PERMA FIX ENVIRONMENTAL SERVICES INC

December 31, 2023, and 2022

NOTE 1

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Perma-Fix Environmental Services, Inc. (the Company, which may be referred to as we, us, or our), an environmental and technology know-how company, is a Delaware corporation, engaged through its subsidiaries, in two reportable segments:

TREATMENT SEGMENT, which includes:

SERVICES SEGMENT, which includes:

The Company’s continuing operations consist of the operations of our subsidiaries/facilities as follow: Diversified Scientific Services, Inc. (“DSSI”), Perma-Fix of Florida, Inc. (“PFF”), Perma-Fix of Northwest Richland, Inc. (“PFNWR”), Safety & Ecology Corporation (“SEC”), Perma-Fix Environmental Services UK Limited (“PF UK Limited”), Perma-Fix Canada, Inc. (“PF Canada”) and Oak Ridge Environmental Waste Operations Center (“EWOC”).

The Company’s continuing operations also consisted of Perma-Fix ERRG, a variable interest entity (“VIE”) for which we were the primary beneficiary. The VIE was an unpopulated joint venture (“JV”) entered between the Company and Engineering/Remediation Resources Group, Inc. (“ERRG”) for a specific project under the Services Segment in which the Company and ERRG had a 51% and 49% partnership interest in the joint venture, respectively. During the fourth quarter of 2022, project work under the JV was completed

The Company’s discontinued operations (see “Note 8 – Discontinued Operations”) consist of operations of all our subsidiaries included in our Industrial Segment which encompasses subsidiaries divested in 2011 and earlier, as well as three previously closed locations.

On December 18, 2023, a JV where the Company and Campoverde Srl (“JV partner”) each owns 50% of the partnership, was awarded a multi-year contract valued up to approximately EUR 50 million by the European Commission (the “Contracting Authority”) for the treatment of radioactive waste from the Joint Research Center in Ispra, Italy. Work under this JV has not started as of December 31, 2023. The scope of work to be performed in the initial phases of this contract will be performed predominately by our JV partner. Revenue generated by the Company under the initial phases will be limited to project management support through 2025. The Company expects to generate an increase in revenue under this contract starting in 2026 when the waste treatment phases begin. The Contracting Authority may terminate the contract under certain conditions as set forth in the contract. Once activities commence under this JV, the Company will consolidate the operations of this JV into its financial statements.

Financial Positions and Liquidity

The Company experienced significant improvement in its 2023 financial results as the lingering effects of COVID-19 began to subside starting in the early part of 2022. The Company’s Treatment Segment continued to see steady improvements in waste receipts from certain customers who had previously delayed waste shipments due, in part, from the impact of COVID-19. Within the Company’s Services Segment, certain projects which were delayed/curtailed in first part of 2022 due, in part, from the lingering effects of the COVID-19, achieved full operational status and improved productivity in 2023 which positively impacted revenue. Revenues from both of the Company’s Segments were also positively impacted from contracts won in 2023 as procurement and planning on behalf of our government clients continued to progress as the lingering effects of COVID-19 pandemic subsided.

Heading into 2024, the Company expects to see overall continue steady improvements in waste receipts and increases in project work from certain existing contracts, contracts won in 2023, and bids submitted in both segments that are awaiting awards. However, due to our operations which is subject to seasonal factor, the Company generally experiences lower revenue in the first quarter due to overall reduced activities by our customers from the usual slowdown in operations due, in part, from returning from the holiday periods and poorer weather conditions. Additionally, due to Congress’s inability to timely approve FY 2024 budget and the extension of the continuing resolution, certain of our government related customers have informed us that waste shipments will likely be delayed. Although the Company expects to see overall improvements in revenue in 2024 as disclosed above, if Congress is unable to enact the full FY 2024 appropriation bills or further extend the continuing resolutions to fund government spending by the late March deadline, the U.S. government will enter into a partial shutdown. The full impact of any additional continued resolution beyond March or a partial government shutdown is uncertain. If a partial government shutdown were to occur and were to continue an extended period, our financial results of operations could be negatively impacted by delays in procurement actions, waste shipments and project delays on newly awarded projects.

The Company’s cash flow requirements during the twelve-months ended December 31, 2023, were primarily financed by its operations, credit facility availability and cash on hand (which included the ERC, along with interest, that the Company received in March 2023 (See “Note 10 – Employee Retention Credit (“ERC”) and proceeds from a new term loan dated July 31, 2023, in the amount of $2,500,000 provided to us under an amendment to the Company’s existing credit facility (See “Note 9 – Long Term Debt”)). The Company’s cash flow requirements for the next twelve months will consist primarily of general working capital needs, scheduled principal payments on our debt obligations, remediation projects, and planned capital expenditures. The Company plans to fund these requirements from its operations, cash on hand, credit facility availability, and collections of unpaid receivables (See “Note 14 – Commitments and Contingencies - Perma-Fix Canada, Inc. (“PF Canada”)” and “Note 19 – Subsequent Events – Perma-Fix Canada, Inc. (“PF Canada”)” for a discussion of a settlement agreement relating to unpaid receivables due to the Company from Canadian Nuclear Laboratories (“CNL”)). The Company’s ability to utilize its credit facility from its lender is subject to meeting its quarterly financial covenant requirements, among other things. The Company continues to explore all sources of increasing its capital and/or liquidity and to improve its revenue and working capital, including, but not limited to entering into equity transactions. There are no assurances that the Company will be successful in increasing our liquidity through our efforts. The Company is continually reviewing operating costs and reviewing the possibility of further reducing operating costs and non-essential expenditures to bring them in line with revenue levels, when necessary. At this time, the Company believes that its cash flows from operations, our available liquidity from our credit facility, and our cash on hand should be sufficient to fund our operations for the next twelve months.

NOTE 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company’s consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. The Company’s consolidated financial statements for 2022 also included the accounts of Perma-Fix ERRG, a VIE for which we were the primary beneficiary as discussed above, after elimination of all significant intercompany accounts and transactions.

Use of Estimates

The Company prepares financial statements in conformity with accounting standards generally accepted in the United States (“U.S. GAAP”), which may require estimates of future cash flows and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.

Cash and Finite Risk Sinking Fund (Restricted Cash)

As of December 31, 2023, and 2022, the Company had cash on hand of approximately $7,500,000 and $1,866,000, respectively. Starting in late 2023, the Company maintained an interest bearing money account with its lender. At December 31, 2023, and 2022, the Company had finite risk sinking funds of approximately $12,074,000 and $11,570,000, respectively, which represented cash held as collateral under the Company’s financial assurance policy (see “Note 14 – Commitment and Contingencies – Insurance” for a discussion of this finite risk sinking fund).

Accounts Receivable

Accounts receivable are customer obligations due under normal trade terms generally requiring payment within 30 or 60 days from the invoice date based on the customer type (government, broker, or commercial). The carrying amount of accounts receivables is reduced by a credit loss determined in accordance with Accounting Standards Update (“ASU”) 2016-13 “Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments.” which requires the Company to consider forward-looking information in estimating the expected loss and is developed using historical collection experience, current and future economic and market conditions that may affect customers’ ability to pay, and a review of the current status of customers’ accounts receivables. The Company does not apply a credit loss allowance to government related receivables due to our past successful experience in their collectability. The Company’s monitoring activities include routine follow-up on past due accounts and consideration of customers’ financial conditions. Once the Company has exhausted all options in the collection of a delinquent accounts receivable balance, which includes collection letters, demands for payment, collection agencies and attorneys, the account is deemed uncollectible and subsequently written off. The write off process involves approvals from senior management based on required approval thresholds.

