10-Q 1 ppih20240430_10q.htm FORM 10-Q ppih20240430_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2024

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File No. 001-32530

 

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

logo.jpg
 

Delaware

36-3922969

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

24900 Pitkin Road, Suite 309, Spring, Texas

77386

(Address of principal executive offices)

(Zip Code)

 

(847) 966-1000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePPIHThe Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☒   Smaller reporting company    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ☒

 

On June 13, 2024, there were 8,017,981 shares of the registrant's common stock outstanding.

 

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended April 30, 2024

 

TABLE OF CONTENTS

 

Item

 

Page

 

 

 

Part I

Financial Information

 

 

 

 

1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 30, 2024

2

 

Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended April 30, 2024 and 2023

3

 

Consolidated Balance Sheets as of April 30, 2024 (Unaudited) and January 31, 2024

4

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the Three Months Ended April 30, 2024 and 2023

5

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 30, 2024 and 2023

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

4.

Controls and Procedures

25

 

 

 

Part II

Other Information

 

     

6.

Exhibits

26

 

 

 

Signatures

27

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 

Net sales

 $34,321  $29,657 

Cost of sales

  23,804   22,883 

Gross profit

  10,517   6,774 
         

Operating expenses

        

General and administrative expenses

  6,148   5,460 

Selling expenses

  1,235   1,239 

Total operating expenses

  7,383   6,699 
         

Income from operations

  3,134   75 
         

Interest expense

  507   512 

Other (expense) income

  (67)  72 

Income (loss) before income taxes

  2,560   (365)
         

Income tax expense

  770   758 
         

Net income (loss)

  1,790   (1,123)

Less: Net income attributable to non-controlling interest

  347   - 

Net income (loss) attributable to common stock

 $1,443  $(1,123)
         

Weighted average common shares outstanding

        

Basic

  7,906   8,004 

Diluted

  8,056   8,004 
         

Earnings per share attributable to common stock

        

Basic

 $0.18  $(0.14)

Diluted

 $0.18  $(0.14)

 

See accompanying notes to consolidated financial statements.

 

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 (Unaudited)

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 

Net income (loss)

 $1,790  $(1,123)
         

Other comprehensive income (loss)

        

Foreign currency translation adjustments, net of tax

  (1,415)  (437)

Comprehensive income (loss)

 $375  $(1,560)

Less: Comprehensive income attributable to non-controlling interests

  347   - 

Total comprehensive income (loss) attributable to common stock

 $28  $(1,560)

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

  

April 30, 2024

  

January 31, 2024

 
   (Unaudited)     

ASSETS

        

Current assets

        

Cash and cash equivalents

 $7,674  $5,845 

Restricted cash

  1,390   1,395 

Trade accounts receivable, less allowance for credit losses of $644 at April 30, 2024 and $699 at January 31, 2024

  44,276   46,646 

Inventories

  15,408   15,541 

Prepaid expenses and other current assets

  12,223   9,697 

Unbilled accounts receivable

  15,718   16,597 

Costs and estimated earnings in excess of billings on uncompleted contracts

  2,302   3,097 

Total current assets

  98,991   98,818 

Long-term assets

        

Property, plant and equipment, net of accumulated depreciation

  38,211   37,620 

Operating lease right-of-use asset

  6,165   6,467 

Deferred tax assets

  8,160   7,919 

Goodwill

  2,172   2,222 

Other long-term assets

  3,464   2,665 

Total long-term assets

  58,172   56,893 

Total assets

 $157,163  $155,711 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Trade accounts payable

 $24,672  $25,323 

Accrued compensation and payroll taxes

  1,752   1,214 

Commissions and management incentives payable

  4,967   4,523 

Revolving line - North America

  5,312   5,519 

Current maturities of long-term debt

  6,099   4,071 

Customers' deposits

  5,285   4,264 

Operating lease liability short-term

  845   914 

Other accrued liabilities

  7,628   9,039 

Billings in excess of costs and estimated earnings on uncompleted contracts

  891   495 

Income taxes payable

  1,959   2,380 

Total current liabilities

  59,410   57,742 

Long-term liabilities

        

Long-term debt, less current maturities

  4,069   4,229 

Long-term finance obligation

  8,982   9,035 

Deferred compensation liabilities

  1,031   1,212 

Deferred tax liabilities

  993   1,217 

Operating lease liability long-term

  6,032   6,270 

Loan payable to GIG

  2,753   2,753 

Other long-term liabilities

  1,313   1,275 

Total long-term liabilities

  25,173   25,991 

Non-controlling interest

  7,033   6,266 

Commitments and contingencies

          

Stockholders' equity

        

Common stock, $.01 par value, authorized 50,000 shares; 8,018 issued and outstanding at April 30, 2024 and 8,017 at January 31, 2024

  80   80 

Additional paid-in capital

  59,870   60,063 

Treasury stock, 112 shares at April 30, 2024 and January 31, 2024

  (968)  (968)

Retained earnings

  13,531   12,088 

Accumulated other comprehensive loss

  (6,966)  (5,551)

Total stockholders' equity

  65,547   65,712 

Total liabilities and stockholders' equity

 $157,163  $155,711 

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

(Unaudited)

 

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Treasury Stock

  

Accumulated Other Comprehensive Loss

  

Total Stockholders' Equity

 

Total stockholders' equity at January 31, 2024

 $80  $60,063  $12,088  $(968) $(5,551) $65,712 
                         

Net income

  -   -   1,443   -   -   1,443 

Stock-based compensation expense

  -   228   -   -   -   228 

Amount attributable to non-controlling interest

  -   (421)  -   -   -   (421)

Foreign currency translation adjustment

  -   -   -   -   (1,415)  (1,415)

Total stockholders' equity at April 30, 2024

 $80  $59,870  $13,531  $(968) $(6,966) $65,547 
                         

 

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Treasury Stock

  

Accumulated Other Comprehensive Loss

  

Total Stockholders' Equity

 

Total stockholders' equity at January 31, 2023

 $80  $62,562  $1,617  $(26) $(6,449) $57,784 
                         

Net loss

  -   -   (1,123)  -   -   (1,123)

Stock-based compensation expense

  -   229   -   -   -   229 

Foreign currency translation adjustment

  -   -   -   -   (437)  (437)

