Item 7. Management’s Discussion and Analysis
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 and the
accounts of our wholly-owned subsidiaries. Our 2022 consolidated financial statements also included the accounts of a variable interest
entity (“VIE”) for which we were the primary beneficiary. During the fourth quarter of 2022, project work under this VIE
was completed.
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.
Overview
We
experienced significant improvement in our 2023 financial results as the lingering effects of COVID-19 began to subside starting in the
early part of 2022. Our Treatment Segment continued to see steady improvements in waste receipts from certain customers who had previously
delayed waste shipments due, in part, from the impact of COVID-19. Within our Services Segment, certain projects which were delayed/curtailed
in first part of 2022 due, in part, from the lingering effects of the COVID-19, achieved full operational status and improved productivity
in 2023 which positively impacted revenue. Revenue from both of our Segments were also positively impacted from contracts won in 2023
as procurement and planning on behalf of our government clients continued to progress as the lingering effects of COVID-19 pandemic subsided.
19
Revenue
increased by $19,136,000 or 27.1% to $89,735,000 for the twelve-months ended December 31, 2023, from $70,599,000 for the corresponding
period of 2022. We saw increases in both Segments where Treatment Segment revenue increased by $10,119,000 or 30.3% to $43,477,000 from
$33,358,000 and Services Segment revenue increased by $9,017,000 or 24.2% to $46,258,000 from $37,241,000. The increase in revenue in
the Treatment Segment was primarily due to overall higher waste volume which was offset by lower averaged price from waste mix.
The increase in revenue in the Services Segment was primarily due to achievement of full operational status and improved productivity
on certain projects which had been delayed/curtailed in 2022 due, in part, from the lingering effects of the COVID-19 pandemic. Total
gross profit for 2023 increased $6,760,000 or 70.4% due to increased revenue. Selling, General, and Administrative (“SG&A”)
expenses increased $323,000 or 2.2% for the twelve-months ended December 31, 2023, as compared to the corresponding period of 2022.
In
March 2023, we received the Employee Retention Credit (“ERC”) of $1,975,000 that we applied for during the third quarter
of 2022 as permitted under the Coronavirus Aid, Relief and Economic Securities Act, as amended (the “CARES Act”). In addition
to the $1,975,000, we also received approximately $60,000 in interest (recorded within “Interest Income” on our Consolidated
Statements of Operations).
We
believe we have sufficient liquidity on hand to continue business operations during the next twelve months. See a discussion of our liquidity
overview within this MD&A – “Liquidity and Capital Resources.”
Heading
into 2024, we expect to see overall continue steady improvements in waste receipts and increases in project work from certain
existing contracts, contracts won in 2023, and bids submitted in both segments that are awaiting awards. However, due to our
operations which is subject to seasonal factor, we generally experience lower revenue in the first quarter due to overall reduced
activities by our customers from the usual slowdown in operations due, in part, from returning from the holiday periods and poorer
weather conditions. Additionally, due to Congress’s inability to timely approve FY 2024 budget and the extension of the
continuing resolution, certain of our government related customers have informed us that waste shipments will likely be delayed.
Although we expect to see overall improvements in revenue in 2024 as disclosed above, if Congress is unable to enact the full FY
2024 appropriation bills or further extend the continuing resolutions to fund government spending by the late March deadline, the
U.S. government will enter into a partial shutdown. The full impact of any additional continued resolution beyond March or a partial
government shutdown is uncertain. If a partial government shutdown were to occur and were to continue an extended period,
our financial results of operations could be negatively impacted by delays in procurement actions, waste shipments and project
delays on newly awarded projects.
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 and the manner in which the applicable government will be required
to spend funding to remediate various sites and a potential partial government shutdown. 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. 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.
