Perma-Pipe International Holdings, Inc. - FORM 10-Q - December 15, 2017

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EX-32 - EXHIBIT 32 CEO & CFO - Perma-Pipe International Holdings, Inc.ppih32q32017.htm
EX-31.2 - EXHIBIT 31.2 CFO - Perma-Pipe International Holdings, Inc.ppih312q32017.htm
EX-31.1 - EXHIBIT 31.1 CEO - Perma-Pipe International Holdings, Inc.ppih311q32017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2017

Commission File No. 0-18370

Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)
pplogo.jpg
Delaware
36-3922969
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
6410 W. Howard Street, Niles, Illinois
60714
(Address of principal executive offices)
(Zip Code)

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

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 x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x Emerging growth company o

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. o

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

On December 12, 2017, there were 7,712,217 shares of the registrant's common stock outstanding.




Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended October 31, 2017
TABLE OF CONTENTS

Item
 
Page
 
 
 
Part I
 
 
 
 
1.
 
 
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended October 31, 2017 and 2016
 
Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended October 31, 2017 and 2016
2
 
Consolidated Balance Sheets as of October 31, 2017 (Unaudited) and January 31, 2017
 
Consolidated Statements of Stockholders' Equity as of October 31, 2017 (Unaudited) and January 31, 2017
 
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 31, 2017 and 2016
 
 
 
 
2.
14
 
 
 
4.
19
 
 
 
Part II
 
6.
20
 
 
 
21



PART I FINANCIAL INFORMATION

Item 1.    Financial Statements

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017

2016

 
2017

2016

Net sales

$27,498


$25,302

 

$77,851


$71,230

Cost of sales
24,178

21,605

 
69,688

62,561

Gross profit
3,320

3,697

 
8,163

8,669

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
General and administrative expenses
4,314

3,490

 
12,456
12,398

Selling expenses
1,297

1,382

 
3,920
4,236

Total operating expenses
5,611

4,872

 
16,376

16,634

 
 
 
 
 
 
Loss from operations
(2,291
)
(1,175
)
 
(8,213
)
(7,965
)
 
 
 
 
 
 
Loss on consolidation of joint venture
—

—

 
—

(1,620
)
 
 
 
 
 
 
Interest expense, net
193

112

 
507

435

Loss from continuing operations before income taxes
(2,484
)
(1,287
)
 
(8,720
)
(10,020
)
 
 
 
 
 
 
Income tax expense (benefit)
808

2,411

 
(241
)
1,077

 
 
 
 
 
 
Loss from continuing operations
(3,292
)
(3,698
)
 
(8,479
)
(11,097
)
 
 
 
 
 
 
(Loss) income from discontinued operations, net of tax
—

(203
)
 
—

906

 
 
 
 
 
 
Net loss

($3,292
)

($3,901
)
 

($8,479
)
($10,191)
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
Basic and diluted
7,714

7,541

 
7,668

7,457

 
 
 
 
 
 
Loss per share from continuing operations
 
 
 
 
 
Basic and diluted

($0.43
)

($0.49
)
 
($1.11)
($1.49)
(Loss) earnings per share from discontinued operations


 
 
 
 
Basic and diluted

$—


($0.03
)
 

$—


$0.12

Loss per share
 
 
 
 
 
Basic and diluted
($0.43)

($0.52
)
 
($1.11)

($1.37
)
See accompanying notes to consolidated financial statements.
Note: Earnings per share calculations could be impacted by rounding.

1

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)

 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017

2016

 
2017

2016

Net loss

($3,292
)

($3,901
)
 

($8,479
)

($10,191
)
 
 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
 
Foreign currency translation adjustments, net of tax
(250
)
(577
)
 
822

457

Unrealized loss (gain) on marketable security, net of tax
—

9

 
(92
)
5

Other comprehensive (loss) income
(250
)
(568
)
 
730

462

 
 
 
 
 
 
Comprehensive loss

($3,542
)

($4,469
)
 

($7,749
)

($9,729
)

See accompanying notes to consolidated financial statements.


2

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
October 31, 2017

January 31, 2017

ASSETS
Unaudited

 
Current assets
 
 
Cash and cash equivalents

$8,373


$7,603

Restricted cash
898

1,098

Trade accounts receivable, less allowance for doubtful accounts of $128 at October 31, 2017 and $305 at January 31, 2017
28,884

31,271

Inventories, net
14,005

13,565

Assets of discontinued operations
—

25

Prepaid expenses and other current assets
3,052

2,171

Costs and estimated earnings in excess of billings on uncompleted contracts
2,422

2,091

Total current assets
57,634

57,824

Property, plant and equipment, net of accumulated depreciation
34,882

36,275

Other assets
 
 
Deferred tax assets - long-term
693

147

Goodwill
2,317

2,279

Other assets
5,157

5,086

Total other assets
8,167

7,512

Total assets

$100,683


$101,611

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
Current liabilities
 
 
Trade accounts payable

$9,462


$10,901

Accrued compensation and payroll taxes
3,429

4,236

Commissions and management incentives payable
1,070

1,845

Revolving line North America
9,088

3,813

Current maturities of long-term debt
1,218

658

Customers' deposits
4,206

2,640

Outside commissions payable
1,802

1,612

Liabilities of discontinued operations
138

199

Billings in excess of costs and estimated earnings on uncompleted contracts
1,944