Total stockholders' equity at April 30, 2023

 $80  $62,791  $494  $(26) $(6,886) $56,453 

 

Shares

 

2024

  

2023

 

Balances at beginning of year

  8,016,781   8,007,002 

Treasury stock retired

  -   - 

Shares issued, net of shares used for tax withholding

  1,200   66,726 

Prior period adjustments

  -   (56,947)

Balances at period end

  8,017,981   8,016,781 

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 

Operating activities

        

Net income (loss)

 $1,790  $(1,123)

Adjustments to reconcile net income (loss) to net cash provided by operating activities

        

Depreciation and amortization

  829   915 

Deferred tax (benefit) expense

  (269)  77 

Stock-based compensation expense

  228   229 

Provision on uncollectible accounts

  (26)  26 

Gain (loss) from disposal of fixed assets

  14   (5)

Changes in operating assets and liabilities

        

Accounts receivable

  1,854   1,862 

Inventories

  (359)  1,813 

Costs and estimated earnings in excess of billings on uncompleted contracts

  1,191   1,858 

Accounts payable

  (268)  (227)

Accrued compensation and payroll taxes

  1,000   1,279 

Customers' deposits

  1,143   (371)

Income taxes payable

  (694)  (318)

Prepaid expenses and other current assets

  (2,552)  (570)

Unbilled accounts receivable

  295   (359)

Other assets and liabilities

  (2,826)  (1,275)

Net cash provided by operating activities

  1,350   3,811 

Investing activities

        

Capital expenditures

  (2,012)  (3,227)

Proceeds from insurance recovery for property and equipment

  -   5 

Net cash used in investing activities

  (2,012)  (3,222)

Financing activities

        

Proceeds from revolving credit lines

  18,268   28,333 

Payments of debt on revolving credit lines

  (16,405)  (25,527)

Payments of principal on finance obligation

  (42)  (27)

Payments of other debt

  (58)  (61)

Increase (decrease) in drafts payable

  794   (176)

Payments on finance lease obligations

  (8)  (83)

Stock options exercised and taxes paid related to restricted shares vested

  8   - 

Net cash provided by financing activities

  2,557   2,459 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  (71)  (56)

Net increase in cash, cash equivalents and restricted cash

  1,824   2,992 

Cash, cash equivalents and restricted cash - beginning of period

  7,240   6,793 

Cash, cash equivalents and restricted cash - end of period

 $9,064  $9,785 

Supplemental cash flow information

        

Cash interest paid

 $248  $521 

Cash income taxes paid

  1,575   939 

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2024

(In thousands, except per share data, or unless otherwise specified)

(Unaudited)

 

Note 1 - Basis of presentation

 

The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Certain information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of  January 31, 2024 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2024 and 2023 are for the fiscal year ending January 31, 2025 and for the fiscal year ended  January 31, 2024, respectively.

 

Significant New Accounting Policies

 

Refer to the Company's Annual Report on Form 10-K for the year ended January 31, 2024 as filed with the SEC on April 26, 2024 for discussion of the Company's significant accounting policies.

 

Subsequent Events

 

The Company has evaluated subsequent events through June 13, 2024, the date the financial statements were issued. Any material subsequent events that occurred during this time have been properly recognized and/or disclosed in these consolidated financial statements.

 

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company engineers, manufactures and sells pre-insulated specialty piping systems, and leak detection systems. Pre-insulated specialty piping systems include: (i) insulated and jacketed district heating and cooling piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines, and (iv) liquid and powder based anti-corrosion coatings applied both to the external and internal surfaces of steel pipe, including shapes like bends, reducers, tees, and other spools/fittings used in pipelines for the transportation of oil and gas products and potable water. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

Note 3 - Accounts receivable

 

The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition. In the United States, collateral is not generally required. In the United Arab Emirates ("U.A.E."), Saudi Arabia, Egypt and India letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated as amounts due from customers net of an allowance for claims and doubtful accounts. Standard payment terms are generally net 30 to 60 days. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write off is recorded against the allowance for doubtful accounts.

 

7

 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $40.1 million as of April 30, 2024, with a remaining balance due in the amount of $1.8 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this amount, $1.0 million is classified in other long-term assets on the Company's consolidated balance sheets.

 

The Company has been actively involved in ongoing efforts to collect this outstanding balance. The Company continues to engage with the customer to ensure full payment of the open balances, and during the three months ended April 30, 2024, and at various times throughout 2023, the Company received partial payments to settle $0.3 million and $0.6 million, respectively, of the customer's outstanding balances. Further, the Company has been engaged by the customer to perform additional work in 2024 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of  April 30, 2024. However, if the Company's efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

For the three months ended April 30, 2024 and 2023, respectively, no one customer accounted for greater than 10% of the Company's consolidated net sales. 

 

As of  April 30, 2024 and January 31, 2024one customer accounted for 11% of the Company's accounts receivable, and one customer accounted for 12% of the Company's accounts receivable, respectively.

 

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers.

 

Revenue from contracts with customers

 

The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.

 

The Company’s standard revenue transactions are classified into two main categories:

 

 

1)

Systems and Coating - which include all bundled products in which Perma-Pipe engineers, and manufactures pre-insulated specialty piping systems mainly relating to the district heating and cooling and oil & gas markets.

 

 

2)

Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

 

In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:

 

 

1)

the customer owns the material that is being coated, so the customer controls the asset and thus the work-in-process; or

 

 

2)

the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured, which has no alternative future use, and there is a right to payment for work performed to date plus profit margin.

 

 Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).

 

A breakdown of the Company's revenues by revenue class for the three months ended April 30, 2024 are as follows:

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 
  

Sales

  

% of Total

  

Sales

  

% of Total

 

Products

 $3,253   9% $2,842   9%
                 

Specialty Piping Systems and Coating

                

Revenue recognized under input method

  10,140   30%  10,338   35%

Revenue recognized under output method

  20,928   61%  16,477   56%

Total

 $34,321   100% $29,657   100%

 

The input method as noted in ASC 606-10-55-20 is used by certain operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the "over time" method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor, and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.  

 

8

 

The output method as noted in ASC 606-10-55-17 is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. 

 

Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above.

