Perma-Fix Environmental Services, Inc. (PESI) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Perma-Fix Environmental Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Natalya Rudman. Please go ahead.

Thank you, Chery. Good morning everyone and welcome to Perma-Fix Environmental Services Second Quarter 2016 Conference Call. On the call with us this morning are Dr. Lou Centofanti, Chief Executive Officer; Ben Naccarato, Chief Financial Officer; and Mark Duff, Executive Vice President. The Company issued a press release this morning containing second quarter 2016 financial results, which is also posted on the Company's website. If you have any questions after the call or would like any additional information about the Company, please contact Crescendo Communications at 212-671-1020. I'd also like to remind everyone that certain statements contained within this conference call may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements on this conference call are subject to known and unknown risks, uncertainties and other factors, which could cause actual results and performance of the Company to differ materially from such statements. These risks and uncertainties are detailed in the Company filings with the U.S. Securities and Exchange Commission. The Company makes no commitment to disclose any revision to forward-looking statements or any facts, events or circumstances after the date hereof that bear upon forward-looking statements. I'd now like to turn the call over to Dr. Lou Centofanti. Please go ahead, Lou.

Thank you, Natalya and welcome everyone. First of all, I think we should apologize for the late filings but there were two major events that caused this. One was the requirement to get a waiver from our lenders. We required this waiver due to the fact we were unable to meet certain covenants in our credit facility. We have received assurances; we will receive this waiver as we have in the past. But like with any large organizations, the banks have procedures, they go through and processes that take time that they have no control over. The second, the other event was our decision to -- the planned shutdown of our M&EC facility. We needed to complete the plan, conduct evaluation related to the impairment which took time. Now I'd like to also in terms of the results which were disappointing, the numbers were weaker than we had hoped. Once again, we experienced delays related to the timing of shipments. Despite these delays, it is important to note, we did achieve positive adjusted EBITDA for the quarter. It's also important to point out these projects were not cancelled but delayed because of the shipping issues. We still expect a strong second half of the year. Our only concern is our biggest challenge given the influx of the shipments in the second half is, how quickly we will be able to treat the waste and how much we'll be able to recognize in '16. As a result of these concerns, we are revising our guidance downward and currently anticipate an adjusted EBITDA in the range of $3 million to $4 million. With these challenges, they do mask some of the very positive developments going on in the Company. First, as we looked at all aspects of our business to identifiers with cost savings, with the exploration of our lease and our M&EC facility in Oak Ridge scheduled for January 18, we have decided to shut down the facility. We believe shutting down the facility results in significant costs savings, in fact, M&EC was also the only plant that we do not own. We're relocating certain equipment and shifting specialized capabilities from our M&EC facility to other facilities where we believe we have sufficient capacity and can easily re-route waste streams with minimal impact through revenue or disruption to our customers. I think it's important to point out that with these three owned facilities, we have very broad permit licenses that will allow us to expand as much as we need to in this business. During the transition period, we will continue to process waste, gradually wind down the facility over the next 18 months with the scheduled end date of January 2018. As a result of this decision, which should be very positive in the long run, as we should say significant fixed cost, our second quarter financial results reflect certain non-cash tangible and intangible asset impairment losses and other charges which Ben will discuss in more detail. On the last call, I had mentioned that the Company is on-track for the most transformative event in the Company's history, which is commencing treatment of high level waste. Specifically we received an IDIQ contract from the DOE for up to $8.6 million demonstrate the treatment of high level waste by the end of the year. We're very excited to tell you it's on-schedule and as many of you know, very limited in what I can say, but this project being our first major forte in high level waste becomes the major priority for our customer. In fact what we're seeing is that it's -- we're getting tremendous support at various highest levels of government on what we're doing in this project. The project is progressing as expected and is on-track with our customers and our expectation is both operationally from timing standpoint to be able to complete the initial demonstration by the end of the year. Turning now to the service segment, we saw growth in profitability in this segment and are excited by the number of projects we're bidding on, which is a great introduction for me to introduce to you our new Executive VP, Mark Duff. I'm very excited and pleased to present Mark as our Executive VP. Mark brings 30 years of management and technical expertise in the Department of Energy, Department of Defense, and in the small company management area. Most recently, he was responsible for the successful completion of over 70 performance based projects at Paducah Gaseous Diffusion Plant which was a five-year project with a total value of $458 million. He was also Senior Manager supporting Babcock & Wilcox where he oversaw implementation, American Recovery and Reinvestment Act at Department of Energy's Y-12 Facility with a $245 million budget for new cleanup projects completed over a two-year period. Mark began with Perma-Fix in June, has immediately focused on driving topline growth providing leadership to our business development effort to expand and generally grow revenue. And I'm real pleased in the short time Mark has been here; we've already seen the positive results of his efforts. Turning now to medical side of our business; our majority owned subsidiary Perma-Fix Medical, we're in active discussions with a number of potential investors, partners, distributors, and customers. We continue to make progress preparing for our 505(b)(2) for submission to the U.S. FDA. Since we're focusing on the regulatory filings, we have not had many public announcements. Nevertheless, we are making steady progress in a number of important fronts . We are in active discussions with potential investors, partners, distributors, and customers. Based on the feedback from the industry, we strongly believe our new process to produce Technetium-99m as the potential to transform the radio pharmaceutical industry, and we look forward to providing additional updates in the future. To wrap up, we are very disappointed about the continued delays we experienced. However, we believe we're in a strong growth trajectory with some very exciting opportunities arising including the high level waste project. In the meantime, we continue to look for ways to grow the business while streamlining operations. We believe the shutdown of our M&EC Facility will contribute significant fixed cost savings, anticipate a strong second half of the year, and look forward to providing additional update. Now I'm very excited again to turn over the call to Mark Duff who will provide a quick introduction, and then Ben will go into more details on the numbers, and then we'll be back to answer questions. Mark, welcome onboard.