1,100

Other accrued liabilities
2,170

2,360

Income taxes payable
1,152

684

Total current liabilities
35,679

30,048

Long-term liabilities
 
 
Long-term debt, less current maturities
7,577

7,258

Deferred compensation liabilities
2,575

2,523

Deferred tax liabilities - long-term
1,864

1,829

Other long-term liabilities
575

540

Total long-term liabilities
12,591

12,150

Stockholders' equity
 
 
Common stock, $.01 par value, authorized 50,000 shares; 7,716 issued and outstanding at October 31, 2017 and 7,595 issued and outstanding at January 31, 2017
77

76

Additional paid-in capital
55,936

55,358

Treasury Stock, 27 shares at January 31, 2017
—

(170
)
Retained (deficit) earnings
(1,606
)
6,873

Accumulated other comprehensive loss
(1,994
)
(2,724
)
Total stockholders' equity
52,413

59,413

Total liabilities and stockholders' equity

$100,683


$101,611

See accompanying notes to consolidated financial statements.

3

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)

($ in thousands, except share data)
 
Additional Paid-in Capital
Treasury Stock
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Total Stockholders' Equity
Common Stock
Total stockholders' equity at January 31, 2017
$76
$55,358

($170
)
$6,873
($2,724)
$59,413
 
 
 
 
 
 
 
Net loss
 
 
 

($8,479
)
 
(8,479
)
Common stock issued under stock plans, net of shares used for tax withholding
1

(217
)
170

 
 
(46
)
Stock-based compensation expense
 
795

 
 
 
795

Marketable security
 
 
 
 
(142
)
(142
)
Foreign currency translation adjustment
 
 
 
 
782

782

Tax benefit/expense on above items
 
 
 
 
90

90

Total stockholders' equity at October 31, 2017
$77
$55,936

$—

($1,606)
($1,994)
$52,413

Shares
2017

2016

 
Balances at beginning of year
7,595,509

7,305,925

 
Treasury stock released
26,753

17,813

 
Shares issued
93,395

271,771

 
Balances at period end
7,715,657

7,595,509

 

See accompanying notes to consolidated financial statements.



4

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended October 31,
 
2017

2016

Operating activities
 
 
Net loss

($8,479
)

($10,191
)
Adjustments to reconcile net loss to net cash flows used in operating activities
 
 
Depreciation and amortization
3,772

4,258

Gain on disposal of subsidiaries
—

(186
)
Deferred tax benefit
(544
)
(93
)
Stock-based compensation expense
795

767

Loss on consolidation of joint venture
—

1,620

Cash surrender value on life insurance policies
—

(136
)
Loss (gain) on disposal of fixed assets
8

(292
)
Provision on uncollectible accounts
(324
)
500

Gain from sale of marketable securities
(142
)
—

Changes in operating assets and liabilities
 
 
Accounts receivable
2,989

14,860

Inventories
(375
)
4,709

Costs and estimated earnings in excess of billings on uncompleted contracts
513

(736
)
Accounts payable
(1,627
)
(5,268
)
Accrued compensation and payroll taxes
(1,633
)
(9,047
)
Customers' deposits
1,566

(1,880
)
Income taxes receivable and payable
(621
)
671

Prepaid expenses and other current assets
(196
)
(742
)
Other assets and liabilities
105

(4,992
)
Net cash used in operating activities
(4,193
)
(6,178
)
Investing activities
 
 
Acquisition of interest in subsidiary, net of cash acquired
—

(4,672
)
Capital expenditures
(2,082
)
(1,544
)
Proceeds from surrender of corporate-owned life insurance policies
—

1,894

Proceeds from sales of marketable securities
142

—

Proceeds from sales of property and equipment
1

13,962

Net cash (used in) provided by investing activities
(1,939
)
9,640

Financing activities
 
 
Proceeds from revolving lines
31,652

32,908

Proceeds from debt
—

6,048

Payments of debt on revolving lines of credit
(26,055
)
(39,807
)
Payments of other debt
(161
)
(10,077
)
Decrease in drafts payable
(4
)
(184
)
Borrowings (payments) on capitalized lease obligations
632

(1,429
)
Release of treasury stock
170

—

Stock options exercised and restricted shares issued
(216
)
363

Net cash provided by (used in) financing activities
6,018

(12,178
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
684

(285
)
Net increase (decrease) in cash, cash equivalents and restricted cash
570

(9,001
)
Cash, cash equivalents and restricted cash - beginning of period
8,701

18,955

Cash, cash equivalents and restricted cash - end of period

$9,271


$9,954

Supplemental cash flow information
 
 
Interest paid

$584


$605

Income taxes paid
786

1,281

Fixed assets acquired under capital leases
841

—

Funds held in escrow related to the sale of Filtration assets
250

502

See accompanying notes to consolidated financial statements.