On December 18, 2023, the JV where we and Campoverde Srl (“JV partner”) each owns 50% of the partnership, was awarded a multi-year
contract valued up to approximately EUR 50 million by the European Commission (the “Contracting Authority”) for the treatment
of radioactive waste from the Joint Research Center in Ispra, Italy. Work under this JV has not started as of December 31, 2023. The
scope of work to be performed in the initial phases of this contract will be performed predominately by our JV partner. Revenue generated
by us under the initial phases will be limited to project management support through 2025. We expect to generate an increase in revenue
under this contract starting in 2026 when the waste treatment phases begin. The Contracting Authority may terminate the contract under
certain conditions as set forth in the contract. Once activities commence under this JV, we will consolidate the operations of this JV
into our financial statements.
20
Results
of Operations
The
reporting of financial results and pertinent discussions are tailored to our two reportable segments: The Treatment Segment and Services
Segment.
Summary
- Years Ended December 31, 2023 and 2022
Below
are the results of continuing operations for years ended December 31, 2023, and 2022 (amounts in thousands):
(Consolidated)
2023
%
2022
%
Net revenues
$ 89,735
100.0
$ 70,599
100.0
Cost of goods sold
73,366
81.8
60,990
86.4
Gross profit
16,369
18.2
9,609
13.6
Selling, general and administrative
14,975
16.7
14,652
20.8
Research and development
561
.6
336
.4
Loss on disposal of
property and equipment
77
.1
18
—
Income (loss) from operations
756
.8
(5,397 )
(7.6 )
Interest income
606
.7
99
.1
Interest expense
(323 )
(.4 )
(175 )
(.3 )
Interest expense – financing fees
(93 )
(.1 )
(61 )
(.1 )
Other (expense) income
(11 )
—
1,945
2.8
Income (loss) from continuing operations before
taxes
935
1.0
(3,589 )
(5.1 )
Income tax expense (benefit)
17
—
(378 )
(.6 )
Income (loss) from continuing
operations
$ 918
1.0
$ (3,211 )
(4.5 )
Revenue
Consolidated
revenues increased $19,136,000 for the year ended December 31, 2023, compared to the year ended December 31, 2022, as follows:
(In thousands)
2023
%
Revenue
2022
%
Revenue
Change
%
Change
Treatment
Government
waste
$ 29,506
32.9
$ 21,946
31.1
$ 7,560
34.4
Hazardous/non-hazardous
(1)
6,260
7.0
5,062
7.1
1,198
23.7
Other
nuclear waste
7,711
8.6
6,350
9.0
1,361
21.4
Total
43,477
48.5
33,358
47.2
10,119
30.3
Services
Nuclear
43,121
48.0
35,952
50.9
7,169
19.9
Technical
3,137
3.5
1,289
1.9
1,848
143.4
Total
46,258
51.5
37,241
52.8
9,017
24.2
Total
$ 89,735
100.0
$ 70,599
100.0
$ 19,136
27.1
1)
Includes wastes generated by government clients of $2,943,000 and $2,380,000 for the twelve months ended December 31, 2023, and
2022, respectively.
21
Treatment
Segment revenue increased by $10,119,000 or 30.3% for the twelve-months ended December 31, 2023 over the same period in 2022. The overall
increase was primarily due to higher waste volume offset by lower averaged price from waste mix. As previously disclosed, starting
in the latter part of the second quarter of 2022, our Treatment Segment began to see steady improvements in waste receipts from certain
customers who had previously delayed waste shipments due, in part, from the lingering effects of COVID-19. Services Segment revenue increased
by approximately $9,017,000 or 24.2%. primarily due to achievement of full operational status and improved productivity on certain projects
which had been delayed/curtailed in the early part of 2022 due, in part, from the lingering effects of the COVID-19 pandemic. 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. Revenues from both of our segments were also positively impacted
from contracts won in 2023.
