10-K 1 ppih20240131_10k.htm FORM 10-K ppih20240131_10k.htm
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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

☒

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

For the fiscal year ended January 31, 2024

OR

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

For the transition period from ___________ to ____________

Commission File No. 001-32530

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

logo10q.jpg

Delaware

36-3922969

(State or other jurisdiction of incorporation or organization)

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

24900 Pitkin Road, Suite 309, Spring, Texas

77386

(Address of principal executive offices)

(Zip Code)

(847) 966-1000 
(Registrant's telephone number, including area code) 

 

 

 

 

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

 

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $.01 par value per share

PPIH

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.         Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.         Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant) was $58,714,498.95 based on the closing sale price of $8.15 per share as reported on the Nasdaq Global Market on July 31, 2023.

The number of shares of the registrant's common stock outstanding at April 26, 2024 was 8,016,781.

 
Table of Contents

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant's definitive proxy statement for its 2024 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after January 31, 2024, are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 
Table of Contents

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-K

 

For the fiscal year ended January 31, 2024

TABLE OF CONTENTS

Item

Page

Part I

 

1.

Business

2

 

Products and Services

2

 

Employees

3

 

Information about our Executive Officers

4
  Available information 4

1A.

Risk Factors

5

1B.

Unresolved Staff Comments

9
1C. Cybersecurity 9

2.

Properties

9

3.

Legal Proceedings

9

4.

Mine Safety Disclosures

9

 

 

 

Part II

 

5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

10

6.

 [Reserved]

11

7.

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

11

7A.

Quantitative and Qualitative Disclosures About Market Risk

18

8.

Financial Statements and Supplementary Data

18

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

18

9A.

Controls and Procedures

19

9B.

Other Information

19
9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 19

 

 

 

Part III

 

10.

Directors, Executive Officers and Corporate Governance

 20

11.

Executive Compensation

 20

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 20

13.

Certain Relationships and Related Transactions, and Director Independence

 20

14.

Principal Accounting Fees and Services

 20

 

 

 

Part IV

 

15.

Exhibits and Financial Statement Schedules

 20

 

Report of Independent Registered Public Accounting Firm (PCAOB Auditor ID Number 248)

21
16. Form 10-K Summary 53

 

Signatures

54

 

 
Table of Contents

 

 

PART I

 

Cautionary Statements Regarding Forward Looking Information

 

Certain statements contained in this Annual Report on Form 10-K, 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 ("Exchange Act"), 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, the following:

 

Market Condition Risks

 

  •

fluctuations in the price of oil and natural gas and its impact on customer order volume for the Company's products;
  •

the Company’s ability to purchase raw materials at favorable prices and to maintain beneficial relationships with its suppliers;
 

•

decreases in government spending on projects using the Company’s products, and challenges to the Company’s customers’ liquidity and access to capital funds;   

 

Financial Risks

 

 

•

the Company’s ability to repay its debt and renew expiring international credit facilities;
 

•

the Company’s ability to effectively execute its strategic plan and achieve sustained profitability and positive cash flows;
 

•

the Company's ability to collect a long-term account receivable related to a project in the Middle East;               
 

•

the Company's ability to interpret and adapt to changes in tax regulations and legislation; 
 

•

the Company’s ability to use its net operating loss carryforwards;                   
 

•

the Company's inability to establish and maintain effective internal control over financial reporting;               
 

•

changes in estimates which could result in a reduction or elimination of previously recorded revenues and profit in connection with "over time" revenue recognition;                 

 

Business Condition Risks

 

 

•

the timing of order receipt, execution, delivery and acceptance for the Company’s products;               
 

•

the Company’s ability to successfully negotiate progress-billing arrangements for its large contracts;             
  •

aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates;
 

•

the Company’s ability to manufacture products free of latent defects and to recover from suppliers who may provide defective materials to the Company;             
 

•

reductions or cancellations of orders included in the Company’s backlog;           
  •

risks and uncertainties specific to the Company's international business operations;

 

General Risks

 

  •

the Company’s ability to attract and retain senior management and key personnel;
 

•

the Company’s ability to achieve the expected benefits of its growth initiatives; 
 

•

the impact of cybersecurity threats on the Company’s information technology systems.
 

 

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Table of Contents

 

Item 1. BUSINESS

 

Perma-Pipe International Holdings, Inc., collectively with its subsidiaries ("PPIH", the "Company" or the "Registrant"), is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company was incorporated in Delaware on October 12, 1993. The Company's common stock is traded on the Nasdaq Global Market and reported under the ticker symbol "PPIH". The Company's fiscal year ends on January 31. Years, results and balances described as 2024, 2023 and 2022 are for the fiscal year ending January 31, 2025 and the fiscal years ended January 31, 2024 and 2023, respectively.

 

PRODUCTS AND SERVICES

 

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, (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines, and (iv) liquid and powder based anti-corrosion coatings applied both to the external and internal surfaces of steel pipe, including shapes such as bends, reducers, tees, and other spools/fittings used in pipelines for the transportation of oil and gas products and potable water. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

The Company frequently engineers and custom fabricates to job site dimensions and incorporates provisions for thermal expansion due to cycling temperatures. Most of the Company's piping systems are produced for underground installations and, therefore, require trenching, which is the responsibility of the general contractor, and completed by unaffiliated installation contractors.

 

The Company’s piping systems are typically sold as a part of discrete projects, and customer demand can vary by reporting period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

Operating Facilities. The Company operates its business from the following locations:

 

Perma-Pipe, Inc.

Perma-Pipe Middle East LLC

Rolling Meadows, IL

Abu Dhabi, United Arab Emirates

New Iberia, LA

Perma-Pipe Middle East FZC

Lebanon, TN

Fujairah, United Arab Emirates

Perma-Pipe Canada, Ltd.

Perma-Pipe Saudi Arabia, LLC

Camrose, Alberta, Canada

Perma-Pipe Gulf Arabia, LLC
Vars, Ontario, Canada Dammam, Kingdom of Saudi Arabia

Perma-Pipe Egypt for Metal Fabrication and Insulation Industries (Perma-Pipe Egypt) S.A.E.

Riyadh, Kingdom of Saudi Arabia

Beni Suef, Egypt

Perma-Pipe India Pvt. Ltd
  Gandhidham, India

 

Customers and sales channels. The Company's customer base is industrially and geographically diverse. In the United States, the Company employs inside and outside sales managers who use and assist a network of independent manufacturers' representatives, none of whom sell products that are competitive with the Company's piping systems. The Company employs a direct sales force to market and sell products and services in Canada, India, Egypt, and in several countries in the Middle East. On a country-by-country basis, and where advantageous, the Company uses an agent network to assist in marketing and selling the Company's products and services.

 

For the years ended January 31, 2024 and 2023, no one customer accounted for greater than 10% of the Company's consolidated net sales.

 

As of January 31, 2024  and 2023, no one customer accounted for greater than 10% of accounts receivable. 

 

Backlog. The Company’s backlog on January 31, 2024 was $68.4 million, compared to $38.5 million on January 31, 2023, most of which is expected to be completed within the year ending January 31, 2025. The increase in the backlog was the result of new awards year-over-year in excess of completed projects during the year in North America and the Middle East. The Company defines backlog as the expected total revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. In the event of a cancellation, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred, and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenues from the Company's reported backlog. Additionally, as a result of the Company's contracts having a duration of less than one year, a practical expedient was applied regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. 

 

Intellectual property. The Company owns various patents covering its piping and electronic leak detection systems, as well as for some of the features of its sensor cables. These patents are not material to the Company either individually or in the aggregate because the Company believes its sales would not be materially reduced if patent protection was not available. The Company owns numerous trademarks connected with its piping and leak detection systems throughout the world. 

 

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Suppliers. The basic raw materials used in production are pipes and tubes made of carbon steel, steel alloys, copper, ductile iron, or polymers and various chemicals such as polyols, isocyanate, urethane resin, polyethylene, and fiberglass, which are mostly purchased in bulk quantities. The Company believes there are currently adequate supplies and sources of availability of these needed raw materials.

 

The sensor cables used in the Company's leak detection and location systems are manufactured to the Company's specifications by companies regularly engaged in manufacturing such cables. The Company assembles the monitoring component of its leak detection and location systems from components purchased from many sources.

 

Due to the current inflationary environment, raw material supply shortages and transportation delays, the Company routinely experiences delays and increased prices for raw materials used in the Company's production processes. To mitigate these impacts, the Company has implemented several strategies, including purchasing from alternative suppliers and planning for material purchases further in advance to ensure the Company has materials when needed. The Company also adjusts its pricing to customers to offset the impacts of the raw material price increases. These impacts are expected to continue throughout 2024, and the resulting future disruptions to the Company’s operations are uncertain.

 

Competition. The piping systems market is highly competitive. The Company believes that quality, service, engineering design capabilities and support, a comprehensive product line, timely execution, plant location and price are key competitive factors in the industry. The Company also believes it has a more comprehensive product line than any competitor. 

 

Research and Development. The Company's research and development efforts primarily focus on activities and development to meet product specifications mandated by its customers and the industry.  

 

Environmental impacts. The Company provides insulated pipe for district energy systems. A district energy system is a highly efficient way to provide heating or cooling to buildings. A central plant produces steam or chilled water that flows through insulated pipes to buildings. The goal of a district energy system is to centralize production to deliver energy efficiency, reduce operating costs, and use less equipment compared to individual buildings with their own boilers and chillers.  In addition, district heating and cooling plants can provide better pollution control than localized boilers and cooling equipment.

 

EMPLOYEES

 

As of January 31, 2024, the Company had approximately 179 full-time employees working in the United States, of which approximately 76 were under two collective bargaining agreements expiring on April 30, 2024 and March 31, 2025. As of January 31, 2024, there were approximately 640 full-time employees working at the Company's international locations. The Company considers its relationship with its employees to be good.

   

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Table of Contents

 

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

 

The following table sets forth information regarding the executive officers of the Company as of April 26, 2024:

 

   

Executive officer of the

Name

Offices and Positions; Age

Company since

David J. Mansfield

Director, President and Chief Executive Officer; Age 64

2016
     
Matthew E. Lewicki Vice President and Chief Financial Officer; Age 41 2023

 

David J. Mansfield: President, Chief Executive Officer ("CEO") and member of the Board of Directors since November 2016. From 2015 to 2016, Mr. Mansfield served as Chief Financial Officer ("CFO") of Compressor Engineering Corp. & CECO Pipeline Services Co., which provides products and services to the gas transmission, midstream, gas processing, and petrochemical industries. In this position, he had overall responsibility for the group’s financial affairs, including the development and execution of turnaround plans and the successful negotiation of a corporate refinancing. From 2009 to 2014, Mr. Mansfield served as CFO and as Acting CEO of Pipestream, Inc., a venture capital-owned technology development company providing a suite of products to the oil and gas pipeline industry. From 1992 to 2009, Mr. Mansfield was employed with Bredero Shaw, the world’s largest provider of protective coatings for the oil and gas pipeline industry, most recently as Vice President Strategic Planning. During his tenure with Bredero Shaw, Mr. Mansfield served in numerous roles including Vice President Controller, and Commercial General Manager, Europe, Africa & the former Soviet Union region, and played a key role in strategy development and merger and acquisition activities as the company grew from annual revenues of $100 million to over $900 million.  He is a Fellow member of the Association of Chartered Certified Accountants.

 

Matthew E. Lewicki: Appointed Vice President and CFO in October 2023, and previously served as Chief Accounting Officer from May 2023 to October 2023. From 2019 to 2023, Mr. Lewicki served as Corporate Controller of HMT Holdings Corp, Inc., a global oil and gas manufacturing and infrastructure services company, consisting of manufacturing of above-ground storage tanks and associated materials, oilfield maintenance and repair services, and inspection services. In this position, Mr. Lewicki was responsible for the consolidated financial affairs of the worldwide organization, including financial strategy, mergers and acquisitions, and treasury management. From 2013 to 2019, Mr. Lewicki served as Senior Manager of Financial Planning and Reporting for Quanta Services, Inc., a fortune 300 electric, oil and gas, and telecommunications infrastructure services company. In this role, Mr. Lewicki was responsible for overseeing financial reporting and SEC compliance, and financial planning and analysis which consisted of strategic planning, budgeting, forecasting, mergers and acquisition integration, and investment strategy. He is a Certified Public Accountant in the State of Texas.

 

AVAILABLE INFORMATION

 

The Company files with, and furnishes to, the Securities and Exchange Commission ("SEC") reports, including annual meeting materials, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The Company maintains a website, www.permapipe.com, where these reports and related materials are available free of charge as soon as reasonably practicable after the Company electronically files with, or furnishes such material to, the SEC. The information on the Company's website is not part of this Annual Report on Form 10-K and is not incorporated into this or any other filings by the Company with the SEC.

 

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Item 1A. RISK FACTORS

 

The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.

 

Market Condition Risks

 

The Company's operations and earnings may be significantly affected by changes in oil and gas prices. Oil and gas prices depend on local, regional, and global events or conditions that affect supply and demand. Any material decline in oil or gas prices could have a material adverse effect on the demand for the Company's products, its operations and financial condition.  