5


PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
OCTOBER 31, 2017
(Tabular amounts presented in thousands, except per share amounts)

1.
Basis of presentation. The interim consolidated financial statements of Perma-Pipe International Holdings, Inc. and subsidiaries ("PPIH," "Company," or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2017 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2017 and 2016 are for the nine months ended October 31, 2017 and 2016, respectively.

2.
Business segment reporting. As of January 31, 2016, PPIH is engaged in the manufacture and sale of products in one segment: Piping Systems. As described below, prior to January 29, 2016, the Company was also engaged in the manufacture and sale of products in the Filtration Products segment. Piping Systems engineers, designs, manufactures and sells specialty piping, leak detection and location systems. This segment's specialty piping systems include (i) industrial and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed district heating and cooling piping systems for efficient energy distribution to multiple locations from central energy plants, and (iii) oil and gas gathering flow and long lines for oil and mineral transportation. Piping Systems' leak detection and location systems are sold with its piping systems and 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.

Prior to January 29, 2016, the Company had a Filtration Products segment. This business is reported as discontinued operations in the consolidated financial statements. For further information, see "Notes to Consolidated Financial Statements, Note 4 Discontinued operations".

For the three months ended October 31, 2017, no individual customer accounted for 10% or more of the Company's consolidated net sales, and for the three months ended October 31, 2016 one customer accounted for 17.0% of the Company's consolidated net sales. For the nine months ended October 31, 2017 and 2016, no individual customer accounted for 10% or more of the Company's consolidated net sales.

At October 31, 2017, one customer accounted for 19% of all accounts receivable. Two customers accounted for 33% of all accounts receivable at January 31, 2017.

 
Three Months Ended October 31,
 
Nine Months Ended October 31,
 
2017

2016

 
2017

2016

Net sales
 
 
 
 
 
Piping Systems

$27,498


$25,302

 

$77,851


$71,230

Gross profit
 
 
 
 
 
Piping Systems

$3,320


$3,697

 

$8,163


$8,669

Income (loss) from operations
 
 
 
 
 
Piping Systems

($428
)

$640

 

($1,825
)

($1,775
)
Corporate

($1,863
)

($1,815
)
 
(6,388
)
(6,190
)
Total loss from operations

($2,291
)

($1,175
)
 

($8,213
)

($7,965
)

3.
Correction of immaterial errors. An error was identified during the preparation and review of the second quarter financial statements, as stock-based compensation cost and additional paid in capital had been reversed for vested equity awards that expired, terminated or were unexercised. The cumulative adjustment for the stock-based compensation cost covering the period from May 1, 2015 to January 31, 2016 was approximately $846 thousand. The adjustments applicable to the fiscal year ending January 31, 2017 were approximately $95 thousand for the three months ending April 30, 2016, $350 thousand for the three months ending July 31, 2016, $138 thousand for the three months ending October 31, 2016, and $213 thousand for the three months ending January 31, 2017.

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. The prior period financial statements were revised, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.

A reconciliation of the effects of the adjustments to the previously reported balance sheet and stockholders' equity at January 31, 2017 follows:
 
As Reported
Adjustment
Revised
Additional paid in capital
$53,716
$1,642
$55,358
Retained earnings
8,515

(1,642
)
6,873


A reconciliation of the effects of the adjustments to the previously reported statement of operations for the three months ending October 31, 2016 follows:
 
As Reported
Adjustment
Revised
General and administrative expense
$3,352
$138
$3,490
Total operating expenses
4,734

138

4,872

Loss from operations
(1,037
)
(138
)
(1,175
)
Loss from continuing operations before income taxes
(1,149
)
(138
)
(1,287
)
Loss from continuing operations
(3,560
)
(138
)
(3,698
)
Net loss
(3,763
)
(138
)
(3,901
)
Loss per share from continuing operations
(0.47
)
(0.02
)
(0.49
)
Loss per share
(0.50
)
(0.02
)
(0.52
)


6


A reconciliation of the effects of the adjustments to the previously reported statement of operations for the nine months ending October 31, 2016 follows:
 
As Reported
Adjustment
Revised
General and administrative expense
$11,815
$583
$12,398
Total operating expenses
16,051

583

16,634

Loss from operations
(7,382
)
(583
)
(7,965
)
Loss from continuing operations before income taxes
(9,437
)
(583
)
(10,020
)
Loss from continuing operations
(10,514
)
(583
)
(11,097
)
Net loss
(9,608
)
(583
)
(10,191
)
Loss per share from continuing operations
(1.41
)
(0.08
)
(1.49
)
Loss per share
(1.29
)
(0.08
)
(1.37
)

A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the nine months ending October 31, 2016 follows:
 
As Reported
Adjustment
Revised
Net loss
($9,608)
($583)
($10,191)
Stock-based compensation expense
184