Thanks, Lou, I appreciate that. I'm really excited to join Perma-Fix. I had a time in the Company's history to have such great opportunity for growth and expansion. Before taking this position, I personally conducted an exhaustive interview review of all our current operations, assessed our brand in the industry and reputation, and surveyed our potential for growth opportunities. I strongly believe this group has a tremendous opportunity to grow the services segment as the market is looking for leadership in both, remediation in the field sector, as well as the ability to reduce cost to projects through waste treatment technology. And with the integration of both of our services and waste treatment segments into our business development strategy, Perma-Fix can increase market share within the government and the commercial sectors while providing increased value to our customers. Perma-Fix has an excellent track record and an impeccable reputation in the industry for delivering value inclusion at very complex environmental waste management problems and with more focus in every business development. I'm very confident we can rapidly grow the services side of our business. With the treatment segments, Perma-Fix has unique opportunity with our existing facility and associated Perma-Fix Technologies are currently in place to treat high level waste in addition to what we've done from legacy side [ph] with low level mixed waste in our business. Given the fixed cost nature of the business we can rapidly grow margins and profitability by driving top line growth and begin to solve high level waste problems as we have for low level waste for so many years. I'm 100% confident we can unlock this potential. I look forward to meeting the investors and answering any questions you may have going forward. With that, I'll turn it over to Ben.

Thank you, Mark. We'll begin with revenue. Our total revenue from continuing operations in the second quarter was $14.8 million compared to last year's second quarter of $16.3 million, a decrease of $1.5 million or 9.4%. This decrease in revenue was the result of the shortfalls as we've discussed in our revenue in the treatment segment, up $3.1 million where the timing delays of expected waste shipments resulted in lower volumes at our time. The shortfalls, however, was offset by increases of our service segment at $1.6 million as we saw increased present state project worth. On cost of sales, we were $13 million in the second quarter compared to $12.3 million in the prior year. Our treatment segment cost included a one-time write-off of three-page regulatory expense related to a BCP treatment asset which we are decommissioning as part of the pending shutdown of our M&EC Oak Ridge Facility. Excluding this expense our treatment costs were $936,000 below prior year as various expenses related to lower volume and lower fixed expenses at the plant of approximately $428,000 accounted for the difference. Our costs of sales around -- in the service segment were up $1 million compared to prior year. Incremental project related expenses increased as a result of the increased project worth, while our fixed overhead expense remained relatively flat. Our gross profit for the quarter was $1.8 million compared to $4 million in '15. Excluding the asset write-off, gross profit in the treatment segment decreased by $2.2 million compared to prior year. Lower revenue was the main reason for the reduced gross profit, although revenue mix minimally added to this variance. Our reduction facility expenses partially offset this variance. In the service segment gross profit increased $537,000, both from the increased revenue and the more profitable project mix. Our G&A cost for the quarter were $2.4 million, compared to $2.9 million last year, a decrease of $500,000. Lower payroll expenses and the recovery of a long time bad debt expense were the primary reasons for the improvement and these numbers were offset partially by increased cost related to then overall. Our loss from continuing operations for the quarter before taxes was $11.3 million compared to $443,000 last year. Most of the current year loss was due to the $10.7 million expenses related to the impairment of tangible, intangible and prepaid assets related to the decision to shut down the M&EC Oak Ridge Facility, and also the $415,000 related to our medical isotopes segment. Our net loss applicable to common shareholders was $8.2 million compared to a net loss of $154,000 last year. M&EC shut down cost accounted for $7.5 million of this loss and our medical isotopes segment again accounted for $416,000. Within the M&EC cost, there was a tax benefit of $3.2 million resulting from the impairment losses from the permits. Our loss per share was $0.71 compared to last year's loss per share of $0.01. Our adjusted EBITDA from continuing operations for the quarter as defined in this morning's press release was $824,000 compared to $2 million last year. Some items on the balance sheet, our cash was down $1.1 million primarily from debt maintenance payments totaling $1.6 million. Our other receivables were down $1.6 million primarily from the amortization of prepaid expenses and the write-off of the prepaid expense related to the M&EC asset. Our impairment of our M&EC tangible and intangible assets of course explains the drop in property and intangible assets. Our waste backlog for the quarter was $3.6 million compared to $4.7 million at year end and $5.7 million a year ago. And our current debt excluding our debt assurance costs were $1.5 million, down $1 million from year end and lower than prior year's second quarter of $2.3 million. And our total debt at quarter end was $10.9 million, $10.7 million of which is from our lender PNC Bank and we had a small amount left from our shareholder loan which has since been paid off. Finally, our cash flow activity; year-to-date as of the second quarter, our cash used by continuing operations was $1.5 million; our cash used by discontinued operations was $458,000; our cash used for investing were $71,000 of which $28,000 was for capital spending; cash provided by investing activities from discontinued ops was $46,000, and our cash provided from financing was $962,000. Finally, I'll address one more time the notification of late filing for our 10-Q. The covenant in our credit facility requires that we maintain a 1.15 to 1.0 ratio on our fixed charge ratio. We failed to achieve this in the second quarter primarily due to the aforementioned delays impacting our top line revenue. We are in discussions and expect to receive a waiver from our lender; unfortunately the bank was unable to view this timely and required us to file the extension. We do expect to receive the waiver at which time we will file our Form 10-Q. Now I'll turn the call back over to Lou.