Cost
of Goods Sold
Cost
of goods sold increased $12,376,000 for the year ended December 31, 2023, as compared to the year ended December 31, 2022, as follows:
(In thousands)
2023
%
Revenue
2022
%
Revenue
Change
Treatment
$ 36,601
84.2
$ 28,115
84.3
$ 8,486
Services
36,765
79.5
32,875
88.3
$ 3,890
Total
$ 73,366
81.8
$ 60,990
86.4
$ 12,376
Cost
of goods sold for the Treatment Segment increased by approximately $8,486,000 or 30.2%. Treatment Segment’s variable costs increased
by approximately $6,189,000 primarily due to higher material and supplies, disposal, lab, outside services costs and higher employee
incentives. Treatment Segment’s overall fixed costs were higher by approximately $2,297,000 resulting from the following: salaries
and payroll related expenses were higher by approximately $1,483,000 due to higher headcount; depreciation expenses were higher by approximately
$393,000 due to depreciation for asset retirement obligations in connection with our EWOC facility; general expenses were higher by approximately
$279,000 primarily due to higher utility costs; maintenance costs were higher by approximately $235,000; travel expenses were higher
by approximately $90,000; and regulatory expenses were lower by approximately $183,000. Services Segment cost of goods sold increased
$3,890,000 or 11.8% due to higher revenue. The overall increase in cost of goods sold was primarily due to the following: aggregated
higher salaries/payroll related, outside services, and travel costs totaling approximately $4,356,000; higher depreciation expenses of
$63,000; lower material and supplies, lab, regulatory and disposal expenses totaling approximately $444,000; and lower general expenses
by approximately $85,000 in various categories. Included within cost of goods sold is depreciation and amortization expense of $2,484,000
and $2,027,000 for the twelve months ended December 31, 2022, and 2021, respectively.
Gross
Profit
Gross
profit for the year ended December 31, 2023, was $6,760,000 higher than 2022 as follows:
(In thousands)
2023
%
Revenue
2022
%
Revenue
Change
Treatment
$ 6,876
15.8
$ 5,243
15.7
$ 1,633
Services
9,493
20.5
4,366
11.7
$ 5,127
Total
$ 16,369
18.2
$ 9,609
13.6
$ 6,760
Treatment
Segment gross profit increased by $1,633,000 or 31.1% primarily due to higher revenue as discussed previously. Despite the slight increase
in gross margin, Treatment Segment gross margin was negatively impacted by higher variable costs from waste mix and the impact of overall
increase in fixed costs. Services Segment gross profit increased by $5,127,000 or 117.4% and gross margin increased from 11.7% to 20.5%
primarily due to higher revenue and improved margin projects. Our overall Services Segment gross margin is impacted by our current projects
which are competitively bid and therefore have varying margin structures.
22
SG&A
SG& A
expenses increased $323,000 for the year ended December 31, 2023, as compared to the corresponding period for 2022 as follows:
(In thousands)
2023
%
Revenue
2022
%
Revenue
Change
Administrative
$ 7,230
-
$ 6,882
-
$ 348
Treatment
4,249
9.8
4,419
13.2
(170 )
Services
3,496
7.6
3,351
9.0
145
Total
$ 14,975
16.7
$ 14,652
20.8
$ 323
Administrative
SG&A expenses were higher primarily due to the following: payroll-related expenses were higher by approximately $660,000 primarily
due to higher accrued employee incentives (including our management incentive plans (“MIPs”)) and higher 401(k) matching
expenses as payroll expenses in 2022 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; outside services expenses were lower by approximately $256,000 as a result of fewer
audit/consulting matters; and general expenses were lower by approximately $56,000 in various categories. Treatment Segment SG&A
expenses were lower primarily due to the following: outside services expenses were lower by approximately $110,000 due to fewer consulting
matters; salaries and payroll related expenses were lower by approximately $212,000; travel expenses were lower by approximately $24,000;
and general expenses were higher by approximately $176,000 in various categories. The increase in SG&A expenses within our Services
Segment was primarily due to the following: salaries/payroll-related expenses were higher by approximately $92,000 due to more administrative
support functions required as the result of higher revenue; travel expenses were higher by approximately $43,000; credit losses on accounts
receivable were higher by approximately $59,000, as in the first quarter of 2022 our Services Segment collected on certain accounts that
were previously deemed to be uncollectible; outside services expenses were lower by approximately $41,000 due to fewer consulting matters;
and general expenses were lower slightly by $8,000. Included in SG&A expenses is depreciation and amortization expense of $84,000
and $82,000 for the twelve months ended December 31, 2023 and 2022, respectively.