583

767



4.
Discontinued operations. The domestic fabric filter business, which was included in discontinued operations, sold product until operations ceased in the second quarter of 2016. The Filtration business segment is reported as discontinued operations in the consolidated financial statements, and the notes to consolidated financial statements have been revised to conform to the current year reporting. There was $0.1 million of tax benefit for the three months ended October 31, 2016 and $0.6 million of tax benefit for the nine months ended October 31, 2016. Income (loss) from discontinued operations net of tax for the three and nine months ended October 31, 2016 and 2017 was as follows:
 
Three Months Ended October 31,
Nine Months Ended October 31,
 
2017

2016

2017

2016

Net sales from discontinued operations

$—


$—


$—


$10,467

 
 
 
 
 
(Loss) gain on disposal of discontinued operations
—

(2,204
)
—

268

Income from discontinued operations
—

1,876

—

1,216

(Loss) income from discontinued operations before income taxes
—

(328
)
—

1,484

Income tax (benefit) expense
—

(125
)
—

578

(Loss) income from discontinued operations, net of tax

$—


($203
)

$—


$906


Components of assets and liabilities from discontinued operations consist of the following:
 
October 31, 2017

January 31, 2017

Current assets
 
 
Trade accounts receivable, net

$—


$25

Total assets from discontinued operations

$—


$25

Current liabilities
 
 
Trade accounts payable, accrued expenses and other

$138


$199

Total liabilities from discontinued operations

$138


$199



7

Cash flows from discontinued operations:
 
Nine Months Ended October 31,
 
2017

2016

Net cash used in discontinued operating activities

($36
)

($673
)
Net cash provided by discontinued investing activities
—

9,606

Net cash used in discontinued financing activities
—

(8,933
)

5.
Income taxes. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.

The Company's effective tax rate ("ETR") from continuing operations for the third quarter and year-to-date was 32.5% and 2.8%, respectively, compared to (187.3)% and (10.7)% during the respective prior-year periods. The change in the ETR from the prior year-to-date to the current year-to-date was mainly due to changes in the foreign income and loss activities.

The amount of unrecognized tax benefits, including interest and penalties, at October 31, 2017, recorded in other long-term liabilities was $0.2 million, all of which would impact the Company’s ETR if recognized.  The Company includes accrued interest and penalties related to uncertain tax positions in income tax expense, with $1,150 included in expense for the current quarter.  The amount of accrued interest and penalties at October 31, 2017 associated with unrecognized tax benefits was $49,100.

The Company files income tax returns in U.S. federal and state jurisdictions. The Internal Revenue Service ("IRS") began an audit of the fiscal year ended January 31, 2015 in August 2016. In August 2017, the Company received a notice from the IRS that it had concluded the tax audit for the year ended January 31, 2015. No changes were made to the reported tax.

6.
Impairment of long-lived assets. The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. A factor considered important that could trigger an impairment review includes a year-to-date loss from operations. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. Piping Systems has a year-to-date loss, but based on the Company's review, there was no impairment of long-lived assets as of October 31, 2017 or January 31, 2017.

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 October 31, 2017 and January 31, 2017 is attributable to the purchase of Perma-Pipe Canada, Ltd. ("PPC")
 
January 31, 2017
Foreign exchange change effect
October 31, 2017
Goodwill

$2,279


$38


$2,317



8


In January 2017, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that simplifies the assessment of goodwill for impairment when the estimated fair value of a reporting unit is less than its carrying value by eliminating the requirement to determine the fair value of goodwill. Under the new guidance, the amount of goodwill impairment will be determined by the amount the carrying value of the reporting unit exceeds its fair value. The new guidance is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company adopted this new guidance in the fourth quarter of 2016.

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. There was no impairment to goodwill as of October 31, 2017.

7.
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 $2.64 million as of October 31, 2017 and January 31, 2017. Accumulated amortization was approximately $2.41 million and $2.38 million as of October 31, 2017 and January 31, 2017, respectively. Full year amortizations for the next five years ending January 31 will be $45,600 in 2018, $37,500 in 2019, $34,700 in 2020, $28,100 in 2021, and $17,400 in 2022, with the residual balance of $93,800 to be amortized in future periods thereafter. Patents are included in other assets in the consolidated balance sheets.
 
Three Months Ended October 31,
Nine Months Ended October 31,
 
2017

2016

2017

2016

Patent amortization expense

$12


$12


$34


$34


8.
Stock-based compensation. The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.
 
Three Months Ended October 31,
Nine Months Ended October 31,
 
2017

2016

2017

2016

Stock-based compensation expense

$21


$55


$80


$216

Restricted stock-based compensation expense

$294


$151


$938


$819


Stock Options. The fair value of the outstanding option awards was estimated on the grant dates using the Black-Scholes option pricing model.
 