 

Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions are made for estimated losses on uncompleted contracts in the contract liabilities account in the period in which such losses are determined.

 

The transaction price associated with the Company's contracts with customers are generally determined based on the fixed amount of consideration as specified in a contract. This  may also include variable consideration in certain instances where it is considered probable that a significant reversal of cumulative revenue recognized will not occur. As a result, the amount of consideration ultimately received from the customer can fluctuate due to the variability of future events stated in a contract. Therefore, the aggregate amount of the transaction price includes the fixed consideration contained in a contract that is generally not subject to change and excludes sales and value added taxes, or amounts collected on behalf of third parties, along with any variable consideration. The total transaction price is then allocated to the performance obligations which is eventually recognized as revenue based on the project type and the method that is used to measure the transfer of promised goods and services to customers. Additionally, transaction prices relating to cost-plus contracts are determined by applying the applicable profit margin to costs incurred on contracts, whereas transaction prices relating to fixed price contracts are determined on a lump-sum basis. Further, standard payment terms are generally net 30 to 60 days, which is customer specific.

 

Contract assets and liabilities

 

Contract assets represent revenue recognized in excess of amounts billed for work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs for work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impact the period end balances in these accounts. In addition, contract assets include receivables or amounts that are billable beyond the passage of time. For additional information, see Note 3 in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 31, 2024 as filed with the SEC on April 26, 2024, and Unbilled accounts receivable, as further described below. 

 

The following table shows the reconciliation of costs in excess of billings and billings in excess of costs: 

 

  

April 30, 2024

  

January 31, 2024

 

Costs incurred on uncompleted contracts

 $15,980  $21,912 

Estimated earnings

  10,441   11,270 

Earned revenue

  26,421   33,182 

Less billings to date

  25,010   30,580 

Costs in excess of billings, net

 $1,411  $2,602 

Balance sheet classification

        

Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts

 $2,302  $3,097 

Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts

  (891)  (495)

Costs in excess of billings, net

 $1,411  $2,602 

 

The Company anticipates that substantially all costs incurred on uncompleted contracts as of  April 30, 2024 will be billed and collected within one year

 

Unbilled accounts receivable

 

The Company has recorded $15.7 million and $16.6 million of unbilled accounts receivable on the consolidated balance sheets as of April 30, 2024 and January 31, 2024, from revenues generated by certain of its subsidiaries. The Company has fulfilled all performance obligations and has recorded revenue under the respective contracts. The deliverables under these contracts have been accepted by the customer and billings will be made once the customer takes possession of or arranges shipping for the products. The Company anticipates that substantially all of the amounts included in unbilled accounts receivable as of  April 30, 2024 will be billed within one year.

 

Practical expedients

 

Costs to obtain a contract are not considered to be incremental or material, and project duration generally does not span more than one year. Accordingly, the Company applies the practical expedient for these types of costs and as such, are expensed in the period incurred.

 

As a result of the Company's contracts having a duration of less than one year, a practical expedient was applied regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. 

 

9

 
 

Note 5 - Income taxes 

 

The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. The relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

 

The Company's worldwide effective tax rates ("ETR") for the three months ended April 30, 2024 and 2023 were 30% and (208%), respectively. The change in the ETR is due to the inability to recognize tax benefits on losses in the United States due to a partial valuation allowance in the prior period and changes in the mix of income and loss in various jurisdictions.

 

The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. As such, the Company has accrued a liability of $0.7 million as of April 30, 2024 related to these taxes.

 

 

Note 6 - Impairment of long-lived assets

 

The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. At  April 30, 2024, the Company performed an assessment to determine whether there were any triggering events that may have occurred which could indicate that the carrying value of the Company's long-lived assets are not recoverable, and an impairment may exist. Based on this assessment, the Company did not identify any triggering events that would indicate that the carrying amounts may not be recoverable with respect to long-lived assets at  April 30, 2024.  The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

 

Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of April 30, 2024 and January 31, 2024 is attributable to the purchase of the remaining 50% interest in Perma-Pipe Canada, Ltd., which occurred in 2016.

 

The following table provides a reconciliation of changes in the carrying amount of goodwill:

 

  

January 31, 2024

  

Foreign exchange change effect

  

April 30, 2024

 

Goodwill

 $2,222  $(50) $2,172 

 

The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. During the period ended  April 30, 2024, the Company performed a periodic assessment to determine whether there were any triggering events that may have occurred which could indicate that more likely than not that the fair value of the reporting unit did not exceed its carrying value, resulting in an impairment. Based on this assessment, the Company did not identify any triggering events that would indicate that the fair value is less than the carrying value of the reporting unit at  April 30, 2024 and 2023. Accordingly, the Company did not proceed with performing an impairment test as a result of this periodic assessment. the Company will continue testing for impairment at least annually as of January 31, or as otherwise required by applicable accounting standards.

 

10

 
 

Note 7 - Stock-based compensation 

 

The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), expired in June 2020.

 

The Company has prior incentive plans under which previously granted awards remain outstanding, including the 2017 Plan, but under which no new awards may be granted. At April 30, 2024 the Company had reserved a total of 245,150 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.

 

While the 2017 Plan provided for the grant of deferred shares, non-qualified stock options, incentive stock options, restricted shares, restricted stock units, and performance-based restricted stock units intended to qualify under section 422 of the Internal Revenue Code, the Company issued only restricted shares and restricted stock units under the 2017 Plan. The 2017 Plan authorized awards to officers, employees, consultants, and independent directors.

 

The Company's 2021 Omnibus Stock Incentive Plan, dated May 26, 2021, was approved by the Company's stockholders in  May 2021 ("2021 Plan"). The 2021 Plan will expire in  May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors. Grants were made to the Company's employees, officers, and independent directors under the 2021 Plan, as described below.

 

Stock-based compensation expense

 

The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The Company recognized the following stock-based compensation expense for the periods presented:

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 

Restricted stock-based compensation expense

 $228  $229 

 

Stock options

 

The Company did not grant any stock options during the three months ended April 30, 2024. The following table summarizes the Company's stock option activity:

 

  

Options

  

Weighted Average Exercise Price (Per share)

  

Weighted Average Remaining Contractual Term (In years)

  

Aggregate Intrinsic Value

 

Outstanding at January 31, 2024

  22  $11.15   0.7  $6 

Exercised

  (1)  6.85   -   2 

Expired or forfeited

  -   11.39   -   - 

Outstanding and exercisable at April 30, 2024

  21  $11.39   0.4  $7 

 

There was no vesting, expiration or forfeiture of previously unvested stock options during the three months ended April 30, 2024. In addition, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.