 

The Company may be unable to purchase raw materials at favorable prices, or maintain beneficial relationships with its suppliers, which could result in a shortage of supply, or increased pricing. There can be no assurance regarding the availability of supply for key components of the Company's products. The lack of supply of these components could result in an adverse effect on the financial condition of the Company.  The steel industry in particular is highly cyclical in nature, and at times, pricing can be highly volatile due to a number of factors beyond the Company's control. The Company utilizes escalation clauses and bid expiration dates to mitigate the impact of this volatility on its earnings. This volatility may negatively impact market conditions thus reducing project activity and the Company's results of operations. If the United States or other countries in which the Company operates impose tariffs on imports of raw materials, including steel, used in the Company's operations, could have an adverse impact on the business.
 

The Company regularly updates its quoting system for the movements in raw material prices and seeks to recover price differentials through increases in the selling price of the Company's products; however, the Company may not always be successful, and any increase in raw material prices that is not offset by an increase in the Company's prices that is accepted by customers could have an adverse effect on the Company's business, results of operations, financial position and cash flows. In addition, if the Company is unable to acquire timely raw material supplies, it may need to decline opportunities, which could also have an adverse effect on the Company's business, results of operations, financial position and cash flows.

 

Due to the current inflationary environment, raw material supply shortages and transportation delays, the Company could experience delays and increased prices for raw materials used in production processes. To mitigate these impacts, the Company has implemented several strategies, including purchasing from alternative suppliers and planning for material purchases farther in advance to ensure the Company has materials when needed. The Company also adjusts its pricing to customers to offset the impacts of the raw material price increases. The Company is unable to predict the duration of the current inflationary environment, raw material supply shortages and transportation delays, and the resulting future disruptions to the Company’s operations are uncertain.

 

Decreases in government spending on projects using the Company’s products, and challenges to the Company’s customers’ liquidity and availability of capital funds, may adversely impact demand for the Company’s products. Decreases in government spending on projects using the Company's products can have a negative impact on the Company's sales volumes. Uncertainty about economic market conditions poses risks that the Company's customers may postpone spending for capital improvement and maintenance projects in response to tighter credit markets or negative financial news, which could have a material adverse effect on the demand for the Company's products.

 

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Financial Risks

 

The Company may be unable to maintain compliance with existing debt covenants, repay its debt or renew its expiring international credit facilities. There is a risk that the Company may not be able to remain in compliance with its credit agreement covenants. If there were an event of default under the Company's current revolving credit facilities, the lenders could cause all amounts outstanding with respect to that debt to be due and payable immediately. The Company cannot assure that its cash flow will be sufficient to fully repay amounts due under any of the financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or restructure the payments under any such arrangements. Complying with the covenants under the Company's domestic and/or foreign revolving credit facilities may limit management's discretion by restricting options such as:

 

 

•

incurring additional debt;
 

•

entering into transactions with affiliates;
 

•

making investments or other restricted payments;
 

•

paying dividends, capital returns, intercompany obligations and other forms of repatriation; and
  •

creating liens.

 

The Company has approximately $3.5 million becoming due in the year ending January 31, 2025 under its various foreign revolving lines of credit. The Company’s credit arrangements used by its Middle Eastern subsidiaries are renewed on an annual basis. In addition to these credit arrangements, the Company also obtains financing in the Middle East on a project-by-project basis. The Company has approximately $0.1 million becoming due in the year ending January 31, 2025 under its project financing agreements. While the Company believes that it will be able to renew its Middle East credit arrangements and will have continued access to individual project financing, there is no assurance that such arrangements will be renewed or made available in similar amounts or on similar terms and conditions as the current arrangements, or that such individual project financing will be available for projects that the Company is interested in pursuing in the future.

 

Any replacement credit arrangements outside of the United States may further limit the Company’s ability to repatriate funds from abroad. Repatriation of funds from certain countries may become limited based upon regulatory restrictions or unfeasible economically because of the taxation of funds when moved to another subsidiary or to the parent company. In addition, any refinancing, replacement or additional financing the Company may obtain could contain similar or more restrictive covenants than those currently applicable to the Company. The Company’s ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management’s control.

 

The Company may be unable to achieve sustained levels of profitability or positive cash flows in the future. There is no guarantee that the Company will be able to achieve profitability or positive cash flows in the future. The Company’s inability to successfully achieve profitability and positive cash flows may result in it experiencing a serious liquidity deficiency resulting in material adverse consequences that could threaten its viability.

 

The Company extended credit to a customer for a project in the Middle East in 2013 and, if the Company is unable to collect this account receivable, its future profitability could be adversely impacted.  One of the Company’s accounts receivable in the total amount of $2.2 million and $2.7 million as of January 31, 2024 and 2023, respectively, has been outstanding for several years. As of January 31, 2024, the entire balance represents a retention asset that is payable upon the commissioning of the system. Due to the long-term nature of the receivable, $1.4 million and $2.5 million were included in other long-term assets as of January 31, 2024 and 2023, respectively. The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer as additional activities must be completed prior to the overall system completion and commissioning. Nevertheless, the Company has been actively involved in ongoing efforts to collect this outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances. Additionally, at various times throughout 2023 and in June 2022, the Company received a partial payment to settle $0.6 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in the year ending January 31, 2024 under customary trade credit terms which supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against this outstanding receivable as of January 31, 2024. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such uncollected amounts.

 

The Company may be impacted by interpretations and changes in tax regulations and legislation which could adversely affect the Company's results of operations. Tax interpretations, regulations, and legislation in the various jurisdictions in which the Company operates are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or benefit, and income tax assets or liabilities.  Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require judgment by the Company that may be challenged by the applicable taxation authorities upon audit.  Although the Company believes its assumptions, judgements and estimates are reasonable, changes in tax laws or the Company's interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in the Company's consolidated financial statements.

 

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The Company’s ability to use its net operating loss carryforwards and certain other tax attributes may be limited. The Company’s net operating loss (“NOL”) carryforwards in the U.S. could expire unused and be unavailable to offset future income tax liabilities because of their limited duration or because of restrictions under U.S. tax law. As of January 31, 2024, the Company had $30.1 million of gross federal NOLs and $21.0 million of gross state NOLs available to offset the Company’s future taxable income. Of the gross federal NOL amount, $22.7 million will begin to expire between tax years 2036 and 2037 and the remainder has an indefinite carryforward. The state NOLs expire at various dates from 2029 to 2053. In addition, the Company's ability to use its NOLs may be limited in the event of future changes in its stock ownership. As a result, if the Company earns net taxable income, the Company’s ability to use its pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in a future tax liability of the Company. In addition, at the state level, there may be periods in the future during which the use of NOLs is suspended or otherwise limited, which could result in a state tax liability which would otherwise not arise. 

 

The Company’s inability to establish and maintain effective internal control over financial reporting could harm its business and financial results. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that the Company would prevent or detect a misstatement of its financial statements or fraud.

 

The Company may experience changes in estimates which could result in a reduction or elimination of previously recorded revenues and profit in connection with "over time" revenue recognition. Certain of the Company's contracts recognize revenues using periodic recognition of income. For these contracts, the Company uses the "over time" accounting method. This methodology allows revenue and profits to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when amounts are known or can be reasonably estimated. Revisions can occur at any time and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress towards completion on long-term contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.

 

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Business Condition Risks

 

Delays in the timing of order receipt, execution, delivery and acceptance for the Company’s products generally negatively impact the Company’s operating results. The Company's operating results in any reporting period could be negatively impacted as a result of delays in the timing of project execution.

 

The Company may not be able to successfully negotiate progress-billing arrangements for its large contracts, which could adversely impact the Company’s working capital needs, cash flows and credit risk. The Company sells systems and products under contracts that allow the Company to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. The Company attempts to negotiate progress-billing milestones on large contracts to help manage its working capital and cash flows, and to reduce the credit risk associated with these large contracts. Consequently, changes in accepted billing terms of contracts could impact the Company's requirements for working capital and cash flows.

 

Aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates could drive down the Company's profits and reduce the Company's revenue. The Company's business is highly competitive. Some of the Company's competitors are large organizations with access to considerable financial resources. Additionally, many of the Company's products are also subject to competition from alternative technologies and alternative products. In periods of declining demand, the Company's fixed cost structure may limit its ability to cut costs, which may be a competitive disadvantage compared to companies with more flexible cost structures, or may result in reduced operating margins, operating losses and negative cash flows.

 

The Company may be subject to claims for damages for defective products. The Company warrants its products to be free of certain defects. The Company has, from time to time, had claims alleging defects in its products. The Company may experience material product liability claims in the future and it could incur significant costs to defend such claims. While the Company currently has product liability insurance that it believes to be sufficient, the Company cannot be certain that its product liability insurance coverage will be adequate for liabilities that may be incurred in the future or that such coverage will continue to be available to the Company on commercially reasonable terms. Any claims relating to defective products that result in liabilities exceeding the Company's insurance coverage could have a material adverse effect on the Company's business, results of operations, financial position and cash flows.

 

The Company may not be able to recover costs and damages from vendors that supply defective materials. The Company may receive defective materials from its vendors that are incorporated into the Company's products during the manufacturing process. While the Company mitigates this risk through contract terms, traceability and specifications, and has recourse to recover from vendors the costs to repair, remake or replace defective products, such costs could be greater than the amount that can be recovered.  Such excess costs could have an adverse effect on the Company's business, results of operations, financial position and cash flows.

 

Product and service orders included in the Company’s backlog may be reduced or cancelled. The Company defines backlog as the revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. Orders may be canceled or modified at any time. In the event of a cancellation, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any reduction or cancellation of orders may result in revenues that are lower than expected.

 

The Company's results of operations could be adversely affected by changes in international regulations and other activities of government agencies related to the Company’s operations. International sales represent a significant portion of the Company's total sales. The Company's sales to foreign customers were 65.6% and 63.8% in the years ended January 31, 2024 and 2023, respectively. The Company's anticipated growth and profitability may require increasing foreign sales volume and may necessitate further international expansion. The Company's results of operations could be adversely affected by changes in trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and other factors. These factors include, but are not limited to, changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. We cannot predict the impact of changes in foreign policies adopted by the current U.S. administration will have on our business. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales. In addition, these risks can include delays in collection of accounts receivable. Because the Company conducts a significant portion of its business activities in the Gulf Cooperation Council ("GCC"), the political and economic events of the countries that comprise the GCC can have a material effect on the Company’s business, results of operations, financial condition, and cash flows.

 

Due to the international scope of the Company’s operations, it is subject to a complex system of commercial and trade regulations around the world. The Company’s foreign subsidiaries are governed by laws, rules and business practices that differ from those of the United States. If the activities of these entities do not comply with U.S. laws or business practices or the Company’s Code of Business Conduct, then violations of these laws may result in severe criminal or civil sanctions, which could disrupt the Company’s business, and result in an adverse effect on the Company’s reputation, business and results of operations or financial condition. The Company cannot predict the nature, scope, or effect of future regulatory requirements to which its operations might be subject or the manner in which existing laws might be administered or interpreted.

 

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General Risks

 

The Company may be unable to retain its senior management and key personnel. The Company's ability to meet its strategic and financial goals will depend to a significant extent on the continued contributions of its senior management and key personnel. Future success will also depend in large part on the Company's ability to identify, attract, motivate, effectively utilize and retain highly qualified managerial, sales, marketing and technical personnel. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it more difficult to manage the Company's business and could adversely affect operations and financial results.

 

The Company may not be able to achieve the expected benefits from its growth initiatives. The Company's cyclical or general expansion may result in unanticipated adverse consequences, including significant strain on management, operations and financial systems, as well as on the Company's ability to attract and retain competent employees. In the future, the Company may seek to grow its business by investing in new or existing facilities, making acquisitions, entering partnerships and joint ventures, or constructing new facilities, which could introduce additional risks, including:

 

 

•

strain on working capital;
 

•

diversion of management's attention away from other activities, which could impair the operation of existing businesses;
 

•

failure to successfully integrate an acquired business or facility into existing operations;
 

•

inability to maintain key pre-acquisition business relationships;
 

•

loss of key personnel of an acquired business or facility;
 

•

exposure to unanticipated liabilities; and
 

•

failure to realize efficiencies, synergies and cost savings.

 

As a result of these and other factors, including general economic risks, the Company may not be able to realize the expected benefits from future acquisitions, new facility developments, partnerships, joint ventures or other investments.

 

The Company's information technology systems may be negatively affected by cybersecurity threats. The Company faces risks relating to cybersecurity attacks that could cause the loss of confidential information and other business disruptions. The Company relies extensively on computer systems to process transactions and manage its business, and its business is at risk from and may be impacted by cybersecurity attacks. The Company employs a number of measures to prevent, detect and mitigate these threats, which include data and email encryption, strong password management policy, firewall systems, anti-virus software, and frequent backups. However, there is no guarantee such efforts will be successful in preventing a cyber-attack. A successful attack could adversely affect the Company's reputation and results of operations, including through lawsuits by third parties. The Audit Committee of the Board of Directors is responsible for overseeing the adequacy and effectiveness of the Company's cybersecurity policies and programs. 

 

Item 1B. UNRESOLVED STAFF COMMENTS - None.

 

Item 1C. CYBERSECURITY

 

Risk Management and Strategy

 

The Company's policies and practices are based on frameworks and standards that address risks through a comprehensive, cross-functional approach that assess, identify, monitor, and mitigate material risks from cybersecurity threats as part of the overall enterprise risk management ("ERM") process. This includes the collection and storage of data, and being responsive to incidents as they occur. Further, the Company's processes and technology are utilized to develop, implement, and maintain appropriate measures to safeguard information systems in protecting the integrity, availability, and confidentiality of data. Additionally, the Company engages certain third parties to assist in network monitoring and control testing, among other functions of similar capacity. 