The following table sets forth the activity in the allowance for credit losses for the years ended December 31, 2023, and 2022 (in thousands):

Unbilled Receivables

Unbilled receivables are generated by differences between invoicing timing and our over time revenue recognition methodology used for revenue recognition purposes. As major processing and contract completion phases are completed and the costs are incurred, the Company recognizes the corresponding percentage of revenue. Within our Treatment Segment, the facilities experience delays in processing invoices due to the complexity of the documentation that is required for invoicing, as well as the difference between completion of revenue recognition milestones and agreed upon invoicing terms, which results in unbilled receivables. The timing differences occur for several reasons which include: delays in the final processing of all wastes associated with certain work orders and delays for analytical testing that is required after the facilities have processed waste but prior to our release of waste for disposal. The tasks relating to these delays can take months to complete but are generally completed within twelve months.

Unbilled receivables within our Services Segment can result from work performed under contracts but invoice milestones have not yet been met and/or contract claims and pending change orders, including requests for equitable adjustments (“REA”) for which work has been performed and collection of revenue is reasonably assured.

Inventories

Inventories consist of treatment chemicals, saleable used oils, and certain supplies. Additionally, the Company has replacement parts in inventory, which are deemed critical to the operating equipment and may also have extended lead times should the part fail and need to be replaced. Inventories are valued at the lower of cost or net realizable value with cost determined by the first-in, first-out method.

Disposal and Transportation Costs

The Company accrues for waste disposal based on the waste at each facility at the end of each accounting period. Current market prices for transportation and disposal costs are applied to the end of period waste inventories to calculate for the transportation and disposal accruals.

Property and Equipment

Property and equipment expenditures are capitalized and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes, while accelerated depreciation methods are principally used for income tax purposes. Generally, asset lives range fromten toforty years for buildings (including improvements and asset retirement costs) andthree toseven years for office furniture and equipment, vehicles, and decontamination and processing equipment. Leasehold improvements are capitalized and amortized over the lesser of the term of the lease or the life of the asset. Maintenance and repairs are charged directly to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any gain or loss from sale or retirement is recognized in the accompanying Consolidated Statements of Operations. Renewals and improvements, which extend the useful lives of the assets, are capitalized.

Certain property and equipment expenditures are financed through leases. Amortization of financed leased assets is computed using the straight-line method over the estimated useful lives of the assets. As of December 31, 2023, assets recorded under finance leases were $1,608,000 less accumulated depreciation of $545,000, resulting in net fixed assets under finance leases of $1,063,000. As of December 31, 2022, assets recorded under finance leases were $1,201,000 less accumulated depreciation of $549,000, resulting in net fixed assets under finance leases of $652,000. These assets are recorded within net property and equipment on the Consolidated Balance Sheets.

Long-lived assets, such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated.

Our depreciation expense totaled approximately $2,370,000 and $1,872,000 in 2023 and 2022, respectively.

Leases

The Company accounts for leases in accordance with FASB’s ASU 2016-02, “Leases (Topic 842).” At the inception of an arrangement, the Company determines if an arrangement is, or contains, a lease based on facts and circumstances present in that arrangement. Lease classifications, recognition, and measurement are then determined at the lease commencement date.

The Company’s operating lease right-of-use (“ROU”) assets and operating lease liabilities include primarily leases for office and warehouse spaces used to conduct our business. The Company’s operating leases also include the lease of a building with land utilized for our waste treatment operations which includes a purchase option. These leases have remaining terms of approximatelyone to six years. The Company includes renewal options in valuing its ROU assets and liabilities when it determines that it is reasonably certain to exercise these renewal options; however, at December 31, 2023, none of our operating leases has remaining renewal options. As most of our operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate when determining the present value of the lease payments. The incremental borrowing rate is determined based on the Company’s secured borrowing rate, lease terms and current economic environment. Some of our operating leases include both lease (rent payments) and non-lease components (maintenance costs such as cleaning and landscaping services). The Company has elected the practical expedient to account for lease component and non-lease component as a single component for all leases under ASU 2016-02. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Finance leases primarily consist of processing and transport equipment used by our facilities’ operations. The Company’s finance leases have remaining terms of approximately one to six years. See “Property and Equipment” above for assets recorded under financed leases. Borrowing rates for our finance leases are either explicitly stated in the lease agreements or implicitly determined from available terms in the lease agreements.

The Company adopted the policy to not recognize ROU assets and liabilities for short term leases.

Intangible Assets

Intangible assets consist primarily of the recognized value of the permits required to operate our business. Indefinite-lived intangible assets are not amortized but are reviewed for impairment annually as of October 1, or when events or changes in the business environment indicate that the carrying value may be impaired. If the fair value of the asset is less than the carrying amount, a quantitative test is performed to determine the fair value. The impairment loss, if any, is measured as the excess of the carrying value of the asset over its fair value. Judgments and estimates are inherent in these analyses and include assumptions for, among other factors, forecasted revenue, gross margin, growth rate, operating income, timing of expected future cash flows, and the determination of appropriate long-term discount rates. Impairment testing of our indefinite-lived permits related to our Treatment reporting unit as of October 1, 2023 and 2022 resulted in no impairment charges.

Intangible assets that have definite useful lives are amortized using the straight-line method over the estimated useful lives (with the exception of customer relationships which are amortized using an accelerated method) and are excluded from our annual intangible asset valuation review as of October 1. Definite-lived intangible assets are also tested for impairment whenever events or changes in circumstances suggest impairment might exist.

Research and Development (“R&D”)

Operational innovation and technical know-how are very important to the success of our business. Our goal is to discover, develop, and bring to market innovative ways to process waste that address unmet environmental needs and to develop new company service offerings. The Company conducts research internally and also through collaborations with other third parties. R&D costs consist primarily of employee salaries and benefits, laboratory costs, third party fees, and other related costs associated with the development and enhancement of new potential waste treatment processes and new technology and are charged to expense when incurred in accordance with ASC Topic 730, “Research and Development.”

Accrued Closure Costs and Asset Retirement Obligations (“ARO”)

Accrued closure costs represent our estimated environmental liability to clean up our facilities, as required by our permits, in the event of closure. ASC 410, “Asset Retirement and Environmental Obligations” requires that the discounted fair value of a liability for an ARO be recognized in the period in which it is incurred with the associated ARO capitalized as part of the carrying cost of the asset. The recognition of an ARO requires that management make numerous estimates, assumptions and judgments regarding such factors as estimated probabilities, timing of settlements, material and service costs, current technology, laws and regulations, and credit adjusted risk-free rate to be used. This estimate is inflated, using an inflation rate, to the expected time at which the closure will occur, and then discounted back, using a credit adjusted risk free rate, to the present value. ARO’s are included within buildings as part of property and equipment and are depreciated over the estimated useful life of the property. In periods subsequent to initial measurement of the ARO, the Company must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Increases in the ARO liability due to passage of time impact net income as accretion expense, which is included in cost of goods sold. Changes in costs resulting from changes or expansion at the facilities require adjustment to the ARO liability and are capitalized and charged as depreciation expense, in accordance with the Company’s depreciation policy.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, “Income Taxes.” Under ASC 740, the provision for income taxes is comprised of taxes that are currently payable and deferred taxes that relate to the temporary differences between financial reporting carrying values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company regularly assesses the likelihood that the deferred tax asset will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred income taxes to an amount that is more likely than not to be realized.

ASC 740 sets out a consistent framework for preparers to use to determine the appropriate recognition and measurement of uncertain tax positions. ASC 740 uses a two-step approach wherein a tax benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit which is greater than 50% likely to be realized. ASC 740 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company recognizes accrued interest and income tax penalties related to unrecognized tax benefits as a component of income tax expense.

