Company Quick10K Filing
Perma-Pipe
Price8.98 EPS0
Shares8 P/E35
MCap72 P/FCF26
Net Debt-6 EBIT4
TEV66 TEV/EBIT15
TTM 2019-10-31, in MM, except price, ratios
10-Q 2020-07-31 Filed 2020-09-09
10-Q 2020-04-30 Filed 2020-06-09
10-K 2020-01-31 Filed 2020-04-21
10-Q 2019-10-31 Filed 2019-12-10
10-Q 2019-07-22 Filed 2019-09-10
10-Q 2019-04-30 Filed 2019-06-11
10-K 2019-01-31 Filed 2019-04-16
10-Q 2018-10-31 Filed 2018-12-11
10-Q 2018-07-31 Filed 2018-09-11
10-Q 2018-04-30 Filed 2018-06-12
10-K 2018-01-31 Filed 2018-04-19
10-Q 2017-10-31 Filed 2017-12-15
10-Q 2017-07-31 Filed 2017-09-19
10-Q 2017-04-30 Filed 2017-06-13
10-K 2017-01-31 Filed 2017-04-14
10-Q 2016-10-31 Filed 2016-12-13
10-Q 2016-07-31 Filed 2016-09-09
10-Q 2016-04-30 Filed 2016-06-10
10-K 2016-01-31 Filed 2016-04-28
10-Q 2015-10-31 Filed 2015-12-08
10-Q 2015-07-31 Filed 2015-09-18
10-Q 2015-04-30 Filed 2015-06-12
10-K 2015-01-31 Filed 2015-04-16
10-Q 2014-10-31 Filed 2014-12-09
10-Q 2014-07-31 Filed 2014-09-09
10-Q 2014-04-30 Filed 2014-06-10
10-K 2014-01-31 Filed 2014-04-15
10-Q 2013-10-31 Filed 2013-12-09
10-Q 2013-07-31 Filed 2013-09-12
10-Q 2013-04-30 Filed 2013-06-11
10-K 2013-01-31 Filed 2013-05-02
10-Q 2012-10-31 Filed 2012-12-07
10-Q 2012-07-31 Filed 2012-09-20
10-Q 2012-04-30 Filed 2012-06-11
10-K 2012-01-31 Filed 2012-05-01
10-Q 2011-10-31 Filed 2011-12-12
10-Q 2011-07-31 Filed 2011-09-14
10-Q 2011-04-30 Filed 2011-06-13
10-K 2011-01-31 Filed 2011-04-14
10-Q 2010-10-31 Filed 2010-12-10
10-Q 2010-07-31 Filed 2010-09-09
10-Q 2010-04-30 Filed 2010-06-11
10-K 2010-04-16 Filed 2010-04-19
8-K 2020-09-09 Earnings, Exhibits
8-K 2020-06-24
8-K 2020-06-09
8-K 2020-04-21
8-K 2019-12-10
8-K 2019-09-15
8-K 2019-09-10
8-K 2019-06-20
8-K 2019-06-11
8-K 2019-05-06
8-K 2019-04-16
8-K 2019-03-07
8-K 2019-01-08
8-K 2018-12-11
8-K 2018-09-28
8-K 2018-09-20
8-K 2018-09-11
8-K 2018-06-12
8-K 2018-06-06
8-K 2018-02-21

PPIH 10Q Quarterly Report

Part I Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Segment Reporting
Note 3 - Accounts Receivable
Note 4 - Revenue Recognition
Note 5 - Income Taxes
Note 6 - Impairment of Long - Lived Assets
Note 7 - Stock - Based Compensation
Note 8 - Income/(Loss) per Share
Note 9 - Debt
Note 10 - Leases
Note 11 - Restricted Cash
Note 12 - Fair Value
Note 13 - Recent Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Item 4. Controls and Procedures
Part II Other Information
Item 6. Exhibits
EX-31.1 ex_195618.htm
EX-31.2 ex_195619.htm
EX-32 ex_195620.htm

Perma-Pipe Earnings 2020-07-31

Balance SheetIncome StatementCash Flow
180144108723602012201420172020
Assets, Equity
70513213-6-252012201420172020
Rev, G Profit, Net Income
20124-4-12-202012201420172020
Ops, Inv, Fin

10-Q 1 ppih20200731_10q.htm FORM 10-Q ppih20181031_10q.htm
 

 

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 July 31, 2020.

 

Commission File No. 0-18370

 

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

36-3922969

(State or other jurisdiction of incorporation or organization)

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

 

 

6410 W. Howard Street, Niles, Illinois

60714

(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 class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $.01 par value per share PPIH The 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, 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 September 4, 2020, there were 8,164,989 shares of the registrant's common stock outstanding.

 

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended July 31, 2020

 

TABLE OF CONTENTS

 

Item

 

Page

 

 

 

Part I

Financial Information

 

 

 

 

1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended July 31, 2020 and 2019

2

 

Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Six Months Ended July 31, 2020 and 2019

3

 

Consolidated Balance Sheets as of July 31, 2020 (Unaudited) and January 31, 2020

4

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Six Months Ended July 31, 2020 and 2019

5

 

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July 31, 2020 and 2019

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

26

 

 

 

Part II

Other Information

 

 

 

 

6.

Exhibits

27

 

 

 

Signatures

28

 

 
 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales

  $ 20,364     $ 36,667     $ 43,106     $ 60,943  

Cost of sales

    18,000       27,014       37,275       46,568  

Gross profit

    2,364       9,653       5,831       14,375  
                                 

Operating expenses

                               

General and administrative expenses

    4,488       4,814       8,792       9,271  

Selling expenses

    1,331       1,416       2,978       2,676  

Total operating expenses

    5,819       6,230       11,770       11,947  
                                 

Income/(loss) from operations

    (3,455 )     3,423       (5,939 )     2,428  
                                 

Interest expense, net

    118       209       304       419  
Other income     3,739       241       3,674       256  

Income/(loss) from operations before income taxes

    166       3,455       (2,569 )     2,265  
                                 

Income tax (benefit)/expense

    (101 )     (265 )     (315 )     47  
                                 

Net income/(loss)

  $ 267     $ 3,720     $ (2,254 )   $ 2,218  
                                 

Weighted average common shares outstanding

                               

Basic

    8,126       7,887       8,087       7,937  

Diluted

    8,278       8,202       8,087       8,122  
                                 

Income/(loss) per share

                               

Basic

    0.03       0.47       (0.28 )     0.28  

Diluted

    0.03       0.45       (0.28 )     0.27  

 

See accompanying notes to consolidated financial statements.