 

The Company's cybersecurity program focuses on the following areas:

 

 

•

Technological safeguards that are designed to protect the Company's information systems from cybersecurity threats, including the prevention and detection of systems, access controls, and firewalls, which the Company assesses the vulnerability and cybersecurity threat and makes necessary improvements.
 

•

Utilization of third parties as part of the Company's risk-based approach in identifying and overseeing cybersecurity risks.
 

•

The Company maintains an incident plan that addresses the Company's response to a cybersecurity event, which is periodically reviewed and updated.

 

While the Company is working to adopt the National Institute of Standards and Technology ("NIST") cybersecurity framework, the Company's on-going investment in information systems and utilization of external 3rd parties represents the best means for extensively testing both the design and operational effectiveness of cybersecurity controls, and to ensure continuity and functionality of the Company's operating systems.

 

As of the date of this report, the Company has not experienced any material cybersecurity events. However, the presence of new or more advanced forms of cybersecurity threats could have a material and adverse impact on the business, results of operations, and financial position. For further discussion relating to this topic, see Item 1A. Risk Factors "The Company's information technology systems may be negatively affected by cybersecurity threats."

 

Governance

 

The Audit Committee of the Board of Director's has the responsibility of overseeing the Company's cybersecurity risks. The Director of Information Technology provides periodic updates to the Board of Director's regarding actions taken to mitigate the Company's exposure and protection to cybersecurity risks. Management routinely evaluates the Company's security processes, procedures, and systems to determine if enhancements are needed to reduce the possibility of a future cybersecurity event. This includes safeguards implemented by the Company, such as a multi-factor authentication process for remote access to systems; restricted firewall settings; network monitoring, email phishing tests, and enhancing the Company's backup recovery strategy, among others. 

 

The Director of Information Technology is responsible for assessing, monitoring, and managing the Company's cybersecurity risks. The Director of Information Technology has extensive experience in leading the Company's information systems and has previously led cybersecurity teams for several large global organizations prior to joining the Company. 

 

The Director of Information Technology, along with members of management, inform the Audit Committee on cybersecurity risks by providing periodic updates regarding (i) Status of ongoing cybersecurity initiatives and strategies, (ii) The overall state of the Company's security program and potential exposure to risks, and (iii) Incident reports and learning from any cybersecurity events. Further, the Director of Information Technology maintains an open dialog regarding any significant developments in cybersecurity risks, ensuring the Audit Committee's oversight is proactive and responsive. 

 

In addition to periodic updates to the Audit Committee, the Director of Information technology, in his capacity, regularly informs the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") regarding matters related to cybersecurity risks and incidents. This ensures the highest level of management are informed of potential risks associated with cybersecurity that could have a material and adverse effect on the Company. 

 

 

Item 2. PROPERTIES

 

Location

Leased and/or Owned

Illinois

Leased building and office space

Louisiana

Owned building and leased land

Tennessee

Leased building, office space, and land

Texas

Leased office space
Camrose, Alberta, Canada Owned building with office space on owned land; leased land and leased office space

Vars, Ontario, Canada

Leased building, office space, and land

India

Leased building, office space, and land

Dammam, Kingdom of Saudi Arabia

Owned building and office space on leased land
Riyadh, Kingdom of Saudi Arabia Leased building and office space

United Arab Emirates

Leased office space and building on leased land; owned building with office space on leased land

Egypt

Leased building and office space on leased land

 

For further information, see Note 6 - Leases, in the Notes to Consolidated Financial Statements.

 

Item 3.

LEGAL PROCEEDINGS - The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability and general liability claims. The Company accrues a liability for these matters when it is considered probable that future costs will be incurred, and the amount can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes with respect to any legal proceedings, and its experience in contesting, litigating and settling other similar matters. 

 

As of January 31, 2024, the Company was actively involved in a legal proceeding that arose in 2018 with an existing customer which was resolved subsequent to the end of the year. For further information, see Note 13 - Subsequent events, in the Notes to Consolidated Financial Statements.

 

Item 4.

MINE SAFETY DISCLOSURES - Not applicable.

 

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PART II

 

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company's common stock is traded on the Nasdaq Global Market under the symbol "PPIH". 

 

As of April 26, 2024, there were approximately 50 stockholders of record and other additional stockholders for whom securities firms or banks acted as nominees.

 

The Company has never declared or paid a cash dividend and does not anticipate paying any cash dividends on its common stock in the foreseeable future. Management presently intends to retain all available funds for the development of the Company's business and for use as working capital, including potentially repurchasing its common stock. The Company's credit facilities also restrict dividend payments. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition, credit agreement restrictions and other relevant factors. For further information, see "Financing" in Item 7 and Note 5 - Debt, in the Notes to Consolidated Financial Statements.

 

The Transfer Agent and Registrar for the Company's common stock is Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342 Brentwood, NY 11717, (877) 830-4936 or (720) 378-5591.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company has not made any sale of unregistered securities during the preceding three fiscal years.

 

Issuer Purchases of Equity Securities

 

The repurchase program approved on October 4, 2021, authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022, the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the 12 months ended January 31, 2024, the Company used the remaining $1.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock. 

 

The following table sets forth information with respect to repurchases by the Company of its shares of common stock during 2022 and 2023 (In thousands, except per share data):  

 

Period

  

Total number of shares purchased

    

Average price paid per share

    

Total number of shares purchased as part of publicly announced plans or programs

    

Approximate dollar value of shares that may yet be purchased under the plans or programs

  

January 1, 2022 - January 31, 2022

     98     $ 8.81       98     $ 1,008  

July 1, 2022 - July 31, 2022

     5       8.85       5       964  

December 1, 2022 - December 31, 2022

     3       8.61       3       939  

July 1, 2023 - July 31, 2023

     37       8.51       37       628  

August 1, 2023 - August 31, 2023

     62       8.67       62       92  

September 1, 2023 - September 30, 2023

     10       8.95       10       -  

Total

     215               215          

 

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Item 6. [RESERVED] 

 

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), 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 Exchange Act 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 headings Cautionary Statements Regarding Forward Looking Information and Item 1A. Risk Factors.

 

The analysis presented below and discussed in more detail throughout this MD&A was organized to provide instructive information for better understanding the Company's results of operations, financial condition and cash flows. However, this MD&A should be read in conjunction with the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, including the notes thereto and the risk factors contained herein. The Company's fiscal year ends on January 31. Years, results and balances described as 2023 and 2022 are for the fiscal years ended January 31, 2024 and 2023, respectively.

 

The Company is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. Since the Company's revenues are significantly dependent upon discrete projects, the Company's operating results in any reporting period could be negatively impacted as a result of variations in the level of the Company's discrete project orders or delays in the timing of the specific project phases. 

 

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Results of Operations

Consolidated Results of Operations

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

 

   

Year Ended January 31,

  
   

2024

    

2023

    

Change favorable (unfavorable)

  
   

Amount

    

Percent of Net Sales

    

Amount

    

Percent of Net Sales

    

Amount

  

Net sales

   $ 150,668             $ 142,569             $ 8,099  
                                         

Gross profit

     41,458       28 %     38,301       27 %     3,157  
                                         

General and administrative expenses

     22,591       15 %     21,994       15 %     (597 )
                                         

Selling expense

     5,508       4 %     5,163       4 %     (345 )
                                         

Interest expense

     2,266               2,119               (147 )
                                         

Other (expense) income

     (1,202 )             533               (1,735 )
                                         

Income before income tax

     9,891               9,558               333  
                                         

Income tax (benefit) expense

     (3,320 )             3,613               6,933  
                                         

Net income

     13,211               5,945               7,266  
                                         

Less: Net income attributable to non-controlling interest

     2,740               -               2,740  
                                         

Net income attributable to common stock

     10,471               5,945               4,526  

 

Year ended January 31, 2024 Compared to year ended January 31, 2023

 

Net sales

 

Net sales were $150.7 million and $142.6 million in the years ended January 31, 2024 and 2023, respectively. The increase of $8.1 million was primarily a result of higher sales volumes in Saudi Arabia.

 

Gross profit

 

Gross profit was $41.5 million, or 28% of net sales and $38.3 million, or 27% of net sales, in the years ended January 31, 2024 and 2023, respectively. The increase of $3.2 million was driven primarily by higher sales volumes and improved gross margins in Saudi Arabia.

  

General and administrative expense

 

General and administrative expenses were $22.6 million and $22.0 million in the years ended January 31, 2024 and 2023, respectively. The increase of $0.6 million was primarily related to higher compensation costs.

 

Selling expenses

 

Selling expenses were $5.5 million and $5.2 million in the years ended January 31, 2024 and 2023, respectively. The increase of $0.3 million was driven by higher payroll expenses.  

 

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Interest expense

 

Interest expense remained consistent and was $2.3 million and $2.1 million in the years ended January 31, 2024 and 2023, respectively. The increase of $0.2 million was related to increased borrowings and, to a lesser extent, higher interest rates. 

 

Other expense

 

Other expense was $1.2 million, as compared to other income of $0.5 million in the years ended January 31, 2024 and 2023, respectively. The current year amount includes certain one-time adjustments, including a charge associated with the termination of the Company's pension plan and the settlement of a legal proceeding. The prior year amount includes income from the release of the Company's liability for a past project and insurance recovery income, partially offset by a non-cash pre-tax settlement charge resulting from the termination of the Company's pension plan. 

 

Income taxes

 

The Company's worldwide effective tax rates ("ETR") were (33.6%) and 37.8% in the years ended January 31, 2024 and 2023, respectively. The change in ETR was largely due to a partial release of the U.S. valuation allowance and changes in the mix of income and loss in various tax jurisdictions. For further information, see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

 

Net income attributable to common stock

 

Net income attributable to common stock was $10.5 million and $5.9 million in the years ended January 31, 2024 and 2023, respectively. The increase in net income was a result of the changes discussed above, less amounts attributable to non-controlling interest. 

 

Liquidity and capital resources

 

Cash and cash equivalents were $5.8 million as of January 31, 2024 and January 31, 2023, respectively. On January 31, 2024, approximately $0.1 million was held in the United States, and $5.7 million was held by the Company's foreign subsidiaries. The Company's working capital was $41.1 million on January 31, 2024 compared to $41.9 million on January 31, 2023. As of January 31, 2024, the Company had $4.0 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $15.4 million of borrowing capacity under its foreign revolving credit agreements. The Company had $5.5 million borrowed under the Renewed Senior Credit Facility and $6.4 million borrowed under its foreign revolving credit agreements at January 31, 2024.

 

Net cash from operating activities in the years ended January 31, 2024 and 2023 was $14.7 million and $(1.2) million, respectively. The current year increase of $15.9 million was due primarily to a rise customer deposits and accounts payable, partially offset by increases in accounts receivable, unbilled accounts receivable, and prepaid expenses and other current assets, as compared to the prior year.

 

Net cash from investing activities in the years ended January 31, 2024 and 2023 was $11.1 million and $6.4 million, respectively. The increase of $4.7 million was primarily due to investments capital assets in the Middle East and Canada during the period. 

 

Net cash from financing activities in the years ended January 31, 2024 and 2023 was $(3.3) million and $4.5 million, respectively. The decrease of $7.8 million during the year ended January 31, 2024 consisted of using the remaining $1.0 million authorized as part of the Company's share repurchase program to reacquire its outstanding shares of common stock, as compared to $0.1 million during the year ended January 31, 2023. Additionally, a net repayment was made from borrowings under the Company's credit facilities of approximately $6.8 million, as compared to net proceeds received from borrowings of approximately $5.5 million during the year ended January 31, 2023. Further, debt totaled $25.7 million and $24.4 million as of January 31, 2024 and 2023, respectively. For additional information, see Note 5 - Debt, in the Notes to Consolidated Financial Statements.

 

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The Company believes it will have the ability to satisfy all working capital needs and any planned capital expenditures for the twelve months following the issuance of the Consolidated Financial Statements, based on its existing cash on hand, cash flows from operations, and available credit facilities.

 

There was no restricted cash held in the United States on January 31, 2024 or January 31, 2023. Restricted cash held by foreign subsidiaries was $1.4 million and $1.0 million as of January 31, 2024 and 2023, respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.

 

The following table summarizes the Company's estimated contractual obligations on January 31, 2024

 

   

Year Ending January 31,

  

Contractual obligations

  

Total

    

2025

    

2026

    

2027

    

2028

    

2029

    

Thereafter

  

Revolving line - North America (1)

   $ 5,519     $ 5,519     $ -     $ -     $ -     $ -     $ -  

Mortgage note (2)

     4,512       239       239       239       239       239       3,317  

Revolving lines - foreign (3)

     3,632       3,632       -       -       -       -       -  

Long-term finance obligation (4)

     9,203       175       210       247       287       329       7,955  

Subtotal

     22,866       9,565       449       486       526       568       11,272  

Finance lease obligations

     113       25       34       37       17       -       -  

Operating lease obligations (5)

     15,709       1,871       1,714       1,701       1,656       1,286       7,481  

Uncertain tax position obligations (6)

     1,112       -       -       -       -       -       1,112  

Loan payable to GIG (7)

     2,753       -       -       -       -       -       2,753  

Total

   $ 42,553     $ 11,461     $ 2,197     $ 2,224     $ 2,199     $ 1,854     $ 22,618  

 

(1)

Interest obligations exclude floating rate interest on debt payable under the North American revolving line of credit. Based on the amount of such debt on January 31, 2024, and the weighted average interest rate of 10.0% on that debt, such interest was being incurred at an annual rate of approximately $0.6 million.