The Company reassesses the validity of our conclusions regarding uncertain income tax positions on a quarterly basis to determine if facts or circumstances have arisen that might cause us to change our judgment regarding the likelihood of a tax position’s sustainability under audit.

Foreign Currency

The Company’s foreign subsidiaries include PF UK Limited and PF Canada. Assets and liabilities are translated to U.S. dollars at the exchange rate in effect at the balance sheet date and revenue and expenses at the average exchange rate for the period. Foreign currency translation adjustments for these subsidiaries are accumulated as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Gains and losses resulting from foreign currency transactions are recognized in the Consolidated Statements of Operations.

Concentration Risk

The Company performed services relating to waste generated by government clients (domestic), either indirectly for others as a subcontractor to government entities or directly as a prime contractor, representing approximately $70,642,000, or 78.8%, of our total revenue during 2023, as compared to $59,658,000, or 84.5%, of our total revenue during 2022.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains cash with high quality financial institutions, which may exceed Federal Deposit Insurance Corporation (“FDIC”) insured amounts from time to time. The Company has not experienced any losses due to such cash concentration. Concentration of credit risk with respect to accounts receivable is limited due to the Company’s large number of customers and their dispersion throughout the United States as well as with the significant amount of work that we perform for government entities.

The Company had two government related customers whose total unbilled and net outstanding receivable balances each represented 13.2% of the Company’s total consolidated unbilled and net accounts receivable at December 31, 2023. The Company had two government related customers whose total unbilled and net outstanding receivable balances represented 12.5% and 23.0% of the Company’s total consolidated unbilled and net accounts receivable at December 31, 2022.

Revenue Recognition and Related Policies

The Company recognizes revenue in accordance with FASB’s ASC 606, “Revenue from Contracts with Customers.” ASC 606 provides a single, comprehensive revenue recognition model for all contracts with customers. Under ASC 606, a five-step process is utilized in order to determine revenue recognition, depicting the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under ASC 606, a performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract transaction price is allocated to each distinct performance obligation and recognized as revenues as the performance obligation is satisfied.

Treatment Segment Revenues:

Contracts in our Treatment Segment primarily have a single performance obligation as the promise to receive, treat and dispose of waste is not separately identifiable in the contract and, therefore, not distinct. Performance obligations are generally satisfied over time using the input method. Under the input method, the Company uses a measure of progress divided into major phases which include receipt (ranging from 9.0% to 33%), treatment/processing (ranging from 40% to 87%) and shipment/final disposal (ranging from 2.0% to 27%). As major processing phases are completed and the costs are incurred, the proportional percentage of revenue is recognized. Transaction price for Treatment Segment contracts are determined by the stated fixed rate per unit price as stipulated in the contract.

The Company periodically enter into arrangements with customers for transportation of wastes to either our facility or to non-company owned disposal sites. Revenue from this arrangement is recognized at a point in time, upon the transfer of control. Control transfers when the wastes are picked up by the Company.

Services Segment Revenues:

Revenues for our Services Segment are generated from time and materials or fixed price arrangements:

The Company’s primary obligation to customers in time and materials contracts relate to the provision of services to the customer at the direction of the customer. This provision of services at the request of the customer is the performance obligation, which is satisfied over time. Revenue earned from time and materials contracts is determined using the input method and is based on contractually defined billing rates applied to services performed and materials delivered.

Under fixed price contracts, the objective of the project is not attained unless all scope items within the contract are completed and all of the services promised within fixed fee contracts constitute a single performance obligation. Transaction price is estimated based upon the estimated cost to complete the overall project. Revenue from fixed price contracts is recognized over time primarily using the input method. For the input method, revenue is recognized based on costs incurred on the project relative to the total estimated costs of the project.

As discussed above for the Treatment and Services Segments, the Company’ revenue is generally recognized using the input method. This method of measuring progress provides a faithful depiction of the transfer to goods and services because the costs incurred are expected to be substantially proportionate to the Company’s satisfaction of the performance obligation.

Contracts with our customers within our Treatment Segment are generally short term with an original expected length of one year or less. For the Services Segment, contracts with our customers generally have original terms ranging from one year or less to approximately twenty-four months. The Company’s contracts and subcontracts relating to activities at governmental sites generally allow for termination for convenience at any time at the government’s option without payment of a substantial penalty.

Variable Consideration

The Company’s contracts generally do not give rise to variable consideration. However, from time to time, the Company may submit requests for equitable adjustments under certain of its government contracts for price or other modifications that are determined to be variable consideration. The Company estimates the amount of variable consideration to include in the estimated transaction price based on historical experience with government contracts, anticipated performance and management’s best judgment at the time and to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. These estimates are re-assessed each reporting period as required.

Significant Payment Terms

Invoicing is based on schedules established in customer contracts. Payment terms vary by customers but are generally established at 30 days from invoicing.

Incremental Costs to Obtain a Contract

Costs incurred to obtain contracts with our customers are immaterial and as a result, the Company expenses (within selling, general and administration expenses (“SG&A”)) incremental costs incurred in obtaining contracts with our customer as incurred.

Remaining Performance Obligations

The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

Within our Services Segment, there are service contracts which provide that the Company has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date. For those contracts, the Company has utilized the practical expedient in ASC 606-10-55-18, which allows the Company to recognize revenue in the amount for which we have the right to invoice; accordingly, the Company does not disclose the value of remaining performance obligations for those contracts.

The Company’s contracts and subcontracts relating to activities at governmental sites generally allow for termination for convenience at any time at the government’s option without payment of a substantial penalty. The Company does not disclose remaining performance obligations on these contracts.

Stock-Based Compensation

Stock-based compensation granted to employees are accounted for in accordance with ASC 718, “Compensation – Stock Compensation.” Stock-based payment transactions for acquiring goods and services from nonemployees are also accounted for under ASC 718. ASC 718 requires stock-based payments to employees and nonemployees, including grant of options, to be recognized in the Statement of Operations based on their fair values. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards which requires subjective assumptions. Assumptions used to estimate the fair value of stock-based awards include the exercise price of the award, the expected term, the expected volatility of our stock over the stock-based award’s expected term, the risk-free interest rate over the award’s expected term, and the expected annual dividend yield. The Company accounts for forfeitures when they occur.

Comprehensive Income (Loss)

The components of comprehensive income (loss) are net income (loss) and the effects of foreign currency translation adjustments.

Income (Loss) Per Share

Basic income (loss) per share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted income (loss) per share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. In periods where they are anti-dilutive, such amounts are excluded from the calculations of dilutive earnings per share. Income (loss) per share is computed separately for each period presented.

Fair Value of Financial Instruments

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:

Level 1*—*Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2*—*Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3*—*Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Financial instruments include cash (Level 1), accounts receivable, accounts payable, and debt obligations (Level 3). Credit is extended to customers based on an evaluation of a customer’s financial condition and, generally, collateral is not required. As of December 31, 2023, and December 31, 2022, the fair value of the Company’s financial instruments approximated their carrying values. The fair value of the Company’s revolving credit, term loans and capital loan approximate its carrying value due to the variable interest rate.

Recently Issued Accounting Standards – Not Yet Adopted

In August 2023, the FASB issued ASU 2023-05, “Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement.” ASU 2023-05 applies to the formation of a “joint venture” or a “corporate joint venture” and requires a joint venture to initially measure all contributions received upon its formation at fair value. The guidance does not impact accounting by the venturers. The new guidance is applicable to joint venture entities with a formation date on or after January 1, 2025 on a prospective basis. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which expands reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the CODM and included within each reported measure of a segment’s profit or loss. The ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. Additionally, ASU 2023-07 requires all segment profit or loss and assets disclosures to be provided on an annual and interim basis. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted, and should be applied on a retrospective basis. ASU 2023-07 will be effective for the Company’s financial statements for the year ended December 31, 2024. This ASU will not have impact on the Company’s consolidated financial condition or results of operations. The Company is evaluating the impact to the related segment reporting disclosures.