Note: Earnings per share calculations could be impacted by rounding.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)

(In thousands)

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

2020

   

2019

 

Net income/(loss)

  $ 267     $ 3,720     $ (2,254 )   $ 2,218  
                                 

Other comprehensive income/(loss)

                               

Foreign currency translation adjustments, net of tax

    153       358       (214 )     41  

Other comprehensive income/(loss)

    153       358       (214 )     41  
                                 

Comprehensive income/(loss)

  $ 420     $ 4,078     $ (2,468 )   $ 2,259  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

   

July 31, 2020

   

January 31, 2020

 
      (Unaudited)          

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 9,106     $ 13,371  

Restricted cash

    1,150       1,287  

Trade accounts receivable, less allowance for doubtful accounts of $300 at July 31, 2020 and $407 at January 31, 2020

    23,884       29,402  

Inventories, net

    12,137       14,498  

Prepaid expenses and other current assets

    7,033       3,531  

Costs and estimated earnings in excess of billings on uncompleted contracts

    1,750       2,166  

Total current assets

    55,060       64,255  

Property, plant and equipment, net of accumulated depreciation

    27,306       28,629  

Other assets

               

Operating lease right-of-use asset

    10,889       11,475  

Deferred tax assets

    566       293  

Goodwill

    2,222       2,254  

Other assets

    3,955       5,319  

Total other assets

    17,632       19,341  

Total assets

  $ 99,998     $ 112,225  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Trade accounts payable

  $ 7,943     $ 9,577  

Accrued compensation and payroll taxes

    1,496       1,190  

Commissions and management incentives payable

    1,107       1,759  

Revolving line - North America

    2,470       8,577  

Current maturities of long-term debt

    1,715       1,458  

Customers' deposits

    1,844       2,202  

Outside commission liability

    1,712       1,755  

Operating lease liability short-term

    1,338       1,040  

Other accrued liabilities

    2,836       3,444  

Billings in excess of costs and estimated earnings on uncompleted contracts

    767       1,173  

Income taxes payable

    750       664  

Total current liabilities

    23,978       32,839  

Long-term liabilities

               

Long-term debt, less current maturities

    6,293       6,717  

Deferred compensation liabilities

    4,415       4,199  

Deferred tax liabilities

    672       1,052  

Operating lease liability long-term

    10,563       11,214  

Other long-term liabilities

    628       575  

Total long-term liabilities

    22,571       23,757  

Stockholders' equity

               

Common stock, $.01 par value, authorized 50,000 shares; 8,165 issued and outstanding at July 31, 2020 and 8,048 issued and outstanding at January 31, 2020

    82       80  

Additional paid-in capital

    60,310       60,024  

Accumulated deficit

    (2,969 )     (715 )

Accumulated other comprehensive loss

    (3,974 )     (3,760 )

Total stockholders' equity

    53,449       55,629  

Total liabilities and stockholders' equity

  $ 99,998     $ 112,225  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share data)

 

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Loss

   

Total Stockholders' Equity

 

Revised total stockholders' equity at January 31, 2019

  $ 79     $ 58,793     $ (4,291 )   $ (2,880 )   $ 51,701  
                                         
Net loss     -       -       (1,502 )     -       (1,502 )
Common stock issued under stock plans, net of shares used for tax withholding     -       79       -       -       79  
Stock-based compensation expense     -       154       -       -       154  
Foreign currency translation adjustment     -       -       -       (317 )     (317 )

Total stockholders' equity at April 30, 2019

  $ 79     $ 59,026     $ (5,793 )   $ (3,197 )   $ 50,115  
                                         
Net income     -       -       3,720       -       3,720  
Common stock issued under stock plans, net of shares used for tax withholding     1       43       -       -       44  
Stock-based compensation expense     -       406       -       -       406  
Foreign currency translation adjustment     -       -       -       358       358  
Total stockholders' equity at July 31, 2019   $ 80     $ 59,475     $ (2,073 )   $ (2,839 )   $ 54,643  

 

    Common Stock     Additional Paid-in Capital     Accumulated Deficit     Accumulated Other Comprehensive Loss     Total Stockholders' Equity  

Total stockholders' equity at January 31, 2020

  $ 80     $ 60,024     $ (715 )   $ (3,760 )   $ 55,629  
                                         
Net loss     -       -       (2,521 )     -       (2,521 )
Stock-based compensation expense     -       219       -       -       219  
Foreign currency translation adjustment     -       -       -       (367 )     (367 )
Total stockholders' equity at April 30, 2020   $ 80     $ 60,243     $ (3,236 )   $ (4,127 )   $ 52,960  
                                         
Net income     -       -       267       -       267  
Common stock issued under stock plans, net of shares used for tax withholding     2       (193 )     -       -       (191 )
Stock-based compensation expense     -       260       -       -       260  
Foreign currency translation adjustment     -       -       -       153       153  
Total stockholders' equity at July 31, 2020   $ 82     $ 60,310     $ (2,969 )   $ (3,974 )   $ 53,449  

 

 

 

Shares

 

2020

   

2019

 

Balances at beginning of year

    8,048,006       7,854,322  

Shares issued

    116,983       193,684  

Balances at period end

    8,164,989       8,048,006  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(In thousands)

 

Six Months Ended July 31,

 
   

2020

   

2019

 

Operating activities

               

Net income/(loss)

  $ (2,254 )   $ 2,218  

Adjustments to reconcile net income/(loss) to net cash flows provided by/(used in) in operating activities

               

Depreciation and amortization

    2,241       2,302  

Deferred tax expense/(benefit)

    (630 )     54  

Equity-based compensation expense

    479       560  

Loss on disposal of fixed assets

    10       85  

Provision on uncollectible accounts

    (105 )     (80 )

Changes in operating assets and liabilities

               

Accounts receivable

    3,782       980  

Inventories

    2,315       (4,238 )

