PERMA FIX ENVIRONMENTAL SERVICES INC quarterly report, Q1 FY2020

Business context and reporting period

Perma-Fix Environmental Services, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company provides waste treatment and environmental services, primarily to government customers, through its Treatment and Services segments. Its Medical segment conducts isotope technology research and development but generated no revenue.

Financial results and liquidity

Amounts below are in millions of dollars except per-share data and percentages.

• Revenue more than doubled, up 112.3%. Services revenue rose to $15.297 million from $1.803 million, while Treatment revenue declined 3.5% to $9.563 million.
• Services gross profit improved to $1.895 million from a $0.456 million loss; Treatment gross profit declined to $2.745 million from $2.957 million. Overall gross margin fell despite higher gross profit, as Services growth came with a 12.4% segment gross margin.
• At March 31, cash was $1.859 million and borrowing availability under the then-current facility was $8.537 million. Working capital was negative $0.166 million, versus positive $0.026 million at year-end 2019.
• Debt totaled $3.209 million, including $1.614 million classified current before the subsequent refinancing. Revolving-credit borrowings were zero at quarter-end. Operating cash flow from continuing operations was $3.424 million; investing activities used $0.895 million and financing activities used $0.834 million.
• Total assets were $68.604 million and stockholders’ equity was $30.449 million at March 31. The $11.363 million finite-risk sinking fund was reported as restricted cash within long-term assets, not ordinary cash.

Material changes versus the prior period

The turnaround to profitability and higher operating cash flow principally reflected a sharp increase in project work in Services, following contract and task-order awards beginning in late Q1 2019. Services represented $15.297 million of Q1 2020 revenue; government-related work represented 90.5% of consolidated revenue, compared with 76.8% a year earlier. Treatment revenue and gross profit were lower, while consolidated SG&A was broadly stable. The 2019 comparison also included $0.165 million of Treatment closure costs that did not recur in 2020.

Accounts receivable declined $2.952 million from year-end, while unbilled receivables increased $2.204 million. Capital expenditures paid in cash were $0.896 million; management reported approximately $0.978 million of equipment purchases including $0.082 million financed.

Outlook, risks and unusual items

• COVID-19: Management reported no material adverse effect on Q1 results, but delayed waste shipments and suspended project work began in late March and were expected to affect Q2 and potentially later periods. The company said it could not reliably estimate the impact. It cited possible further project or shipment delays, facility shutdowns, liquidity pressure and covenant risk.
• Liquidity and financing after quarter-end: On May 8, 2020, the company replaced its prior PNC agreement with a facility providing up to $18 million of revolving credit, subject to eligible receivables and reserves, plus a $1.742 million term loan. The new facility matures May 15, 2024 and includes financial covenants, including a 1.15:1 minimum fixed-charge coverage ratio. The company reported meeting its Q1 covenant requirements.
• CARES Act: The company received a $5.666 million PPP loan on April 14, 2020, at 1% interest, with a two-year term and initial six-month payment deferral. It intended to seek forgiveness for an eligible portion, subject to lender approval; it warned that an audit could require repayment of some or all of the loan. It also elected to defer an estimated $0.815 million of employer Social Security taxes, generally payable in 2021 and 2022; timing may depend on PPP forgiveness.
• Management actions and plans: Cost measures included a hiring freeze and curtailed capital spending. The company had budgeted about $2 million of 2020 capital expenditures but said projects could be delayed or deferred. It continued to pursue contract growth and commercial and international expansion. Medical-segment R&D remained reduced pending funding or partners; no specific financial guidance was provided.
• Other exposures: Environmental remediation liabilities were $0.895 million, including $0.785 million current. Outstanding letters of credit were $3.139 million and bonds were $51.538 million; closure coverage under the AIG policy was $19.651 million. Management said no pending litigation was expected to have a material adverse effect, but hazardous-waste operations carry potential cleanup and regulatory exposure. Discontinued operations had no revenue and a $0.114 million quarterly loss.

Important facts for investors to verify

1. Whether COVID-related shipment delays and suspended projects materially affected Q2 and subsequent Services revenue, margins, cash flow and liquidity.
2. Actual availability under the May 2020 PNC facility after borrowing-base limits, reserves and letters of credit, and ongoing covenant compliance.
3. How much of the $5.666 million PPP loan was ultimately forgiven, repaid or otherwise treated, including any audit outcome.
4. Whether the Services contract mix and project execution sustain profitability, given the quarter’s lower consolidated gross margin and reliance on government-related revenue.
5. Changes in unbilled receivables, customer collections, environmental remediation costs and the funding outlook for Medical-segment R&D.