In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. This ASU will not have impact on the Company’s consolidated financial condition or results of operations. The Company is evaluating the impact to its income taxes reporting disclosures.

NOTE 3

REVENUE

Disaggregation of Revenue

In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of our services and provides meaningful disaggregation of each business segment’s results of operations. The following tables present further disaggregation of our revenues by different categories for our Services and Treatment Segments:

Contract Balances

The timing of revenue recognition and billings results in unbilled receivables (contract assets). The Company’s contract liabilities consist of deferred revenues which represent advance payment from customers in advance of the completion of our performance obligation. The following table represents changes in our contract asset and contract liabilities balances: Our deferred revenue as of December 31, 2023, included a remaining prepayment of approximately $2,031,000 by a certain customer for a waste treatment project which is expected to be completed in 2024.

During the twelve-months ended December 31, 2023, and 2022, the Company recognized revenue of $6,759,000 and $6,576,000, respectively, related to untreated waste that was in the Company’s control as of the beginning of each respective year. Revenue recognized in each period relates to performance obligations satisfied within the respective period.

NOTE 4

LEASES

The components of lease cost for the Company’s leases were as follows (in thousands):

The weighted average remaining lease term and the weighted average discount rate for operating and finance leases at December 31, 2023, were:

The weighted average remaining lease term and the weighted average discount rate for operating and finance leases at December 31, 2022, were:

The following table reconciles the undiscounted cash flows for the operating and finance leases as of December 31, 2023, to the operating and finance lease liabilities recorded on the balance sheet (in thousands):

Supplemental cash flow and other information related to our leases were as follows (in thousands):

NOTE 5

PERMIT AND OTHER INTANGIBLE ASSETS

The following table summarizes changes in the carrying value of permits, which exist only in our Treatment Segment.

The following table summarizes information relating to the Company’s definite-lived intangible assets:

The intangible assets noted above were amortized on a straight-line basis over their useful lives with the exception of customer relationships which were amortized using an accelerated method.

The following table summarizes the expected amortization over the next five years for our definite-lived intangible assets:

Amortization expense recorded for definite-lived intangible assets was approximately $198,000 and $237,000, for the years ended December 31, 2023, and 2022, respectively.

NOTE 6

CAPITAL STOCK, STOCK PLANS, WARRANTS AND STOCK BASED COMPENSATION

Stock Option Plans

The Company’s 2003 Outside Directors Stock Plan, as amended (the “2003 Plan”) provides for the grant of Non-Qualified Stock Options (“NQSOs”) to member of the Company’s Board of Directors (the “Board”) who is not an employee of the Company or its subsidiaries (“Eligible Director”). The 2003 Plan also provides for the grant of an NQSO to purchase up to 10,000 shares of the Company’s Common Stock for each Eligible Director upon each re-election to the Board, and the grant of an NQSO to purchase up to 20,000 shares of the Company’s Common Stock upon initial election. NQSOs granted prior to July 20, 2021 have a vesting period ofsix months from the date of grant and a term of 10 years, with an exercise price equal to the closing trade price on the date prior to grant date. NQSOs granted on and after July 20, 2021 vest 25% per year, beginning on the first anniversary date of the grant and also have a term of 10 years, with an exercise price equal to the closing trade price on the date prior to grant date. Additionally, the 2003 Plan provides for the issuance to each Eligible Director a number of shares of the Company’s Common Stock in lieu of 65% or 100% (based on option elected by each director) of the fee payable to the Eligible Director for services rendered as a member of the Board. The number of shares issued is determined at 75% of the market value as defined in the plan (the Company recognizes 100% of the market value of the shares issued). At December 31, 2023, the 2003 Plan had available for issuance 318,680 shares.

The Company’s 2017 Stock Option Plan, as amended (the “2017 Plan”), authorizes the grant of options to officers and employees of the Company, including any employee who is also a member of the Board, as well as to consultants of the Company. The 2017 Plan authorizes an aggregate grant of 1,740,000 NQSOs and Incentive Stock Options (“ISOs”), which included an increase of 600,000 additional authorized shares approved by the Company’s Stockholders at the Company’s 2023 Annual Meeting of Stockholders held on July 20, 2023. Consultants of the Company can only be granted NQSOs. The term of each stock option granted under the 2017 Plan shall be fixed by the Compensation and Stock Option Committee (the “Compensation Committee”), but no stock options will be exercisable more than ten years after the grant date, or in the case of an ISO granted to a 10% stockholder, five years after the grant date. The exercise price of any ISO granted under the 2017 Plan to an individual who is not a 10% stockholder at the time of the grant shall not be less than the fair market value of the shares at the time of the grant, and the exercise price of any ISO granted to a 10% stockholder shall not be less than 110% of the fair market value at the time of grant. The exercise price of any NQSOs granted under the plan shall not be less than the fair market value of the shares at the time of grant. At December 31, 2023, the 2017 Plan had available for issuance 720,500 shares.

Stock Options to Employees and Outside Director

On January 19, 2023, the Company granted ISOs to certain employees under the 2017 Plan, for the purchase of up to an aggregate 295,000 shares of the Company’s Common Stock. The total ISOs granted included an ISO for each of the Company’s executive officers for the purchase set forth in his respective ISO Agreement, as follows:70,000 shares for the Chief Executive Officer (“CEO”); 40,000 shares for the Chief Financial Officer (“CFO”);30,000 shares for the Executive Vice President (“EVP”) of Strategic Initiatives;30,000 shares for the EVP of Waste Treatment Operations; and 30,000 shares for the EVP of Nuclear and Technical Services. Each of the ISOs granted has a contractual term ofsix years withone-fifth yearly vesting over a five-year period. The exercise price of each ISO is $3.95 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

On July 20, 2023, the Company issued a NQSO to each of the Company’s seven reelected outside (non-management) directors under the 2003 Plan, for the purchase of up to 10,000 shares of the Company’s Common Stock. The CEO and EVP of Strategic Initiatives, each an executive officer of the Company as well as a director, were not eligible to receive an option under the 2003 Plan. Each NQSO granted is for a contractual term often years withone-fourth vesting annually over a four-year period. The exercise price of each NQSO is $9.81 per share, which was equal to the fair market value of the Company’s Common Stock on the day preceding the grant date, in accordance with the 2003 Plan.

On October 19, 2023, the Company granted an ISO to an employee under the 2017 Plan, for the purchase of up to 5,000 shares of the Company’s Common Stock. The ISO granted is for a contractual term ofsix years withone-fifth vesting annually over a five-year period. The exercise price of the ISO is $9.62 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

On July 21, 2022, the Company issued a NQSO to each of the Company’s seven reelected outside directors under the 2003 Plan, for the purchase of up to 10,000 shares of the Company’s Common Stock. The Company’s EVP of Strategic Initiatives and also a member of the Company’s Board, was not eligible to receive an option under the 2003 Plan as an employee of the Company. Each NQSO granted is for a contractual term often years withone-fourth vesting annually over a four-year period. The exercise price of the NQSO is $5.15 per share, which was equal to the fair market value of the Company’s Common Stock the day preceding the grant date, pursuant to the 2003 Plan.

On July 21, 2022, the Company granted ISOs to certain employees under the 2017 Plan, for the purchase of up to an aggregate of 24,000 shares of the Company’s Common Stock. Each ISO granted is for a contractual term ofsix years withone-fifth vesting annually over a five-year period. The exercise price of the ISO is $5.34 per share, which was equal to the fair market value of the Company’s Common Stock on the date of grant.

