Perma-Fix Environmental Services, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts below are in USD millions unless stated otherwise. The company provides waste treatment and environmental services through its Treatment and Services segments.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $18.472 | $15.797 | $53.842 | $55.075 |
| Gross profit / margin | $3.070 / 16.6% | $2.224 / 14.1% | $7.590 / 14.1% | $5.546 / 10.1% |
| Operating loss | $(0.928) | $(1.368) | $(3.691) | $(4.543) |
| Continuing operations, net | $0.824 | $1.381 | $(1.682) | $3.464 |
| Net income (loss) | $0.664 | $1.338 | $(2.124) | $3.179 |
| Cash used in operating activities | — | $(0.893) | $(4.327) |
- Q3 revenue rose 16.9%, led by Services, up 39.0% to $9.595 million; Treatment revenue was nearly flat at $8.877 million. Nine-month revenue fell 2.2% as Services declined 6.1%, partly offset by 2.7% growth in Treatment.
- Nine-month gross profit improved despite lower revenue. Management attributed improvement in both segments primarily to greater activity and higher-margin Services projects. SG&A increased 15.5% for the nine-month period to $11.035 million.
- Q3 other income included a $1.975 million Employee Retention Credit (ERC) receivable recorded as income. Nine-month other income was $1.960 million. The prior-year nine-month comparison included a $5.381 million gain from forgiveness of the PPP loan and a substantial tax benefit from releasing a valuation allowance.
Balance sheet, liquidity and debt
- At September 30, cash was $1.858 million; working capital was $1.505 million, down from $4.060 million at December 31, 2021. Current assets were $25.440 million and current liabilities $23.935 million.
- Cash and restricted cash in the finite-risk sinking fund totaled $13.398 million, including $11.540 million restricted. Total assets were $73.189 million and total liabilities $34.219 million.
- Debt totaled $1.150 million, excluding lease liabilities; there were no revolving-credit borrowings. Revolver availability was approximately $4.548 million, net of letters of credit, with a required minimum $3.000 million availability until the applicable covenant is met and certified. Lease liabilities totaled approximately $2.615 million.
- Nine-month investing cash use was $0.922 million; capital expenditures were approximately $1.061 million, including financed purchases. The company budgeted approximately $2.0 million of 2022 capital expenditures, subject to deferral.
Changes, outlook and key risks
- Management reported resumed and increased work on Services projects delayed by COVID-19 and customer administrative delays. Treatment waste receipts also improved; backlog was $7.088 million at September 30, up 15.8% from March 31. Hurricane Ian delayed some shipments to the Florida facility.
- Management expects continued steady improvement in waste receipts and project work, but provided no specific revenue or earnings guidance. It said available cash, credit availability, operating cash flows and the expected ERC refund should fund operations for the next 12 months, while noting uncertainty.
- The lender waived the Q2 2022 fixed-charge coverage ratio (FCCR) failure and removed Q3 testing; FCCR testing resumes for Q4 2022 with a 1.15:1 minimum. Breach could permit acceleration of debt and termination of further credit. The company stated it expected to meet future covenant requirements.
- PF Canada had $2.385 million of unpaid receivables and $1.044 million of contractual holdback tied to completed work for Canadian Nuclear Laboratories. Amounts remain under discussion; the customer may offset certain costs, and a bond of approximately CAD $1.9 million relates to issues raised on the contract.
- Other risks include dependence on government-funded contracts that may be terminated for convenience, inflation and supply-chain costs, environmental remediation and regulatory exposure, and possible challenge to the ERC claim. The company reported $59.322 million in outstanding bonds and $3.016 million in standby letters of credit.
- A proposed UK nuclear-waste facility joint venture remains conditional on contract award, definitive agreements, approvals and other requirements; the company anticipates a 45% interest and an investment amount and funding method have not been determined.
- Disclosure controls were deemed ineffective because of an existing material weakness in controls over revenue recognition for complex, nonstandard contracts. Remediation measures are underway; management said the weakness is not considered remediated pending sufficient testing.
Investor verification priorities
- Confirm collection and accounting treatment of the $1.975 million ERC claim and Canadian receivable/holdback.
- Track Q4 FCCR compliance, required revolver availability and actual borrowing capacity.
- Assess whether improved segment activity converts into sustained operating profit and positive operating cash flow.
- Review progress remediating the revenue-recognition control weakness and any related disclosure updates.
- Monitor government contract funding and termination risk, environmental obligations, and conditions and funding needs for the proposed UK joint venture.