Nine Months Ended October 31,
Fair value assumptions
2017
2016
Expected volatility
43.2%
43.2%
Risk free interest rate
1.2%
1.2%
Dividend yield
0
0
Expected life
5.0
5.0


9


Option activity
Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
Outstanding at January 31, 2017
524


$11.55

4.5

$534

Exercised
(30
)
6.77

 
37

Expired or forfeited
(125
)
18.75

 
 
Outstanding end of period
369

9.50

4.3
338

 
 
 
 
 
Exercisable end of period
335


$9.62

3.9

$303


Unvested option activity
Options
Weighted Average Grant Date Fair Value
Aggregate Intrinsic Value
Outstanding at January 31, 2017
74


$9.31


$69

Vested
(32
)
 
 
Expired or forfeited
(8
)
11.49

 
Outstanding end of period
34


$8.32


$35


As of October 31, 2017, there was $0.1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of 1.8 years.

Restricted stock. The following table summarizes restricted stock activity for the year:
Restricted stock activity
Restricted Shares
Weighted Average Grant Price Per Share
Aggregate Intrinsic Value
Outstanding at January 31, 2017
290


$8.75


$2,540

Granted
172

8.02

 
Issued
(55
)
 
 
Forfeited
(39
)
7.86

 
Outstanding end of period
368


$8.35


$2,955


As of October 31, 2017, there was $1.6 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. The cost is expected to be recognized over the weighted-average period of 2.2 years.


10


9.
Earnings per share.
 
Three Months Ended October 31,
Nine Months Ended October 31,
 
2017

2016

2017

2016

Basic weighted average common shares outstanding
7,714

7,541

7,668

7,457

Dilutive effect of equity compensation plans
—

—

—

—

Weighted average common shares outstanding assuming full dilution
7,714

7,541

7,668

7,457

 
 
 
 
 
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares
143

270

143

336

 
 
 
 
 
Stock options with an exercise price below the average market price
226

304

226

238


10.
Interest expense, net.
 
Three Months Ended October 31,
Nine Months Ended October 31,
 
2017

2016

2017

2016

Interest expense

$225


$164


$583


$556

Interest income
(32
)
(52
)
(76
)
(121
)
Interest expense, net

$193


$112


$507


$435


11.    Debt. Debt totaled $17.9 million at October 31, 2017, a net increase of $6.2 million since January 31, 2017.

Revolving lines North America. On September 24, 2014, the Company entered into the Credit and Security Agreement with a financial institution (as amended, "Credit Agreement"). Under the terms of the Credit Agreement, which matures on September 24, 2018, the Company can borrow up to a combined $15.0 million in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and require achieving a minimum fixed charge coverage ratio with respective performance metrics as defined by the Credit Agreement if a minimum availability is not met. In a seventh amendment to the Credit Agreement executed on December 14, 2017, lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017. Other than noted above, the Company was in compliance with all covenants under the Credit Agreement as of October 31, 2017. The North American revolving line balances as of October 31, 2017 and January 31, 2017 were included as current liabilities in the consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause.

Interest rates vary based on the average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. On October 31, 2017, the Company had borrowed $9.1 million at 5.5% and 4.5% and had $0.7 million available to it under the revolving line of credit. In addition, $0.2 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.

Revolving lines foreign. The Company also had credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. 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

11


revolving credit facilities restrict payment of dividends. On October 31, 2017, the Company was in compliance with the covenants under the credit arrangements. On October 31, 2017, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On October 31, 2017, the Company's interest rates ranged from 5.0% to 6.5%, and the Company could borrow $13.5 million under these credit arrangements. On October 31, 2017, $7.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On October 31, 2017, the Company had borrowed $0.4 million and had, an additional $5.8 million available. The foreign revolving lines balances as of January 31, 2017 were included as current maturities of long-term debt in the consolidated balance sheets.

On May 5, 2017, Piping Systems obtained two capital leases for a total of $0.94 million CAD (approximately $0.7 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 7.8% per annum with monthly principal and interest payments of $9 thousand, and these leases mature on April 30, 2021. On October 20, 2017, Piping Systems obtained a capital lease for $0.18 million CAD (approximately $0.1 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 4.0% per annum with monthly principal and interest payments of $3 thousand, and these leases mature on September 29, 2022.

12.
Restricted cash. Restricted cash held by foreign subsidiaries was $0.9 million as of October 31, 2017 and $1.1 million as of January 31, 2017. Restricted cash held by foreign subsidiaries related to an escrow account from the sale of Nordic Air Filtration and fixed deposits that also serve as security deposits and guarantees.
 
Nine Months Ended October 31,
 
2017

2016

Cash and cash equivalents

$8,373


$9,008

Restricted cash
898

946

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

$9,271


$9,954


13.
Fair Value. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value, because the majority of the amounts outstanding accrue interest at variable rates.