(2)

Scheduled maturities, excluding interest.

(3)

Scheduled maturities of foreign revolver line, excluding interest.
(4) This schedule represents the cash payments to be made under the lease agreement for the land and buildings sold by the Company in Lebanon, Tennessee and leased back from the purchaser in April 2021. These amounts differ from the liabilities presented as debt in the consolidated balance sheets as the debt amount represents future payments discounted to the present date. Refer to Note 5 - Debt, in the Notes to the Consolidated Financial Statements for further discussion of the transaction. 

(5)

Minimum contractual amounts, assuming no changes in variable expenses.

(6)

Refer to Note 7 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.
(7) Refer to Note 12 - Non-controlling interest, in the Notes to Consolidated Financial Statements for further discussion regarding the loan payable to Gulf Insulation Group ("GIG").

 

Financing

 

Revolving lines - North America.

 

On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).
 
On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. is a borrower under the Renewed Senior Credit Facility (collectively, the “Borrowers”).
 
The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, SOFR rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on SOFR rate borrowings is the SOFR rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility. 
 
Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million.
 
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The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. As of January 31, 2024, the calculated ratio was greater than 1.10 to 1.00. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of January 31, 2024.

 

The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.
 
As of January 31, 2024 , the Company had borrowed an aggregate of $ 5.5 million at a rate of  10.0% and had $ 4.0 million available under the Renewed Senior Credit Facility. As of January 31, 2023 , the Company had borrowed an aggregate of $ 4.4 million and had $ 9.9 million available under the Renewed Senior Credit Facility.

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as further described below:
 
United Arab Emirates
 
The Company has a revolving line for 8.0  million U.A.E. Dirhams (approximately $ 2.2 million at January 31, 2024 ) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately  9.00%  and is set to expire in May 2024.  The Company had borrowed an aggregate of $0.2 million and $0.6 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of January 31, 2024 and January 31, 2023, the Company had unused borrowing availability of approximately $1.9 million and $1.6 million, respectively. 

 

The Company has a revolving line for  20.5 million U.A.E. Dirhams (approximately $ 5.6 million at January 31, 2024 ) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately  9.00%  and is set to expire in May 2024. The Company had borrowed an aggregate of $0.1 million and $1.0 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of January 31, 2024 and January 31, 2023, the Company had unused borrowing availability of approximately $1.0 million and $1.8 million, respectively. 

 

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In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of  100.0 million Egyptian Pounds (approximately $ 3.2 million at  January 31, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of January 31, 2024, the facility has an interest rate of approximately  20.75% and expired in August 2023. This credit arrangement was subsequently renewed in November 2023 with substantially the same terms and conditions and expires in November 2024. The Company had borrowed an aggregate of $1.4 million and $3.1 million  as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of  January 31, 2024 and January 31, 2023, the Company had unused borrowing capacity of $3.2 million and $2.0 million, respectively. 
 
In December 2021, the Company entered into a credit arrangement for project financing with a bank of Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company received collections, the facility has decreased to a current amount of  2.1 million Egyptian Pounds (approximately $ 0.1 million at  January 31, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately  20.75% and, as of November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $ 0.1 million and $ 0.4 million outstanding  as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 
 
Saudi Arabia
 
In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of  37.0 million Saudi Riyal (approximately $ 9.9 million at January 31, 2024 .) This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary, and as of January 31, 2024, the facility has an interest rate of approximately  9.50% and is set to expire in May 2024. The Company had borrowed an aggregate of $3.2 million and $1.1 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The unused borrowing availability attributable to this credit arrangement at  January 31, 2024 and January 31, 2023, was $6.1 million and $2.3 million, respectively. 
 
These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. The amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 at January 31, 2024  and January 31, 2023, respectively.

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of January 31, 2024 , with the exception of those arrangements that may have expired and have not yet been renewed. Although certain of the arrangements may have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. As of   January 31, 2024 , interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these rates, as of January 31, 2024, the Company's interest rates ranged from  8.00% to 20.75% , with a weighted average rate of 10.71% , and the Company had facility limits totaling $ 24.5 million under these credit arrangements. As of January 31, 2024 , $ 8.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, the Company had borrowed approximately $6.4 million and had an additional $15.4 million of remaining borrowing capacity available under the foreign revolving credit arrangements. The foreign revolving line balances were included as current maturities of long-term debt in the Company's consolidated balance sheets as of January 31, 2024 and January 31, 2023, respectively. 
 
In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with GIG. In accordance with the promissory note, all principal is due and payable on the maturity date of April 9, 2026, with the option to prepay, in whole or in part, at any time prior to the maturity date, without premium or penalty. 

 

Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. As of January 31, 2024, the remaining balance on the mortgage in Canada is approximately 6.1 million Canadian Dollars ("CAD") (approximately $4.5 million at January 31, 2024). The interest rate is variable, and was 10.19% at January 31, 2024. The principal balance is included as a component of long-term debt, less current maturities in the Company's consolidated balance sheets and is presented net of issuance costs of $0.1 million as of January 31, 2024 and January 31, 2023, respectively.   

 

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Finance obligation - buildings and land.

On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold the Property for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company is leasing back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  As of January 31, 2024 and 2023, the Company had a net book value relating to this asset of $1.9 million and $2.1 million, respectively.  
 
In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $ 0.2  million is recognized in current maturities of long-term debt and the long-term portion of $ 9.0 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of  January 31, 2024 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

Accounts receivable

 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $39.7 million as of January 31, 2024, with a remaining balance due in the amount of $2.2 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this retention amount, $1.4 million is classified in a long-term asset account.

 

The Company has been actively involved in ongoing efforts to collect the outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances, and at various times throughout 2023 and in June 2022, the Company received a partial payment to settle $0.6 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in 2024  under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of January 31, 2024 . However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

 

Stock repurchase plan

 

The repurchase program approved on October 4, 2021, authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022, the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the 12 months ended January 31, 2024, the Company used the remaining $1.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock. 

 

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Critical accounting estimates and policies

 

The Company's significant accounting policies are discussed in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known.

 

Revenue recognition. In accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, the Company recognizes revenue for certain contracts when a customer obtains control of promised goods or services.  Other contracts recognize revenues using periodic recognition of income. For these contracts, the Company uses the "over time" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The amount of revenue recognized is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due to the Company are recognized in contract revenues when realization is probable, the amount can be reliably estimated, and the amount is not subject to reversal. See Note 4 - Revenue recognition, in the Notes to Consolidated Financial Statements, for further information relating to input and output accounting methods. 

 

Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets for realizability at each reporting period. The Company is now recognizing a tax benefit on losses in the United States after removal of a partial valuation allowance applied against its deferred tax assets.

 

The Company recognizes a tax position in its consolidated financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, See Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

 

New accounting pronouncements. See Recent accounting pronouncements in Note 2 - Significant accounting policies, in the Notes to Consolidated Financial Statements.

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not applicable.

 

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements of the Company for each of the two years in the years ended January 31, 2024 and 2023 and the notes thereto are set forth as an exhibit hereto.

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - None.

 

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Item 9A.

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 Exchange Act as of January 31, 2024. This evaluation included consideration of the controls, processes and procedures that are designed to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the certifying officers have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were not effective because of the material weaknesses described below under "Management's Annual Report on Internal Control Over Financial Reporting." 

 

Management's Annual Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, the Company's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of January 31, 2024. The framework on which such evaluation was based is contained in the report entitled Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

The Company's system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on management's evaluation, management has concluded that we did not maintain effective internal control over financial reporting as of January 31, 2024, due to the material weaknesses identified below. 

 

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. 

 

Material Weaknesses Identified in the Period Ended January 31, 2024.

 

We did not maintain effective information technology general controls ("ITGC") specifically related to the policies and procedures over the timely review of security management and monitoring, user access and security administration, password control, administrative access, program change management, data security and back up, review of third-party SOC 1 reports, and related management's review of the completeness and accuracy of certain system-generated reports. Additionally, we did not maintain effective controls over certain entity level controls over financial reporting related to the review and approval of manual journal entries, the timely review of the financial close process, and timely review of certain financial policies and procedures and respective HR policies. We also did not maintain effective controls at certain operating locations in the Middle East and North Africa ("MENA"), specifically we did not maintain sufficient documentation to support our evaluation that controls over business processes were operating effectively. 

 

Material Weakness Identified in the Prior Year Ended January 31, 2023 and Continuing Remediation Plan.

 

As previously disclosed in the January 31, 2023 10-K, management had identified a material weakness in the Company's internal control over financial reporting regarding the design and operating effectiveness of controls related to the existence of inventory during the fiscal year ended January 31, 2023. Specifically, the Company failed to appropriately perform cycle count procedures at one of the Company's operating facilities, resulting in a significant adjustment during the full physical inventory count at period end. Further, management’s review of the process and resulting adjustments on a periodic basis failed to identify the issue. The material weakness did not result in any material misstatements to the Company’s consolidated financial statements. The Company's remediation plans progressed during the year ended January 31, 2024, and included hiring of an additional resource with inventory management expertise, engaged outside consultants for additional expertise to review current practices to assist in updating and monitoring inventory count policies and procedures, and performed physical counts periodically throughout the year at the Lebanon, Tennessee plant to supplement the cycle count process. The Company has also redesigned cycle count parameters to ensure higher value and more active inventory parts are counted more frequently and include additional review by finance and accounting personnel to ensure any necessary adjustments are addressed in a timely manner; and reviewed and updated physical organization of inventory to better identify and segregate inventory. 

 

Management has determined that with its new control over quarterly physical counts at the plant, along with updated reviews, the Company has changed its controls over the existence of inventory. As a result, the Company has determined that the material weakness over the existence of inventory at the above Lebanon plant has been remediated as of January 31, 2024. 

 

Remediation Plan for the Material Weaknesses Identified in the Period Ended January 31, 2024. 

 

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

 

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

 

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

 

Changes in Internal Control over Financial Reporting. While the Company continues to implement design enhancements to our internal control procedures, we believe that, other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the fourth quarter of the fiscal year ending January 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

Attestation Report of Registered Public Accounting Firm. This Annual Report does not contain an attestation report of our independent registered public accounting firm related to internal control over financial reporting because the rules for smaller reporting companies provide an exemption from the attestation requirement. 

 

 

Item 9B.

OTHER INFORMATION - Not applicable.

 
 
Item 9C.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS - Not applicable.

 

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PART III

 

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2024 annual meeting of stockholders.

 

Information with respect to executive officers of the Company is included in Part I, Item 1, hereof under the caption "Information about our Executive Officers".

 

Item 11.

EXECUTIVE COMPENSATION

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2024 annual meeting of stockholders.

 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table provides information regarding the number of shares of common stock that may be issued upon exercise of outstanding options, warrants and rights under the Company's equity compensation plans and the weighted average exercise price and number of shares of common stock remaining available for issuance under those plans as of January 31, 2024.

 

   

Number of shares to be issued upon exercise of outstanding options, warrants and rights

  

Weighted-average exercise price of outstanding options, warrants and rights

  

Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))

Plan Category

  

(a)(1)

  

(b)(1)

  

(c)(2)

Equity compensation plans approved by stockholders

  

22,300

  

$11.15

  

169,503

 

 

(1) The amounts shown in columns (a) and (b) of the above table do not include 222,852 outstanding shares of restricted stock granted under the Company's 2013 Omnibus Stock Incentive Plan as amended on June 14, 2013, the 2017 Omnibus Stock Incentive Plan as amended on June 13, 2017 ("2017 Plan") or the 2021 Omnibus Stock Incentive Plan dated May 26, 2021 ("2021 Plan").

(2) The 2017 Plan expired in June 2020. The 2021 Plan will expire on May 26, 2024.

 

The other information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2024 annual meeting of stockholders.

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2024 annual meeting of stockholders.

 

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2024 annual meeting of stockholders.

 

 

PART IV

 

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

a.

List of documents filed as part of this report:

(1) Financial Statements - Consolidated Financial Statements of the Company

Refer to Part II, Item 8 of this report.

(2) Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

(3) Report of Registered Public Accounting Firm (Grant Thornton LLP, Houston, Texas, Auditor Firm ID 248)

 

b.

Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section of this report.

 

c.

The response to this portion of Item 15 is submitted under 15a(2) above.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Perma-Pipe International Holdings, Inc.

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Perma-Pipe International Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended January 31, 2024, and the related notes and financial statement schedule included in Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Revenue at U.S. operating entities for specialty piping systems and coating is recognized using the input method over time

As described further in Note 2 and 4 to the consolidated financial statements, the Company’s U.S. operating entities record specialty piping and coating systems revenue over time based upon the costs incurred to date relative to the estimated total contract costs. Significant changes in estimates could have a material effect on the Company’s results of operations. We identified revenue being recognized using the input method over time as a critical audit matter.

 

The principal considerations for our determination that revenue recognition using the input method over time is a critical audit matter are the Company’s estimates include the forecasted costs to complete the contract that may vary significantly from past estimates due to changes in facts and circumstances. These estimates are based on management’s assessment of the current status of the contract and historical results.