Interest
Income
Interest
income increased by approximately $507,000 for the twelve-months ended December 31, 2023, respectively, as compared to the corresponding
period of 2022 primarily due to higher interest earned from the finite risk sinking fund. Interest income for 2023 also included approximately
$60,000 received in March 2023 under the ERC program under the CARES Act.
Interest
Expense
Interest
expense increased by approximately $148,000 for the twelve-months ended December 31, 2023, as compared to the corresponding period of
2022 due to interest incurred on the new $2,500,000 term loan dated July 31, 2023, under our credit facility. Interest expense was also
higher in 2023 from higher interest rate on our term loan dated May 8, 2020, which was offset by the declining term loan balance. Additionally,
the increase in interest expense in 2023 was also the result of interest incurred from advances made in May of 2022 from the capital
line under our credit facility.
Income
Taxes
We
had income tax expense of $17,000 and income tax benefit of $378,000 for continuing operations for the twelve-months ended December 31,
2023 and 2022, respectively. Our effective tax rates were approximately 1.8% and 10.5% for the twelve- month ended December 31, 2023
and 2022, respectively. Our effective tax rates for the twelve-months ended December 31, 2023, and 2022 were impacted by non-deductible
expenses and state 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. As of December
31, 2023, our Treatment Segment had a backlog of approximately $8,702,000, as compared to approximately $9,156,000 as of December 31,
2022. 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 earlier, as well as three previously closed locations.
Our
discontinued operations had no revenue for the twelve-months ended December 31, 2023 and 2022. We incurred net losses of $433,000 (net
of tax benefit of $117,000) and $605,000 (net of tax benefit of $199,000) for our discontinued operations for the twelve-months ended
December 31, 2023, and 2022, respectively. In 2022, we incurred additional costs in connection with management of administrative and
regulatory matters related to our remediation projects. 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, 2023, were primarily financed by our operations, cash on hand (which
included the ERC, along with interest, that we received in March 2023 and proceeds from a new term loan dated July 31, 2023, in the amount
of $2,500,000 provided to us under an amendment to our existing credit facility), and credit facility availability. 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 collections of unpaid receivables (See “Known Trends and Uncertainties – Perma-Fix Canada,
Inc. (“PF Canada”)” for a discussion of unpaid receivables due to our Perma-Fix Canada, Inc. subsidiary from a certain
customer in which a settlement agreement has been reached, subject to meeting certain conditions/terms precedent and a partial payment
received in January 2024). Our ability to utilize our credit facility from our lender is subject to meeting our quarterly financial covenant
requirements, among other things. We continue to explore all sources of increasing our capital and/or liquidity and
to improve our revenue and working capital, including, but not limited to entering into equity transactions. There are no assurances that
we will be successful in increasing our liquidity through our efforts. 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.
As of December 31, 2023, our borrowing availability under our revolving part of our credit facility was approximately $10,622,000, which
included our cash (deposited with our lender) and was based on our eligible receivables and was net of approximately $3,950,000 in outstanding
standby letters of credit and a $750,000 indefinite reduction in borrowing availability that our lender imposed pursuant to the July
31, 2023 amendment of our Loan Agreement. W e believe that our cash flows from operations, our available
liquidity from our credit facility, and our cash on hand should be sufficient to fund our operations for the next twelve months.