 

11

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the three months ended  April 30, 2024:

 

  

Restricted Shares

  

Weighted Average Price (Per share)

  

Aggregate Intrinsic Value

 

Outstanding at January 31, 2024

  223  $9.33  $2,079 

Granted

  -   -     

Vested and issued

  -   -     

Forfeited or retired for taxes

  -   -     

Outstanding at April 30, 2024

  223  $9.33  $2,079 

 

As of April 30, 2024, there was $0.8 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. These costs are expected to be recognized over a weighted average period of 1.7 years.

 

Note 8 - Earnings per share

 

  

Three Months Ended April 30,

 
  

2024

  

2023

 

Basic weighted average common shares outstanding at April 30, 2024

  7,906   8,004 

Dilutive effect of equity compensation plans

  150   - 

Weighted average common shares outstanding assuming full dilution

  8,056   8,004 
         

Stock options and restricted stock not included in the computation of diluted earnings per share of common stock because the option exercise prices or grant date prices exceeded the average market prices of the common shares

  32   35 

Stock options and restricted stock with exercise prices or grant date prices below the average market prices

  150   210 
         

Net income (loss) attributable to common stock

 $1,443  $(1,123)
         

Earnings per share attributable to common stock

        

Basic

 $0.18  $(0.14)

Diluted

 $0.18  $(0.14)

 

12

 
 

Note 9 - Debt

 

Debt totaled $27.3 million and $25.7 million at April 30, 2024 and January 31, 2024, respectively.

 

Revolving lines - North AmericaOn September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a three-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

 

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. (collectively, the "Borrowers") is a borrower under the Renewed Senior Credit Facility.

 

The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, SOFR rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on SOFR rate borrowings is the SOFR rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility.

 

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million.

 

The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of  April 30, 2024.

 

The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.

 

As of April 30, 2024, the Company had borrowed an aggregate of $5.3 million at a rate of 10.0% and had $5.0 million available under the Renewed Senior Credit Facility. As of January 31, 2024, the Company had borrowed an aggregate of $5.5 million and had $4.0 million available under the Renewed Senior Credit Facility.  

 

13

 

Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale, the Company paid off the approximately $0.9 million mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company leases back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  

 

In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying assets. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.2 million is recognized in current maturities of long-term debt and the long-term portion of $9.0 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of April 30, 2024. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt and Saudi Arabia as discussed further below.

 

United Arab Emirates

 

The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.8%, and is set to expire in July 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.2 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The Company had unused borrowing availability of approximately $1.9 million as of  April 30, 2024 and January 31, 2024, respectively. 

 

The Company has a revolving line for 20.5 million U.A.E. Dirhams (approximately $5.6 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.7%, and is set to expire in August 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.1 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of  April 30, 2024 and January 31, 2024, the Company had unused borrowing availability of approximately $1.6 million and $1.0 million, respectively.

 

Egypt

 

In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $2.1  million at April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of April 30, 2024 the facility has an interest rate of approximately 9.5%  and expired in June 2022. This credit arrangement was subsequently renewed in August 2023 with substantially the same terms and conditions, except for the facility interest rate which increased to 20.8%, and expires in August 2024. This credit arrangement was subsequently renewed in November 2023 with substantially the same terms and conditions and expires in November 2024. As of  April 30, 2024, the Company had substantially nothing outstanding with respect to this credit arrangement, and approximately $1.4 million outstanding at  January 31, 2024, which is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of  April 30, 2024 and  January 31, 2024, the Company had unused borrowing capacity of $2.1 million and $3.2 million, respectively. 
 
In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has made collections, the facility has decreased to a current amount of  2.1 million Egyptian Pounds (approximatel y $0.1  million at April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 11.0%  and, as of  November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $0.1 million outstanding  as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets.

 

Saudi Arabia

 

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 37.0 million Saudi Riyals (approximately $9.9 million at  April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary. The facility was renewed in May 2024 with substantially the same terms and conditions and expires in May 2025. As of April 30, 2024, the facility has an interest rate of approximately 9.5%. The Company had borrowed an aggregate of $4.1 million and $3.2 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The unused borrowing availability attributable to this credit arrangement at  April 30, 2024 and  January 31, 2024, was $5.4 million and $6.1 million, respectively. 

 

14

 

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. The amount of foreign subsidiary debt guaranteed by the Company was approximately $0.3 million and $0.1 million at  April 30, 2024 and  January 31, 2024, respectively. 

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of April 30, 2024, with the exception of those arrangements that have expired or are set to expire and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On April 30, 2024, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter-Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of April 30, 2024, the Company's interest rates ranged from 8.7% to 20.8%, with a weighted average rate of 11.5%, and the Company had facility limits totaling $24.7 million under these credit arrangements. As of April 30, 2024$6.7 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2024, the Company had borrowed $8.4 million and had an additional $13.0 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances were included as a component of current maturities of long-term debt in the Company's consolidated balance sheets as of April 30, 2024 and January 31, 2024.

 

In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with Gulf Insulation Group (see Note 15). In accordance with the promissory note, all principal is due and payable on the maturity date of April 9, 2026, with the option to prepay, in whole or in part, at any time prior to the maturity date, without premium or penalty.

 

Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. As of April 30, 2024, the remaining balance on the mortgage in Canada is approximately CAD 6.00 million (approximately $4.4 million at April 30, 2024). The interest rate is variable, and was 9.1% at April 30, 2024. The principal balance is included as a component of long-term debt, less current maturities in the Company's consolidated balance sheets and is presented net of issuance costs of $0.1 million as of April 30, 2024 and January 31, 2024, respectively.

 

Note 10 - Leases

 

The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheets. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities short-term, and operating lease liabilities long-term in the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt less current maturities in the Company's consolidated balance sheets. 

 

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate.  Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term.  For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term.  For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded expense over the lease term.  Variable lease expenses are recorded when incurred. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.