During 2023, the Company issued an aggregate 185,549 shares of its Common Stock from cashless exercises of options for the purchases of 280,000 shares of the Company’s Common Stock, at exercise prices ranging from $3.60 per share to $7.005 per share. Additionally, the Company issued 40,400 shares of its Common Stock from the cash exercise of options for the purchase of 40,400 shares of the Company’s Common Stock, at exercise prices ranging from at $2.785 per share to $7.005 per share resulting in proceeds of approximately $164,000. Income tax benefit associated with stock options exercised with cash during 2023 was approximately $25,000.

During 2022, the Company issued 16,526 shares of its Common Stock from a cashless exercise of an option for the purchase of 50,000 shares of the Company’s Common Stock at $3.97 per share. Additionally, the Company issued 2,400 shares of its Common Stock from the exercise of an option for the purchase of 2,400 shares of the Company’s Common Stock at $5.50 per share resulting in proceeds of approximately $13,000. Income tax benefit associated with the stock option exercised with cash during 2022 was approximately $3,000.

The Company estimates fair value of stock options using the Black-Scholes valuation model. Assumptions used to estimate the fair value of stock options granted include the exercise price of the award, the expected term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The fair value of the options granted during 2023 and 2022 and the related assumptions used in the Black-Scholes option model used to value the options granted were as follows:

The following table summarizes stock-based compensation recognized (within SG&A expenses) for fiscal years 2023 and 2022.

Income tax benefits associated with stock-based compensation expense were approximately $45,000 and $23,000, respectively, for the years ended December 31, 2023, and 2022.

At December 31, 2023, the Company had approximately $1,809,000 of total unrecognized compensation costs related to unvested options for employee and directors. The weighted average period over which the unrecognized compensation costs are expected to be recognized is approximately 3.2 years.

Stock Options to Consultant

On July 27, 2017, the Company granted a NQSO from the 2017 Plan to Robert Ferguson, for the purchase of up to 100,000 shares of the Company’s Common Stock (“Ferguson Stock Option”), at an exercise price of $3.65 per share, which was the fair market value of the Company’s Common Stock on the date of grant. The Ferguson Stock Option was granted in connection with Mr. Ferguson’s work as a consultant to the Company’s Test Bed Initiative (“TBI”) at our PFNWR facility. The term of the Ferguson Stock Option was seven years from the grant date, with vesting subject to the achievement of three separate milestones by certain dates, the achievement of which would entitle Mr. Ferguson to purchase, respectively,10,000,30,000, and 60,000 shares of the Company’s Common Stock issuable under the Ferguson Stock Option. Mr. Ferguson previously achieved the first milestone during the first vesting period. Upon the death of Mr. Ferguson, the balance of the shares issuable under the Ferguson Stock Option was forfeited in accordance with the terms of the option.

Summary of Stock Option Plans

The summary of the Company’s total plans as of December 31, 2023, and 2022, and changes during the period then ended are presented as follows:

The summary of the Company’s nonvested options as of December 31, 2023, and changes during the period then ended are presented as follows:

Warrant

In connection with a $2,500,000 loan that the Company received from Mr. Robert Ferguson (the “Ferguson Loan”) on April 1, 2019, the Company issued a warrant to Mr. Ferguson (the “Ferguson Warrant”) for the purchase of up to 60,000 shares of our Common Stock at an exercise price of $3.51 per share. The Ferguson Loan was paid in full in December 2020. Upon Mr. Ferguson’s death, the Ferguson Warrant was transferred equally to Mr. Ferguson’s two heirs with each holding a Warrant for the purchase of up to 30,000 shares of the Company’s Common Stock, as permitted under the Ferguson Warrant. On December 12, 2023, one of Warrant was exercised by Mr. Ferguson’s heir for the purchase of 30,000 shares of the Company’s Common Stock, resulting in proceeds received by the Company of approximately $105,000. As of December 31, 2023, the remaining Warrant remains outstanding and will expire on April 1, 2024.

Common Stock Issued for Services

The Company issued a total of 65,854 and 90,920 shares of our Common Stock in 2023 and 2022, respectively, under our 2003 Plan to our outside directors as compensation for serving on our Board. As a member of the Board, each director elects to receive either 65% or 100% of the director’s fee in shares of our Common Stock. The number of shares received is calculated based on 75% of the fair market value of our Common Stock determined on the business day immediately preceding the date that the quarterly fee is due. The balance of each director’s fee, if any, is payable in cash. The Company recorded approximately $477,000 in each of the years 2023 and 2022 in compensation expense (included in SG&A expenses) for the for the portion of director fees earned in the Company’s Common Stock.

Shares Reserved

As of December 31, 2023, the Company has reserved approximately 994,500 shares of our Common Stock for future issuance under all of the option arrangements.

NOTE 7

INCOME (LOSS) PER SHARE

The following table reconciles the income (loss) and average share amounts used to compute both basic and diluted income (loss) per share:

NOTE 8

DISCONTINUED OPERATIONS

The Company’s discontinued operations consist of all our subsidiaries included in our Industrial Segment which encompasses subsidiaries divested in 2011 and earlier, as well as three previously closed locations.

The Company incurred losses from discontinued operations of $433,000 (net of tax benefit of $117,000) and $605,000 (net of tax benefit of $199,000) for the years ended December 31, 2023, and 2022, respectively. In 2022, the Company incurred additional costs in connection with management of administrative and regulatory matters for the Company’s remediation projects as discussed below.

The following table presents the major class of assets of discontinued operations as of December 31, 2023, and December 31, 2022. No assets and liabilities were held for sale at each of the periods noted.

Environmental Liabilities

The Company has three remediation projects, which are currently in progress relating to our PFD, PFM and PFSG subsidiaries, all within our discontinued operations. The Company divested PFD in 2008; however, the environmental liability of PFD was retained by the Company upon the divestiture of PFD. These remediation projects principally entail the removal/remediation of contaminated soil and, in most cases, the remediation of surrounding ground water. The remediation activities are closely reviewed and monitored by the applicable state regulators.

As of December 31, 2023, the Company had total accrued environmental remediation liabilities of $845,000, a decrease of $16,000 from the December 31, 2022 balance of $861,000. The decrease represents payments for remediation projects. As of December 31, 2023, $61,000 of the total accrued environmental liabilities was recorded as current.

The current and long-term accrued environmental liabilities as of December 31, 2023, are summarized as follows (in thousands).

NOTE 9

LONG - TERM DEBT

Long-term debt consists of the following as of December 31, 2023, and December 31, 2022:

Revolving Credit and Term Loan Agreement

The Company entered into a Second Amended and Restated Revolving Credit, Term Loan and Security Agreement, dated May 8, 2020 (“Loan Agreement”), with PNC National Association (“PNC” and “lender”), acting as agent and lender. The Loan Agreement, as amended from time to time and including the March 21, 2023, and the July 31, 2023, amendments as discussed below, provides the Company with the following credit facility with a maturity date of May 15, 2027: (a) up to $12,500,000 revolving credit (“revolving credit”), with the maximum that the Company can borrow under the revolving credit based on a percentage of eligible receivables (as defined) at any one time reduced by outstanding standby letters of credit and borrowing reductions that the Company’s lender may impose from time to time; (b) a term loan (“Term Loan 1”) of approximately $1,742,000, requiring monthly installments of $35,547; (c) a term loan (“Term Loan 2”) of $2,500,000, requiring monthly installments of $41,667; and (d) a capital expenditure line (“Capital Line”) of up to $1,000,000 with advances on the line, subject to certain limitations, permitted for up to twelve months starting May 4, 2021 (the “Borrowing Period”), with interest only payable on advances during the Borrowing Period. Amounts advanced under the Capital Line at the end of the Borrowing Period totaled approximately $524,000, requiring monthly installments of principal of approximately $8,700 plus interest, commencing June 1, 2022.