Contract assets and contract liabilities

    10       (2,250 )

Accounts payable

    (1,733 )     641  

Accrued compensation and payroll taxes

    (475 )     (627 )

Customers' deposits

    (352 )     (112 )

Income taxes receivable and payable

    (66 )     (1,421 )

Prepaid expenses and other current assets

    (3,774 )     (8 )

Other assets and liabilities

    3,170       953  

Net cash provided by/(used in) operating activities

    2,618       (943 )

Investing activities

               

Capital expenditures

    (761 )     (981 )

Net cash used in investing activities

    (761 )     (981 )

Financing activities

               

Proceeds from revolving lines

    23,533       40,630  

Payments of debt on revolving lines of credit

    (29,341 )     (41,912 )

Payments of other debt

    (175 )     (179 )

Increase/(decrease) in drafts payable

    100       (131 )

Payments on finance lease obligations

    (202 )     (103 )

Stock options exercised and restricted shares retired for tax

    (193 )     123  

Net cash used in financing activities

    (6,278 )     (1,572 )

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

    19       (22 )

Net decrease in cash, cash equivalents and restricted cash

    (4,402 )     (3,518 )

Cash, cash equivalents and restricted cash - beginning of period

    14,658       12,737  

Cash, cash equivalents and restricted cash - end of period

  $ 10,256     $ 9,219  

Supplemental cash flow information

               

Interest paid

  $ 321     $ 408  

Income taxes paid

    170       1,393  

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

July 31, 2020

(Tabular amounts presented in thousands, except per share amounts)

 

 

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. 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, 2020 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 2020 and 2019 are for the three and six months ended July 31, 2020 and 2019, and for the fiscal years ended January 31, 2021 and 2020, respectively.

 

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one segment: Piping Systems. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. 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, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. 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, including the availability of credit insurance. In the U.S., collateral is not generally required. In the United Arab Emirates and Saudi Arabia, 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 at amounts due from customers net of an allowance for claims and doubtful accounts. 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. 

 

One of the Company’s accounts receivable in the total amount of $4.1 million as of July 31, 2020 and January 31, 2020 has been outstanding for several years. Included in this balance is a retention receivable amount of $3.6 million, of which, due to the long-term nature of the receivable, $1.6 million and $2.1 million were included in the balance of other long-term assets as of July 31, 2020 and January 31, 2020, respectively. The Company completed all of its deliverables in 2015 under the related contract, and has been engaged in ongoing active efforts to collect this outstanding amount. During the first quarter of 2020, the Company certified invoices of $0.5 million in the process of collection. In August 2020, the Company received approximately $0.2 million from the customer and additional receipts are expected in September 2020 and throughout the remainder of the year. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2019 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this receivable as of July 31, 2020. 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 July 31, 2020 and 2019no individual customer accounted for 10% of the Company’s consolidated net sales. For the six months ended July 31, 2020 and 2019, no individual customer accounted for more than 10% of the Company's consolidated net sales.

 

At July 31, 2020 and January 31, 2020one customer accounted for 14.4% and 13.3% of the Company's accounts receivable, respectively. 

 

 

 

Note 4 - Revenue recognition 

 

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 - which include all bundled products in which the Company designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. 

 

 

2)

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

 

In accordance with Accounting Standards Codification ("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 insulated or 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 as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

 

 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 and six months ended July 31, 2020 and 2019 are as follows:

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

2020

   

2019

 
   

Sales

   

% to Total

   

Sales

   

% to Total

   

Sales

   

% to Total

   

Sales

   

% to Total

 

Products

  $ 1,703       8 %   $ 5,860       16 %   $ 6,168       14 %   $ 10,757       18 %
                                                                 

Specialty Piping Systems and Coating

                                                               

Revenue recognized under input method

    9,784       48 %     15,451       42 %     18,346       43 %     24,238       40 %

Revenue recognized under output method

    8,877       44 %     15,356       42 %     18,592       43 %     25,948       42 %

Total

  $ 20,364       100 %   $ 36,667       100 %   $ 43,106       100 %   $ 60,943       100 %

 

The input method, as noted in ASC 606-10-55-20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion 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. 

 

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 for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.

 

 

Contract assets and liabilities:

 

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract 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 (unearned revenue) for contract 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 impacts the period end balances in these accounts.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of July 31, 2020 will be billed and collected within one year.

 

The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. In addition to these amounts, the Company has recorded $3.3 million of unbilled receivables from one of its subsidiaries in the Middle East in other assets on its consolidated balance sheet as of July 31, 2020.

 

   

Contract Assets

 
Balance January 31, 2019   $ 1,653  

Costs and gross profit recognized during the period for uncompleted contracts from the prior period

    (1,038 )

Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period

    1,368  
Closing Balance at April 30, 2019   $ 1,983  
Costs and gross profit recognized during the period for uncompleted contracts from the prior period     (1,509 )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period     3,000  
Closing Balance at July 31, 2019   $ 3,474  
         

Balance January 31, 2020

  $ 2,166  
Costs and gross profit recognized during the period for uncompleted contracts from the prior period     (2,896 )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period     3,630  
Closing Balance at April 30, 2020   $ 2,900  
Costs and gross profit recognized during the period for uncompleted contracts from the prior period     (1,743 )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period     593  
Closing Balance at July 31, 2020   $ 1,750  

 

   

Contract Liabilities

 
Balance January 31, 2019   $ 1,569  

Revenue recognized during the period for uncompleted contracts from the prior period

    (444 )

New contracts entered into that are uncompleted at the end of the current period

    721  
Closing Balance at April 30, 2019   $ 1,846  
Revenue recognized during the period for uncompleted contracts from the prior period     (1,250 )
New contracts entered into that are uncompleted at the end of the current period     545  
Closing Balance at July 31, 2019   $ 1,141  
         

Balance January 31, 2020

  $ 1,173  
Revenue recognized during the period for uncompleted contracts from the prior period     (17 )
New contracts entered into that are uncompleted at the end of the current period     (95 )
Closing Balance at April 30, 2020   $ 1,061  
Revenue recognized during the period for uncompleted contracts from the prior period     631  
New contracts entered into that are uncompleted at the end of the current period     (925 )
Closing Balance at July 31, 2020   $ 767  

 

Practical expedients:

 

Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies the practical expedient for these types of costs and as such are expensed in the period incurred.