 

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.

 

In calculating the ROU asset and lease liability, the Company elects to combine lease and non-lease components. Additionally, the Company excludes short-term leases having an initial term of 12 months or less in accordance with the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.

 

Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company built a facility. The initial annual payments were approximately 1.2 million U.A.E. Dirhams (approximately $0.3 million at April 30, 2024), inclusive of rent, escalation clauses, and other common charges contained in the agreement. Rent payments previously deferred until August 2022 have commenced, and the lease expires in August 2050. 

 

In March and December 2022, the Company served Notices of Termination to its lessor for the Company's lease of land and buildings in Fujairah in the U.A.E. The Company served the Notices of Termination in connection with the Company's intended relocation to a different facility in Abu Dhabi. The Company vacated portions of the leased space in December 2022 and expects to vacate the remaining space in December 2024. The first Notice of Termination required that the Company pay an additional amount equal to three months' rent after that termination to enable the lessor to prepare the assets for lease by another party. As a result of the termination, the Company has recognized adjustments to the amounts recorded in the consolidated financial statements as of April 30, 2024. The termination resulted in decreases of $0.4 million, $6.0 million and $5.5 million to operating lease liability short-term, operating lease liability long-term and operating lease right-of-use asset, respectively, in the consolidated balance sheets as of April 30, 2024. The termination also resulted in a decrease in rent expense of $1.1 million in the consolidated statement of operations for the year ended January 31, 2023. There were no other adjustments in connection with these terminations for the year ended January 31, 2024, or during the three months ended April 30, 2024

 

At April 30, 2024, the Company had total operating lease liabilities of $6.9 million and operating ROU assets of $6.2 million, which are reflected in the consolidated balance sheets. At April 30, 2024, the Company also had total finance lease liabilities of $0.1 million included in current maturities of long-term debt, and total finance ROU assets of $0.4 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheets.

 

Finance Leases. The Company has several significant operating lease agreements, with lease terms of one to thirty years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees.  Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and ROU assets as the Company is not reasonably certain to exercise the options.  The Company does not have any arrangements where it acts as a lessor. 

 

At  April 30, 2024, the Company also had finance lease liabilities of $0.1 million included in current maturities of long-term debt and long-term debt less current maturities, and financial ROU assets of $0.4 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheets. 

 

15

 

Supplemental balance sheet information related to leases is as follows: 

 

Operating and Finance leases:

 

April 30, 2024

  

January 31, 2024

 

Finance leases assets:

        

Property and Equipment - gross

 $949  $970 

Accumulated depreciation and amortization

  (562)  (536)

Property and Equipment - net

 $387  $434 
         

Finance lease liabilities:

        

Finance lease liability short-term

 $32  $113 

Finance lease liability long-term

  71   - 

Total finance lease liabilities

 $103  $113 
         

Operating lease assets:

        

Operating lease ROU assets

 $6,165  $6,467 
         

Operating lease liabilities:

        

Operating lease liability short-term

 $845  $914 

Operating lease liability long-term

  6,032   6,270 

Total operating lease liabilities

 $6,877  $7,184 

 

Total lease costs consist of the following: 

 

   

Three Months Ended April 30,

 

Lease costs

Consolidated Statements of Operations Classification

 

2024

  

2023

 

Finance Lease Costs

         

Amortization of ROU assets

Cost of sales

 $38  $53 

Interest on lease liabilities

Interest expense

  2   3 

Operating lease costs

Cost of sales, SG&A expenses

  455   456 

Short-term lease costs (1)

Cost of sales, SG&A expenses

  143   179 

Sub-lease income

SG&A expenses

  -   (20)

Total Lease costs

 $638  $671 

 

(1) Includes variable lease costs, which are not material.

 

16

 

Supplemental cash flow information related to leases is as follows:

 

  Three Months Ended April 30,
  

2024

  

2023

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Financing cash outflows from finance leases

 $8  $83 

Operating cash outflows from finance leases

  2   3 

Operating cash outflows from operating leases

  454   468 
         

ROU assets obtained in exchange for new lease obligations:

        

Operating leases liabilities

 $-  $129 

 

Weighted-average lease terms and discount rates are as follows: 

 

  

April 30, 2024

 

Weighted-average remaining lease terms (in years):

    

Finance leases

  3.0 

Operating leases

  13.8 
     

Weighted-average discount rates:

    

Finance leases

  6.9%

Operating leases

  9.8%

 

Maturities of lease liabilities as of April 30, 2024, is as follows:

 

  

Operating Leases

  

Finance Leases

 

For the nine months ending January 31, 2024

 $1,416  $28 

For the year ended January 31, 2026

  1,714   38 

For the year ended January 31, 2027

  1,701   38 

For the year ended January 31, 2028

  1,656   9 

For the year ended January 31, 2029

  1,286   - 

For the year ended January 31, 2030

  499   - 

Thereafter

  6,982   - 

Total lease payments

 $15,254  $113 

Less: amount representing interest

  (8,377)  (10)

Total lease liabilities at April 30, 2024

 $6,877  $103 

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.6 million for the three months ended  April 30, 2024 and 2023, respectively.

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries is related to fixed deposits that also serve as security deposits and guarantees: 
 
  

April 30, 2024

  

January 31, 2024

 

Cash and cash equivalents

 $7,674  $5,845 

Restricted cash

  1,390   1,395 

Cash, cash equivalents and restricted cash shown in the statement of cash flows

 $9,064  $7,240 

 

17

 

 

Note 12 - Fair value

 

The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered reasonable estimates of fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving lines of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.

 

Note 13 - Recent accounting pronouncements

 

The Company evaluated recent accounting pronouncements and does not expect any to have a material impact on its consolidated financial statements or related disclosures.

 

Note 14 - Treasury stock

 

The repurchase program approved on October 4, 2021 authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the twelve months ended  January 31, 2024, the Company used the remaining $1.0 million authorized to repurchase its outstanding shares of common stock. Accordingly, there was no repurchase activity with respect to the Company's shares of common stock during the three months ended  April 30, 2024.