On March 21, 2023, the Company entered into an amendment to its Loan Agreement, as amended, with its lender which provided, among other things, the following:

In connection with the March 21, 2023, amendment, the Company paid its lender a fee of $25,000 which is being amortized over the remaining term of the Loan Agreement, as amended, as interest expense-financing fees.

On July 31, 2023, the Company entered into a further amendment to its Loan Agreement, as amended, which provided, among other things, the following:

At maturity of the Loan Agreement, as amended, any unpaid principal balance plus interest, if any, will become due.

Pursuant to the amendment dated July 31, 2023, as discussed above, the Company agreed to pay PNC 1.0% of the total financing under the Loan Agreement, as amended, in the event the Company pays off its obligations on or before July 31, 2024, and 0.5% of the total financing if the Company pays off its obligations after July 31, 2024, to and including July 31, 2025. No early termination fee shall apply if the Company pays off its obligations under Loan Agreement, as amended, after July 31, 2025.

In connection with the amendment dated July 31, 2023, the Company paid its lender a fee of $100,000 which is being amortized over the remaining term of the Loan Agreement, as amended, as interest expense-financing fees.

Pursuant to the Loan Agreement, as amended, the annual rate of interest due on the revolving credit is at prime plus 2% or SOFR plus 3.00% plus an SOFR Adjustment applicable for an interest period selected by the Company. The annual rate of interest due on Term Loan 1 and the Capital Line is at prime plus 2.50% or SOFR plus 3.50% plus an SOFR Adjustment applicable for an interest period selected by the Company. SOFR Adjustment rates of 0.10% and 0.15% are applicable for a one-month interest period and three-month period, respectively, that may be selected by the Company. See payment of annual rate of interest due on Term Loan 2 as provided under the amendment dated July 31, 2023.

The Company’s credit facility under its Loan Agreement, as amended, with PNC contains certain financial covenants, along with customary representations and warranties. A breach of any of these financial covenants, unless waived by PNC, could result in a default under our credit facility allowing our lender to immediately require the repayment of all outstanding debt under our credit facility and terminate all commitments to extend further credit. The Company’s Loan Agreement, as amended, prohibits us from paying cash dividends on our Common Stock without prior approval from our lender. The Company was not required to perform testing of the FCCR requirement in the first quarter of 2023 pursuant to the March 21, 2023, amendment as discussed above. It otherwise met all of its other financial covenant requirements. The Company met all of its covenant requirements in each of the second to fourth quarters of 2023.

At December 31, 2023, the borrowing availability under the Company’s credit facility was approximately $10,622,000 which included our cash (deposited with the Company’s lender) and was based on our eligible receivables and is net of approximately $3,950,000 in outstanding standby letters of credit and net of the $750,000 indefinite reduction in borrowing availability imposed by the Company’s lender pursuant to the amendment dated July 31, 2023, as discussed above.

The following table details the amount of the maturities of long-term debt maturing in future years as of December 31, 2023 (excludes unamortized debt issuance costs of $170,000).

NOTE 10

EMPLOYEE RETENTION CREDIT (“ERC”)

The Coronavirus Aid, Relief and Economic Securities Act (“CARES Act”), which was enacted on March 27, 2020, provided an Employee Retention Credit (“ERC”) for qualifying businesses keeping employees on their payroll during the COVID-19 pandemic. The ERC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERC availability and guidelines under the CARES Act. Following these amendments, the Company determined that it was eligible for the ERC, and as a result of the foregoing legislations, was eligible to claim a refundable tax credit against the Company’s share of certain payroll taxes equal to 70% of the qualified wages paid to employees between July 1, 2021 and September 30, 2021. Qualified wages were limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERC per employee of $7,000 per calendar quarter in 2021. For purposes of the amended ERC, an eligible employer was defined as having experienced a significant (20% or more) decline in gross receipts during one or more of the first three 2021 calendar quarters when compared to 2019.

During the third quarter of 2022, the Company determined it was eligible for the ERC and amended its third quarter 2021 employer payroll tax filings claiming a refund from the U.S. Treasury in the amount of approximately $1,975,000. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, the Company accounted for the ERC by analogy to International Accounting Standard (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance.” In accordance with IAS 20, management determined it had reasonable assurance for receipt of the ERC and recorded the expected refund as other income (within “Other income (expense)”) on the Company’s Consolidated Statements of Operations and other receivables (within “Prepaid and other assets”) on the Company’s Consolidated Balance Sheets. On March 30, 2023, the Company received the ERC refund of $1,975,000 and approximately $60,000 in interest (recorded within “Interest Income” on the Company’s Consolidated Statements of Operations for the quarter ended March 31, 2023), totaling approximately $2,035,000.

NOTE 11

ACCRUED EXPENSES** **

Accrued expenses include the following (in thousands) at December 31:

Accrued expenses for 2023 included a total of approximately $750,000 in compensation expenses accrued under the 2023 Management Incentive Plans (“MIPs”) for our executives (See “Note 18 – Employment Agreements and MIPs” for further discussion of the 2023 MIPs) in addition to a remaining $25,000 in discretionary bonus approved by the Company’s Compensation Committee payable to the Company’s EVP of Nuclear and Technical Services.

NOTE 12

ACCRUED CLOSURE COSTS AND ARO

Accrued closure costs represent our estimated environmental liability to clean up our fixed-based regulated facilities as required by our permits, in the event of closure. Changes to reported closure liabilities (current and long-term) for the years ended December 31, 2023, and 2022, were as follows:

In 2022, the Company recorded a total of approximately $1,339,000 in additional estimated closure liabilities of which approximately $465,000 (within long-term) was recorded in connection with the footprint expansion at one of our facilities and an update to a processing enclosure area at another facility. The remaining additional closure liabilities was recorded for our EWOC facility for decommissioning activities due to changes in estimated closure costs.

As of December 31, 2023, and December 31, 2022, the current portion of the closure liabilities totaled approximately $79,000 and $682,000, respectively, which reflect closure liabilities for our EWOC facility. The spending made in each of the years 2023 and 2022 was primarily for our EWOC facility.

The reported closure asset or ARO, is reported as a component of “Net Property and equipment” in the Consolidated Balance Sheets as of December 31, 2023, and 2022 with the following activity for the years ended December 31, 2023, and 2022:

The addition to ARO in 2022 reflects closure obligations as discussed above.

NOTE 13

INCOME TAXES

The components of income (loss) before income tax expense (benefit) by jurisdiction for continuing operations for the years ended December 31, consisted of the following (in thousands):

The components of current and deferred federal and state income tax expense (benefit) for continuing operations for the years ended December 31, consisted of the following (in thousands):

An overall reconciliation between the expected tax expense (benefit) using the federal statutory rate of 21% for each of the years ended 2023 and 2022 and the expense (benefit) for income taxes from continuing operations as reported in the accompanying Consolidated Statement of Operations is provided below (in thousands).

The global intangible low-taxed income (“GILTI”) provisions under the Tax Cuts and Jobs Act of 2017 (the “TCJA”) require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has elected to account for GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the years ended December 31, 2023 and 2022. As the Canada and United Kingdom foreign subsidiaries are in loss positions for 2023, no GILTI inclusion is expected for these entities for the current year.

The Company had temporary differences and net operating loss carry forwards from both our continuing and discontinued operations, which gave rise to deferred tax assets as of December 31, 2023, and 2022 as follows (in thousands):

As of December 31, 2023, the Company assessed whether its deferred tax asset will more likely than not to be realized. This assessment included both positive and negative available evidences, which included the Company’s current contracts, cumulative loss, future reversal of existing taxable differences, and overall prospect of future business and earnings. Based on the weight of these available evidences, the Company concluded that it will more likely than not utilize its Federal and certain state net operating losses.