 

As the Company's contracts are less than one year, the Company has applied the practical expedient 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.

 

 

 

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. Income earned in the United Arab Emirates is not subject to local country income tax. Additionally, 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 effective tax rate ("ETR") from operations for the second quarter and year-to-date in fiscal 2020 was (56.8%) and 12.3% compared to (7.6%) and 2.1% during the respective prior year periods. The change in the ETR from the prior year quarter to the current year quarter was largely due to changes in the mix of income and loss in various jurisdictions.

 

The amount of unrecognized tax benefits, including interest and penalties at July 31, 2020, recorded in other long-term liabilities was $0.1 million, all of which would impact the Company’s ETR if recognized. 

 

On March 7, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (H.R. 748) (the "CARES Act"). Among the changes to the U.S. federal income tax rules, the CARES Act restored net operating loss carryback rules that were eliminated by the U.S. Tax Cuts and Jobs Act ("Tax Act"), restored 100% bonus depreciation for qualified improvement property, modified the limit on the deduction for net interest expense and accelerated the timeframe for refunds of alternative minimum tax credits. With consideration to these changes to federal income tax rules, there is no net impact to the Company's deferred taxes due to the full valuation allowance. The Company will continue to evaluate the effects of the CARES Act as additional legislative guidance becomes available.

 

 

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 July 31, 2020, the Company performed a qualitative analysis assessment to determine if it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values. The Company assessed three asset groups as part of this analysis: United States, Canada and Middle East. The qualitative assessment indicated that it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values for the United States and Middle East asset groups. However, triggering events were identified related to the Company's Canada asset group, indicating potential impairment of the asset group's long-lived assets. Therefore, the Company performed a quantitative assessment to determine any potential impairment. After completion of this additional assessment, it was determined that there was no impairment of the Company's long-lived assets for the three and six months ended July 31, 2020 and 2019. 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 July 31, 2020 and January 31, 2020 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.

 

   

January 31, 2020

   

Foreign exchange change effect

   

July 31, 2020

 

Goodwill

  $ 2,254     $ (32 )   $ 2,222  

 

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. At July 31, 2020, the Company elected to perform a Step 0 qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's goodwill exceeded its carrying value. The qualitative assessment identified triggering events that indicated potential impairment of the Company's goodwill. Therefore, the Company proceeded to complete the Step 1 analysis to determine any potential impairment. The Step 1 analysis involved a quantitative fair valuation of the reporting unit associated with the Company's goodwill, including a market approach, transaction approach and discounted cash flow analysis. After completion of the Step 1 analysis, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment for the three and six months ended July 31, 2020 and 2019.

 

 

 

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. Prior to the 2017 Plan's expiration, grants were made to the Company's employees, officers and independent directors, as described below. 

 

The Company has prior incentive plans under which previously granted awards remain outstanding, but under which no new awards may be granted. At July 31, 2020 the Company had reserved a total of 534,670 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 has granted stock-based compensation awards to eligible employees, officers or independent directors. The following were the Company's stock-based compensation expenses for the periods presented:

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

2020

   

2019

 

Stock-based compensation expense

  $ 1     $ 3     $ 3     $ 8  

Restricted stock-based compensation expense

    259       403       476       552  

Total stock-based compensation expense

  $ 260     $ 406     $ 479     $ 560  

 

Stock Options

 

The Company did not grant any stock options during the three or six months ended July 31, 2020. The following tables summarizes the Company's stock option activity:

 

Option activity

  No. of Shares Underlying Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value  

Outstanding at January 31, 2020

    132     $ 8.98       3.2     $ 160  
Exercised     -       -       -       -  
Expired or forfeited     (13 )     -       -       -  

Outstanding at July 31, 2020

    119       9.20       2.9       4  
                                 

Exercisable at July 31, 2020

    119     $ 9.20       2.9     $ 4  

 

No stock options were exercised during the six months ended July 31, 2020

 

Unvested option activity

  No. of Shares Underlying Options     Weighted Average Grant Date Fair Value     Aggregate Intrinsic Value  

Outstanding at January 31, 2020

    3     $ 7.33     $ 4  
Vested     (3 )     -       -  
Expired or forfeited     -       -       -  

Outstanding at July 31, 2020

    -     $ -     $ -  

 

 

As of July 31, 2020, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the six months ended July 31, 2020:

 

Restricted stock activity

  Restricted Shares     Weighted Average Grant Price Per Share     Aggregate Intrinsic Value  

Outstanding at January 31, 2020

    321     $ 8.89     $ 2,857  

Granted

    156       5.88          
Vested and issued     (63 )     8.96          

Forfeited or retired for taxes

    (36 )     8.72          

Outstanding at July 31, 2020

    378     $ 7.63     $ 2,884  

 

As of July 31, 2020, there was $1.9 million of unrecognized compensation expense related to unvested restricted stock granted under the 2017 Plan. That cost is expected to be recognized over a weighted average period of 2.1 years.

 

 

Note 8 - Income/(loss) per share

 

   

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

2020

   

2019

 

Basic weighted average common shares outstanding

    8,126       7,887       8,087       7,937  

Dilutive effect of equity compensation plans

    152       315       -       185  

Weighted average common shares outstanding assuming full dilution

    8,278       8,202       8,087       8,122  
                                 

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

    248       73       197       203  

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

    152       315       203       185  
 

 

 

Note 9 - Debt

 

Debt totaled $10.5 million and $16.9 million at July 31, 2020 and January 31, 2020, respectively.

 

Paycheck Protection Program Loan. On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses.  The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program.

 

Guidance from the American Institute of Certified Public Accountants' ("AICPA") Technical Question and Answer Section 3200.18 states that if a company expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standards ("IAS") 20 - Accounting for Government Grants and Disclosure of Government Assistance to account for the PPP loan.  The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Therefore, the Company has recognized the earnings impact on a systematic basis over the periods in which the Company recognized as expenses the related costs for which the grants were intended to compensate. We noted that all of these expenses, and thus the related earnings impact, were incurred during the three months ended July 31, 2020.  