 

Note 15 - Noncontrolling interest

 

On June 1, 2023, the Company closed on its formation of a joint venture ("the JV", and the agreement governing the JV, "the JV Agreement") with Gulf Insulation Group ("GIG"), a leading provider of pre-insulated piping systems and pipe fabrication, in which the Company acquired a 60% controlling financial interest and contributed assets consisting of a building and equipment. The JV is a limited liability company named Perma Pipe Gulf Arabia Industry and is a closed joint stock company established under the laws of the Kingdom of Saudi Arabia. The JV's capital is comprised of ordinary shares with 60% owned by the Company and remaining 40% owned by GIG. The Company expects this collaborative business arrangement to result in expanding its market presence in Saudi Arabia, Kuwait, and Bahrain. The primary business activities of the JV include the manufacture and sale of the pre-insulated piping systems and pipe coating services. The other party to this business arrangement acquired a 40% non-controlling interest by contributing assets to the JV of approximately $6.8 million in fair value, mainly consisting of an idle building and equipment. The fair value of the net assets contributed was determined through the use of a third-party appraiser using the indirect cost method.

 

Pursuant to the applicable guidance in ASC 805, Business Combinations and Noncontrolling Interests, the Company determined that the transaction did not meet the necessary conditions to be considered a business as the set of assets acquired did not contain an organized workforce and therefore was recorded as an asset acquisition. The assets transferred by the Company to the JV were recorded at historical cost, and no gain was recognized as a result of this exchange since the Company has a controlling interest in the JV. The Company’s measurement of the acquired assets is comprised of the fair value of the contributed net assets given up by the Company and the fair value of the non-controlling interest excluding the contributed assets. The non-controlling interest attributable to the other party was recorded as of the investment date and was measured as part of the carrying amount of the ownership interest in the net assets given up by the Company plus the fair value of the non-controlling interest excluding the contributed assets. No gain or loss was recognized as a result of this exchange. The Company also assumed a promissory note payable to GIG issued as part of the formation of the JV in the principal amount of $2.8 million. The principal amount is presented within the Long-term debt, less current maturities caption in the Company's consolidated balance sheets. The Company also has a promissory note due from the JV that was issued as part of the formation of the JV in the amount of approximately $4.2 million and eliminates in consolidation.

 

The Company has a 60% controlling financial interest in the JV which is not considered a wholly owned subsidiary. Accordingly, there remains a minority portion of the equity interest that is owned by a third party, GIG. Pursuant to the applicable guidance contained in ASC 810, Consolidations, the balance sheets and operating activities of this investment are included in the Company's consolidated financial statements. The carrying amount of the assets and liabilities of the JV that are consolidated by the Company totaled $26.3 million and $17.7 million, respectively, as of  April 30, 2024.

 

The Company adjusts net income in the consolidated statements of operations to exclude the proportionate share of results that is attributable to the non-controlling interest. Additionally, the Company presents the proportionate share that is attributable to the redeemable non-controlling interest as temporary equity within the consolidated balance sheets. This mezzanine presentation is the result of the non-controlling interest being subject to a put option that is not solely within the Company's control and in connection with the equity shares of the business arrangement that is redeemable at any time after five years following the date of formation. The redemption amount per the JV Agreement is at fair value of the non-controlling interest which represents the fair value of ordinary shares of the JV that is owned by GIG. Further, neither the call option or put option contained in the JV Agreement met the definition of a derivative as a result of not containing a net settlement provision and the shares not being readily convertible to cash, thereby being considered embedded with respect to non-controlling interest and not a freestanding instrument.

 

As a result of the non-controlling interest being subject to redemption rights that are not entirely within the Company's control, it was concluded that the necessary conditions were met to be accounted for in accordance with ASC 480, Distinguishing Liabilities from Equity. Pursuant to this accounting standard, the Company determined that the only criteria for the security to become redeemable is the passage of time and, therefore, is considered probable of redemption. The Company made a policy election to measure changes in the non-controlling interest immediately as they occur and adjust the carrying amount of non-controlling interest equal to its redemption amount as the non-controlling interest has no stated fixed price or fixed date. As such, at each subsequent balance sheet date following the formation of the JV, the Company must determine whether further adjustment is required to increase the carrying value of the redeemable non-controlling interest. If the Company determines that the fair value of the redeemable non-controlling interest exceeds its carrying value, an adjustment is made to reflect this change. However, if the value is determined to be less than its carrying value, such adjustment is limited to its original carrying value at the formation of the business arrangement. Additionally, adjustments made to reflect the change in the value of the redeemable non-controlling interest are offset against permanent equity within the Company's consolidated balance sheets.

 

Net income attributable to GIG was $0.3 million and $0.0 million for the three months ended  April 30, 2024 and 2023, respectively. The proportionate share of net income was accounted for as a reduction in deriving net income attributable to common stock in the Company's consolidated statements of operations.

 

The Company is the ultimate parent of the JV through its 60% controlling financial interest and as part of the JV Agreement majority control of the operational activities of the JV and no joint control exists. The JV Agreement has no veto or kickout rights and board voting is proportional to the ownership interest. Certain activities do include a two-thirds majority affirmative vote of shareholders of the JV and include acquiring another company, establishing new subsidiaries, entering another partnership or joint venture, engaging in any merger or materially changing the business of the JV. These are considered protective rights. The 60% equity ownership of the JV by the Company allows it to receive its proportionate share of losses and residual returns.

 

The non-controlling interest as measured at fair value was $7.0 million and $6.3 million, and was recorded within temporary equity at  April 30, 2024 and  January 31, 2024, respectively. The change in non-controlling interest consists of $0.3 million in current year net income attributable to non-controlling interest, and approximately $0.4 million as an adjustment in the carrying value of the redeemable non-controlling interest pertaining to the business arrangement. In addition, there were no dividends or any other form of distributions from non-controlling interest for the period ended  April 30, 2024 and  January 31, 2024, respectively. 

 

18

  
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

 

The statements contained in this MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2024 and 2023 are for the fiscal year ending January 31, 2025 and the fiscal year ended January 31, 2024, respectively.

 

This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in this MD&A have been rounded to the nearest percentage point. 

 

 

 CONSOLIDATED RESULTS OF OPERATIONS

(In thousands, except per share data, or unless otherwise specified)

(Unaudited)

 

The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.

