Perma-Fix Environmental Services, Inc. — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014; comparisons are with Q1 2013. Perma-Fix provides waste treatment and environmental services through Treatment and Services segments. Unless noted, amounts are in millions.
Key financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $10.544 | $19.829 |
| Gross profit / margin | $0.094 / 0.9% | $0.537 / 2.7% |
| Operating loss | $(3.489) | $(4.150) |
| Continuing-operations net loss | $(3.703) | $(2.888) |
| Net loss attributable to common stockholders | $(3.969); $(0.35) per share | $(2.912); $(0.26) per share |
| Operating cash flow | $(1.480) total; $(2.341) continuing operations | $(2.252) total |
Q1 2014 SG&A was $3.212 million, down 23.3%, and research and development expense was $0.371 million. Cash was $39,000 at March 31, down from $333,000 at year-end. Net property and equipment was $25.238 million. Total assets were $88.154 million, versus $91.600 million at December 31, 2013.
Total debt was approximately $15.7 million, including $3.220 million current; revolving-credit borrowings were $2.033 million. Revolver availability was $3.316 million at quarter-end, subject to eligible receivables. Working capital deficit was $4.462 million, compared with $2.958 million at year-end. Stockholders’ equity was $44.363 million; accumulated deficit was $59.047 million.
Material changes versus Q1 2013
- Revenue fell $9.285 million, or 46.8%. Services revenue declined $9.617 million, primarily following completion of the CHPRC subcontract and other large DOE work. The CHPRC subcontract had generated approximately $5.746 million of Q1 2013 revenue.
- Treatment revenue increased 4.5% to $7.673 million; Services revenue fell 77.0% to $2.871 million.
- Gross margin contracted to 0.9%. Treatment produced $0.111 million gross profit, while Services recorded a $0.017 million gross loss. Management cited lost higher-margin subcontract work and lower Services revenue.
- Operating loss narrowed to $3.489 million, partly reflecting lower SG&A, but continuing-operations net loss increased as the prior-year period included a $1.429 million tax benefit. Q1 2014 recorded $30,000 tax expense.
- Federal-government-related work represented 48.4% of continuing revenue, down from 79.3% a year earlier.
Outlook, risks, contingencies and unusual items
- Going concern and liquidity: Management disclosed substantial doubt about the Company’s ability to continue as a going concern. It reported a $3.969 million quarterly net loss, a $4.462 million working-capital deficit and only $39,000 cash at quarter-end. Management warned that without near-term capital or increased revenue, cash may be insufficient to sustain operations for the remainder of 2014, potentially requiring further reductions or curtailment of operations.
- Credit amendments after quarter-end: On April 14, 2014, PNC waived Q1 2014 fixed-charge-coverage testing and the Q4 2013 covenant failure, revised 2014 covenant calculations and thresholds, and reduced the revolving facility limit from up to $18 million to up to $12 million. The Company said it expected to meet remaining 2014 tests, but warned that a future breach could permit acceleration and that it might lack liquidity to repay debt. The amendment also waived the requirement for 2013 statements without a going-concern qualification.
- Management outlook: The Company cited the 2014 federal omnibus budget, including approximately $5.83 billion for DOE Environmental Management, as a potential source of increased project activity. It also planned cost reductions and expansion in commercial and international markets; these plans and anticipated cash-flow improvement were not assured.
- PFSG fire: The discontinued South Georgia facility remained non-operational after an August 2013 fire and was being evaluated for rebuilding while marketed for sale. Costs incurred through March 31 were reported as $8.115 million, insurance recoveries received were $7.287 million, and a $628,000 recovery receivable was recorded. Insurers paid a further approximately $900,000 after quarter-end. The facility generated no Q1 2014 revenue and contributed a $266,000 discontinued-operations loss.
- Other risks and contingencies: Federal contracts may be terminated or renegotiated on 30 days’ notice; reduced government budgets, contract losses, delayed receivable collections and disposal-site delays pose risks. Environmental remediation liabilities totaled $1.031 million, including $649,000 current. Required facility closure and post-closure financial assurance was approximately $46.844 million, supported in part by a $21.314 million sinking fund. The filing also describes hazardous-waste cleanup exposure and a dispute concerning non-conforming waste, with trial then scheduled for November 2014 if issues remained.
- Operating leases totaled approximately $2.634 million, and outstanding bonds and letters of credit were approximately $1.453 million. The filing states disclosure controls were effective at March 31, 2014 and reports no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue recovery, cost reductions and capital-raising plans provide sufficient liquidity to address the disclosed going-concern uncertainty.
- Actual revolver availability after the facility limit reduction, covenant compliance in subsequent quarters, and any further lender waivers or amendments.
- Services-segment pipeline and replacement work following the termination of major government contracts, alongside continued federal budget and contract exposure.
- Collection timing and collectability of unbilled receivables, which totaled $5.974 million at March 31, and any extended delays at third-party disposal sites.
- Final insurance proceeds, remaining fire-related costs, and the future disposition or reopening of the PFSG facility.
- Progress and financing for the Polish subsidiary and medical-technology initiative; the filing describes contemplated private placements, not assured proceeds.