021, the total amount of standby letters of credit outstanding totaled approximately $3,020,000 and the total amount of bonds outstanding totaled approximately $50,109,000. We also provide closure and post-closure requirements through a financial assurance policy for certain of our Treatment Segment facilities through AIG. At December 31, 2021, the closure and post-closure requirements for these facilities were approximately $20,403,000. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared based upon the selection and application of US GAAP, which may require us to make estimates, judgments and assumptions that affect amounts reported in our financial statements and accompanying notes. The accounting policies below are those we believe affect the more significant estimates and judgments used in preparation of our financial statements. Our other accounting policies are described in the accompanying notes to our consolidated financial statements of this Form 10-K (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – “Note 2 – Summary of Significant Accounting Policies”): 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. 28 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, 2021 and 2020 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. 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. Recent Accounting Pronouncements See “Item 8 – Financial Statements and Supplementary Data” – Notes to Consolidated Financial Statements” – Note 2 – Summary of Significant Accounting Policies” for the recent accounting pronouncements that have been adopted during the year ended December 31, 2021, or will be adopted in future periods. Known Trends and Uncertainties Economic Conditions. Our business continues to be heavily dependent on services that we provide to governmental clients, primarily as subcontractors for others who are prime contractors to government authorities (particularly the DOE and DOD) or directly as the prime contractor. 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, COVID-19 impact, 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 for convenience at any time at the option of the government. Our TOAs with the Canadian government also provide that the government may terminate a TOA at any time for convenience (see below “Perma-Fix Canada, Inc. (“PF Canada”)” below for a discussion of a notice of termination (“NOT”) that we received under a contract with a Canadian government authority during the fourth quarter of 2021). 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. 29 Significant Customers . Our Treatment and Services Segments have significant relationships with the U.S governmental authorities through contracts entered into indirectly as subcontractors for others who are prime contractors or directly as the prime contractor to government authorities. We also had significant relationships with Canadian government authorities primarily through TOAs entered into with Canadian government authorities. Project work under TOAs with Canadian government authorities has substantially been completed. Our inability to continue under existing contracts that we have with the U.S government (directly or indirectly as a subcontractor) or significant reductions in the level of governmental funding in any given year could have a material adverse impact on our operations and financial condition. We performed services relating to waste generated by 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 $60,812,000, or 84.2%, of our total revenue during 2021, as compared to $96,582,000, or 91.6%, of our total revenue during 2020. Revenue generated by us as a subcontractor to a customer for a remediation project performed for a government entity (the DOE) within our Services Segment in 2021 and 2020 accounted for approximately $8,526,000 or 11.8% and $41,011,000 or 38.9% (included in revenue generated relating to government clients above) of our total revenue for 2021 and 2020, respectively. This remediation project included among other things, decontamination support of a building. This project was completed in the second quarter of 2021. 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. Perma-Fix Canada, Inc. (“PF Canada”) During the fourth quarter of 2021, PF Canada received a NOT from Canadian Nuclear Laboratories, LTD. (“CNL”) on a TOA that PF Canada entered into with CNL in May 2019 for remediation work within Ontario, Canada. The NOT was received after work under the TOA was substantially completed. CNL may terminate the TOA at any time for convenience. As of December 31, 2021, PF Canada has approximately $2,640,000 in unpaid receivables and unbilled costs due from CNL as a result of work performed under the TOA. Additionally, CNL has approximately $871,000 in contractual holdback under the TOA that is payable to PF Canada. CNL also established a bond securing approximately $1,900,000 (CAD) to cover certain issue raised in connection with the TOA. Under the TOA, CNL may be entitled to set off certain costs and expenses incurred by CNL in connection with the termination of the TOA, including the bond as discussed above, against amounts owed to PF Canada for work performed by PF Canada or its subcontractors. PF Canada continues to be in discussions with CNL to finalize the amounts due to PF Canada under the TOA and continues to believes these amounts are due and payable. COVID-19 Impact. See “COVID-19 Impact” within this MD&A for a discussion of the impact of COVID-19 on our 2021 financial results and the potential impact it may have to our future financial results and business operations. Supply Chain. We use various commercially available materials and supplies which include among other things chemicals, containers/drums and PPE in our operations. We generally source these items from various suppliers in order to take advantage of competitive pricing. 30 We also utilize various types of equipment, which include among other things trucks, flatbeds, lab equipment, heavy machineries, in carrying out our business operations. Our equipment may be obtained through direct purchase, rental option or leases. Within our Services Segment, equipment required for projects are often provided by our subcontractors as part of our contract agreement with the subcontractor. Due to some of our specialized waste treatment processes, certain equipment that we utilize are designed and built to our specifications. We rely on various commercial equipment suppliers for the construction of these equipment. Due to recent supply chain constraints, we experienced a delay in the delivery of a new waste processing unit to us by our supplier due to shortage of parts required for the construction of the unit, among other things. Delivery of this unit was expected during the third quarter of 2021 but did not occur until the first quarter of 2022. The supply chain interruption delayed deployment of our new technology which negatively impacted our revenue for 2021 as associated revenue was not able to be generated. Continued increases in pricing and/or potential delays in procurements of material and supplies and equipment required for our operations resulting from further tightening supply chain could further adversely affect our operations and profitability. Potential Partnership with Springfields Fuels Limited. As discussed above, we have signed a term sheet addressing plans to partner with Springfields Fuels Limited, an affiliate of Westinghouse Electric Company LLC, to develop and manage a nuclear waste-materials treatment facility in the United Kingdom. See “Liquidity and Capital Resources – Investing Activities” of this MD&A for a discussion of this transaction. Inflation and Cost Increases. Continued increases in any of our operating costs, including changes in fuel prices (which impacts our transportation costs), wage rates, supplies, and utility costs, may increase our overall cost of goods sold or operating expenses. These cost increases may be the result of inflationary pressures that could further reduce profitability. Competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our services that we provide to our customers and therefore reduce our profitability. Related Party Transactions See a discussion of the Company’s related party transactions in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidate Financial Statements – Note 17 – Related Party Transactions and Note 21 – Subsequent Events – Executive Compensation.”