 

   

Three Months Ended April 30,

         
   

2024

   

2023

   

Change favorable (unfavorable)

 
   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

 

Net sales

  $ 34,321             $ 29,657             $ 4,664  
                                         

Gross profit

    10,517       31 %     6,774       23 %     3,743  
                                         

General and administrative expenses

    6,148       18 %     5,460       18 %     (688 )
                                         

Selling expense

    1,235       4 %     1,239       4 %     4  
                                         

Interest expense

    507               512               5  
                                         

Other (expense) income

    (67 )             72               (139 )
                                         

Loss before income taxes

    2,560               (365 )             2,925  
                                         

Income tax expense

    770               758               (12 )
                                         

Net income (loss)

    1,790               (1,123 )             2,913  
                                         

Less: Net income attributable to non-controlling interest

    347               -               (347 )
                                         

Net income (loss) attributable to common stock

    1,443               (1,123 )             2,566  

 

 

 

 

Three months ended April 30, 2024 vs. Three months ended April 30, 2023

 

Net sales:

 

Net sales were $ 34.3 million and $ 29.7 million in the three months ended April 30, 2024 and 2023, respectively.  The  increase o f $4.6  million, or 15% , was a result of increased sales volumes in the Middle East and India. 

 

Gross profit:

 

Gross profit was $10.5 million, or 31% of net sales, and $6.8 million, or 23% of net sales, in the three months ended April 30, 2024 and 2023, respectively. The increase of $3.7 million was primarily driven by increased sales volumes in the Middle East and India.

 

General and administrative expenses:

 

General and administrative expenses were $6.1 million and $5.5 million in the three months ended April 30, 2024 and 2023, respectively. The increase of $0.6 million, or 11%, was due to higher professional service fees in the quarter.  

 

Selling expenses:

 

Selling expenses remained consistent and were $ 1.2 million in the  three months ended April 30, 2024 and 2023, respectively.                                                                                               
 

Interest expense:

 

Net interest expense remained consistent and was $0.5 million in the three months ended April 30, 2024 and 2023, respectively.  

 

Other (expense) income:

 

Other (expense) income was $(0.1) million and $0.1 million for the three months ended April 30, 2024 and 2023, respectively. The change was primarily due to exchange rate fluctuations in foreign currency transactions. 

 

Income tax expense:

 

The Company's worldwide effective tax rate ("ETR") was 30% and (208%) in the three months ended April 30, 2024 and 2023, respectively. The change in the ETR is due to the inability to recognize tax benefits and losses in the United States due to a partial valuation allowance in the prior period and changes in the mix of income and loss in various jurisdictions. 

 

For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.

 

Net income (loss) attributable to common stock:

 

Net income (loss) attributable to common stock was $1.4 million and $(1.1) million in the three months ended April 30, 2024 and 2023, respectively. The increase of $2.5 million was mainly due to increased sales activity in the quarter, and better project execution. 

 

 

Liquidity and capital resources

 

Cash and cash equivalents as of April 30, 2024 were $7.7 million compared to $5.8 million on January 31, 2024. On April 30, 2024, $0.3 million was held in the United States, and $7.4 million was held at the Company's foreign subsidiaries. The Company's working capital was $39.6 million on April 30, 2024 compared to $41.1 million on January 31, 2024. Of the working capital components, accounts receivable decreased by $2.3 million and cash and cash equivalents increased by $1.9 million as the result of the movements discussed below. As of April 30, 2024, the Company had $5.0 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $13.0 million of borrowing capacity under its foreign revolving credit agreements. The Company had $5.3 million borrowed under the Renewed Senior Credit Facility and $8.4 million borrowed under its foreign revolving credit agreements at April 30, 2024.

 

Net cash from operating activities was $1.4 million and $3.8 million in the three months ended April 30, 2024 and 2023, respectively. The decrease of $2.5 million was due primarily attributable to increases in prepaid expenses and other current assets and inventory, partially offset by changes to accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts. 

 

Net cash from investing activities in the three months ended April 30, 2024 and 2023 was $2.0 million and $3.2 million, respectively. The decrease of $1.2 million was due primarily to fewer investments in the United States and Canada.

 

Net cash from financing activities in the three months ended April 30, 2024 and 2023 was $2.6 million and $2.5 million, respectively. The main source of cash from financing activities during the three months ended April 30, 2024 consisted of net proceeds from borrowings of approximately $1.9 million under the Company's credit facilities, an increase in drafts payable of $0.9 million, and approximately $0.1 million attributable to fewer payments on finance lease obligations, as compared to net proceeds of approximately $2.8 million during the three months ended April 30, 2023. Debt totaled $27.3 million and $25.7 million as of April 30, 2024 and January 31, 2024, respectively. See Note 9 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic.

 

Treasury stock. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. See Note 14 - Treasury stock, for further discussion relating to this topic.

 

Revolving lines - North America On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a three-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

 

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. (collectively, the "Borrowers") is a borrower under the Renewed Senior Credit Facility.

 

The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, SOFR rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on SOFR rate borrowings is the SOFR rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility.

 

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million.
 
The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of  April 30, 2024.
 

The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.

 

As of April 30, 2024, the Company had borrowed an aggregate of $5.3  million at a rate of 10.0%  and had $5.0  million available under the Renewed Senior Credit Facility. As of January 31, 2024, the Company had borrowed an aggregate of $5.5 million and had $4.0 million available under the Renewed Senior Credit Facility.  

 

 
Revolving lines - foreign The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as discussed further below.
 
United Arab Emirates

 

The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.8%, and is set to expire in July 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.2 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The Company had unused borrowing availability of approximately $1.9 million as of April 30, 2024 and January 31, 2024, respectively. 

 

The Company has a revolving line for 20.5 million U.A.E. Dirhams (approximately $5.6 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.7%, and is set to expire in August 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.1 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of April 30, 2024 and January 31, 2024, the Company had unused borrowing availability of approximately $1.6 million and $1.0 million, respectively.