 

Our audit procedures included the following, among others:

 

 •

Obtained supporting documentation for a sample of contract costs incurred to date as well as recalculated revenue recognition based on the percentage of completion;

 •

Evaluated the reasonableness of management's estimates related to the cost to complete for contracts through testing of the key components of the estimated costs to complete;

 •

Performed a retrospective review to assess management's historical ability to accurately estimate the transaction price and cost to complete the contracts including investigating significant cost changes; and

 •

Obtained confirmations of significant contract terms for certain significant new contracts. 

 

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2004.

 

Houston, Texas

April 26, 2024

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

  

Year ended January 31,

 
  

2024

  

2023

 
         

Net sales

 $150,668  $142,569 

Cost of sales

  109,210   104,268 

Gross profit

  41,458   38,301 
         

Operating expenses

        

General and administrative expenses

  22,591   21,994 

Selling expense

  5,508   5,163 

Total operating expenses

  28,099   27,157 
         

Income from operations

  13,359   11,144 
         

Interest expense

  2,266   2,119 

Other (expense) income

  (1,202)  533 

Income before income tax

  9,891   9,558 
         

Income tax (benefit) expense

  (3,320)  3,613 
         

Net income

  13,211   5,945 

Less: Net income attributable to non-controlling interest

  2,740   - 

Net income attributable to common stock

 $10,471  $5,945 
         

Weighted average common shares outstanding

        

Basic

  7,977   7,976 

Diluted

  8,073   8,116 
         

Earnings per share attributable to common stock

        

Basic

 $1.31  $0.75 

Diluted

 $1.30  $0.73 

 

See accompanying notes to consolidated financial statements.

 

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

  

Year ended January 31,

 
  

2024

  

2023

 
         

Net income

 $13,211  $5,945 
         

Other comprehensive income (loss)

        

Currency translation adjustments, net of tax

  898   (4,592)

Minimum pension liability adjustment, net of tax

  -   1,247 

Comprehensive income (loss)

 $14,109  $2,600 

Less: Comprehensive income attributable to non-controlling interest

  2,740   - 

Total comprehensive income attributable to common stock

 $11,369  $2,600 

 

See accompanying Notes to Consolidated Financial Statements.

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

  

January 31,

 
  

2024

  

2023

 

ASSETS

        

Current assets

        

Cash and cash equivalents

 $5,845  $5,773 

Restricted cash

  1,395   1,020 

Trade accounts receivable, less allowance for doubtful accounts of $699 at January 31, 2024 and $612 at January 31, 2023

  46,646   42,010 

Inventories

  15,541   14,738 

Prepaid expenses and other current assets

  9,697   7,357 

Unbilled accounts receivable

  16,597   11,634 

Costs and estimated earnings in excess of billings on uncompleted contracts

  3,097   3,126 

Total current assets

  98,818   85,658 

Long-term assets

        

Property, plant and equipment, net of accumulated depreciation

  37,620   26,518 

Operating lease right-of-use asset

  6,467   4,527 

Deferred tax assets

  7,919   696 

Goodwill

  2,222   2,227 

Other long-term assets

  2,665   3,340 

Total long-term assets

  56,893   37,308 

Total assets

 $155,711  $122,966 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Trade accounts payable

 $25,323  $14,754 

Accrued compensation and payroll taxes

  1,214   1,179 

Commissions and management incentives payable

  4,523   4,764 

Revolving line - North America

  5,519   4,387 

Current maturities of long-term debt

  4,071   6,227 

Customers' deposits

  4,264   1,951 

Operating lease liability short-term

  914   912 

Other accrued liabilities

  9,039   5,549 

Billings in excess of costs and estimated earnings on uncompleted contracts

  495   1,743 

Income taxes payable

  2,380   2,324 

Total current liabilities

  57,742   43,790 

Long-term liabilities

        

Long-term debt, less current maturities

  4,229   4,389 

Long-term finance obligation

  11,788   9,215 

Deferred compensation liabilities

  1,212   1,608 

Deferred tax liabilities

  1,217   909 

Operating lease liability long-term

  6,270   4,252 

Other long-term liabilities

  1,275   1,019 

Total long-term liabilities

  25,991   21,392 

Non-controlling interest

  6,266   - 

Commitments and contingencies

          

Stockholders' equity

        

Common stock, $.01 par value, authorized 50,000 shares; 8,017 issued and outstanding at January 31, 2024 and 8,004 issued and outstanding at January 31, 2023

  80   80 

Additional paid-in capital

  60,063   62,562 

Treasury stock, 112 shares at January 31, 2024 and 3 shares at January 31, 2023

  (968)  (26)

Retained earnings

  12,088   1,617 

Accumulated other comprehensive loss

  (5,551)  (6,449)

Total stockholders' equity

  65,712   57,784 

Total liabilities and stockholders' equity

 $155,711  $122,966 
         

 

See accompanying notes to consolidated financial statements.

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

 

  

Common Stock

  

Additional Paid-in Capital

  

(Accumulated Deficit) Retained Earnings

  

Treasury Stock

  

Accumulated Other Comprehensive Loss

  

Total Stockholders' Equity

 

Total stockholders' equity on January 31, 2022

 $82  $61,766  $(2,295) $(1,992) $(3,104) $54,457 
                         

Net income

  -   -   5,945   -   -   5,945 

Common stock issued under stock plans, net of shares used for tax withholding

  -   (206)  -   -   -   (206)

Repurchase of common stock

  -   -   -   (69)  -   (69)

Retirement of treasury stock

  (2)     (2,033)  2,035      - 

Stock-based compensation expense

  -   1,002   -   -   -   1,002 

Pension liability adjustment

  -   -   -   -   1,247   1,247 

Foreign currency translation adjustment

  -   -   -   -   (4,592)  (4,592)

Total stockholders' equity on January 31, 2023

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

Net income

  -   -   10,471   -   -   10,471 

Common stock issued under stock plans, net of shares used for tax withholding

  -   (274)  -   -   -   (274)

Repurchase of common stock

  -   -   -   (942)  -   (942)

Stock-based compensation expense

  -   913   -   -   -   913 

Acquisition-related adjustment

  -   (3,138)  -   -   -   (3,138)

Foreign currency translation adjustment

  -   -   -   -   898   898 

Total stockholders' equity on January 31, 2024

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

 

Shares

 

2023

  

2022

 

Balances at beginning of year

  8,007,002   8,151,754 

Treasury stock purchased

  -   (4,887)

Shares issued, net of shares used for tax withholding

  66,726   94,416 

Prior year adjustments

  (56,947)  (234,281)

Balance end of year

  8,016,781   8,007,002 

 

See accompanying notes to consolidated financial statements.

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

  

Year ended January 31,

 
  

2024

  

2023

 

Operating activities

        

Net income

 $13,211  $5,945 

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

        

Depreciation and amortization

  3,830   3,646 

Deferred tax expense (benefit)

  (6,920)  479 

Stock-based compensation expense

  913   1,002 

Non-cash pension termination

  -   826 

Provision on uncollectible accounts

  89   142 

(Gain) loss on disposal of fixed assets

  (6)  43 

Gain from insurance recovery

  -   (565)

Changes in operating assets and liabilities

        

Accounts payable

  8,814   1,094 

Accrued compensation and payroll taxes

  (1,144)  65 

Inventories

  (830)  (1,505)

Proceeds from insurance recovery for inventory

  -   539 

Customers' deposits

  2,315   (336)

Income taxes receivable and payable

  144   450 

Prepaid expenses and other current assets

  (2,849)  (123)

Accounts receivable

  (4,859)  (3,232)

Costs and estimated earnings in excess of billings on uncompleted contracts

  (1,218)  (351)

Unbilled accounts receivable

  (5,053)  (9,814)

Other assets and liabilities

  8,294   454 

Net cash provided by (used in) operating activities

  14,731   (1,241)

Investing activities

        

Capital expenditures

  (11,106)  (6,975)

Proceeds from insurance recovery for property and equipment

  5   499 

Proceeds from sales of property and equipment

  3   94 

Net cash used in investing activities

  (11,098)  (6,382)

Financing activities

        

Proceeds from revolving lines

  155,706   96,903 

Payments of debt on revolving lines

  (156,996)  (91,438)

Payments of principal on finance obligation

  (118)  (88)

Payments of other debt

  (243)  (263)

Decrease in drafts payable

  (197)  42 

Payments on finance lease obligations, net

  (193)  (338)

Repurchase of common stock

  (942)  (69)

Stock options exercised and taxes paid related to restricted shares vested

  (273)  (206)

Net cash (used in) provided by financing activities

  (3,256)  4,543 

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

  70   102 

Net increase (decrease) in cash, cash equivalents and restricted cash

  447   (2,978)

Cash, cash equivalents and restricted cash - beginning of period

  6,793   9,771 

Cash, cash equivalents and restricted cash - end of period

 $7,240  $6,793 

Supplemental cash flow information

        

Interest paid

 $2,285  $2,045 

Income taxes paid

  3,283   2,480 

Fixed assets acquired under capital leases - non-cash

 $139  $- 

 

See accompanying notes to consolidated financial statements.

 

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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JANUARY 31, 2024 AND 2023

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

 

Note 1 - Business information

 

Perma-Pipe International Holdings, Inc. ("PPIH", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993. The Company is engaged in the manufacture and sale of products in one distinct segment: Piping Systems.

 

Fiscal year. The Company's fiscal year ends on January 31. Years, results and balances described as 2023 and 2022 are for the fiscal years ended January 31, 2024 and 2023, respectively.

 

Nature of business. 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 ("DHC") 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.

 

Geographic information. Net sales attributed to a geographic area are based on the destination of the product shipment. Sales to foreign customers were 65.6% in 2023 compared to 63.8% in 2022. Long-lived assets are based on the physical location of the assets and consist of property, plant and equipment.

 

  

2023

  

2022

 

Net sales

        

United States

 $51,893  $51,557 

Canada

  31,351   36,482 

Middle East/North Africa/India

  63,880   53,742 

Europe

  559   456 

Other

  2,985   332 

Total net sales

 $150,668  $142,569 
         

Property, plant and equipment, net of accumulated depreciation

        

United States

 $5,600  $5,920 

Canada

  10,775   9,290 

Middle East/North Africa/India

  21,244   11,308 

Total property, plant and equipment, net of accumulated depreciation

 $37,619  $26,518 

 

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Note 2 - Significant accounting policies

 

Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue recognition. During 2023 and 2022 and in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, the Company recognizes revenue for certain contracts when a customer obtains control of promised goods or services.  Other contracts recognize revenues using periodic recognition of income. For these contracts, the Company uses the "over time" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The amount of revenue recognized is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due to the Company are recognized in contract revenues when realization is probable, the amount can be reliably estimated, and the amount is not subject to reversal. See Note 4 - Revenue recognition, in the Notes to Consolidated Financial Statements, for further information relating to input and output accounting methods. 

 

Shipping and handling. Shipping and handling costs are included in cost of sales, and the amounts invoiced to customers relating to shipping and handling are included in net sales.

 

Sales tax. Sales tax is reported on a net basis in the consolidated financial statements.

 

Operating cycle. The length of contracts varies but are typically less than one year. The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion unless completion of such contracts extends significantly beyond one year.

 

Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. This includes all wholly owned subsidiaries as well as certain joint ventures in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated.

 

Translation of foreign currency. Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at weighted average exchange rates prevailing during the year. The resulting translation adjustments are included in stockholders' equity as part of accumulated other comprehensive loss. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The aggregate foreign exchange transaction loss recognized in the income statement was $0.1 million and $0.3 million in 2023 and 2022, respectively. Additionally, translation adjustments attributable to intercompany transactions, such as loans and receivables, are included in stockholders' equity as part of accumulated other comprehensive loss.

 

Contingencies. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred, and the amount can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters, and its experience in contesting, litigating and settling other similar matters. The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Company's financial position, liquidity, or future operations.

 

Cash and cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Cash and cash equivalents were $5.8 million as of January 31, 2024 and 2023, respectively. On January 31, 2024, $0.1 million was held in the United States and $5.7 million was held by foreign subsidiaries. On January 31, 2023, less than $0.1 million was held in the United States and $5.7 million was held by foreign subsidiaries.

 

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Restricted cash. There was no restricted cash held in the United States on January 31, 2024 or 2023. Restricted cash held by foreign subsidiaries was $1.4 million and $1.0 million as of January 31, 2024 and 2023, respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.

 

  

2023

  

2022

 

Cash and cash equivalents

 $5,845  $5,773 

Restricted cash

  1,395   1,020 

Cash, cash equivalents and restricted cash as presented in the statement of cash flows

 $7,240  $6,793 

 

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

 

For the years ended  January 31, 2024 and 2023, respectively, no one customer accounted for greater than 10% of the Company's consolidated net sales.

 

As of January 31, 2024 and 2023, respectively, no one customer accounted for greater than 10% of accounts receivable. 

 

Concentration of credit risk. The Company maintains its U.S. cash in bank deposit accounts at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Cash balances are below FDIC limits. The Company has not experienced any losses in such accounts. The Company's foreign cash is held in accounts at multiple institutions in the various countries in which the Company operates, limiting the concentration of risk internationally. The Company has a broad customer base doing business in all regions of the United States as well as other areas in the world.

 

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Accumulated other comprehensive loss. Accumulated other comprehensive loss represents the change in equity from non-owner transactions and consisted of foreign currency translation and minimum pension liability.