12


14.
Acquisition. On February 4, 2016, PPIH acquired the remaining 51% ownership of PPC, a coating and insulation company in Camrose, Alberta that serves the oil and gas industry in Western Canada. The purchase price was $13.1 million CAD ($9.6 million USD) in cash and debt at closing. This transaction was accounted for under the acquisition method of accounting. The following table represents the allocation of the total consideration in the acquisition of PPC:
Total purchase consideration:
 
 
Cash
 

$7,587

Loan payable
 
2,000

Purchase consideration to third party
 
9,587

 
 
 
Fair value of 49% previously held equity interest
 
7,492

Total purchase consideration
 

$17,079

 
 
 
Fair value of net assets acquired:
 
 
Cash and cash equivalents
 

$2,915

Property and equipment
 
13,124

Goodwill
 
2,279

Net working capital
 
406

Other assets (liabilities) net
 
(1,645
)
Net assets acquired
 

$17,079


The acquisition resulted in $2.3 million of goodwill. Goodwill is not deductible for income tax purposes. The Company incurred legal, professional and other costs related to this acquisition. These one-time costs of $0.2 million were recognized as general and administrative expenses.

In the first quarter of 2016, the Company recognized a non-cash loss of $1.6 million, which represents the difference between the pre-existing book value interest in PPC immediately prior to the acquisition remeasured to its fair value upon the acquisition date.

15.
Recent accounting pronouncements. In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting February 1, 2018 and will be applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The Company does not expect the adoption of this guidance to have a material impact on the results of operations or financial position.

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning February 1, 2018, with early adoption permitted. The Company is currently assessing the potential impact the guidance will have upon adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company is

13


currently evaluating the effect that this standard will have on the consolidated financial statements and related disclosures.

In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The mandatory adoption will require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for the Company beginning February 1, 2018, with early adoption permitted. The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.

The Company is currently evaluating the impact of adopting the standard on the Company’s financial position, results of operations, cash flows and related disclosures and has selected the modified retrospective basis with a cumulative adjustment to opening retained earnings in the year of initial adoption. The Company has completed staff education and has completed the discovery and analysis phases of reviewing contracts and identifying potential differences that would result from applying the new standard to current contracts. The Company is currently beginning to identify and implement changes to the Company’s business processes, systems and controls to support adoption of the new standard in 2018. Although it is early in the evaluation process, the Company does not expect Topic 606 to have a material impact on the financial statements, though internal processes, record keeping and disclosures may be significantly impacted. The sales are not believed to be material, because Topic 606 generally supports the recognition of revenue over time under the cost-to-cost method for the majority of the contracts, which is consistent with the current percentage of completion revenue recognition model.

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

16.    Reclassifications. Reclassifications were made to the prior-year consolidated statement of cash flows to conform to the current-year presentations and were not material to the financial statements.

17.
Subsequent events. In December, 2017, the Company completed a seventh amendment to the Credit Agreement. Lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver retroactive to October 31, 2017.

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

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


14


RESULTS OF OPERATIONS

Consolidated

Perma-Pipe International Holdings, Inc. is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company's website is www.permapipe.com. Since the Piping Systems segment includes large discrete projects, operating results could be negatively impacted in the future as a result of large variations in the level of market demand in reporting periods.

This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, contained elsewhere in this report.

Piping Systems
 
Three Months Ended October 31,
Nine Months Ended October 31,
($ in thousands)
2017

%
2016

%
% Increase (decrease)
2017

%

2016

%

% Increase (decrease)
Net sales
$27,498
 
$25,302
 
9
 %
$77,851
 
$71,230
 
9
 %
Gross profit
3,320

12
 %
3,697

15
%
(10
)%
8,163
10
 %
8,669
12
 %
(6
)%
General and administrative expenses
2,451

9
 %
1,675

7
%
46
 %
6,068

8
 %
6,208
9
 %
(2
)%
Selling expenses
1,297

5
 %
1,382

5
%
(6
)%
3,920

5
 %
4,236
6
 %
(7
)%
(Loss) income from operations
(428
)
(2
)%
640

3
%
(167
)%
(1,825
)
(2
)%
(1,775
)
(2
)%
3
 %
Loss on consolidation of JV
—

 
—

 
—
 %
—

 
(1,620
)
 
100
 %

Three months ended October 31, 2017 ("current quarter") vs. Three months ended October 31, 2016 ("prior-year quarter")

Net sales increased 9% to $27.5 million in the current quarter from $25.3 million in the prior-year quarter. Higher revenues resulted from increased domestic oil and gas business, an increase in district heating and cooling in the U.S. educational sector and increased business with distributors of coated pipe in Canada. Sales in the Middle East were comparable to prior year, as fulfillment of higher order volume in the backlog did not impact the current quarter due to normal lead times for incoming pipe material.

Gross margin decreased to 12% of net sales in the current quarter from 15% of net sales in the prior-year quarter due to changes in the North American product mix and competitive market conditions.

Selling and general and administrative expenses combined increased by $0.7 million in the current quarter from the prior-year quarter. The year over year increase resulted from $0.8 million of expense in the quarter as described below.

Following the departures of the Company’s Middle East region President and Vice President in June 2017 and the related regional management transition, Company management became concerned that its corporate policies, procedures and internal controls within the region may not have been adhered to fully by the prior management team.