 

The IAS 20 guidance allows for recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected the former option, to make a more clear distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness. As such, we have recognized the proceeds in earnings during the three months ended July 31, 2020. The amounts are recognized in other income in the consolidated statements of operations. 

 

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, 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”).

 

The Company has used proceeds from the Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin.  The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility.  Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period.  Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility.  The facility fee is payable quarterly in arrears.

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of the assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the 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 cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00  at each quarter end on a trailing four-quarter basis; and (iii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis. The Company was in compliance with these covenants as of July 31, 2020

 

As of July 31, 2020, the Company had borrowed an aggregate of $2.5 million at rates of 6.25% and 4.17% resulting in a weighted average rate of 4.56% and had $5.2 million available under the Senior Credit Facility. 

 

 

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

The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at July 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 3.8% and expires in November 2020.

The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at July 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 4.3% and was originally set to expire in July 2020, however, the expiration has been extended to September 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.

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.

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.5 million at July 31, 2020). 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). Among other covenants, the credit arrangement establishes a maximum leverage ratio allowable and restricts the ability to undertake any additional debt. The facility has an interest rate of approximately 12.8% and was originally set to expire in June 2020, however, the expiration has been extended to September 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.

The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees the subsidiaries' debt including all foreign debt.

The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of July 31, 2020. On July 31, 2020, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt corridor rate plus 1.5% per annum for the Egypt credit arrangement. Based on these base rates, as of July 31, 2020, the Company's interest rates ranged from 3.8% to 12.8%, with a weighted average rate of 3.76%, and the Company could borrow $20.0 million under these credit arrangements. As of July 31, 2020, $4.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of July 31, 2020, the Company had borrowed $1.0 million, and had an additional $14.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of July 31, 2020 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, and was 4.55% at July 31, 2020. Principal payments began in January 2018.

On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.

 

 

 

Note 10 - Leases

 

Finance Leases. In 2019, the Company obtained two finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023.  In 2017, the Company obtained three finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature between April 2021 to September 2022.

 

In August 2016, the Company obtained a finance lease for 0.6 million Indian Rupees (approximately $8 thousand at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this finance lease was 15.6% per annum with monthly principal and interest payments of less than $1 thousand. This lease expired in July 2019. 

 

The Company has several significant operating lease agreements, with lease terms of one to 14 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.  Variable expenses generally represent the Company’s share of the landlord’s operating expenses.  The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement. 

 

At July 31, 2020, the Company had total operating lease liabilities of $11.9 million and total operating ROU assets of $10.9 million, which are reflected in the consolidated balance sheet. At July 31, 2020, the Company also had total finance lease liabilities of $0.9 million included in current maturities of long-term debt and long-term debt less current maturities, and total finance ROU assets of $1.0 milliowhich were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.

 

 

Supplemental balance sheet information related to leases is as follows: 

 

Operating and Finance leases:

 

July 31, 2020

   

January 31, 2020

 

Finance leases assets:

               

Property and Equipment - gross

  $ 1,659     $ 1,696  

Accumulated depreciation and amortization

    (640 )     (551 )

Property and Equipment - net

  $ 1,019     $ 1,145  
                 

Finance lease liabilities:

               

Finance lease liability short-term

  $ 375     $ 417  

Finance lease liability long-term

    502       677  

Total finance lease liabilities

  $ 877     $ 1,094  
                 

Operating lease assets:

               

Operating lease ROU assets

  $ 10,889     $ 11,475  
                 

Operating lease liabilities:

               

Operating lease liability short-term

  $ 1,338     $ 1,040  

Operating lease liability long-term

    10,563       11,214  

Total operating lease liabilities

  $ 11,901     $ 12,254  

 

Total lease costs consist of the following: 

 

Lease costs

Consolidated Statements of Operations Classification

 

Three Months Ended July 31, 2020

   

Three Months Ended July 31, 2019

   

Six Months Ended July 31, 2020

   

Six Months Ended July 31, 2019

 

Finance Lease Costs

                                 

Amortization of ROU assets

Cost of sales

  $ 53     $ 51     $ 101     $ 102  

Interest on lease liabilities

Interest expense

    18       8       37       17  

Operating lease costs

Cost of sales, SG&A expenses

    610       581       1,222       1,132  

Short-term lease costs (1)

Cost of sales, SG&A expenses

    213       82       236       266  

Sub-lease income

SG&A expenses

    (20 )     (20 )     (40 )     (40 )

Total Lease costs

  $ 874     $ 702     $ 1,556     $ 1,477  

 

(1) Includes variable lease costs, which are immaterial

 

 

Supplemental cash flow information related to leases is as follows:

 

   

Six Months Ended July 31, 2020

   

Six Months Ended July 31, 2019

 

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

               

Financing cash flows from finance leases

  $ 202     $ 103  

Operating cash flows from finance leases

  $ 37       17  

Operating cash flows from operating leases

  $ 1,385       1,127  

 

   

Six Months Ended July 31, 2020

 

ROU Assets obtained in exchange for new lease obligations:

       

Finance leases liabilities

  $ -  

Operating leases liabilities

    53  

 

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

 

   

July 31, 2020

 

Weighted-average remaining lease terms (in years):

       

Finance leases

    2.6  

Operating leases

    8.3  
         

Weighted-average discount rates:

       

Finance leases

    7.7 %

Operating leases

    7.9 %

 

Maturities of lease liabilities as of July 31, 2020, are as follows:

 

Year:

 

Operating Leases

   

Finance Leases

 

For the six months ended January 31, 2021

  $ 949     $ 239  

For the year ended January 31, 2022

    2,340       325  

For the year ended January 31, 2023

    2,229       264  

For the year ended January 31, 2024

    2,061       142  

For the year ended January 31, 2025

    1,330       -  

For the year ended January 31, 2026

    1,144       -  
                 

Thereafter

    6,214       -  

Total lease payments

    16,267       970  

Less: amount representing interest

    (4,366 )     (93 )

Total lease liabilities at July 31, 2020

  $ 11,901     $ 877  

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.8 million and $0.7 million for the three months ended July 31, 2020 and 2019, and $1.5 million and $1.4 million for the six months ended July 31, 2020 and 2019, respectively. 

 

 

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries was $1.2 million as of July 31, 2020 and 2019, respectively, and is related to fixed deposits that also serve as security deposits and guarantees. 

