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, our audited consolidated financial statements and includes our accounts, the accounts of our wholly-owned subsidiaries and the account of a variable interest entity for which we were the primary beneficiary. 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. COVID-19 and Other Impacts Our 2022 financial results continued to be impacted by COVID-19, among other things. Our Treatment Segment began to see steady improvements in waste receipts starting in the second quarter of 2022 from certain customers who had previously delayed waste shipments due, in part, from the impact of COVID-19 which is reflective of our Treatment Segment’s backlog of approximately $9,156,000 at December 31, 2022, an increase of approximately $2,027,000 from the balance of $7,129,000 at December 31, 2021. This positive trend was negatively impacted by occurrences of severe weather conditions which contributed to temporary delays in waste shipments from certain customers and a temporary shortage in skilled production personnel which peaked through the fourth quarter of 2022 at one of our facilities. In early part of 2022, our Services Segment continued to experience delays/curtailments in project work by certain customers since the award of projects to us late in the second quarter of 2021 due to COVID-19 impact and/or administrative delays. However, starting in the second quarter of 2022, work under these projects had resumed/increased as the pandemic impacts began to subside and has since reached full operational status. In 2022, we continued to realize delays in procurement and planning on behalf of our government clients that saw easing through the second half of the year. Heading into 2023, we expect to see continued improvements in waste receipts and continued increases in project work from contracts recently won and bids submitted in both segments that are awaiting awards, subject to potential impact of COVID-19 and economic impacts. 18 Liquidity Overview We believe we have sufficient liquidity on hand to continue business operations during the next twelve months. At December 31, 2022, we had borrowing availability under our revolving credit facility of approximately $4,290,000 which was based on a percentage of eligible receivables and subject to certain reserves. Our borrowing availability of $4,290,000 at December 31, 2022 included a requirement from our lender that we maintain a minimum of $3,000,000 in borrowing availability. As a result of an amendment to our Loan Agreement that we entered into with our lender in March 2023, we are required to continue 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, 2023 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 ways to improve our liquidity and the need in reducing operating costs during this volatile time. Reducing operating costs may include curtailing certain capital expenditures and eliminating non-essential expenditures. We continue to closely monitor any potential impact from the countries’ economic conditions and COVID-19 pandemic on all aspects of our business. Although we believe we have sufficient liquidity to support our operations over the next twelve months, due to losses incurred in 2022 and our lender requiring us to maintain a minimum borrowing availability of $3,000,000 as discussed above, we are working toward improving our liquidity by either amending our existing lines of credit, obtaining new term loans or entering into equity transactions. There are no assurances that we will be successful in increasing our liquidity through these efforts. Review Revenue decreased by $1,592,000 or 2.2% to $70,599,000 for the twelve-month ended December 31, 2022 from $72,191,000 for the corresponding period of 2021. The decrease was entirely within our Services Segment where revenue decreased by $1,958,000 or 5.0% to $37,241,000 from $39,199,000. As previously disclosed, work under certain of the new projects awarded to our Services Segment at the end of the second quarter of 2021 continued to be delayed/curtailed into most of the first quarter of 2022 due to COVID-19 impact and/or administrative delays experienced by certain customers. However, work under these projects resumed/increased starting in the second quarter of 2022 and has since reached full operational status. The lower revenue in 2022 was further exacerbated by the completion of a large project in the second quarter of 2021 which was not replaced with a similar size contract because of delays in contract awards and procurement from COVID-19 impact which continued into the first half of 2022 and eased through the second half of 2022. Our Treatment Segment revenue increased by $366,000 or 1.1% primarily due to overall higher waste volume which was offset by lower averaged price waste due to revenue mix. As disclosed above, our Treatment Segment began to see steady improvements in waste receipts starting in the second quarter of 2022 from certain customers who had previously delayed waste shipments due, in part, from the impact of COVID-19. This