 

  

2023

  

2022

 

Equity adjustment foreign currency, gross

 $(5,804) $(6,707)

Minimum pension liability, gross

  -   - 

Subtotal excluding tax effect

  (5,804)  (6,707)

Tax effect of equity adjustment foreign currency

  253   258 

Tax effect of minimum pension liability

  -   - 

Total accumulated other comprehensive loss

 $(5,551) $(6,449)

 

Inventories. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories.

 

  

2023

  

2022

 

Raw materials

 $13,787  $14,992 

Work in process

  611   750 

Finished goods

  2,022   203 

Subtotal

  16,420   15,945 

Less allowance

  879   1,207 

Inventories

 $15,541  $14,738 

 

Long-lived assets. Property, plant and equipment are stated at cost. Interest is capitalized in connection with the construction of facilities and amortized over the estimated useful life of the asset. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an estimated fair value.

 

Depreciation is computed using the straight-line method over the estimated useful lives of assets, as presented in the following table. Leasehold improvements are depreciated over the remaining life of the lease or its useful life, whichever is shorter. Amortization of finance lease assets is included in depreciation. Depreciation expense was approximately $3.8 million and $3.7 million in the years ended  January 31, 2024 and 2023, respectively.

 

  

Useful Life (Years)

  

2023

  

2022

 

Land, buildings and improvements

  3 - 30  $25,620  $22,276 

Machinery and equipment

  3 - 10   56,411   54,200 

Furniture, office equipment and computer systems

  3 - 7   3,169   3,727 

Transportation equipment

  3   2,293   2,727 

Subtotal

      87,493   82,930 

Less accumulated depreciation

      49,873   56,412 

Property, plant and equipment, net of accumulated depreciation

     $37,620  $26,518 

 

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  January 31, 2024, the Company performed an assessment to determine whether there were any triggering events that may have occurred which could indicate that the carrying value of the Company's long-lived assets are not recoverable, and an impairment may exist. Based on this assessment, the Company did not identify any triggering events that would indicate that the carrying amounts may not be recoverable with respect to long-lived assets for the year ended  January 31, 2024.  The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards. 

 

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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 January 31, 2024 and 2023, is attributable to the purchase of the remaining 50% interest in Perma-Pipe Canada, Ltd., which occurred in 2016. 

 

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

 

  

2023

  

2022

 

Balance at beginning of year

 $2,227  $2,342 

Foreign exchange adjustment

  (5)  (115)

Balance at end of year

 $2,222  $2,227 

 

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  January 31, 2024, the Company performed a qualitative assessment to determine whether there were any triggering events that may have occurred which could indicate that more likely than not that the fair value of the reporting unit did not exceed its carrying value, resulting in an impairment. Based on this assessment, the Company did not identify any triggering events that would indicate that the fair value is less than the carrying value of the reporting unit for the year ended  January 31, 2024. The Company will continue testing for impairment at least annually as of January 31, or as otherwise required by applicable accounting standards. 

 

Other intangible assets with definite lives. The Company owns several patents including those covering features of its piping and electronic leak detection systems. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were $2.7 million as of January 31, 2024 and 2023. Accumulated amortization was approximately $2.6 million as of  January 31, 2024 and 2023. Amortization over the next five fiscal years will be less than $0.1 million and less than $0.1 million thereafter. Amortization expense is expected to be recognized over the weighted-average period of 8.0 years.

 

Research and development. Research and development expenses consist of materials, salaries and related expenses of engineering personnel and outside services for product development projects. Research and development costs are expensed as incurred. Research and development expense was approximately $0.5 million and $0.6 million in the years ended  January 31, 2024 and 2023, respectively.

 

Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets and liabilities for realizability at each reporting period.

 

The Company recognizes a tax position in its consolidated financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, see Note 7 - Income taxes.

 

One of the base broadening provisions of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") is the Global Intangible Low-Taxed Income provisions ("GILTI"). In accordance with guidance issued by the Financial Accounting Standards Board ("FASB") staff, the Company has adopted an accounting policy to treat any GILTI inclusions as a period cost if and when incurred. Thus, for the years ended  January 31, 2024 and 2023, deferred taxes were computed without consideration of the possible future impact of the GILTI provisions, and any current year impact was recorded as a part of the current portion of income tax expense. 

 

Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon 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 rates.

 

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Net income per common share. Earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding (basic). The Company reported net income in 2023 and 2022. Therefore, the Company adjusted for dilutive shares in 2023 and 2022, assuming conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share. The dilutive shares are in the following table:

 

Basic weighted average number of common shares outstanding

 

2023

  

2022

 

Basic weighted average number of common shares outstanding

  7,977   7,976 

Dilutive effect of stock options and restricted stock units

  96   140 

Weighted average number of common shares outstanding assuming full dilution

  8,073   8,116 
         

Restricted stock and stock options not included in the computation of diluted EPS of common stock because the option exercise prices exceeded the average market prices

  87   105 

Canceled options during the year

  (17)  (11)

Restricted stock and stock options with an exercise price below the average stock price

  96   140 

 

Equity-based compensation. The Company issues or has issued various types of stock-based awards to employees and directors: restricted stock, deferred stock and stock options. Non-cash compensation expense associated with restricted stock is based on the fair value of the common stock at the grant date, and amortized using the straight line method over a vesting period range of one to four years. Compensation expense associated with deferred stock which has been awarded to the Board of Directors (non-employee) is based upon the fair value of the common stock at the date of grant, and since the grant vests immediately it is expensed on the date of the grant. Stock compensation expense for stock options is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards.

 

Treasury Stock. In accordance with ASC 505, Equity, the Company accounts for share repurchases pursuant to the repurchase program under the cost method. This results in recognizing the shares as treasury stock, a reduction of stockholders' equity on the Company's consolidated balance sheets and on the Company's consolidated statements of stockholders' equity. These amounts include costs associated with the acquisition of the shares. See Note 11 - Treasury stock for further detail.

 

Segments. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker ("CODM") in making decisions regarding resource allocation and assessing performance the Company’s Chief Executive Officer is the CODM, and he uses a combination of several management reports, including the Company's financial information in determining how to allocate resources and assess performance. The Company has determined that it operates in one segment.

 

Recent accounting pronouncements. In June 2016, the Financial Accounting Standards Board ("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. The amended guidance requires the application of a current expected credit loss ("CECL") model, which measures credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and as subsequently amended and extended to December 15, 2022. The Company adopted this guidance effective February 1, 2023, which did not have a material impact on the consolidated financial statements.  

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The standard update requires additional disclosures, including further details about segment expenses regarding a public entity's reportable segments on an annual and interim basis. The additional segment disclosures are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is still evaluating the impact of these updated disclosure requirements on its consolidated financial statements. 

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Pursuant to this standard update, companies are required to provide additional information which is primarily attributable to the rate reconciliation and income taxes paid. The new income tax disclosures are effective for fiscal years beginning after December 15, 2024. The Company is still evaluating this standard update but does not expect it to have a material impact on its consolidated financial statements. 

 

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Note 3 - Retention

 

A retention receivable is a portion of an outstanding receivable balance amount withheld by a customer until a contract is fully completed as specified in the contract. Retention receivables of $2.5 million and $2.4 million were included in the balance of trade accounts receivable as of January 31, 2024 and 2023, respectively. A retention receivable of $1.7 million and $2.9 million was included in the balance of other long-term assets as of  January 31, 2024 and 2023, respectively, due to the long-term nature of the receivables. See Note 2 - Accounts receivable for further information regarding the future realization of these long-term balances.

 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $ 39.7 million as of January 31, 2024 , with a remaining balance due in the amount of $ 2.2 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this retention amount, $ 1.4 million is classified as a long-term asset.

 

The Company has been actively involved in ongoing efforts to collect the outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances, and at various times throughout 2023 and in June 2022, the Company received a partial payment to settle $0.6 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in 2024  under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of January 31, 2024 . However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

 

For further information regarding accounts receivable, see Note 2 - Significant accounting policies, in the Notes to Consolidated Financial Statements.
 

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under ASC 606, Revenue from Contracts with Customers.

 

Revenue from contracts with customers

 

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

 

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

 

 

1)

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

 

 

2)

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

 

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

 

 

1)

The customer owns the material that is being 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, which has no alternative future use, and there is a right to payment for work performed to date plus profit margin. 

 

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

 

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A breakdown of the Company's revenues by revenue class for the years ended January 31, 2024 and 2023 are as follows:

 

  

2023

  

2022

 
  

Sales

  

% to Total

  

Sales

  

% to Total

 

Products

 $10,368   7% $14,626   10%
                 

Specialty Piping Systems and Coating

                

Revenue recognized under input method

  51,977   34%  44,648   31%

Revenue recognized under output method

  88,323   59%  83,295   59%

Total

 $150,668   100% $142,569   100%

 

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

 

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

 

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

 

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

 

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

 

Contract assets and liabilities

 

Contract assets represent revenue recognized in excess of amounts billed for 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 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 impact the period end balances in these accounts. In addition, contract assets include receivables or amounts that are billable beyond the passage of time. For additional information, see Note 3 - Retention, in the Notes to Consolidated Financial Statements, and Unbilled accounts receivable, as further described below. 

 

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The Company anticipates that substantially all costs incurred on uncompleted contracts as of  January 31, 2024 will be billed and collected within one year.

 

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

 

  

2023

  

2022

 

Costs incurred on uncompleted contracts

 $21,912  $18,342 

Estimated earnings

  11,270   9,370 

Earned revenue

  33,182   27,712 

Less billings to date

  30,580   26,329 

Costs in excess of billings, net

 $2,602  $1,383 

Balance sheet classification

        

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

 $3,097  $3,126 

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

  (495)  (1,743)

Costs in excess of billings, net

 $2,602  $1,383 

 

Substantially all of the $1.7 million and $1.3 million contract liabilities balances at  January 31, 2023 and 2023, respectively, were recognized in revenues during 2023 and 2022, respectively.

 

Unbilled accounts receivable

 

The Company has recorded $16.6 million and $11.6 million of unbilled accounts receivable on the consolidated balance sheets as of  January 31, 2024 and 2023, respectively, from revenues generated by certain of its subsidiaries. The Company has fulfilled all performance obligations and has recorded revenue under the respective contracts. The deliverables under these contracts have been accepted by the customer and billings will be made once the customer takes possession of or arranges shipping for the products. The Company anticipates that substantially all of the amounts included in unbilled accounts receivable as of  January 31, 2024 will be billed within one year. 

 

Practical expedients

 

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

 

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

 

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Note 5 - Debt

 

  

2023

  

2022

 

Revolving line - North America

 $5,519  $4,387 

Mortgage note

  4,512   4,772 

Revolving lines - foreign

  3,632   5,714 

Term loan - foreign

  -   5 

Loan payable to GIG

  2,753   - 

Finance lease obligations

  9,316   9,472 

Total debt

  25,732   24,350 

Unamortized debt issuance costs

  (125)  (132)

Less current maturities

  9,590   10,614 

Total long-term debt

 $16,017  $13,604 
         

Current portion of long-term debt

 $9,590  $10,614 

Unamortized debt issuance costs

  -   - 

Total short-term debt

 $9,590  $10,614 

 

The following table summarizes the Company's scheduled maturities on January 31:

 

  

Total

  

2025

  

2026

  

2027

  

2028

  

2029

  

Thereafter

 

Revolving line - North America

 $5,519  $5,519  $-  $-  $-  $-   - 

Mortgage note

  4,512   239   239   239   239   239   3,317 

Revolving lines - foreign

  3,632   3,632   -   -   -   -   - 

Long-term finance obligation

  9,203   175   210   247   287   329   7,955 

Loan payable to GIG

  2,753   -   -   -   -   -   2,753 

Finance lease obligations

  113   25   34   37   17   -   - 

Total

 $25,732  $9,590  $483  $523  $543  $568  $14,025 

 

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

 

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

 

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

 

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

 

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The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. As of January 31, 2024, the calculated ratio was greater than 1.10 to 1.00. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of January 31, 2024.

 

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

 

As of January 31, 2024, the Company had borrowed an aggregate of $5.5 million at a rate of 10.0% and had $4.0 million available under the Renewed Senior Credit Facility. As of January 31, 2023, the Company had borrowed an aggregate of $4.4 million and had $9.9 million available under the Renewed Senior Credit Facility.

 

Finance obligation - buildings and land. On  April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold the Property for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company is leasing back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option. As of  January 31, 2024 and 2023, the Company had a net book value relating to this asset of $1.9 million and $2.1 million, respectively. 

 

In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.2 million is recognized in current maturities of long-term debt and the long-term portion of $9.0 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of  January 31, 2024. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as further described below:
 
United Arab Emirates
 
The Company has a revolving line for 8.0  million U.A.E. Dirhams (approximately $ 2.2 million at January 31, 2024 ) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately  9.00%  and is set to expire in May 2024.  The Company had borrowed an aggregate of $0.2 million and $0.6 million as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of  January 31, 2024 and  January 31, 2023, the Company had unused borrowing availability of approximately $1.9 million and $1.6 million, respectively. 

 

The Company has a revolving line for 20.5 million U.A.E. Dirhams (approximately $5.6 million at January 31, 2024) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately 9.00% and is set to expire in May 2024. The Company had borrowed an aggregate of $0.1 million and $1.0 million as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of  January 31, 2024 and  January 31, 2023, the Company had unused borrowing availability of approximately $1.0 million and $1.8 million, respectively. 