 

Egypt
 
In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $2.1  million at April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of April 30, 2024 the facility has an interest rate of approximately 9.5%  and expired in June 2022. This credit arrangement was subsequently renewed in August 2023 with substantially the same terms and conditions, except for the facility interest rate which increased to 20.8%, and expires in August 2024. This credit arrangement was subsequently renewed in November 2023 with substantially the same terms and conditions and expires in November 2024. As of April 30, 2024, the Company had substantially nothing outstanding with respect to this credit arrangement, and approximately $1.4 million outstanding at January 31, 2024, which is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of  April 30, 2024 and  January 31, 2024, the Company had unused borrowing capacity of $2.1 million and $3.2 million, respectively. 

 

In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has made collections, the facility has decreased to a current amount of  2.1 million Egyptian Pounds (approximatel y $0.1  million at April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 11.0%  and, as of November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $0.1 million outstanding  as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets.                      

 

Saudi Arabia

 

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of  37.0 million Saudi Riyals (approximately $ 9.9 million at  April 30, 2024). This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary. The facility was renewed in May 2024 with substantially the same terms and conditions and expires in May 2025. As of April 30, 2024, the facility has an interest rate of approximately  9.5%. The Company had borrowed an aggregate of $4.1 million and $3.2 million  as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The unused borrowing availability attributable to this credit arrangement at  April 30, 2024 and  January 31, 2024, was $5.4 million and $6.1 million, respectively. 

 

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. The amount of foreign subsidiary debt guaranteed by the Company was approxim ately $0.3 million and $0.1 million at April 30, 2024 and January 31, 2024, respectively. 

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of April 30, 2024, with the exception of those arrangements that have expired or are set to expire and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On April 30, 2024, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of April 30, 2024, the Company's interest rates ranged from 8.7% to 20.8%, with a weighted average rate of 11.5%, and the Company had facility limits totaling $24.7 million under these credit arrangements. As of April 30, 2024$6.7 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2024, the Company had borrowed $8.4 million and had an additional $13.0 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances were included as a component of current maturities of long-term debt in the Company's consolidated balance sheets as of April 30, 2024 and January 31, 2024.

 

In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with Gulf Insulation Group (see Note 15). In accordance with the promissory note, all principal is due and payable on the maturity date of April 9, 2026, with the option to prepay, in whole or in part, at any time prior to the maturity date, without premium or penalty.

 

Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale, the Company paid off the approximately $0.9 million mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company leases back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  
 
In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying assets. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.2 million is recognized in current maturities of long-term debt and the long-term portion of $9.0 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of April 30, 2024 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

 

Accounts receivable: 

 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $ 40.1 million as of April 30, 2024, with a remaining balance due in the amount of $ 1.8 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this amount, $ 1.0 million is classified in other  long-term assets on the Company's consolidated balance sheets.
 
The Company has been actively involved in ongoing efforts to collect this outstanding balance. The Company continues to engage with the customer to ensure full payment of the open balances, and during the three months ended April 30, 2024, and at various times throughout 2023, the Company received partial payments to settle $ 0.3 million and $ 0.6 million, respectively, of the customer's outstanding balances. Further, the Company has been engaged by the customer to perform additional work in 2024 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of  April 30, 2024. However, if the Company's efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2024 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

 

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 30, 2024. This evaluation included consideration of the controls, processes and procedures that are designed to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the certifying officers have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective because of the material weakness described below. 

 

Management has previously reported on material weaknesses in the Company's internal control over information technology general controls ("ITGC"), financial reporting relating to the review and approval of manual journal entries, timely review of the financial close process, and timely review of certain financial policies and procedures and respective HR policies. The Company also did not maintain effective controls at certain operating locations in the Middle East and North Africa ("MENA"), specifically the Company did not maintain sufficient documentation to support an evaluation that controls over business processes were operating effectively. These deficiencies led management to conclude that a material weakness existed with respect to the Company's internal control over financial reporting. The material weakness did not result in any material misstatements to the Company’s consolidated financial statements. As a result, at January 31, 2024 and April 30, 2024, and on the date of this Quarterly Report on Form 10-Q, the Company's internal control over financial reporting is not effective. 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. 

 

As a result of the material weaknesses identified, the Company has begun updating its internal control over financial reporting as discussed in its remediation plan as further described below. 

 

Remediation Plan for the Material Weaknesses in Internal Control over Financial Reporting. To address these matters, the Company has begun implementing its remediation plan. Specifically, the Company is executing on the following:

 

The remediation plans related to ITGCs include: (i) addressing the identified issues with control owners, including Company leadership and IT personnel; (ii) engaging outside consultants with expertise relating to ITGCs to document processes, assist in addressing the design and operating business process controls, monitoring and testing reviews focusing on systems supporting our financial reporting process (iii) developing and maintaining documentation underlying ITGCs for knowledge transfer and function changes, including access control and change management; (iv) outsourcing certain functions to third-party providers, specifically relating to servers and firewalls, and managed detection and response.

 

The remediation plans related to the entity level controls and business process controls over MENA locations include: (i) addressing issues with control owners, including company leadership; (ii) evaluating and updating the Company's evidence of internal control policies and procedures as needed and providing necessary guidance to applicable locations; (iii) assessing the adequacy and determine whether enhancements are needed to the design of corporate and / or operating locations business process controls; and (iv) augmenting our internal audit function by hiring an additional resource to assist in overseeing the remediation process, including updating policies and procedures, and implementing internal controls; (v) engaging outside consultants to conduct training sessions. 

 

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and will address the related material weaknesses described above. However, the material weaknesses cannot be considered fully remediated until the remediation processes have been in operation for a period of time and successfully tested.

 

Change in Internal Control over Financial Reporting. While the Company continues to implement design enhancements to our internal control procedures, we believe that, other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the fiscal quarter ended April 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

 

31.1

Rule 13a - 14(a)/15d - 14(a) Certifications

(1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Rule 13a - 14(a)/15d - 14(a) Certifications

(2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

101.INS

Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation

101.DEF

Inline XBRL Taxonomy Extension Definition

101.LAB

Inline XBRL Taxonomy Extension Labels

101.PRE

Inline XBRL Taxonomy Extension Presentation

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    Perma-Pipe International Holdings, Inc.
     
     

Date:

June 13, 2024

By: /s/ David J. Mansfield

 

 

David J. Mansfield

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:

June 13, 2024

By: /s/ Matthew E. Lewicki

 

 

Matthew E. Lewicki

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

27