positive trend was negatively impacted by occurrences of severe weather conditions which resulted in temporary delays in waste shipments from certain customers and a temporary shortage in skilled production personnel which peaked through the fourth quarter of 2022 at one of our facilities. Overall gross profit for 2022 increased $2,785,000 or 40.8%. The increase was entirely from our Services Segment due to higher margin projects. The decrease in Treatment Segment gross profit was impacted by overall lower averaged price waste from revenue mix and the impact of the increase in fixed costs. SG&A expenses increased by approximately $1,807,000 or 14.1% for the year ended December 31, 2022 as compared to the corresponding period of 2021. During the third quarter of 2022, we recorded approximately $1,975,000 in other income and other receivables (within current assets in our Consolidated Balance Sheets), which represent an employee retention credit that we are eligible for under the Coronavirus Aid, Relief, and Economic Security Act, as amended (the “CARES Act”) as result of the COVID-19 pandemic (see “Employee Retention Credit (“ERC”)” within this MD&A for a discussion of this refund that we are expecting resulting from this tax credit). 19 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 potential further impact from COVID-19. 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/TOAs with the Canadian government authorities also allow the authorities to terminate the contract/task orders at any time for convenience. Work under all of our contracts/TOAs with Canadian government authorities has substantially been completed. A significant account receivable due to PF Canada is subject to continuing negotiations. See “Known Trends and Uncertainties – Perma-Fix Canada, Inc. (“PF Canada”)” within this MD&A for additional discussion as to a terminated Canadian TOA. 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 two reportable segments: The Treatment Segment (“Treatment”) and the Services Segment (“Services”). Our financial results for 2021 also included our Medical Segments. As previously disclosed, we made the strategic decision to cease all R&D activities under the Medical Segment and sold 100% of our interest in Perma-Fix Medical S.A. (“PFM Poland” - which comprised the Medical Segment) in December 2021. Our Medical Segment had not generated any revenue and was involved in our medical isotope production technology. All costs previously incurred by the Medical Segment were included within R&D. Summary - Years Ended December 31, 2022 and 2021 Below are the results of continuing operations for years ended December 31, 2022 and 2021 (amounts in thousands): (Consolidated) 2022 % 2021 % Net revenues $ 70,599 100.0 $ 72,191 100.0 Cost of goods sold 60,990 86.4 65,367 90.5 Gross profit 9,609 13.6 6,824 9.5 Selling, general and administrative 14,652 20.8 12,845 17.8 Research and development 336 .4 746 1.0 Loss on disposal of property and equipment 18 — 2 — Loss from operations (5,397 ) (7.6 ) (6,769 ) (9.3 ) Interest income 99 .1 26 — Interest expense (175 ) (.3 ) (247 ) (.3 ) Interest expense – financing fees (61 ) (.1 ) (41 ) (.1 ) Other income (expense) 1,945 2.8 (86 ) (.1 ) Gain on extinguishment of debt — — 5,381 7.4 Loss on deconsolidation of subsidiary — — (1,062 ) (1.5 ) Loss from continuing operations before taxes (3,589 ) (5.1 ) (2,798 ) (3.9 ) Income tax benefit (378 ) (.6 ) (3,890 ) (5.4 ) (Loss) income from continuing operations $ (3,211 ) (4.5 ) $ 1,092 1.5 20 Revenue Consolidated revenues decreased $1,592,000 for the year ended December 31, 2022 compared to the year ended December 31, 2021, as follows: (In thousands) 2022 % Revenue 2021 % Revenue Change % Change Treatment Government waste $ 21,946 31.1 $ 20,816 28.8 $ 1,130 5.4 Hazardous/non-hazardous (1) 5,062 7.1 4,915 6.8 147 3.0 Other nuclear waste 6,350 9.0 7,261 10.1 (911 ) (12.5 ) Total 33,358 47.2 32,992 45.7 366 1.1 Services Nuclear 35,952 50.9 37,834 52.4 (1,882 ) (5.0 ) Technical 1,289 1.9 1,365 1.9 (76 ) (5.6 ) Total 37,241 52.8 39,199 54.3 (1,958 ) (5.0 ) Total $ 70,599 100.0 $ 72,191 100.0 $ (1,592 ) (2.2 ) 1) Includes wastes generated by government clients of $2,380,000 and $2,299,000 for the twelve months ended December 31, 2022 and 2021, respectively. Treatment Segment revenue increased by $366,000 or 1.1% for the twelve months ended December 31, 2022 over the same period in 2021. The overall increase was primarily due to higher waste volume as certain customers who had previously delayed waste shipments due to COVID-19 resumed steady waste shipments starting in the latter part of the second quarter. This positive trend was negatively impacted by occurrences of severe weather conditions which resulted in temporary delays in waste shipments from certain customers and a temporary shortage in skilled production personnel which peaked through the fourth quarter of 2022 at one of our facilities. The higher revenue from higher waste volume was offset by lower averaged price waste from revenue mix. Services Segment revenue decreased by approximately $1,958,000 or 5.0%. As previously disclosed, work under certain of the new projects awarded to our Services Segment at the end of the second quarter of 2021 continued to be delayed/curtailed into most of the first quarter of 2022 due to COVID-19 impact and/or administrative delays experienced by certain customers. However, since the second quarter of 2022, work under these projects had resumed/increased and has since reached full operational status. The lower revenue in 2022 was further exacerbated by the completion of a large project in the second quarter of 2021 which was not replaced with a similar size contract because of delays in contract awards and procurement from COVID-19. 