The
following table reflects the cash flow activity for the year ended December 31, 2023, and the corresponding period of 2022:
(In thousands)
2023
2022
Cash provided by operating activities
of continuing operations
$ 6,745
$ 164
Cash used in operating activities of discontinued
operations
(597 )
(717 )
Cash used in investing activities of continuing
operations
(1,714 )
(997 )
Cash provided by (used in) financing activities
of continuing operations
1,696
(921 )
Effect of exchange rate
changes on cash
8
(4 )
Increase (decrease)
in cash and finite risk sinking fund (restricted cash)
$ 6,138
$ (2,475 )
As
of December 31, 2023, we were in a positive cash position with no revolving credit balance. As of December 31, 2023, we had cash on hand
of approximately $7,500,000.
Operating
Activities
Accounts
receivable, net of credit losses, totaled $9,722,000 as of December 31, 2023, an increase of $358,000 from the December 31, 2022, balance
of $9,364,000. The increase was attributed to increased revenue, timing of invoicing, and our accounts receivable collection. Our contracts
with our customers are subject to various payment terms and conditions. Our accounts receivable at December 31, 2023, included invoices
for work performed for a certain Canadian project that remained outstanding which a settlement agreement has been reached, subject to
meeting certain conditions/terms precedent (See discussion under “Known Trends and Uncertainties - Perma-Fix Canada Inc. (“PF
Canada”)” below for a discussion of the accounts receivable and a partial payment made by the customer on January 22, 2024).
24
Prepaid
and other assets totaled $3,738,000 as of December 31, 2023, a decrease of $1,667,000 from the December 31, 2022, balance of $5,405,000.
The decrease was primarily due to receipt of the ERC of $1,975,000 in March 2023 that we applied for during the third quarter of 2022.
Accounts
payable totaled $9,582,000 as of December 31, 2023, a decrease of $743,000 from the December 31, 2022, balance of $10,325,000. 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 our segments.
Accrued
expenses totaled $6,560,000 as of December 31, 2023, an increase of $1,967,000 from the December 31, 2022, balance of $4,593,000. The
increase was primarily due to higher employee incentive and commission accruals totaling approximately $1,346,000. Our employee incentive
accruals included an aggregate of approximately $750,000 recorded under our 2023 Management Incentive Plans (“MIPs”) for
our executives.
We
had working capital of $4,613,000 (which included working capital of our discontinued operations) as of December 31, 2023, as compared
to working capital of $818,000 as of December 31, 2022. The improvement in our working capital was primarily due to increases in our
cash and unbilled receivables from improved operations. In 2023, our cash was also increased from the receipt of the ERC in March 2023
and the additional Term Loan 2 dated July 31, 2023, that we entered into with our lender under our Loan Agreement (see a discussion of
the Term Loan 2 below under “Financing Activities). The overall improvement in our working capital was offset by the increases
in our accrued expenses and deferred revenues.
See
discussion of a multi-year contract valued up to approximately EUR 50 million awarded to us and our JV partner by the European Commission
on December 18, 2023, for the treatment of radioactive waste from the Joint Research Center in Ispra, Italy under “Business Environment”
within this MD&A.
Investing
Activities
During
2023, our purchases of capital equipment totaled approximately $2,498,000, of which $784,000 was subject to financing, with the remaining
funded from cash from operations and our credit facility. We have budgeted approximately $2,000,000 for 2024 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, collections of unpaid receivables, borrowing availability under our credit facility 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 non-binding 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,
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.
25
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” and “lender”), acting as agent and lender. The Loan Agreement, as amended
(including the two amendments that we entered into with our lender in 2023 described below), provides us with the following credit facility
with a maturity date of May 15, 2027: (a) up to $12,500,000 revolving credit (“revolving credit”), with the maximum that
we can borrow under the revolving credit 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; (b) a term loan (“Term Loan 1”)
dated May 8, 2020, of approximately $1,742,000, requiring monthly installments of $35,547; (c) a term loan (“Term Loan 2”)
of $2,500,000 dated July 31, 2023, requiring monthly installments of $41,667; and (d) a capital expenditure line (“Capital 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”), with interest only payable on advances during the Borrowing Period. Amounts advanced under the
Capital Line at the end of the Borrowing Period totaled approximately $524,000, requiring monthly installments of principal of approximately
$8,700 plus interest, commencing June 1, 2022.