The Company has estimated net operating loss carryforwards (“NOLs”) for federal and state income tax purposes of approximately $19,450,000 and $72,859,000, respectively, as of December 31, 2023. These NOLs can be carried forward and applied against future taxable income, if any, andexpire in various amounts starting in 2023. All of our federal NOLs were generated after December 31, 2017 and thus do not expire.

The Company accounts for uncertainties in income tax pursuant to ASC 740. A reconciliation of the beginning and ending amount of our recognized tax expense is summarized as follows (in thousands):

The tax years 2020 through 2022 remain open to examination by taxing authorities in the jurisdictions in which the Company operates.

The Company had $76,000 and $0 federal income tax payable for the years ended December 31, 2023 and 2022, respectively.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) amended Section 174 to eliminate current-year deductibility of research and experimentation (“R&E”) expenditures and software development costs (collectively, “R&E expenditures”) and instead require taxpayers to charge their R&E expenditures to a capital account amortized over five years (15 years for expenditures attributable to R&E activity performed outside the United States). For each tax year 2023 and 2022, the Company has capitalized $2,059,000 of research and development expenses. While Management believes the estimate for 2023 to be materially accurate, the Company plans to complete a formal IRC Section 174 analysis in advance of filing the tax return for the year ended December 31, 2023.

NOTE 14

COMMITMENTS AND CONTINGENCIES

Hazardous Waste

In connection with our waste management services, the Company processes hazardous, non-hazardous, low-level radioactive and mixed (containing both hazardous and low-level radioactive) waste, which we transport to our own, or other, facilities for destruction or disposal. As a result of disposing of hazardous substances, in the event any cleanup is required at the disposal site, the Company could be a potentially responsible party for the costs of the cleanup notwithstanding any absence of fault on our part.

Legal Matters

In the normal course of conducting our business, the Company may be involved in various litigation. The Company is not a party to any litigation or governmental proceeding which our management believes could result in any judgments or fines against us that would have a material adverse effect on our financial position, liquidity or results of future operations.

Tetra Tech EC, Inc. (“Tetra Tech”)

During July 2020, Tetra Tech EC, Inc. (“Tetra Tech”) filed a complaint in the U.S. District Court for the Northern District of California (the “Court”) against CH2M Hill, Inc. (“CH2M”) and four subcontractors of CH2M, including the Company (“Defendants”). The complaint alleges various claims, including a claim for negligence, negligent misrepresentation, equitable indemnification and related business claims against all Defendants related to alleged damages suffered by Tetra Tech in respect of certain draft reports prepared by Defendants at the request of the U.S. Navy as part of an investigation and review of certain whistleblower complaints about Tetra Tech’s environmental restoration at the Hunter’s Point Naval Shipyard in San Francisco.

CH2M was hired by the Navy in 2016 to review Tetra Tech’s work. CH2M subcontracted with environmental consulting and cleanup firms Battelle Memorial Institute, Cabrera Services, Inc., SC&A, Inc. and the Company to assist with the review, according to the complaint.

The Company’s insurance carrier is providing a defense on our behalf in connection with this lawsuit, subject to a $100,000 self-insured retention and the terms and limitations contained in the insurance policy.

The majority of Tetra Tech’s claims have been dismissed by the Court. Remaining claims include: (1) intentional interference with contractual relations; and (2) inducing a breach of contract. The Company continues to believe it has no liability exposure to Tetra Tech.

Insurance

The Company has a 25-year finite risk insurance policy entered into in June 2003 (“2003 Closure Policy”) with AIG, which provides financial assurance to the applicable states for our permitted facilities in the event of unforeseen closure. The 2003 Closure Policy, as amended, provides for a maximum allowable coverage of $28,177,000 which includes available capacity to allow for annual inflation and other performance and surety bond requirements. Total coverage under the 2003 Closure Policy, as amended, was $22,461,000 at December 31, 2023. As of December 31, 2023, and December 31, 2022, finite risk sinking funds contributed by the Company related to the 2003 Closure Policy which is included in other long term assets on the accompanying Consolidated Balance Sheets totaled $12,074,000 and $11,570,000, respectively, which included interest earned of $2,603,000 and $2,099,000 on the finite risk sinking funds as of December 31, 2023 and December 31, 2022, respectively. Interest income for the year ended 2023 and 2022 was approximately $504,000 and $99,000, respectively. If the Company so elects, AIG is obligated to pay the Company an amount equal to 100% of the finite risk sinking fund account balance in return for complete release of liability from both the Company and any applicable regulatory agency using this policy as an instrument to comply with financial assurance requirements.

Perma-Fix Canada Inc. (“PF Canada”)

During the fourth quarter of 2021, PF Canada received a Notice of Termination (“NOT”) from CNL on a Task Order Agreement (“TOA”) that PF Canada entered into with CNL in May 2019 for remediation work within Ontario, Canada (“Agreement”). The NOT was received after work under the TOA was substantially completed and work under the TOA has since been completed. CNL may terminate the TOA at any time for convenience. As of December 31, 2023, PF Canada has approximately $2,389,000 in unpaid receivables due from CNL as a result of work performed under the TOA. CNL and PF Canada have reached a settlement agreement on payment of the aforementioned receivables to PF Canada by CNL, subject to certain conditions/terms precedents being met, including release of certain liens. (see “Note 19 - Subsequent Event – PF Canada” for a discussion of a partial payment made by CNL in January 2024 on the receivables and the remaining receivables to be paid by CNL).

Letter of Credits and Bonding Requirements

From time to time, the Company is required to post standby letters of credit and various bonds to support contractual obligations to customers and other obligations, including facility closures. At December 31, 2023, the total amount of standby letters of credit outstanding was approximately $3,950,000 and the total amount of bonds outstanding was approximately $36,674,000.

NOTE 15

PROFIT SHARING PLAN

The Company adopted a 401(k) Plan in 1992, which is intended to comply with Section 401 of the Internal Revenue Code and the provisions of the Employee Retirement Income Security Act of 1974. All full-time employees who have attained the age of 18 are eligible to participate in the 401(k) Plan. Eligibility is immediate upon employment but enrollment is only allowed during four quarterly open periods of January 1, April 1, July 1, and October 1. Participating employees may make annual pretax contributions to their accounts up to 100% of their compensation, up to a maximum amount as limited by law. The Company, at its discretion, may make matching contributions of 25% based on the employee’s elective contributions. Company contributions vest over a period offive years. In 2023 and 2022, the Company contributed approximately $576,000 and $575,000 in 401(k) matching funds, respectively.

NOTE 16

RELATED PARTY TRANSACTIONS

David Centofanti serves as our Vice President of Information Systems. For such position, he received annual compensation of $191,000 and $187,000 for 2023 and 2022, respectively. David Centofanti is the son of our EVP of Strategic Initiatives and a Board member.

NOTE 17

SEGMENT REPORTING

In accordance with ASC 280, “Segment Reporting”, we define an operating segment as a business activity:

We havetwo reporting segments, consisting of the Treatment and Services Segments, which are based on a service offering approach. Our reporting segments exclude our corporate headquarter, business center and our discontinued operations (see “Note 8 – Discontinued Operations”) which do not generate revenues.

The table below shows certain financial information of our reporting segments as of and for the years ended December 31, 2023, and 2022 (in thousands).