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. In 2022, our Segments continued to realize delays in procurement and planning on behalf of our government clients which did not ease until the second half of 2022. Cost of Goods Sold Cost of goods sold decreased $4,377,000 for the year ended December 31, 2022, as compared to the year ended December 31, 2021, as follows: % % (In thousands) 2022 Revenue 2021 Revenue Change Treatment $ 28,115 84.3 $ 26,274 79.6 $ 1,841 Services 32,875 88.3 39,093 99.7 (6,218 ) Total $ 60,990 86.4 $ 65,367 90.5 $ (4,377 ) Cost of goods sold for the Treatment Segment increased by approximately $1,841,000 or 7.0%. Treatment Segment’s variable costs increased by approximately $607,000 primarily due to higher material and supplies, transportation, and outside services costs. Treatment Segment’s overall fixed costs were higher by approximately $1,234,000 resulting from the following: general expenses were higher by $483,000 primarily due to higher utility costs; depreciation expenses were higher by approximately $392,000 due to depreciation for asset retirement obligations in connection with our EWOC facility; regulatory expenses were higher by approximately $232,000 primarily due to additional closure costs recorded for our EWOC facility due to change in estimated costs; maintenance costs were higher by approximately $109,000; salaries and payroll related expenses were higher by $61,000; and travel expenses were lower by approximately $43,000. Services Segment cost of goods sold decreased $6,218,000 or 15.9% primarily due to lower revenue. The decrease in cost of goods sold was primarily due to lower salaries/payroll related, outside services, material and supplies and travel costs totaling approximately $6,863,000 which was offset by higher disposal, transportation and general expenses totaling approximately $645,000. Included within cost of goods sold is depreciation and amortization expense of $2,027,000 and $1,654,000 for the twelve months ended December 31, 2022, and 2021, respectively. 21 Gross Profit Gross profit for the year ended December 31, 2022 was $2,785,000 higher than 2021 as follows: % % (In thousands) 2022 Revenue 2021 Revenue Change Treatment $ 5,243 15.7 $ 6,718 20.4 $ (1,475 ) Services 4,366 11.7 106 0.3 4,260 Total $ 9,609 13.6 $ 6,824 9.5 $ 2,785 Treatment Segment gross profit decreased by $1,475,000 or approximately 22.0% and gross margin decreased to 15.7% from 20.4% primarily due to lower averaged price waste from revenue mix and the impact of the increase in fixed costs. Services Segment gross profit increased by $4,260,000 or 4,018.9% and gross margin increased to 11.7% from 0.3% primarily due to higher 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. SG&A SG& A expenses increased $1,807,000 for the year ended December 31, 2022 as compared to the corresponding period for 2021 as follows: (In thousands) 2022 % Revenue 2021 % Revenue Change Administrative $ 6,882 — $ 5,751 — $ 1,131 Treatment 4,419 13.2 4,030 12.2 389 Services 3,351 9.0 3,064 7.8 287 Total $ 14,652 20.8 $ 12,845 17.8 $ 1,807 Administrative SG&A expenses were higher primarily due to the following: overall outside services expenses were higher by approximately $654,000 resulting from higher consulting/outside services/audit fees; travel expenses were higher by approximately $19,000; general expenses were higher by approximately $13,000 in various categories; and salaries and payroll related expenses were higher by approximately $445,000 primarily due to higher stock-based compensation expenses from options granted to certain employees in October 2021 and higher 401(k) plan matching expenses as our payroll expenses in 2021 included more forfeitures of 401(k) plan matching funds contributed by us for former employees who failed to meet the 401(k) plan vesting requirements. Additionally, Administrative salaries and payroll related expenses were higher as in 2021, resources were allocated in supporting Medical Segment’s R&D/administrative functions. Treatment Segment SG&A expenses were higher primarily due to the following: outside services expense were higher by $120,000 due to more consulting/business matters (including our ESG initiatives); salaries and payroll related expenses were higher by $46,000; travel expenses were higher by approximately $59,000; and general expenses were higher by $164,000 which included higher tradeshow expenses and various other categories. The increase in SG&A expenses within our Services Segment was primarily due to the following: travel expenses were higher by $32,000; general expenses were higher by approximately $107,000 which included higher tradeshow expenses and various other categories; salaries/payroll related and consulting expenses were higher by approximately $202,000, and credit loss expense on accounts receivable was lower by approximately $54,000. Included in SG&A expenses is depreciation and amortization expense of $82,000 and $33,000 for the twelve months ended December 31, 2022 and 2021, respectively. 