Once again, I'd like to thank everybody for participating in our second quarter conference call. We look forward to a strong second half of the year. We anticipate solid growth in treatment and services and we're extremely excited about the outlook for our high level waste project. We're pleased to welcome Mark Duff and believe he brings the strong skillset and significantly expands the debt of our senior management team, especially on the sales and business development side. We continue to advance our process to produce Tc-99 and remain on-track to submit a filing with U.S. FDA. We think the future has never been brighter and we will anticipate this continued support and patience of our shareholders. We look forward to providing additional updates in their near future. Thank you. With that, we can now open the call to questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Walter Schenker from MAZ Partners.

Hello. Can we just spend a little bit more time on the closing of the Oak Ridge facility? You lost your lease because it went to someone else, you lost the lease because you didn't want to pay to renew it because that was your largest facility, and it had broad ranges of capabilities from PCBs supposed to benefit a number of years ago when the government closed down its incinerator. And given the long-term pieces of very large amounts of stored waste, I'm trying to understand why closing this is not a fairly negative step?

It's not negative at all. Number one, the PCB treatment is at the other Oak Ridge facility and that will continue. And in that facility, we have -- it's just a good example, we have almost 70 acres at that facility. It has a tremendous permit and license, we have the ability to easily expand. The capabilities of M&EC -- it's a very old building, it is an extremely expensive building, it's also on a DOE site which has tremendous institutional costs and other issues. It -- the Department of Energy, their long-term plan is to tear that building down, and so when they called this and said, we would really -- not interested in extending the lease because we need that for redevelopment, our initial reaction was fine, this is a perfect time we've been looking at it over the last two years; we've been building up the capabilities at the other three facilities, and it was really obvious to us that the tremendous cost in M&EC were not worse, the capabilities there that we had at other facilities. So it was a very easy decision at that time. Therefore, we'll be closing the permit, we'll shut the permit down, it will be gone; and the capabilities there will be closed, but our capacity to treat waste will exist at all the other facilities.

And so the answer -- my word is, you have enough capacity elsewhere as you look at your expected flow of waste streams to handle it without this facility?

Yes. The M&EC facility was a value initially when you had at Oak Ridge tens of thousands of drums of waste that really had low revenue associated with them and had to be treated in large volumes and rapidly, and they were very close to the facility and either large storage to get those out of the sites and move into a treatment facility. And we now have that ability at the other three facilities so that we can easily, dramatically expand our ability to treat waste if needed, but at a much lower cost and with much lower -- much ability to offer a lower cost and still make a very good profit on it. So when we looked at this -- to be honest with you, it's a very -- we've been believing this for quite -- thinking about this for quite a while.

Thank you, I got it.

Thank you. Our next question comes from Bill Chadman [ph], a private investor.

Good morning. I'd like to -- I want to commend you and your team for coming up with all these new ways to fast [ph] processes, certainly in the medical. And I would like to know, we’ve been talking about this at one point, you doing this test on 66 [ph] million gallons of waste and you can create approximately 80% of it, I'm curious about the other government plans that have waste to be treated [indiscernible] plans; could you give me an idea, maybe – a little about how much of untreated waste is there out there at these government facilities?