As a result of these concerns, the Company engaged outside third-party firms to complete an extensive review of regional management activities from early 2014. Based on the review the Company concluded that its policies were generally followed, with the exception of commissions paid to a third-party sales representative in 2015 and 2016. These commissions, which were of an immaterial amount in the aggregate, were authorized by the regional management who have since left the Company.


15


As a result of this review, the Company has identified certain internal control improvements and other enhanced policies and procedures to be implemented, a number of which have already been completed. The total non-recurring cost for this review and the resulting policy improvement implementations for the quarter ended October 31, 2017 was approximately $0.8 million.

While the Company believes the majority of the costs associated with this review and policy improvements has already been incurred, there can be no assurance the Company will not be subject to further material expenses related to this matter.

Nine months ended October 31, 2017 ("year-to-date") vs. Nine months ended October 31, 2016 ("prior-year year-to-date")

Net sales increased 9% to $77.9 million in the current year-to-date from $71.2 million in the prior-year year-to-date. Higher coating volumes for distributors in Canada and increased project demand in the U.S. contributed to the increase.

Gross margin decreased to 10% of net sales in the current year-to-date from 12% of net sales in the prior-year year-to-date due to changes in the product mix and competitive market conditions.

Selling and general and administrative expenses combined decreased by $0.4 million to $10.0 million in the current year-to-date from $10.4 million in the prior-year year-to-date. The prior-year year-to-date expenses included one-time legal settlement expenses of $0.8 million. The cumulative year-to-date non-recurring costs related to the Company’s review into Middle East matters as disclosed above amounted to approximately $1.1 million.

Corporate
Current quarter vs. prior-year quarter

Corporate operating expenses include general and administrative expenses that are not allocated to the segment.

Net interest expense increased to $193 thousand in the current quarter from $112 thousand in the prior-year quarter due to higher borrowings, both domestic and foreign.

Year-to-date vs. prior-year year-to-date

General and administrative expenses increased to $6.4 million in the current year-to-date from $6.2 million in the prior-year year-to-date.

Net interest expense increased to $507 thousand in the current year-to-date from $435 thousand in the prior-year year-to-date due to higher borrowings, both domestic and foreign, in 2017.

Consolidated results
Current quarter vs. prior-year quarter

The pretax loss from continuing operations for the current quarter increased to $2.5 million from $1.3 million due to:
•
lower gross profit due to changes in the product mix and competitive market conditions;
•
decreased sales in the Middle East; and
•
one-time non-recurring professional services fees in the current quarter.

Year-to-date vs. prior-year year-to-date

The pretax loss from continuing operations was $8.7 million year-to-date versus $10.0 million in the prior-year year-to-date. The contributing factors were:

16


•
increased coating volume from distributors in Canada;
•
the prior-year year-to-date included a non-cash loss of $1.6 million from the consolidation of the Canadian joint venture;
•
the prior-year year-to-date general and administrative expenses included a one-time $0.8 million lawsuit settlement; and
•
one-time non-recurring professional services fees in the current year.

Income taxes

The Company's ETR from continuing operations for the current quarter and year-to-date was 32.5% and 2.8%, respectively, compared to (187.3)% and (10.7)% during the respective prior-year periods. The change in the ETR from the prior year to the current year was mainly due to the change in foreign income and loss activities. The Company remains in a domestic net operating loss carryforward position. For additional information, see "Notes to Consolidated Financial Statements, Note 5 Income taxes".

Other

For the three months ended October 31, 2017, no individual customer accounted for 10% or more of the Company's consolidated net sales, and for the three months ended October 31, 2016 one customer accounted for 17.0% of the Company's consolidated net sales. For the nine months ended October 31, 2017 and 2016, no individual customer accounted for 10% or more of the Company's consolidated net sales.

At October 31, 2017, one customer accounted for 19% of all accounts receivable. Two customers accounted for 33% of all accounts receivable at January 31, 2017.

Liquidity and capital resources

Cash, cash equivalents and restricted cash as of October 31, 2017 were $9.3 million compared to $8.7 million on January 31, 2017. On October 31, 2017, $0.2 million was held in the U.S., and $9.1 million was held at the foreign subsidiaries. The Company's working capital was $22.0 million on October 31, 2017 compared to $27.8 million on January 31, 2017. Of the working capital components, accounts receivable decreased $2.4 million as a result of collections from higher sales in previous quarters and customer deposits increased $1.6 million in the Middle East related to new project business. Net cash used in operating activities during the first nine months of 2017 was $4.2 million compared to $6.2 million during the first nine months of 2016.

Foreign earnings in the Middle East are considered to be indefinitely reinvested outside the U.S. The Company has not provided U.S. Federal tax on unremitted earnings of its Middle East subsidiaries. The Company does not believe that it will be necessary to repatriate investments from these subsidiaries. The $9.1 million cash held at the foreign subsidiaries are designated for working capital expansion and other operational investments outside the U.S. Also, some foreign credit arrangement covenants require a minimum tangible net worth to be maintained overseas, including maintaining certain levels of intercompany subordinated debt.