22 R&D R&D expenses decreased $410,000 for the year ended December 31, 2022 as compared to the corresponding period of 2021 as follows: (In thousands) 2022 2021 Change Administrative $ 67 $ 40 $ 27 Treatment 246 221 25 Services 23 71 (48 ) PF Medical — 414 (414 ) Total $ 336 $ 746 $ (410 ) R&D 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 was primarily the result of the sale of PFM Poland in December 2021 which comprised of our Medical Segment and which previously was involved in the R&D of our medical isotope technology. Interest Income Interest income increased by approximately $73,000 for the twelve months ended December 31 2022 as compared to the corresponding period of 2021 primarily due to higher interest earned from our finite risk sinking fund. Interest Expense Interest expense decreased by approximately $72,000 for the twelve months ended December 31, 2022 as compared to the corresponding period of 2021 primarily due to lower interest expense from our declining term loan balance outstanding. Also, interest expense for the first six months of 2021 included interest accrued for our Paycheck Protection Program (“PPP”) Loan which was forgiven by the U.S. Small Business Administration (“SBA”) effective June 15, 2021. The overall lower interest expense was offset by monthly interest incurred starting in June of 2022 from the capital line under our credit facility. Income Taxes We had income tax benefits of $378,000 and $3,890,000 for continuing operations for the twelve months ended December 31, 2022 and 2021, respectively. Our effective tax rates were approximately 10.5% and 139.0% for the twelve months ended December 31, 2022 and 2021, respectively. Our effective tax rates for the twelve months ended December 31, 2022 were impacted by non-deductible expenses and state taxes. Our effective tax rate for the twelve months ended December 31, 2021 was substantially impacted by the release of our valuation allowance on deferred tax assets primarily related to U.S. Federal income taxes during the third quarter of 2021 of approximately $2,351,000. 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 release of valuation allowance and the forgiveness of our PPP Loan which was 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, 2022, our Treatment Segment had a backlog of approximately $9,156,000, as compared to approximately $7,129,000 at December 31, 2021. 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. 23 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, 2022 and 2021. We incurred net losses of $605,000 (net of tax benefit of $199,000) and $421,000 (net of tax benefit of $139,000) for our discontinued operations for the twelve months ended December 31, 2022 and 2021, respectively. The increase in net losses in 2022 as compared to 2021 was primarily due to costs incurred in connection with management of administrative and regulatory matters within our discontinued operations. 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. Liquidity and Capital Resources Our cash flow requirements during the twelve months ended December 31, 2022 were primarily financed by our operations, cash on hand and credit facility availability. Subject to COVID-19 and other impacts 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, cash on hand and a refund that we expect to receive under the ERC program under the CARES Act (see a discussion of this expected refund below – “Employee Retention Credit (“ERC”)”). We continue to explore all sources of increasing our capital and/or liquidity and to improve our revenue and working capital (see our discussion contained in this “MD&A – Liquidity Overview” above for further discussion as to liquidity. 