Business context and reporting period
Perma-Fix Environmental Services, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. It provides waste treatment and environmental services, mainly to government customers, and funds medical-isotope research through its Medical Segment, which has not generated revenue. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $12.921 | $17.309 | $37.768 | $47.264 |
| Gross profit / margin | $1.807 / 14.0% | $4.946 / 28.6% | $3.657 / 9.7% | $10.455 / 22.1% |
| Operating income (loss) | $(1.378) | $1.499 | $(16.195) | $0.315 |
| Continuing operations, net | $(1.500) | $1.284 | $(13.480) | $(0.322) |
| Net income (loss) attributable to common stockholders | $(1.556) | $1.070 | $(13.630) | $(1.148) |
| Loss per common share | $(0.13) | $0.09 | $(1.18) | $(0.10) |
At September 30, cash was $0.145 million, total debt was $10.619 million, and revolving-credit availability was $2.294 million, subject to borrowing-base limits. Working capital was $1.473 million, including discontinued operations; total assets were $68.453 million and stockholders’ equity was $30.706 million. Cash used in operating activities was $2.023 million for the nine months: $1.313 million from continuing operations and $0.710 million from discontinued operations. Cash fell $1.290 million from year-end 2015.
Material changes versus the prior comparable period
- Revenue fell 25.4% in Q3 and 20.1% for the nine months. Treatment Segment revenue declined 29.7% and 28.0%, respectively, primarily because of lower government waste volumes. Services revenue fell 18.1% in Q3, largely due to project completions, and 4.0% year to date.
- Gross profit declined 63.5% in Q3 and 65.0% year to date; gross margins contracted substantially as lower Treatment revenue left fixed costs spread over less volume.
- For the nine months, the company recorded $8.288 million of intangible-asset impairment and $1.816 million of tangible-asset impairment, both related to its planned M&EC facility shutdown. It also wrote off $0.587 million of prepaid fees and accrued $1.626 million of additional closure costs.
- Cash, working capital, and equity were lower than at December 31, 2015. Total debt increased from $9.836 million to $10.619 million; the company repaid its separate $3.0 million promissory note in August.
Outlook, risks, contingencies, and unusual items
- M&EC shutdown: The Oak Ridge, Tennessee facility’s lease ends January 21, 2018 and will not be renewed. The company plans to transition shipments and capabilities to other facilities, subject to customer needs and regulatory approvals. Management expects the shutdown to reduce fixed costs with minimal revenue loss, but says replacement facilities may not be able to handle all waste streams.
- Revenue outlook: Management expected certain large waste-treatment shipments in Q4 2016, but warned they could be delayed into 2017. The filing gives no specific earnings or revenue guidance. Government customers represented 50.8% of Q3 continuing-operations revenue and 51.7% for the first nine months.
- Credit covenants: The company failed its minimum fixed-charge coverage ratio (FCCR) covenant in each of the first three quarters of 2016; the lender waived the breaches. A November 17, 2016 amendment also waived Q3 noncompliance, changed future FCCR testing, increased the borrowing-availability restriction by $0.750 million, and raised interest-rate spreads. Receipt of funds released from the PFNWR finite-risk sinking fund was required by December 31, 2016; upon receipt, a further $0.750 million restriction would apply, bringing total restrictions to $2.0 million. Failure to meet covenants without a waiver could allow acceleration of debt, and the company warned it might not have enough liquidity to repay.
- Medical Segment financing: An October 11 letter of intent contemplated a $10.0 million preferred-share investment in PFM Corporation, potentially giving the investor approximately 48.6% of its voting securities. The proposal remained subject to conditions and a definitive agreement; it was not completed financing. The company said the Medical Segment may need to reduce, delay, or stop research if it cannot raise capital.
- Environmental and other obligations: Accrued environmental remediation liabilities were $0.900 million, including $0.029 million current. Facility closure and post-closure financial-assurance requirements totaled approximately $46.847 million; related sinking funds were $21.456 million. Outstanding bonds and letters of credit were approximately $1.514 million. Management reported no litigation it believed would materially affect financial position, liquidity, or future results.
- Management stated disclosure controls were effective at September 30, 2016 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether delayed government waste shipments arrived, and whether Treatment revenue and gross margins recovered after September 30.
- Current revolving-credit availability, covenant compliance, lender waivers, and the effect of the November 17 amendment on borrowing costs and liquidity.
- Whether the PFNWR sinking-fund release and replacement financial-assurance approvals were obtained by the specified deadline.
- Progress and costs of the M&EC transition, closure work, and ability of other facilities to accept its waste shipments.
- Whether the PF Medical letter of intent became a definitive, funded transaction, including resulting ownership and control changes.