 

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In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $3.2 million at  January 31, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of January 31, 2024, the facility has an interest rate of approximately 20.75% and expired in August 2023. This credit arrangement was subsequently renewed in November 2023 with substantially the same terms and conditions and expires in November 2024. The Company had borrowed an aggregate of $1.4 million and $3.1 million as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of  January 31, 2024 and  January 31, 2023, the Company had unused borrowing capacity of $3.2 million and $2.0 million, respectively.

 

In December 2021, the Company entered into a credit arrangement for project financing with a bank of Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company received collections, the facility has decreased to a current amount of 2.1 million Egyptian Pounds (approximately $0.1 million at  January 31, 2024). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 20.75% and, as of November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $0.1 million and $0.4 million outstanding as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Saudi Arabia

 

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 37.0 million Saudi Riyal (approximately $9.9 million at January 31, 2024.) This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary, and as of January 31, 2024, the facility has an interest rate of approximately 9.50% and is set to expire in May 2024. The Company had borrowed an aggregate of $3.2 million and $1.1 million as of January 31, 2024 and  January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The unused borrowing availability attributable to this credit arrangement at  January 31, 2024 and  January 31, 2023, was $6.1 million and $2.3 million, respectively. 

 

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. The amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 at  January 31, 2024 and  January 31, 2023, respectively.

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of January 31, 2024, with the exception of those arrangements that may have expired and have not yet been renewed. Although certain of the arrangements may have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. As of  January 31, 2024, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these rates, as of  January 31, 2024, the Company's interest rates ranged from 8.00% to 20.75%, with a weighted average rate of 10.71%, and the Company had facility limits totaling $24.5 million under these credit arrangements. As of January 31, 2024, $8.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, the Company had borrowed approximately $6.4 million and had an additional $15.4 million of remaining borrowing capacity available under the foreign revolving credit arrangements. The foreign revolving line balances were included as current maturities of long-term debt in the Company's consolidated balance sheets as of January 31, 2024 and  January 31, 2023, respectively. 

 

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

 

Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. As of  January 31, 2024, the remaining balance on the mortgage in Canada is approximately 6.1 million Canadian Dollars ("CAD") (approximately $4.5 million at  January 31, 2024). The interest rate is variable, and was 10.19% at  January 31, 2024. The principal balance is included as a component of long-term debt, less current maturities in the Company's consolidated balance sheets and is presented net of issuance costs of $0.1 million as of January 31, 2024 and  January 31, 2023, respectively.   

 

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Note 6 - Leases

 

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

 

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

 

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

 

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

 

Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company has built a production facility. The annual payments are approximately 1.2 million U.A.E. Dirhams (approximately $0.3 million at  January 31, 2024), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments were deferred until August 2022 and have now commenced. The lease expires in August 2050. 

 

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

 

At  January 31, 2024, the Company had total operating lease liabilities of $7.2 million and operating ROU assets of $6.5 million, which are reflected in the consolidated balance sheets.

 

Finance Leases. The Company has several significant lease agreements, with lease terms of one to thirty years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees.  Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and ROU assets as the Company is not reasonably certain to exercise the options. 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  January 31, 2024, the Company also had finance lease liabilities of $0.1 million included in current maturities of long-term debt and long-term debt less current maturities, and finance ROU assets of $0.4 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheets.

 

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Supplemental balance sheet information related to leases is as follows:

 

Operating and Finance leases

 

January 31, 2024

  

January 31, 2023

 

Finance lease assets

        

Property and Equipment - gross

 $970  $1,161 

Accumulated depreciation and amortization

  (536)  (700)

Property and Equipment - net

 $434  $461 
         

Finance lease liabilities

        

Finance lease liability short-term

 $113  $164 

Finance lease liability long-term

  -   - 

Total finance lease liabilities

 $113  $164 
         

Operating lease assets

        

Operating lease ROU assets

 $6,467  $4,527 
         

Operating lease liabilities

        

Operating lease liability short-term

 $914  $912 

Operating lease liability long-term

  6,270   4,252 

Total operating lease liabilities

 $7,184  $5,164 

 

Total lease costs consist of the following:

 

Lease costs

Consolidated Statements of Operations Classification

 

Year Ended January 31, 2024

  

Year Ended January 31, 2023

 
          

Finance Lease Costs

         

Amortization of ROU assets

Cost of sales

 $162  $233 

Interest on lease liabilities

Interest expense

  9   28 

Operating lease costs

Cost of sales, SG&A expenses

  1,888   1,388 

Short-term lease costs (1)

Cost of sales, SG&A expenses

  530   421 

Sub-lease income

SG&A expenses

  (61)  (81)

Total Lease costs

 $2,528  $1,989 

 

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

 

Supplemental cash flow information related to leases is as follows:

 

  Year Ended January 31, 
  

2024

  

2023

 

Cash paid for amounts included in the measurement of lease liabilities

        

Financing cash flows from finance leases

 $193  $338 

Operating cash flows from finance leases

  9   28 

Operating cash flows from operating leases

  1,789   1,839 
         

ROU Assets obtained in exchange for new lease obligations:

        

Finance leases liabilities

 $139  $- 

Operating leases liabilities

  4,988   143 

 

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

 

  

January 31, 2024

  

January 31, 2023

 
         

Weighted-average remaining lease terms (in years)

        

Finance leases

  3.3   0.5 

Operating leases

 

13.7

   19.6 
         

Weighted-average discount rates:

        

Finance leases

  6.8%  12.0%

Operating leases

  9.3%  8.2%

 

Maturities of lease liabilities as of January 31, 2024, are as follows:

 

Year

 

Operating Leases

  

Finance Leases

 

For the year ended January 31, 2025

 $1,871  $39 

For the year ended January 31, 2026

  1,714   39 

For the year ended January 31, 2027

  1,701   39 

For the year ended January 31, 2028

  1,656   10 

For the year ended January 31, 2029

  1,286   - 

Thereafter

  7,481   - 

Total lease payments

  15,709   127 

Less: amount representing interest

  (8,525)  (14)

Total lease liabilities at January 31, 2023

 $7,184  $113 

 

Rent expense on operating leases, which is recorded on a straight-line basis, was $2.4 million and $1.7 million for the years ended  January 31, 2024 and 2023, respectively.

 

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Note 7 - Income taxes

 

Income (loss) from continuing operations before income taxes

 

2023

  

2022

 

Domestic (1)

 $(8,541) $(5,392)

Foreign

  18,432   14,950 

Total

 $9,891  $9,558 

 

(1) The domestic loss from continuing operations before income taxes includes corporate overhead costs.

 

Components of income tax (benefit) expense

 

2023

  

2022

 

Current

        

Federal

 $(21) $(3)

Foreign

  3,351   2,971 

State and other

  270   166 

Total current income tax expense

  3,600   3,134 

Deferred

        

Federal

  (7,311)  - 

Foreign

  391   479 

State and other

  -   - 

Total deferred income tax (benefit) expense

  (6,920)  479 

Total income tax expense

 $(3,320) $3,613 

 

As a result of the one-time transition tax from the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company estimates that distributions from foreign subsidiaries will no longer be subject to incremental U.S. federal income tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction to offset any U.S. federal income tax liability on the undistributed earnings. However, upon repatriation, various state taxes and foreign withholding taxes may be levied on such amounts. Determination of the amount of unrecognized state and local tax liability is not practicable due to the complexities associated with its hypothetical calculation. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. Earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. The Company's liability was $0.8 million and $0.6 million as of January 31, 2024 and 2023, respectively, related to these taxes.

 

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of its Middle Eastern and Indian subsidiaries. The Middle Eastern and Indian subsidiaries have unremitted earnings of $35.5 million and $10.5 million, respectively, as of January 31, 2024. Unremitted earnings of $23.9 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, and $11.6 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $0.6 million. 

 

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The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% was as follows:

 

  2023  2022 

Tax expense at federal statutory rate

 $2,083  $2,007 

State expense, net of federal income tax effect

  159   110 

Domestic return to provision

 

247

  

-

 

Deferred compensation adjustment

  -   (32)

Domestic valuation allowance

  (8,065)  (590)

Domestic return to provision

  -   390 

Global Intangible Low-Taxed Income inclusion

  2,202   1,206 

State NOL expirations

 1,375  - 

Permanent differences other

 258  - 

Valuation allowance for state NOLs

  (1,314)  133 

Differences in foreign tax rate

  (598)  (410)

Reductions of uncertain tax positions of prior years

 (239) - 

Deferred tax on unremitted earnings

  195   438 

Foreign withholding taxes

  135   304 

Research tax credit

  247   220 

Pension Settlement

  -   (115)

All other, net expense

  (5)  (48)

Total income tax (benefit) expense

 $(3,320) $3,613 

 

The Company's worldwide effective tax rates ("ETR") were (33.6%) and 37.8% in the year ended January 31, 2024 and 2023, respectively. The change in the ETR was largely due to a partial release of the domestic valuation allowance, changes in the mix of income and loss in various tax jurisdictions, and the global intangible low-taxed income inclusion. 

 

Components of deferred income tax assets

 

2023

  

2022

 

U.S. Federal NOL carryforward

 $6,173  $7,197 

Deferred compensation

  241   276 

Research tax credit

  1,505   2,258 

Foreign NOL carryforward

  258   318 

Foreign tax credit

  2,580   2,580 

Stock compensation

  21   43 

Other accruals not yet deducted

  500   305 

State NOL carryforward

  1,495   2,744 

Accrued commissions and incentives

  845   851 

Inventory reserve

  70   107 

Lease liability

  878   278 

Other

  -   165 

Deferred tax assets, gross

  14,566   17,122 

Valuation allowance

  (5,689)  (15,993)

Total deferred tax assets, net of valuation allowances

 $8,877  $1,129 
         

Components of the deferred income tax liability

        

Depreciation

 $(370) $(415)

Foreign subsidiaries unremitted earnings

  (783)  (591)

Prepaid

  (94)  (70)

Right of use asset

  (855)  (266)

Other

  (73)  0 

Total deferred tax liabilities

 $(2,175) $(1,342)
         

Deferred tax assets (liabilities), net

 $6,702  $(213)
         

Balance sheet classification

        

Long-term assets

 $7,919  $696 

Long-term liability

  (1,217)  (909)

Total deferred tax assets (liabilities), net of valuation allowances

 $6,702  $(213)

 

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As of January 31, 2024 and 2023, the Company had deferred tax assets of $6.2 million and $7.2 million, respectively, related to gross U.S. Federal net operating loss ("NOL") carryforwards of $30.1 million and $34.3 million, respectively. Of this amount, $22.7 million will begin to expire between tax years 2036 and 2037, with the remainder not subject to expiration. As of January 31, 2024 and 2023, the Company had deferred tax assets of $1.5 million and $2.7 million, respectively, related to gross state NOLs of $21.0 million and $45.5 million, respectively, that expire between 2024 and 2032. The Company has released the valuation allowance recorded against U.S. Federal NOLs and continues to maintain a valuation allowance against its state NOLs. As of January 31, 2024 and 2023, the Company had deferred tax assets of $0.3 million related to gross foreign NOLs of $1.3 million and $1.6 million, respectively, for its subsidiary in Saudi Arabia, which can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of the tax benefit is dependent upon the future generation of taxable income in the respective tax jurisdictions. 

 

The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and may make further adjustments based on management's outlook for continued profits in each jurisdiction. 

 

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets.  A significant piece of objective evidence previously evaluated was the domestic cumulative loss incurred over the three-year period. The Company has achieved three years of cumulative income in the U.S. federal tax jurisdiction as of the period ended  January 31, 2024. As such, management has determined that certain deferred tax assets are more likely than not to be realized and have partially released the valuation allowance accordingly during the period ended  January 31, 2024. The Company continues to maintain a valuation allowance against certain domestic deferred tax assets, including its foreign tax credit carryovers, R&D credit carryovers, and state deferred tax assets. The amount of the domestic deferred tax assets considered realizable, however, could be increased if there are changes to the objective positive and negative evidence considered. The valuation allowance decreased $10.3 million during the period ended January 31, 2024.

 

The Company has a deferred tax asset of $2.6 million for U.S. foreign tax credits after considering the impact of the repatriated foreign earnings and the one-time transition tax. The foreign tax credit deferred tax asset is fully offset with a valuation allowance. The excess foreign tax credits are subject to a ten-year carryforward and will begin to expire on January 31, 2026.

 

The following table summarizes uncertain tax position ("UTP") activity, excluding the related accrual for interest and penalties:

 

  

2023

  

2022

 

Balance at beginning of year

 $1,673  $1,611 

Decreases in positions taken in a prior period

  (256)  - 

Increases in positions taken in a current period

  143   159 

Decreases due to lapse of statute of limitations

  (21)  (3)

Decreases due to settlements

  (106)  (94)

Balance at end of year

 $1,433  $1,673 

 

Included in the total UTP liability were estimated accrued interest and penalties of $0.4 million and $0.3 million as of  January 31, 2024 and 2023, respectively. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheets and recognized as an expense during the period. The Company's policy is to include interest and penalties in income tax expense. On January 31, 2024, the Company did not anticipate any significant adjustments to its unrecognized tax benefits within the next twelve months. Included in the balance on January 31, 2024 were amounts offset by deferred taxes (i.e. temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Upon reversal, $1.1 million of the amount accrued on  January 31, 2024 would impact the future ETR.