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 cash on hand and the expected refund from the ERC program should be sufficient to fund our operations for the next twelve months. However, due to the uncertainty of the countries’ current economic environment and the COVID-19 as disclosed in “COVID-19 and Other Impacts” within this MD&A, there are no assurances such will be the case. The following table reflects the cash flow activity for the year ended December 31, 2022 and the corresponding period of 2021: (In thousands) 2022 2021 Cash provided by (used in) operating activities of continuing operations $ 164 $ (6,316 ) Cash used in operating activities of discontinued operations (717 ) (521 ) Cash used in investing activities of continuing operations (997 ) (1,564 ) Cash (used in) provided by financing activities of continuing operations (921 ) 4,943 Effect of exchange rate changes on cash (4 ) (1 ) Decrease in cash and finite risk sinking fund (restricted cash) $ (2,475 ) $ (3,459 ) At December 31, 2022, we were in a positive cash position with no revolving credit balance. At December 31, 2022, we had cash on hand of approximately $1,866,000. Operating Activities Accounts receivable, net of credit losses, totaled $9,364,000 at December 31, 2022, a decrease of $2,008,000 from the December 31, 2021 balance of $11,372,000. The decrease was attributed to timing of invoicing and accounts receivable collection. Our contracts with our customers are subject to various payment terms and conditions. Additionally, our contracts with our customers may sometimes result in modifications which can cause delays in collections. Our accounts receivable at December 31, 2022 include invoices for work performed which previously was in our unbilled account for a certain Canadian project that remain outstanding and subject to negotiations (see unbilled receivables discussion below). See discussion under “Known Trends and Uncertainties – Perma-Fix Canada, Inc. (“PF Canada”)” for a discussion as to this certain account receivable. 24 Unbilled receivables totaled $6,062,000 at December 31, 2022, a decrease of $2,933,000 from the December 31, 2021 balance of $8,995,000. The decrease in unbilled receivables was primarily within our Services Segment due to invoicing in connection with our Canadian projects. Accounts payable, totaled $10,325,000 at December 31, 2022, a decrease of $1,650,000 from the December 31, 2021 balance of $11,975,000. 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. We had working capital of $818,000 (which included working capital of our discontinued operations) at December 31, 2022, as compared to working capital of $4,060,000 at December 31, 2021. Our working capital was negatively impacted primarily by our results of operations which were heavily impacted from COVID-19 and other delays as discussed previously, especially in the first quarter of 2022. Our working capital was positively impacted by the employee retention credit in the amount of approximately $1,975,000 recorded as current receivables (within “Prepaid and other assets” on our Consolidated Balance Sheets. See a discussion of this credit below “Employee Retention Credit (“ERC”)”). Investing Activities During 2022, our purchases of capital equipment totaled approximately $1,137,000, of which $114,000 was subject to financing, with the remaining funded from cash from operations and our credit facility. We have budgeted approximately $2,000,000 for 2023 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, winning a certain contract, completion and execution of a definitive agreement and facility design, granting of required regulatory, lender or permitting approvals and updated cost and profitability analysis based on current and forecast future economic conditions. 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, (the “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”) (see discussion below as to an amendment dated March 21, 2023 which reduced the revolving credit to $12,500,000) 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. Our Loan Agreement, as amended (the “Amended Loan Agreement”), also provides 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. 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 Amended Loan Agreement, any unpaid principal balance plus interest, if any, will become due. At the end of the Borrowing Period, advance on the capital line totaled approximately $524,000. We are required to make monthly principal installment payment of approximately $8,700 starting June 1, 2022 plus interest. At December 31, 2022, balance on the capital line was approximately $463,000. The advance made on the capital line was used to purchase the underlying asset under a previous finance lease. 25 During 2022, we entered into further amendments to our Amended Loan Agreement with our lender, which provided the following, among other things (with the amended terms set forth in a Revised Loan Agreement): ● waived our failure to meet the minimum quarterly fixed charge coverage ratio (“FCCR”) requirement for the fourth quarter of 2021 and second quarter of 2022; ● removed the quarterly FCCR testing requirement for the first and third quarters of 2022; ● reinstated the quarterly FCCR testing requirement starting for the fourth quarter of 2022 and revised the methodology in calculating the FCCR for the quarter ended December 31, 2022 and the methodology to be used in calculating the FCCR for the quarter ending March 31, 2023 (with no change to the minimum 1.15:1 ratio requirement for each quarter); ● 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, 2022 has been met and certified to the lender; ● revised 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; ● added certain additional