Net cash used in investing activities for the nine months ended October 31, 2017 was $1.9 million.

Debt totaled $17.9 million on October 31, 2017, a net increase of $6.2 million compared to the beginning of the current fiscal year. For additional information, see "Notes to Consolidated Financial Statements, Note 11 Debt". Net cash provided by financing activities was $6.0 million for the nine months ended October 31, 2017.

On September 24, 2014, the Company entered into the Credit Agreement. Under the terms of the Credit Agreement, which matures on September 24, 2018, the Company can borrow up to a combined $15.0 million in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and require achieving a minimum fixed charge

17


coverage ratio with respective performance metrics as defined by the Credit Agreement if a minimum availability is not met. In a seventh amendment to the Credit Agreement executed on December 14, 2017, lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017. Other than noted above, the Company was in compliance with all covenants under the Credit Agreement as of October 31, 2017. The North American revolving line balances as of October 31, 2017 and January 31, 2017 were included as current liabilities in the consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause.

Interest rates vary based on the average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. On October 31, 2017, the Company had borrowed $9.1 million at 5.5% and 4.45% and had $0.7 million available to it under the revolving line of credit. In addition, $0.2 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.

Revolving lines foreign. The Company also had credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On October 31, 2017, the Company was in compliance with the covenants under the credit arrangements. On October 31, 2017, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On October 31, 2017, the Company's interest rates ranged from 5.0% to 6.5%, and the Company could borrow $13.5 million under these credit arrangements. On October 31, 2017, $7.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. As there were no borrowings under these credit arrangements, an additional $5.8 million remained unused. The foreign revolving lines balances as of January 31, 2017 were included as current maturities of long-term debt in the consolidated balance sheets.

On May 5, 2017, Piping Systems obtained two capital leases for a total of 0.94 million CAD (approximately $0.7 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 7.8% per annum with monthly principal and interest payments of $9 thousand, and these leases mature on April 30, 2021. On October 20, 2017, Piping Systems obtained a capital lease for 0.18 million CAD (approximately $0.1 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 4.0% per annum with monthly principal and interest payments of $3 thousand, and these leases mature on September 29, 2022.

The Company believes its current cash and cash flow from operations, together with borrowing capacity under the revolving credit facilities as amended, and credit facilities refinanced before expiration will be sufficient to fund anticipated operations, working capital and capital spending needs for at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2017 contained in the Company's most recent Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.


18


Item 4.    Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of October 31, 2017. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management has previously reported on a material weakness in our internal control over financial reporting in connection with an error that was identified during the preparation and review of the second quarter financial statements related to stock-based compensation cost. The material weakness in internal control over financial reporting resulted from the lack of technical accounting knowledge, leading management to conclude that disclosure controls and procedures were not effective.

As described below, the Company has adopted and implemented policies and procedures to ensure that the staff has the necessary technical accounting knowledge. These controls have been operating since July 31, 2017 and for the quarter ending October 31, 2017.

Notwithstanding the material weaknesses described above, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

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

As reported in our assessment of the effectiveness of our internal control over financial reporting as of July 31, 2017, an error was identified during the preparation and review of the current quarter financial statements related to stock-based compensation cost. The material weakness in internal control over financial reporting resulted from the lack of technical accounting knowledge. Specifically, we did not have adequate controls in place to properly account for stock-based compensation cost, because the stock-based compensation had been reversed for vested equity awards that expired, terminated or were cancelled unexercised.

Remediation Plan for the Material Weakness in Internal Control over Financial Reporting: To address the material weakness regarding the adjustment for awards that expired unexercised, the Company has done the following:
•
Expanded the training of employees in financial technical accounting, reporting and disclosure-related positions;
•
Reinforced the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies and procedures;
•
Reviewed the categories that are underlying the calculations related to stock-based compensation, and revise procedures for the calculation and review of effects from vested, forfeited and expired options;
•
Implemented a catalog of key accounting rules that have been applied during the quarter. In the reviews of any major journal entries for non-standard operational accounting matters, this catalog will be used as a checklist to validate that the required accounting treatment is applied and disclosures are made accordingly. Management evaluated whether the accounting treatment follows the current rules in the catalog and will decide whether outside firm expertise is warranted in such a review; and
•
Management validated and update the catalog quarterly for any changes resulting from changed or newly pronounced accounting rules.

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We anticipate the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to recording stock-based compensation cost and will address the related material weakness that was identified as of July 31, 2017. However, the material weakness cannot be remediated fully until the remediation processes have been in operation for a period of time and successfully tested.

PART II OTHER INFORMATION
Item 6.     Exhibits



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SIGNATURES


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


Perma-Pipe International Holdings, Inc.

Date:
December 15, 2017
/s/ David J. Mansfield
 
 
David J. Mansfield
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
Date:
December 15, 2017
/s/ Karl J. Schmidt
 
 
Karl J. Schmidt
 
 
Vice President and Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)



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Perma-Pipe International Holdings, Inc. Reports