 

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Tax years related to January 31, 2020, 2021, 2022 and 2023 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2004 through January 31, 2010, are subject to adjustment on audit, up to the amount of research tax credit generated in those years. Any NOL carryover can still be adjusted by the Internal Revenue Service in future year audits.

 

The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in other long-term liabilities on the consolidated balance sheets.

 

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Note 8 - Retirement plans

 

401(k) plan

 

The domestic employees of the Company participate in the PPIH 401(k) Employee Savings Plan, which is applicable to all employees except employees covered by collective bargaining agreement benefits. The plan allows employee pretax payroll contributions from 1% to 16% of total compensation. The Company matches 100% of each participant's payroll deferral contributions up to 1% of their compensation, plus 50% of each participant's payroll deferral contributions on the next 5% of compensation.

 

Contributions to the 401(k) plan were $0.4 million and $0.3 million in the years ended January 31, 2024 and 2023, respectively. 

 

Multi-employer plans

 

The Company contributes to a multi-employer plan for certain collective bargaining U.S. employees. The risks of participating in this multi-employer plan are different from a single employer plan in the following aspects:

 

 

•

Assets contributed to the multi-employer plans by one employer may be used to provide benefits to employees of other participating employers.

 

•

If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers.

 

•

If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

 

The Company has assessed and determined that the multi-employer plans to which it contributes are not significant to the Company's consolidated financial statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contribution over the remainder of the contract period. The Company made contributions to the bargaining unit supported multi-employer pension plans (in thousands):

 

          (In thousands)  (In thousands)   
          

FIP/RP Status

 

2023

  

2022

 

Surcharge

 

Plan Name

 

EIN

  

Plan #

 

Funded Zone Status

Pending/Implemented

 

Contribution

  

Contribution

 

Imposed

Collective Bargaining Expiration Date

Plumbers & Pipefitters Local 572 Pension Fund

 62-6102837  001 

Yellow

No

 $161  $178 

No

3/31/2025

 

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Note 9 - Stock-based compensation

 

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

 

The Company has prior incentive plans under which previously granted awards remain outstanding, including the 2017 Plan, but under which no new awards may be granted. At January 31, 2024, the Company had reserved a total of 245,150 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.

 

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

 

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

 

Stock compensation expense

 

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

 

  

2023

  

2022

 

Restricted stock based compensation expense

 $913  $1,002 

Total stock-based compensation expense

 $913  $1,002 

 

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Stock options

 

The Company did not grant any stock options during the years ended January 31, 2024 or 2023. The following tables summarizes the Company's stock option activity:

 

  

Options

  

Weighted average exercise price

  

Weighted average remaining contractual term

  

Weighted average grant date fair value

 

Outstanding on January 31, 2022

  67  $9.51   1.74  $63 
                 

Exercised

  (16)  6.66         

Expired or forfeited

  (11)  10.85         

Outstanding on January 31, 2023

  40   10.85   1.1   19 
                 

Options exercisable on January 31, 2023

  40  $10.85   1.1   19 
                 

Exercised

  (1)  6.85         

Expired or forfeited

  (17)  11.15         

Outstanding on January 31, 2024

  22   11.15   0.7   6 
                 

Options exercisable on January 31, 2024

  22  $11.15   0.7  $6 

 

There was no vesting, expiration or forfeiture of previously unvested stock options during the year ended  January 31, 2024. In addition, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options during the year ended  January 31, 2024.

 

Deferred stock

 

As part of their compensation, in previous years the Company granted deferred stock units to each non-employee director, equal to the result of dividing the award amount by the fair market value of the common stock on the date of grant. The stock vests on the date of grant; however, it is distributed to the directors only upon their separation from service. During the year ended  January 31, 2024, no deferred stock units were distributed.  There were approximately 62,926deferred stock units outstanding included in the restricted stock activity shown below as of  January 31, 2024 and 2023, respectively.

 

Restricted stock

 

The Company has granted restricted stock to executive officers, independent directors, and employees. The restricted stock vests ratably over one to four years. The Company calculates restricted stock compensation expense based on the grant date fair value and recognizes expense on a straight-line basis over the vesting period. The following table summarizes restricted stock activity for the years ended  January 31, 2024 and 2023, respectively:

 

  

Restricted shares

  

Weighted average price

  

Weighted average grant date fair value

 

Outstanding on January 31, 2022

  353  $7.48  $2,652 

Granted

  102   10.96     

Issued / vested

  (147)        

Forfeited

  (42)  6.87     

Outstanding on January 31, 2023

  266  $8.55  $2,286 

Granted

  92   10.26     

Issued / vested

  (84)        

Forfeited

  (52)  9.59     

Outstanding on January 31, 2024

  222  $9.33  $2,078 

 

The fair value of vested restricted stock was $1.1 million and $1.2 million in the year ended January 31, 2024 and 2023 respectively. Additionally, there was $1.0 million and $1.1 million of unrecognized compensation cost related to unvested restricted stock granted under the plans as of  January 31, 2024 and 2023, respectively. These costs are expected to be recognized over the weighted-average period of 1.8 years and 2.0 years, respectively. Further, the Company had approximately 0.2 million of non-vested restricted stock granted under the plan as of  January 31, 2024. The remaining amount of non-vested restricted stock is expected to vest over the weighted-average period of 1.8 years. 

 

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Note 10 - Interest expense

  

  

2023

  

2022

 

Interest expense

  2,429   2,243 

Interest income

  163   124 

Interest expense

  2,266   2,119 

 
 

Note 11 - Treasury stock

 

The repurchase program approved on October 4, 2021, authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022, the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the 12 months ended January 31, 2024, the Company used the remaining $1.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock. 

 

The following table sets forth information with respect to repurchases by the Company of its shares of common stock during 2022 and 2023:  

 

Period

 

Total number of shares purchased

  

Average price paid per share

  

Total number of shares purchased as part of publicly announced plans or programs

  

Approximate dollar value of shares that may yet be purchased under the plans or programs

 

January 1, 2022 - January 31, 2022

  98  $8.81   98  $1,008 

July 1, 2022 - July 31, 2022

  5   8.85   5   964 

December 1, 2022 - December 31, 2022

  3   8.61   3   939 

July 1, 2023 - July 31, 2023

  37   8.51   37   628 

August 1, 2023 - August 31, 2023

  62   8.67   62   92 

September 1, 2023 - September 30, 2023

  10   8.95   10   - 

Total

  215       215     

 

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Note 12 - Joint venture and non-controlling interest

 

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

 

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

 

The Company has a 60% controlling financial interest in the joint venture which is not considered a wholly owned subsidiary. Accordingly, there remains a minority portion of the equity interest that is owned by a third party, GIG. Pursuant to the applicable guidance contained in ASC 810, Consolidations, the balance sheets and operating activities of this investment are included in the Company's consolidated financial statements. The carrying amount of the assets and liabilities of the JV that are consolidated by the Company totaled $27.3 million and $19.8, respectively, as of  January 31, 2024.

 

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

 

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

 

Net income attributable to GIG was $2.7 million and $0.0 million for the twelve months ended  January 31, 2024 and 2023, respectively. The proportionate share of net income was accounted for as a reduction in deriving net income attributable to common stock in the Company's consolidated statements of operations.

 

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

 

The non-controlling interest is measured at fair value was $6.3 million and $0.0 million recorded within temporary equity at  January 31, 2024 and 2023, respectively. The change in non-controlling interest consists of an initial measurement of the JV of approximately $1.0 million, $2.7 million in current year net income attributable to non-controlling interest, and approximately $2.5 million as an adjustment in the carrying value of the redeemable non-controlling interest pertaining to the business arrangement. In addition, there were no dividends or any other form of distributions from non-controlling interest for the year ended  January 31, 2024 and 2023, respectively.

 

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Note 13 - Subsequent events

 

On February 1, 2024, the Company entered into a settlement agreement ("Settlement Agreement") due to a legal proceeding that arose in 2018 regarding a series of projects executed during years ended 2015-2016 for an existing customer. Pursuant to this Settlement Agreement, the Company will pay the counter party approximately $0.8 million to resolve the matter, subject to certain terms and conditions therein, including a limitation on future claims that pertain to the projects contained in this legal proceeding. In connection with this Settlement Agreement, the Company recognized an expense of approximately $0.8 million which is presented as a component of other expense in the Company's consolidated statement of operations for the year ended  January 31, 2024. Additionally, this amount is presented as a component of other accrued liabilities within the Company's consolidated balance sheets as of  January 31, 2024.

 

The Company has evaluated subsequent events through  April 26, 2024, the date the financial statements were issued. Apart from what is described above, there were no other identified material subsequent events that occurred during this time that required to be recognized and/or disclosed in the Company's consolidated financial statements.

 

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Schedule II

Perma-Pipe International Holdings, Inc. and Subsidiaries

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended  January 31, 2024 and 2023

 

  

Balance at beginning of period

  

Charges to expenses

  

Write-offs (1)

  

Other charges (2)

  

Balance at end of period

 

Year Ended January 31, 2024

                    

Valuation allowance for deferred tax assets

 $15,993  $(208) $-  $(10,096) $5,689 

Allowance for possible losses in collection of trade receivables

  612   123   (36)  -   699 
                     

Year Ended January 31, 2023

                    

Valuation allowance for deferred tax assets

 $16,905  $(585) $-  $(327) $15,993 

Allowance for possible losses in collection of trade receivables

  486   140   (14)  -   612 

 

(1) The release of valuation allowances related to deferred tax assets.

 

(2) Uncollectible accounts written off.

 

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EXHIBIT INDEX
 

The exhibits listed below are filed herewith except the exhibits described below as incorporated by reference. Exhibits not filed herewith are incorporated by reference to such exhibits filed by the Company under the location set forth under the caption "Description and Location" below. The Commission file number for the Company's Exchange Act filings referenced below is 001-32530.

Exhibit No.

 

Description and Location
3.1   Certificate of Incorporation of Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.3 to Registration Statement No. 33-70298]
3.2   Certificate of Amendment to Certificate of Incorporation of Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 20, 2017]
3.3   Fifth Amended and Restated By-Laws of Perma-Pipe International Holdings, Inc. [Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on May 6, 2019]
4   Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 [Incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2020 filed on April 21, 2020]
10.1   Form of Directors and Officers Indemnification Agreement [Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2006 filed on May 15, 2006] *
10.2   Executive Employment Agreement with David J. Mansfield dated October 19, 2016 [Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on December 13, 2016]*
10.3   Revolving Credit and Security Agreement, dated September 20, 2018, by and among the Company, PNC Bank, National Association, and the other parties thereto [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 24, 2018]
10.4   Second Amendment and Waiver to Revolving Credit and Security Agreement, dated September 17, 2021, by and among the Company, PNC Bank, National Association, and other parties thereto [Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 21, 2021]
10.5
 
10.6   Perma-Pipe International Holdings, Inc. 2021 Omnibus Stock Incentive Plan [Incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 16, 2021]*
10.7   Lease dated March 15, 2021, between the Company and Nash88 [Incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K/A filed on April 22, 2021]
10.8   Form of Restricted Stock and Performance Award Agreement under the 2021 Omnibus Stock Incentive Plan [Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed on April 19, 2022]*
10.9   Form of Non-Employee Director Restricted Stock Unit Agreement under the 2021 Omnibus Stock Incentive Plan [Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed on April 19, 2022]*
10.10   Form of Employee Restricted Stock Unit Agreement under the 2021 Omnibus Stock Incentive Plan [Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2022 filed on April 19, 2022]*
14   Code of Conduct [Incorporated by reference to Exhibit 14 of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2004 filed on June 1, 2004]

21

 

Subsidiaries of Perma-Pipe International Holdings, Inc.

23

 

Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP

24

 

Power of Attorney executed by directors and officers of the Company

31

 

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

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

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

32

 

Section 1350 Certifications(1) Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2) Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
97   Recoupment of Incentive Compensation Following a Restatement

101.INS

 

Inline XBRL Instance

101.SCH

 

Inline XBRL Taxonomy Extension Schema

101.CAL

 

Inline XBRL Taxonomy Extension Calculation

101.DEF

 

Inline XBRL Taxonomy Extension Definition

101.LAB

 

Inline XBRL Taxonomy Extension Labels

101.PRE

 

Inline XBRL Taxonomy Extension Presentation
104   Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

*Management contracts and compensatory plans or agreements 

 

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Item 16. FORM 10-K SUMMARY - None.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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:   April 26, 2024

/s/ David J. Mansfield

 

 

 David J. Mansfield

 

 

 Director, President and Chief Executive Officer

 
  (Principal Executive Officer)  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

DAVID J. MANSFIELD

  

Director, President and Chief Executive Officer (Principal Executive Officer)

 

 

 

  

 

 

 

MATTHEW E. LEWICKI*

  

Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

 April 26, 2024

 

  

 

 

 

CYNTHIA BOITER* 

  

Director

 

 

 

  

 

 

 

DAVID B. BROWN* 

  

Director

 

 

 

  

 

 

 

ROBERT MCNALLY*

  

Director

 

 
         
JEROME T. WALKER*   Director and Chairman of the Board of Directors    

 

 

  

 

 

 

*By:

/s/ David J. Mansfield

  

Individually and as Attorney in Fact

 

 

 

David J. Mansfield

  

 

 

 

 

54