 

                 
   

July 31, 2020

   

July 31, 2019

 

Cash and cash equivalents

  $ 9,106     $ 8,052  

Restricted cash

    1,150       1,167  

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

  $ 10,256     $ 9,219  

 

 

Note 12 - Fair value

 

The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line 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

 

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), which provides guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by the scheduled discontinuation of LIBOR on December 31, 2021. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. This ASU is effective for all entities; however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022. The Company's Senior Credit Facility which matures on September 20, 2021 bears interest using an alternate base rate or LIBOR plus an applicable margin.  Based on the maturity of the Senior Credit Facility prior to the discontinuation of LIBOR, the Company does not expect a material impact from the adoption of this standard on the financial statements of the Company.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this standard and the impact to the financial statements of the Company.

 

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of existing disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company will adopt this standard in its Annual Report on Form 10-K footnote disclosures for the year ended January 31, 2021 and does not expect a material impact on the financial statements of the Company.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A recently adopted amendment has delayed the effective date until fiscal years beginning after December 15, 2022. The Company is currently evaluating this standard and the impact to the financial statements of the Company. 

 

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

 

 

 

Item 2.

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

 

The statements contained under the caption 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. 

 

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 the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented.

 

COVID-19 and Depressed Oil and Gas Market Impact

 

In January 2020, an outbreak of novel coronavirus (also known as "COVID-19") started in Wuhan, China. The virus was recognized as a pandemic by the World Health Organization on March 11, 2020. In response to the rapid spread of the virus, national and local governments have instituted varying levels of actions to contain the virus's spread.

 

As of the date of filing this Form 10-Q, all of the Company’s plants are operating and, to date, the Compay's global supply chains have not been materially affected by the global pandemic. Due to the unprecedented actions taken to stem the spread of the virus and the uncertainty of the duration and impact of additional actions that may be required, the resulting future disruptions to the Company’s operations are uncertain.

 

In response to the extraordinary steps taken to combat the spread of COVID-19 and the impact of decreased oil prices, the Company has updated its forecasts more frequently during this period to determine the continuing financial impact of these events on the Company’s results of operations. The resulting actions from these reforecasts included reducing planned capital expenditures and non-essential operating expenses. With the actions taken, the Company believes it will remain in compliance with its debt covenants under its Senior Credit Facility; however, foreign cash can be repatriated to maintain debt covenant compliance if necessary.

 

On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the program rules.

 

Based on the facts and circumstances of the Company's loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the three months ended July 31, 2020. The amounts are recognized in other income in the consolidated statements of operations. 

 

Beginning in April 2020, the Company's subsidiary, Perma-Pipe Canada, Ltd. ("PPCA"), applied for relief in the form of grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. PPCA was approved for and received approximately $0.6 million in grants under the program during the six months ended July 31, 2020. The CEWS program is scheduled to continue through November 2020. PPCA plans to apply for additional grants under the program, however there is no guarantee that PPCA will be granted any additional funds under the program. The CEWS proceeds are recognized in other income in the consolidated statements of operations. 

 

The Company’s results of operations, financial condition, liquidity and cash flow in 2020 have been adversely affected by the COVID-19 pandemic and the current depressed market prices for oil and gas and will likely continue to be materially adversely affected, the extent to which remains unclear at this time. See Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K for additional information.

 

19

 

RESULTS OF OPERATIONS

 

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

 

($ in thousands)

 

Three Months Ended July 31,

   

Six Months Ended July 31,

 
   

2020

   

2019

   

Change favorable/(unfavorable)

   

2020

   

2019

   

Change favorable/(unfavorable)

 
   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent

 

Net sales

  $ 20,364             $ 36,667             $ (16,303 )     (44 %)   $ 43,106             $ 60,943             $ (17,837 )     (29 %)
                                                                                                 

Gross profit

    2,364       12 %     9,653       26 %     (7,289 )     (76 %)     5,831       14 %     14,375       24 %     (8,544 )     (59 %)
                                                                                                 

General and administrative expenses

    4,488       22 %     4,814       13 %     326       7 %     8,792       20 %     9,271       15 %     479       5 %
                                                                                                 

Selling expense

    1,331       7 %     1,416       4 %     85       6 %     2,978       7 %     2,676       4 %     (302 )     (11 %)
                                                                                                 

Interest expense, net

    118               209               91       44 %     304               419               115       27 %
                                                                                                 

Other income

    3,739               241               3,498       1451 %     3,674               256               3,418       1335 %
                                                                                                 

Income/(loss) from operations before income taxes

    166               3,455               (3,289 )     (95 %)     (2,569 )             2,265               (4,834 )     (213 %)
                                                                                                 

Income tax (benefit)/expense

    (101 )             (265 )             (164 )     (62 %)     (315 )             47               362       770 %
                                                                                                 

Net income/(loss)

    267               3,720               (3,453 )     (93 %)     (2,254 )             2,218               (4,472 )     (202 %)

 

Three months ended July 31, 2020 ("current quarter") vs. Three months ended July 31, 2019 ("prior year quarter")

 

Net sales:

 

Net sales were $20.4 million in the current quarter, a decrease of $16.3 million, or 44%, from $36.7 million in the prior year quarter. The decrease in the Company's our Canadian and offshore Gulf of Mexico businesses resulted from the impact of lower oil prices combined with project delays in the Company's U.S. and Middle East district heating and cooling businesses arising as a result of the COVID-19 pandemic.

 

 

Gross profit:

 

Gross profit decreased to $2.4 million, or 12% of net sales, in the current quarter from $9.7 million, or 26% of net sales, in the prior year quarter. This decrease was primarily driven by lower sales volumes.

 

General and administrative expenses:

 

General and administrative expenses decreased to $4.5 million in the current quarter from $4.8 million in the prior year quarter. This decrease was primarily driven by cost cutting measures enacted as a result of the COVID-19 pandemic. 

 

Selling expenses:

 

Selling expenses decreased to $1.3 million in the current quarter, compared to $1.4 million in the prior year quarter due primarily to lower personnel costs.

 

Interest expense, net:

 

Net interest expense decreased to $0.1 million in the current quarter, compared to $0.2 million in the prior year quarter. This decrease was driven by lower interest rates on borrowings during the period.  