anti-terrorism provisions to the covenants; and ● replaced the London InterBank Offer Rate (“LIBOR”) based interest rate benchmark with the Secured Overnight Finance Rate (“SOFR”). As a result of this new provision, payment of annual rate of interest due on the revolving credit is at prime (7.50% at December 31, 2022) plus 2% or Term SOFR Rate (as defined in the Revised Loan Agreement) plus 3.00% plus an SOFR Adjustment applicable for an interest period selected by us and payment of annual rate of interest due on the term loan and the capital expenditure line is at prime plus 2.50% or Term SOFR Rate plus 3.50% plus an SOFR Adjustment applicable for an interest period selected by us. A SOFR Adjustment rates of 0.10% and 0.15% are applicable for a one-month interest period and three-month period, respectively, that may be selected by us In connection with the amendments, we paid our lender fees totaling $30,000 which is being amortized over the remaining term of the Revised Loan Agreement as interest expense-financing fees. Our credit facility under our Revised Loan Agreement 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 were not required to perform testing of the FCCR requirement in the first and third quarters of 2022 pursuant to the amendments that we entered with our lender in 2022 as discussed above. Based on an amendment that we entered into with our lender on March 21, 2023 as discussed below, we were not required to perform testing of the FCCR requirement in the fourth quarter of 2022. We failed to meet our FCCR requirement in the second quarter of 2022; however, this non-compliance was waived by our lender pursuant to an amendment that we entered into with our lender in 2022 as discussed above. Other than the above discussion pertaining to our FCCR requirements, we met all of our other financial covenant requirements in each of the quarters of 2022. We expect to meet our quarterly financial covenant requirements for the next twelve months under our Amended Loan Agreement. On March 21, 2023, we entered into an amendment to our Revised Loan Agreement with our lender which provides, among other things, the following: ● removed the quarterly FCCR testing requirement for the fourth quarter of 2022 and removes the FCCR testing requirement the first quarter of 2023; 26 ● reduced the maximum revolving credit line under the credit facility from $18,000,000 to $12,500,000; ● reinstates the quarterly FCCR testing requirement starting in the second quarter of 2023 using a trailing twelve months period (with no change to the minimum 1.15:1 ratio requirement for each quarter); and ● 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, 2023 has been met and certified to the lender. In connection with the amendment, the Company paid its lender a fee of $25,000. From this point on, we may terminate our Revised Loan Agreement upon 90 days’ prior written notice upon payment in full of our obligations under the Revised Loan Agreement with no early termination fees. Employee Retention Credit (“ERC”) The CARES Act, which was enacted on March 27, 2020, provides an ERC for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. The ERC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERC availability and guidelines under the CARES Act. Following these amendments, we determined that we were eligible for the ERC, and as a result of the foregoing legislations, are eligible to claim a refundable tax credit against our share of certain payroll taxes equal to 70% of the qualified wages paid to employees between July 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERC per employee of $7,000 per calendar quarter in 2021. For purposes of the amended ERC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during one or more of the first three 2021 calendar quarters when compared to 2019. During the third quarter of 2022, we determined we were eligible for the ERC and amended our third quarter 2021 employer payroll tax filings claiming a refund from the U.S. Treasury in the amount of approximately $1,975,000. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we account for the ERC by analogy to International Accounting Standard (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the expected refund as other income (within “Other income (expense)”) on our Consolidated Statements of Operations and other receivables (within “Prepaid and other assets”) on our Consolidated Balance Sheets. Payment of Deferred Employment Tax Deposits The CARES Act provided 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 with the remaining paid in December 2022 (previously 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, 2022, the total amount of standby letters of credit outstanding totaled approximately $3,016,000 and the total amount of bonds outstanding totaled approximately $35,432,000. We also provide closure and post-closure requirements through a financial assurance policy for certain of our Treatment Segment facilities through American International Group, Inc. (“AIG”). At December 31, 2022, the closure and post-closure requirements for these facilities were approximately $21,175,000. 