Perma-Fix Environmental Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Financial statements are unaudited. Amounts below are in thousands of dollars unless otherwise stated.
Business context and results
Perma-Fix provides waste treatment and environmental services, primarily to government customers, through its Treatment and Services segments. Its Medical segment remains in research and development and has generated no revenue. The Industrial segment is reported as discontinued operations.
- Revenue was $11,708, down 7.5% from $12,658 in Q1 2018. Treatment revenue increased 10.6% to $9,905, while Services revenue fell 51.3% to $1,803, mainly because projects completed in 2018 were not replaced by new project activity until later in Q1/Q2 2019.
- Gross profit declined 24.7% to $2,501; gross margin contracted to 21.4% from 26.2%. Services reported a $456 gross loss versus $541 gross profit a year earlier. Treatment gross profit was $2,957, including $165 of additional M&EC closure costs; excluding those costs, Treatment gross profit increased, and its margin was 31.5% versus 31.0%.
- SG&A increased 4.2% to $2,898; R&D was $227 versus $232. The company recorded an operating loss of $624 compared with operating income of $317 in Q1 2018.
- Continuing-operations net loss was $550 versus income of $253. Consolidated net loss was $702, including a $152 discontinued-operations loss; net loss attributable to common stockholders was $672, or $0.06 per share, versus income of $136, or $0.01 per share.
Cash flow, balance sheet and financing
- Operating cash flow was negative $329, compared with positive $2,434 in Q1 2018; continuing operations used $147. Investing activities used $198, and financing activities provided $137. Cash plus restricted finite-risk funds decreased $384 to $16,397; this includes $16,052 of restricted funds and only $345 of cash on the balance sheet.
- At March 31, cash was $345, current assets were $14,228 and current liabilities were $21,795. The working-capital deficit was $7,567, versus $6,753 at year-end 2018. Accounts payable rose $1,709 to $7,206, partly reflecting M&EC closure costs pending payment.
- Total debt was $3,371, including $1,184 current; operating lease liabilities were $2,576 and finance lease liabilities $515. The PNC credit facility matures March 24, 2021. Reported revolving borrowings were $1,004, with approximately $1,860 of borrowing availability at quarter-end; availability was subject to borrowing-base limits and reductions, and letters of credit totaled $2,639.
- On April 1, the company borrowed $2,500 from shareholder and consultant Robert Ferguson for working capital. The unsecured, subordinated loan bears 4% interest, has a two-year term and requires principal payments during its second year. Consideration included 75,000 common shares and a warrant for 60,000 shares at $3.51; the company said it was evaluating the accounting treatment.
Changes, outlook and risks
- On March 29, PNC waived the Q4 2018 fixed-charge coverage ratio (FCCR) failure and waived FCCR testing for Q1 2019. The lender revised the FCCR calculation for Q2 and Q3 2019, retained a 1.15:1 minimum for those quarters, and reduced the tangible adjusted net worth minimum from $26,000 to $25,000. The company reported compliance with other Q1 covenants and expected to meet covenants for the next 12 months, but warned that an unwaived breach could permit acceleration of debt and that it might lack liquidity to repay accelerated borrowings.
- Management expected approximately $5,000 of restricted AIG sinking funds to be released by the end of Q2 2019 following M&EC closure, subject to AIG and regulatory approval. Physical closure and decommissioning were completed, but final surveys and regulatory approvals remained outstanding.
- Management stated that operating cash flows, credit-facility availability and the April loan should fund operations for the next 12 months; the anticipated sinking-fund release would provide further support. This is an expectation, not a guarantee. No earnings or revenue guidance was provided.
- Management said Services projects awarded late in Q1 were expected to begin in Q2. It reported an expected combined value of about $17,000 for contract awards through 2019, including an approximately $8,500 Canadian Nuclear Laboratories task order announced in May. Timing, execution and government funding remain uncertain.
- Government customers generated approximately 73.4% of Q1 revenue. Federal contracts may generally be terminated or renegotiated on 30 days’ notice. Other risks include uneven project timing, collection delays, permit and regulatory requirements, environmental remediation or potential-responsible-party exposure, and the need to raise capital for Medical-segment R&D. Accrued environmental remediation liabilities were $877.
- The company adopted lease accounting Topic 842 on January 1, recording operating lease right-of-use assets and liabilities; management reported an immaterial effect on Q1 operations and cash flows. Disclosure controls were assessed as effective at March 31, 2019.
Key facts for investors to verify
- Whether Services revenue and margins recovered as delayed projects began, and whether the announced contracts converted into revenue and cash collections.
- Whether the company satisfied the revised PNC covenants and retained adequate borrowing availability, particularly after considering letters of credit and borrowing-base restrictions.
- Whether the expected $5,000 AIG restricted-fund release received all required approvals and was received on the anticipated schedule.
- Whether liquidity, operating cash flow and working capital improved after the April loan, and the final accounting and dilution effects of its shares, warrant and potential default-related share settlement.
- Progress on final M&EC closure approvals and the adequacy of closure, disposal and environmental remediation accruals.