On
March 21, 2023, we entered into an amendment to our Loan Agreement, as amended, with our lender which provided, among other things, the
following:
●
removed
the quarterly fixed charge coverage ratio (“FCCR”) testing requirement for the fourth quarter of 2022 and removed the
FCCR testing requirement for the first quarter of 2023;
●
reduced
the maximum revolving credit line under the credit facility from $18,000,000 to $12,500,000;
●
reinstated
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
●
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 June 30, 2023 has been met and certified to the lender (we met our FCCR requirement in the second quarter of 2023
which was certified to our lender and therefore, this requirement is no longer applicable under our Loan Agreement, as amended).
In
connection with the March 2023 amendment, we paid our lender a fee of $25,000 which is being amortized over the remaining term of the
Loan Agreement, as amended, as interest expense-financing fees.
On
July 31, 2023, we entered into a further amendment of the Loan Agreement, as amended, with our lender which provided, among other things,
the following:
●
extended
the maturity date of the Loan Agreement, as amended, to May 15, 2027, from May 15, 2024;
●
an
additional term loan (“Term Loan 2”) to us in the amount of $2,500,000, requiring monthly installments of approximately
$41,667. The annual rate of interest due on Term Loan 2 is at prime (8.50% at December 31, 2023) plus 3.00% or Secured Overnight
Finance Rate (“SOFR”) (as defined in the Loan Agreement, as amended) plus 4.00% plus an SOFR Adjustment applicable for
an interest period selected by us. A SOFR Adjustment rate of 0.10% and 0.15% is applicable for a one-month interest period and three-month
period, respectively, that may be selected by us;
●
removed
the minimum Tangible Adjusted Net Worth (as defined in the Loan Agreement, as amended) covenant requirement;
●
placed
an indefinite reduction in borrowing availability of $750,000; and
●
allows
for up to $2,500,000 in capital expenditure made in fiscal year 2023 and thereafter to be treated as financed capital expenditure
in the Company’s quarterly FCCR covenant calculation requirement.
At
maturity of the Loan Agreement, as amended, any unpaid principal balance plus interest, if any, will become due.
26
Pursuant
to the amendment dated July 31, 2023, we have agreed to pay PNC 1.0% of the total financing under the Loan Agreement, as amended, in
the event we pay off our obligations on or before July 31, 2024, and 0.5% of the total financing if we pay off our obligations after
July 31, 2024, to and including July 31, 2025. No early termination fee shall apply if we pay off our obligations under the amended Loan
Agreement after July 31, 2025.
In
connection with amendment dated July 31, 2023, we paid our lender a fee of $100,000 which is being amortized over the remaining term
of the Loan Agreement, as amended, as interest expense-financing fees.
Pursuant
to the Loan Agreement, as amended, the annual rate of interest due on the revolving credit is at prime plus 2% or SOFR plus 3.00% plus
an SOFR Adjustment applicable for an interest period selected by us. The annual rate of interest due on Term Loan 1 and the Capital line
is at prime plus 2.50% or SOFR plus 3.50% plus an SOFR Adjustment applicable for an interest period selected by us. 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. See
payment of annual rate of interest due on Term Loan 2 under the amendment dated July 31, 2023, as discussed above.
Our
credit facility under our Loan Agreement, as amended, contains certain financial covenants, along with customary representations and
warranties. A breach of any of these financial covenants, unless waived by our lender, could result in a default under our credit facility
allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments
to extend further credit. We were not required to perform testing of the FCCR requirement in the first quarter of 2023 pursuant to the
March 21, 2023, amendment as discussed above. We otherwise met all of our other financial covenant requirements. We met all of our covenant
requirements in each of the second to fourth quarters of 2023 and we expect to meet our covenant requirements in the next twelve months.