27 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. 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, 2022 and 2021 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. Our future cash flow assumptions and conclusions with respect to asset impairments could be impacted by changes arising from (i) a sustained period of economic and industrial slowdowns (ii) inability to scale our operations and implement cost reduction efforts during reduced demand and/or (iii) a significant decline in our share price for a sustained period of time. These factors, among others, could significantly impact the impairment analysis and may result in future asset impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations. We believe that the assumptions and estimates utilized for the reporting periods are appropriate based on the information available to management. 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. We develop estimates for the cost of these activities based on our evaluation of site-specific facts and circumstances, such as the existence of structures and other improvements that would need to be dismantled and the length of the post-closure period as determined by the applicable regulatory agency, among other things. Included in our cost estimates are our interpretation of current regulatory requirements and any proposed regulatory changes. These cost estimates may change in the future due to various circumstances including, but not limited to, permit modifications, changes in legislation or regulations, technological changes and results of environmental studies. Our cost estimates are calculated using internal sources as well as input from third-party experts. 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. Income Taxes. The provision for income tax is determined in accordance with ASC 740, “Income Taxes.” As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes . This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We regularly review deferred tax assets by jurisdiction to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions could cause an increase or decrease to the valuation allowance which could materially impact our results of operations. 28 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, 2022, 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, the manner in which the government entity will be required to spend funding to remediate various sites, and potential COVID-19 impact. 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 provided 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 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 $60,030,000, or 85.0%, of our total revenue during 2022, as compared to $60,812,000, or 84.2%, of our total revenue during 2021. 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. Perma-Fix Canada, Inc. (“PF Canada”) During the fourth quarter of 2021, PF Canada received a Notice of Termination (“NOT”) from Canadian Nuclear Laboratories, LTD. (“CNL”) on a Task Order Agreement (“TOA”) that PF Canada entered into with CNL in May 2019 for remediation work within Ontario, Canada (“Agreement”). The NOT was received after work under the TOA was substantially completed and work under the TOA has since been completed. CNL may terminate the TOA at any time for convenience. As of December 31, 2022, PF Canada has approximately $1,853,000 in unpaid receivables due from CNL as a result of work performed under the TOA. Additionally, CNL has approximately $1,060,000 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 issues 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 believe these amounts are due and payable to PF Canada. 29 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. 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. 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 supply chain challenges, we previously 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, This supply chain interruption delayed deployment of our new technology which negatively impacted our revenue for 2021 and the first quarter of 2022 as associated revenue was not able to be generated. Deployment of this unit commenced in mid-May of 2022. 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. Inflation and Cost Increases. Continued increases in any of our operating costs, including further changes in fuel prices, wage rates, supplies, and utility costs, may further increase our overall cost of goods sold or operating expenses. Some of these cost increases have been the result of inflationary pressures that could further reduce profitability. We may attempt to increase our sales prices in order to maintain satisfactory margin; however, 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. Liquidity. See above discussion contained herein as to issues relating to “Liqudity” and efforts to improve our liquidity 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 18 – Related Party Transactions and Note 20 – Subsequent Events – Executive Compensation - MIPs.”