Segment Reporting as of and for the year ended December 31, 2023

Segment Reporting as of and for the year ended December 31, 2022

NOTE 18

EMPLOYEMENT AGREEMENTS AND MIPS

Employment Agreements

On April 20, 2023, the Company entered into employment agreements with each of its executive officers: Mark Duff, President and CEO; Ben Naccarato, EVP and CFO; Dr. Louis Centofanti, EVP of Strategic Initiatives; Andrew Lombardo, EVP of Nuclear and Technical Services; and Richard Grondin, EVP of Waste Treatment Operations (collectively the “New Employment Agreements” and each, individually, the “New Employment Agreement”). The Company had previously entered into employment agreements with each of the aforementioned executive officers on July 22, 2020, all five of which agreements were due to expire on July 22, 2023, but which were terminated effective April 20, 2023, upon the execution of the New Employment Agreements.

Each of the New Employment Agreements are substantially identical except for compensation. Under the New Employment Agreements, each of these executive officers is provided an annual salary, which annual salary may be increased from time to time, but not reduced, as determined by the Compensation Committee. In addition, each of these executive officers is entitled to participate in the Company’s broad-based benefits plans and to certain performance compensation payable under separate Management Incentive Plan (“MIP”) as approved by the Company’s Compensation Committee and the Company’s Board.

Each of the New Employment Agreements is effective for three years from April 20, 2023 (the “Initial Term”) unless earlier terminated by the Company or by the executive officer. At the end of the Initial Term of each New Employment Agreement, each New Employment Agreement will automatically be extended for one additional year, unless at least six months prior to the expiration of the Initial Term, the Company or the executive officer provides written notice not to extend the terms of the New Employment Agreement. Mr. Andrew Lombardo retired from the position of EVP of Nuclear and Technical Services effective January 1, 2024. Upon Mr. Lombardo’s retirement from the position of EVP of Nuclear and Technical Services, he no longer was an executive officer of the Company and his employment agreement dated April 20, 2023, was terminated effective January 1, 2024. Mr. Lombardo remains employed by the Company at a reduced capacity, and assists with the transition of his former responsibilities as well as contributing to certain business development matters.

Pursuant to the New Employment Agreements, if the executive officer’s employment is terminated due to death, disability or for cause (as defined in the agreements), the Company will pay to the executive officer or to his estate an amount equal to the sum of any unpaid base salary and accrued unused vacation time through the date of termination and any benefits due to the executive officer under any employee benefit plan (the “Accrued Amounts”) plus any performance compensation payable pursuant to the MIP with respect to the fiscal year immediately preceding the date of termination. In the event that an executive officer’s employment is terminated due to death, the Company will also pay a lump-sum payment (the “Cash Medical Continuation Benefit”) equal to eighteen times the monthly premium that would be required to be paid, pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), to continue group health coverage for the executive officer’s eligible covered dependents in effect on the date of the executive officer’s termination of employment, based on the premium for the first month of COBRA coverage. Such cash payment will be taxable and will be made regardless of whether the executive officer’s eligible covered dependents elect COBRA continuation coverage.

If the executive officer terminates his employment for “good reason” (as defined in the agreements) or is terminated by the Company without cause (including any such termination for “good reason” or without cause within 24 months after a Change in Control (as defined in the agreements), the Company will pay the executive officer Accrued Amounts, (a) two years of full base salary, plus (b) (i) two times the performance compensation (under the executive officer’s MIP) earned with respect to the fiscal year immediately preceding the date of termination provided the performance compensation earned with respect to the fiscal year immediately preceding the date of termination has not yet been paid, or (ii) if performance compensation earned with respect to the fiscal year immediately preceding the date of termination has already been paid to the executive officer, the executive officer will be paid an additional year of the performance compensation earned with respect to the fiscal year immediately preceding the date of termination, and (c) the Cash Medical Continuation Benefit. If the executive officer terminates his employment for a reason other than for good reason, the Company will pay to the executive officer an amount equal to the Accrued Amounts plus any performance compensation payable pursuant to the MIP applicable to such executive officer.

Additionally, in the event of a Change in Control (as defined in the agreements), all outstanding stock options to purchase common stock held by the executive officer will immediately become exercisable in full commencing on the date of termination through the original term of the options. In the event of the death of an executive officer, all outstanding stock options to purchase common stock held by the executive officer will immediately become exercisable in full commencing on the date of death, with such options exercisable for the lesser of the original option term or twelve months from the date of the executive officer’s death. In the event an executive officer terminates his employment for “good reason” (as defined in the agreements) or is terminated by the Company without cause, all outstanding stock options to purchase common stock held by the officer will immediately become exercisable in full commencing on the date of termination, with such options exercisable for the lesser of the original option term or within 60 days from the date of the executive officer’s date of termination. Severance benefits payable with respect to a termination (other than Accrued Amounts) shall not be payable until the termination constitutes a “separation from service” (as defined under Treasury Regulation Section 1.409A-1(h)).

MIPs

On January 19, 2023, the Board and the Compensation Committee approved individual MIP for the calendar year 2023 for each of the Company’s executive officers. Each MIP was effective January 1, 2023, and applicable for year 2023. Each MIP provided guidelines for the calculation of annual cash incentive-based compensation, subject to Compensation Committee oversight and modification. The performance compensation under each of the MIPs was based upon meeting certain of the Company’s separate target objectives during 2023. The total potential target performance compensation payable ranged from 25% to 150% of the 2023 base salary for the CEO ($93,717 to $562,304),25% to 100% of the 2023 base salary for the CFO ($76,193 to $304,772),25% to 100% of the 2023 base salary for the EVP of Strategic Initiatives ($63,495 to $253,980),25% to 100% of the 2023 base salary for the EVP of Nuclear and Technical Services ($76,193 to $304,772), and 25% to 100% ($65,308 to $261,233) of the 2023 base salary for the EVP of Waste Treatment Operations. Total compensation earned under the five 2023 MIPs were approximately $750,000, which is to be paid on or about 90 after year-end, or sooner, based on the Company’s filing of its 2023 Form 10-K. As disclosed above, Mr. Lombardo retired from the position of EVP of Nuclear and Technical Services effective January 1, 2024. He is entitled to compensation earned under his 2023 MIP as EVP of Nuclear and Technical Services.

NOTE 19

SUBSEQUENT EVENTS

The Company evaluated subsequent events and transactions that occurred after the balance sheet date through March 13, 2024, the date that these consolidated financial statements were available to be issued. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements other than the below.

MIPs

On January 18, 2024, the Board (with Mr. Mark Duff and Dr. Louis Centofanti abstaining) and the Compensation Committee approved individual MIP for the calendar year 2024 for each of our executive officers. Each MIP is effective January 1, 2024 and applicable for year 2024. Each MIP provides guidelines for the calculation of annual cash incentive-based compensation, subject to Compensation Committee oversight and modification. The performance compensation under each of the MIPs is based upon meeting certain of the Company’s separate target objectives during 2024. The total potential target performance compensation payable ranges from 25% to 150% of the 2024 base salary for the CEO ($104,287 to $625,733),29% to 100% of the 2024 base salary for the CFO ($95,681 to $332,811),25% to 100% of the 2024 base salary for the EVP of Strategic Initiatives ($69,337 to $277,346), and 25% to 100% ($71,317 to $285,267) of the 2024 base salary for the EVP of Waste Treatment Operations.

PF Canada

As discussed in “Note 14 – Commitment and Contingencies - Perma-Fix Canada Inc. (“PF Canada”),” the Company’s subsidiary, PF Canada. has unpaid receivables due from CNL for a previous TOA that PF Canada entered into with CNL in May 2019 for remediation work within Ontario, Canada in which a settlement agreement on the payment of the receivables by CNL was reached, subject to certain conditions/terms precedents being met, including release of certain liens. On January 22, 2024, the Company received approximately $741,000 of the $2,389,000 in unpaid receivables, with the remaining receivables to be paid by CNL upon completion of the settlement conditions/terms, which the Company believes should occur during 2024.