One, we haven't really disclosed what plant we're working at, and the -- but I've tried to talk in very broad terms about this because we are under confidentiality agreements here with our client. But again, when you're looking at this, if you think about it, all you need to do is go to the DOE website and there is a tremendous volume of defense high level waste sitting out there at three or four or five sites; Savannah River, Idaho, Hanford, all have tremendous volumes of high level waste, and they -- some of them will be treated on-site but what we think we have is the path forward to treat some of the problematic high level waste streams, very simply and easily at our facilities. And so at this point, we're seeing great success, great progress, we're hoping here to -- as I've mentioned in the past, by the end of the year to have not only treated high level waste streams but to put them in a disposal facility to go through the whole process. The excitement here is as much as -- this project is -- today it will be hard to talk about all the commercial high level waste that sits out there because there are all sorts of institutional barriers for that waste and our present strategy is to take a reactor core and throw it in the ground for a high level waste which is in one way environmentally crazy. And as I've said, the defense waste offers a proving ground to fine tune how you treat high level waste. And so, we're really excited about that to be at the forefront of providing some of those options. So there is a lot of it out there, hopefully by the end of the year, we'll really be able to talk in very specifics and details on how it works and how we've pulled this off, but right now it's -- I would like to say it's attracted some of the -- all the way to the top of the government. There is attention on what we're doing. So we're really excited about that.

Okay. Let me ask you two -- are there any new technologies or a way to process that could have threatened to the big advantage you possibly have?

No, what we -- this is treating -- what we have is, we have the technologies to do the whole kit-and-kaboodle, very simply, easily and inexpensively. This is -- we're not talking about grand [ph] big treatment, new technologies, you're taking chemistry and use it to solve the problem as in and put in the form that environmentally would last geologic times. I mean there are -- what we're offering is, so you can take nuclear waste, put it in the waste form through treatment that will last over geologic times and we have examples in nature where it was had where exactly what we're proposing as last geologic times. No need to check, we don't need anything fancy. We've got simple solutions that don't require exhaustive capital expenditure or dramatic break-through's in science here.

Okay, thank you. And let me ask one more question on the raise of the Perma-Fix Medical. We anticipate that a help in the [indiscernible] will give us timeline when you might be able to close in?

Yes, we're making with that several options were going down there has been no final decision on a final option. We're looking at several options and we're excited about the possibilities there and hopefully, we'll be able to talk in more detail in the very near future.

Okay, thank you.

It will be your timeframe as the board correct. We should be able to talk about that in the next two months.

Okay. Okay guys, thank you.

Thank you. [Operator Instructions] Our next question comes from Robert Mines [ph], a private investor.

Would it be free to say now help quantify the magnitude of the high level waist opportunities from visible stuff in the near term? And maybe if you can't say more than you've already said but whatever you helped to see give us quantifying that would be interest?

Well, it's hard to quantify because -- but, the Department of Energy for Defense Waste high level -- the budgets are in hundreds of billions of dollars right now that are -- that have been accrued on the Federal balance sheet. So you're talking and we think we can do it for a fraction of that. So you're talking a dramatic market, just in the defense ways. Some of that we will -- there are processes going on at the sites which will treat some of that and so we're not talking about the whole thing but we think we can contribute significantly to reducing that number dramatically. On multi-billion dollars, there is -- I could tell you that at least there is easily multi-billion dollar.

I'm afraid, multi-billion dollar next to Perma-Fix?

Right.

And I presume this would be over a period of year during the years -- what sort of magnitude they're talking about for the number of years to get there?

Well, as you've all learned nothing goes fast in this business and it will be -- what we think is a multi-year project that demonstrates and to move up the chain and we're very focused now on the second step which will be to go from tens of gallons to thousands of gallons, for next year. But easily if you look at our facility that would do this -- handle very significant volumes of waste easily.

Thank you.

Thank you. Our next question is a follow-up from Bill Chadman [ph], a private investor.

Could you address the tax credit you guys are able to take on the ride? Do you expect to get a sizeable amount of money from higher risk or give us some?

No, it's just an expense adjustment. We normally all other aspects of our taxes have a valuation allowance which allows us to not report taxes. If you recall though, a year or so ago we had to take a tax adjustment because of what called an impairment tax credit and please don't make me get into all that means but it's related to the permits and the long-lived intangible assets. And so because we are now impairing one of those assets we're actually going the other direction, this will just pretty much just increase our NOLs overtime and therefore it's all kind of mix into a total tax turn but there won't be like an immediate tax pick up because we're not paying taxes at this time.

Okay, thank you.

Thank you. At this time we have no further questions. I would turn the call back over to our speakers for closing comments.

Once again, I'd thank everybody and we appreciate your support. We look forward to strong second half growth in treatment and services, and very excited about the outlook. Look forward to providing you additional updates in the near future. Thank you all.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.