 

Other income:

 

Other income increased to $3.7 million in the current quarter, compared to $0.2 million in the prior year quarter, an increase of $3.5 million. This increase was primarily the result of recognition of the Company's reasonable expectation of forgiveness of its PPP loan proceeds during the period of $3.2 million.

 

Income/(loss) from operations before income taxes:

 

Income from operations before income taxes decreased by $3.3 million to $0.2 million in the current quarter from $3.5 million in the prior year quarter. The decrease resulted from lower revenues in North America due to declines in oil prices and certain of the Company's Middle East and U.S. district heating and cooling operations due to project delays as a result of the COVID-19 pandemic. The negative impact of these lower revenues was offset by increased income from the Company's new operations in Egypt and by reduced overhead as a consequence of cost reduction initiatives.

 

Income tax (benefit)/expense:

 

The Company's worldwide effective tax rates ("ETR") were (56.8%) and (7.6%) in the current quarter and the prior year quarter, respectively. The change in the ETR from the prior year quarter to the current year quarter was largely due to changes in the mix of income and loss in various jurisdictions, as well as the impact of the lower current quarter pre-tax income as compared to the prior year quarter.

 

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, and earnings in its Indian subsidiary are partially permanently reinvested. The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of Indian, Canadian and Egyptian withholding taxes will be recorded. As such, the Company has accrued a liability of $0.4 million as of July 31, 2020 related to these taxes.

 

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

 

 

Net income:

 

The resulting net income of $0.3 million in the current quarter was a decline of $3.4 million over the net income of $3.7 million in the prior year quarter. The decrease resulted from lower revenues in North America due to declines in oil prices and certain of the Company's Middle East and U.S. district heating and cooling operations due to project delays as a result of the COVID-19 pandemic. The negative impact of these lower revenues was offset by increased income from the Company's new operations in Egypt and by reduced overhead as a consequence of cost reduction initiatives.

 

Six months ended July 31, 2020 ("year-to-date") vs. Six months ended July 31, 2019 ("prior year year-to-date")

 

Net sales:

 

Net sales were $43.1 million in the current year-to-date, a decrease of $17.8 million, or 29%, from $60.9 million in the prior year year-to-date. The decrease resulted from lower revenues in North America due to declines in oil prices and certain of the Company's Middle East and U.S. district heating and cooling operations due to project delays as a result of the COVID-19 pandemic.

 

Gross profit:

 

Gross profit decreased to $5.8 million, or 14% of net sales, in the current year-to-date from $14.4 million, or 24% of net sales, in the prior year year-to-date. This decrease was primarily driven by lower sales volumes.

 

General and administrative expenses:

 

General and administrative expenses decreased to $8.8 million in the current year-to-date from $9.3 million in the prior year year-to-date. This decrease was primarily driven by cost cutting measures enacted as a result of the COVID-19 pandemic.  

 

Selling expenses:

 

Selling expenses increased to $3.0 million in the current year-to-date, compared to $2.7 million in the prior year year-to-date, an increase of $0.3 million, or 11%. This increase was primarily due to payroll expenses for additional sales employees added in 2019.

 

Interest expense, net:

 

Net interest expense decreased to $0.3 million in the current year-to-date, compared to $0.4 million in the prior year year-to-date. This decrease was driven by lower interest rates on borrowings during the period. 

 

Other income:

 

Other income increased to $3.7 million in the current year-to-date, compared to $0.3 million in the prior year year-to-date, an increase of $3.4 million. This increase was primarily the result of recognition of the Company's reasonable expectation of forgiveness of the PPP loan proceeds during the period of $3.2 million.

 

Income/(loss) from operations before income taxes:

 

Income/(loss) from operations before income taxes decreased by $4.8 million to a loss of $2.6 million in the current year-to-date from income of $2.2 million in the prior year year-to-date. The decrease resulted from lower revenues in North America due to declines in oil prices and certain of the Company's Middle East and U.S. district heating and cooling operations due to project delays as a result of the COVID-19 pandemic. The negative impact of these lower revenues was offset by increased income from the Company's new operations in Egypt and by reduced overhead as a consequence of cost reduction initiatives.

 

 

Income tax (benefit)/expense:

 

The Company's worldwide ETRs were 12.3% and 2.1% in the current year-to-date and the prior year year-to-date, respectively. The change in the ETR from the prior year year-to-date to the current year year-to-date was largely due to 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, and earnings in its Indian subsidiary are partially permanently reinvested. The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of the Indian, Canadian and Egyptian withholding taxes will be recorded. As such, the Company has accrued a liability of $0.4 million as of July 31, 2020 related to these taxes.

 

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

 

Net income/(loss):

 

The resulting net loss of $2.3 million in the current year-to-date was a decline of $4.5 million over the net income of $2.2 million in the prior year year-to-date. The decrease resulted from lower revenues in North America due to declines in oil prices and certain of the Company's Middle East and U.S. district heating and cooling operations due to project delays as a result of the COVID-19 pandemic. The negative impact of these lower revenues was offset by increased income from the Company's new operations in Egypt and by reduced overhead as a consequence of cost reduction initiatives.

Liquidity and capital resources

Cash and cash equivalents as of July 31, 2020 were $9.1 million compared to $13.4 million on January 31, 2020. On July 31, 2020, $0.2 million was held in the U.S., and $8.9 million was held at the Company's foreign subsidiaries. The Company's working capital was $31.1 million on July 31, 2020 compared to $31.4 million on January 31, 2020. Of the working capital components, cash decreased $4.3 million as the result of the movements discussed below.

 

Net cash provided by operating activities in the current quarter was $2.6 million, as compared to net cash used in operating activities of $0.9 million in the prior year quarter. This increase was primarily due to the Company collecting more accounts receivable and purchasing less inventory for projects in the current quarter compared to the prior year quarter.

 

Net cash used in investing activities in the current quarter and prior year quarter was $0.8 million and $1.0 million, respectively. This was due to a decrease in investments in fixed assets needed for the operation of the business, including the deferral of certain capital expenditures until the global markets recover from the current downturn.