On
May 19, 2023, we filed a shelf registration statement on Form S-3 with the U.S Securities and Exchange Commission (the “Commission”),
which was declared effective by the Commission on June 1, 2023. The shelf registration statement gives us
the ability to sell up to 2,500,000 shares of our Common Stock from time to time and through one or more methods of distribution, subject
to market conditions and our capital needs at that time. The terms of any offering under the registration statement will be established
at the time of the offering and be set forth in an accompanying prospectus or prospectus supplement relating to the offering. At this
time, we do not have any immediate plans or current commitments to issue shares under the registration statement. This is not an offer
to sell or a solicitation of an offer to buy, nor shall there be a sale of securities in any state or jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction.
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, 2023, the total amount of standby letters of credit outstanding totaled
approximately $3,950,000 and the total amount of bonds outstanding totaled approximately $36,674,000. 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, 2023, the closure and post-closure requirements for these facilities were approximately $22,461,000.
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”):
Revenues. Our revenues are
generated from our two segments, Treatment and Services. Certain contracts within our Services Segment are generated from long-term fixed
price contracts. Under fixed price contracts, the objective of the project is not attained unless all scope items within the contract
are completed and all of the services promised within fixed fee contracts constitute a single performance obligation. Transaction price
is estimated based upon the estimated cost to complete the overall project. Revenue from fixed price contracts is recognized over time
primarily using the input method. For the input method, revenue is recognized based on costs incurred on the project relative to the total
estimated costs of the project.
Our contracts generally do not give rise to variable consideration. However, from time to time, we may submit requests
for equitable adjustments under certain of our government contracts for price or other modifications that are determined to be variable
consideration. We estimate the amount of variable consideration to include in the estimated transaction price based on historical experience
with government contracts, anticipated performance and management’s best judgment at the time and to the extent it is probable that
a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration
is resolved. These estimates are re-assessed each reporting period as required.
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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, 2023, and 2022 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.
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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.
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 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 (domestic), 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 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. 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.
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), either directly as a prime contractor or indirectly
for others as a subcontractor to government entities, representing approximately $70,642,000, or 78.7%, of our total revenue during 2023,
as compared to $59,658,000, or 84.5%, of our total revenue during 2022.
See
discussion of a multi-year contract valued up to approximately EUR 50 million awarded to us and our JV partner by the European Commission
on December 18, 2023, for the treatment of radioactive waste from the Joint Research Center in Ispra, Italy under “Business Environment”
within this MD&A.
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, 2023, PF Canada has approximately $2,389,000
in unpaid receivables due from CNL as a result of work performed under the TOA. CNL and PF Canada have reached a settlement agreement
on payment of the receivables to PF Canada by CNL, subject to certain conditions/terms precedents being met, including release of certain
liens. On January 22, 2024, we received a partial payment of approximately $741,000 from CNL, with the remaining receivables to be paid
by CNL upon completion of the settlement conditions/terms, which we believe should occur during 2024.
29
Potential
Partnership with Springfields Fuels Limited. As discussed above, we have signed a non-binding 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 Supply Chain. Our financial results have been negatively impacted by various macroeconomic factors, including the effects of
inflation, supply chain issues, labor shortages, and higher interest rates, due, in part, to the impact of COVID-19 (which has mostly
subsided). Continued i ncreases in any of our operating costs, including utility, transportation, wage rates,
and supply costs, may further increase our overall cost of goods sold or operating expenses. We may attempt to increase our service and
treatment prices in order to maintain satisfactory margin from the effect of these factors as discussed above; 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.
Related
Party Transactions
See
a discussion of our related party transactions in “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidate Financial Statements – Note 16 – Related Party Transactions.”