 

Net cash used in financing activities in the current quarter and prior year quarter was $6.3 million and $1.6 million, respectively. The primary reason for this change was that during the prior year quarter the Company's repayments exceeded its borrowings under its revolving credit facility by approximately $1.3 million, whereas in the current quarter, repayments exceeded borrowings by approximately $5.8 million. Debt totaled $10.5 million and $16.9 million as of July 31, 2020 and January 31, 2020, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.

 

 

Revolving line - 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, 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”). 

 

The Company has used proceeds from the Senior Credit Facility to pay outstanding amounts under a prior credit facility, a cash collateralized letter of credit, and for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or LIBOR, plus, in each case, an applicable margin.  The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility.  Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period.  Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility.  The facility fee is payable quarterly in arrears.

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the 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 cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of their EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis; and (iii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of their EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis. The Company was in compliance with these requirements as of July 31, 2020.

 

As of July 31, 2020, the Company had borrowed an aggregate of $2.5 million at a rate of 6.25% and 4.17% resulting in a weighted average rate of 4.56% and had $5.2 million available under the Senior Credit Facility. 

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E. and Egypt as discussed further below. The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at July 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 3.8% and expires in November 2020.

 

The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at July 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 4.3% and was originally set to expire in July 2020, however, the expiration has been extended to September 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.

 

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.

 

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.5 million at July 31, 2020). 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). Among other covenants, the credit arrangement establishes a maximum leverage ratio allowable and restricts the ability to undertake any additional debt. The facility has an interest rate of approximately 12.8% and was originally set to expire in June 2020, however, the expiration has been extended to September 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.

 

 

The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees the subsidiaries' debt including all foreign debt.

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of July 31, 2020. On July 31, 2020, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt corridor rate plus 1.5% per annum for the Egypt credit arrangement. Based on these base rates, as of July 31, 2020, the Company's interest rates ranged from 3.8% to 12.8%, with a weighted average rate of 3.76%, and the Company could borrow $20.0 million under these credit arrangements. As of July 31, 2020, $4.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of July 31, 2020, the Company had borrowed $1.0 million, and had an additional $14.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of July 31, 2020 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Additional Liquidity from the PPP

 

On May 1, 2020, the Company entered into a loan agreement under the SBA's PPP and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to such effect may be provided. Under the current provisions of the CARES Act, any recipients of a PPP loan may be subject to an audit to confirm they qualify for the loan and that the proceeds were used for qualified expenses as prescribed by the program rules.

 

Based on the facts and circumstances of the Company's loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the three months ended July 31, 2020. The amounts are recognized in other income in the consolidated statements of operations. 

 

Accounts receivable: 

In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million. The Company completed all of its deliverables in 2015, and has since then collected approximately $37.8 million as of July 31, 2020, with a remaining balance due in the amount of $4.1 million. Included in this balance is an amount of $3.6 million, which pertains to retention clauses within the agreements of the Company's customer (contractor), and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $1.6 million of this retention amount was reclassified to a long-term receivable account.

 

The Company has been engaged in ongoing active efforts to collect the outstanding amount, but due to the current global pandemic and associated government shutdowns, has not made any collections during the six months ended July 31, 2020. During fiscal 2019, the Company received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. During the first quarter of 2020, the Company has certified invoices of $0.5 million in the process of collection. In August 2020, the Company received approximately $0.2 million from the customer and additional receipts are expected in September 2020 and throughout the remainder of the year. As a result, the Company did not reserve any allowance against this amount as of July 31, 2020. 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, 2020 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 July 31, 2020. Based upon the foregoing and the material weakness remediation activities implemented by the Company as described below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective and operating to provide reasonable assurance 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.  Management has previously reported on a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company’s auditors during the audit of the Company’s financial statements for the fiscal year ended January 31, 2020 related to the Company’s revenue recognition under percentage of completion accounting. Specifically, the Company had improperly recognized revenue for an open project based on imputed sales amounts greater than the total contracted amount. This accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews and led management to conclude that a material weakness existed with respect to the Company’s internal control over financial reporting.

 

As described below, the Company has adopted and implemented policies and procedures to ensure that personnel will not deviate from the Company's standard accounting policies and perform monthly reviews that will result in appropriate revenue recognition.

 

Notwithstanding the material weakness described above, the Company's management, including the Chief Executive Officer and Chief Financial Officer, based on the remediation activities implemented by the Company as described below, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Changes in Internal Control over Financial Reporting. 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.

 

The Company's auditors identified an accounting error during the audit of the Company's financial statements for the fiscal year ended January 31, 2020 related to the Company's revenue recognition under percentage of completion accounting. Specifically, the Company had improperly recognized revenue for an open project based on imputed sales amounts greater than the total contracted amount. The accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews and led management to conclude that a material weakness existed with respect to the Company's internal control over financial reporting. As a result of the material weakness identified, the Company has updated its internal control over financial reporting as discussed in its remediation plan below.

 

Remediation Plan for the Material Weakness in Internal Control over Financial Reporting. To address the material weakness regarding the improper recognition of revenue for open projects, the Company has substantially completed the following:

 

Reinforced the importance of adherence to Company policies regarding entering into and subsequently modifying contracts with customers, and confirmed in monthly meetings with managers that no contracts have been entered into that deviate from Company’s accounting policies;  

Created additional reports to identify potential system errors and exceptions related to project revenues and costs where higher risk may exist for inappropriate revenue recognition;

Reviewed listing of material request invoices each month to identify if any significant items are included and reviewed with additional scrutiny for appropriate revenue recognition;

Ensured adherence to guidelines for preparation of the Company's monthly revenue and contribution margin presentation to include all components of a project in one line to provide full visibility of total job performance; and

Implemented a monthly meeting between accounting personnel to discuss and analyze the asset and liability work-in-process accounts to identify any specific projects that require further investigation.

 

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to revenue recognition under percentage of completion accounting and will address the related material weakness described above. However, the material weakness cannot be considered fully remediated until the remediation processes have been in operation for an acceptable period of time and successfully tested.

 

 

PART II OTHER INFORMATION

 

Item 6.

Exhibits

 

 

 

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:

September 9, 2020

/s/ David J. Mansfield

 

 

David J. Mansfield

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:

September 9, 2020

/s/ D. Bryan Norwood

 

 

D. Bryan Norwood

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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