Attached files

file filename
EX-32 - EXHIBIT 32 - Perma-Pipe International Holdings, Inc.ex_242241.htm
EX-31.2 - EXHIBIT 31.2 - Perma-Pipe International Holdings, Inc.ex_242240.htm
EX-31.1 - EXHIBIT 31.1 - Perma-Pipe International Holdings, Inc.ex_242239.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended April 30, 2021.

 

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)

permapipelogo10q.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)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $.01 par value per share PPIH The NASDAQ Stock Market LLC

 

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

Yes ☒    No ☐

 

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

 

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

 

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

 

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

 

On June 4, 2021, there were 8,164,989 shares of the registrant's common stock outstanding.

 

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended April 30, 2021

 

TABLE OF CONTENTS

 

Item

 

Page

 

 

 

Part I

Financial Information

 

 

 

 

1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 30, 2021 and 2020

2

 

Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended April 30, 2021 and 2020

3

 

Consolidated Balance Sheet as of April 30, 2021 (Unaudited) and January 31, 2021

4

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the Three Months Ended April 30, 2021 and 2020

5

 

Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 30, 2021 and 2020

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

2.

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

19

 

 

 

4.

Controls and Procedures

25

 

 

 

Part II

Other Information

 

 

 

 

6.

Exhibits

26

 

 

 

Signatures

27

 

 
 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 

Net sales

  $ 24,423     $ 22,741  

Cost of sales

    19,918       19,275  

Gross profit

    4,505       3,466  
                 

Operating expenses

               

General and administrative expenses

    4,404       4,304  

Selling expenses

    1,042       1,647  

Total operating expenses

    5,446       5,951  
                 

Loss from operations

    (941 )     (2,485 )
                 

Interest expense, net

    178       186  

Other income, net

    441       (65 )

Loss from operations before income taxes

    (678 )     (2,736 )
                 

Income tax expense/(benefit)

    165       (215 )
                 

Net loss

  $ (843 )   $ (2,521 )
                 

Weighted average common shares outstanding

               

Basic

    8,165       8,048  

Diluted

    8,165       8,048  
                 

Loss per share

               
Basic     (0.10 )     (0.31 )
Diluted     (0.10 )     (0.31 )

 

See accompanying notes to consolidated financial statements.

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

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(In thousands)

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 

Net loss

  $ (843 )   $ (2,521 )
                 

Other comprehensive income/(loss)

               

Foreign currency translation adjustments, net of tax

    40       (367 )

Other comprehensive income/(loss)

    40       (367 )
                 

Comprehensive loss

  $ (803 )   $ (2,888 )

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED BALANCE SHEET

(In thousands, except per share data)

 

   

April 30, 2021

   

January 31, 2021

 
      (Unaudited)          

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 8,483     $ 7,174  

Restricted cash

    1,164       1,201  

Trade accounts receivable, less allowance for doubtful accounts of $497 at April 30, 2021 and $474 at January 31, 2021

    27,305       25,226  

Inventories, net

    15,069       12,157  

Prepaid expenses and other current assets

    9,078       4,110  

Costs and estimated earnings in excess of billings on uncompleted contracts

    3,473       4,007  

Total current assets

    64,572       53,875  

Property, plant and equipment, net of accumulated depreciation

    26,223       26,897  

Other assets

               

Operating lease right-of-use asset

    12,178       13,384  

Deferred tax assets

    911       823  

Goodwill

    2,427       2,332  

Other assets

    5,305       5,380  

Total other assets

    20,821       21,919  

Total assets

  $ 111,616     $ 102,691  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Trade accounts payable

  $ 13,644     $ 10,365  

Accrued compensation and payroll taxes

    1,660       1,448  

Commissions and management incentives payable

    231       218  

Revolving line - North America

    -       2,826  

Current maturities of long-term debt

    2,723       3,941  

Customers' deposits

    2,206       2,088  

Outside commission liability

    1,980       1,431  

Operating lease liability short-term

    1,311       1,402  

Other accrued liabilities

    3,287       2,616  

Billings in excess of costs and estimated earnings on uncompleted contracts

    2,034       762  

Income taxes payable

    1,409       1,155  

Total current liabilities

    30,485       28,252  

Long-term liabilities

               

Long-term debt, less current maturities

    5,585       6,268  
Long-term finance obligation     8,905       -  

Deferred compensation liabilities

    4,116       4,120  

Deferred tax liabilities

    868       914  

Operating lease liability long-term

    12,185       13,174  

Other long-term liabilities

    690       650  

Total long-term liabilities

    32,349       25,126  

Stockholders' equity

               

Common stock, $.01 par value, authorized 50,000 shares; 8,165 issued and outstanding at April 30, 2021 and 8,165 issued and outstanding at January 31, 2021

    82       82  

Additional paid-in capital

    61,147       60,875  

Accumulated deficit

    (9,200 )     (8,357 )

Accumulated other comprehensive loss

    (3,247 )     (3,287 )

Total stockholders' equity

    48,782       49,313  

Total liabilities and stockholders' equity

  $ 111,616     $ 102,691  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share data)

 

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Accumulated Other Comprehensive Loss

   

Total Stockholders' Equity

 

Total stockholders' equity at January 31, 2021

  $ 82     $ 60,875     $ (8,357 )   $ (3,287 )   $ 49,313  
                                         
Net loss     -       -       (843 )     -       (843 )
Stock-based compensation expense     -       272       -       -       272  
Foreign currency translation adjustment     -       -       -       40       40  

Total stockholders' equity at April 30, 2021

  $ 82     $ 61,147     $ (9,200 )   $ (3,247 )   $ 48,782  

 

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

Total stockholders' equity at January 31, 2020

  $ 80     $ 60,024     $ (715 )   $ (3,760 )   $ 55,629  
                                         
Net loss     -       -       (2,521 )     -       (2,521 )
Stock-based compensation expense     -       219       -       -       219  
Foreign currency translation adjustment     -       -       -       (367 )     (367 )
Total stockholders' equity at April 30, 2020   $ 80     $ 60,243     $ (3,236 )   $ (4,127 )   $ 52,960  

 

 

 

Shares

 

2021

   

2020

 

Balances at beginning of year

    8,164,989       8,048,006  

Shares issued

    -       116,983  

Balances at period end

    8,164,989       8,164,989  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(In thousands)

 

Three Months Ended April 30,

 
   

2021

   

2020

 

Operating activities

               

Net loss

  $ (843 )   $ (2,521 )

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

               

Depreciation and amortization

    1,122       1,111  

Deferred tax benefit

    (157 )     (362 )

Stock-based compensation expense

    272       219  

Provision on uncollectible accounts

    22       (62 )

Changes in operating assets and liabilities

               

Accounts receivable

    (2,634 )     3,361  

Inventories, net

    (2,873 )     468  

Costs and estimated earnings in excess of billings on uncompleted contracts

    1,806       (847 )

Accounts payable

    3,239       (977 )

Accrued compensation and payroll taxes

    221       900  

Customers' deposits

    128       (750 )

Income taxes receivable and payable

    302       56  

Prepaid expenses and other current assets

    (2,588 )     (997 )

Other assets and liabilities

    (444 )     997  

Net cash (used in)/provided by operating activities

    (2,427 )     596  

Investing activities

               

Capital expenditures

    (424 )     (775 )

Net cash used in investing activities

    (424 )     (775 )

Financing activities

               

Proceeds from revolving lines

    69       15,186  

Payments of debt on revolving lines

    (4,168 )     (16,003 )
Payments of debt on mortgage     (892 )     -  
Proceeds from finance obligation, net of issuance costs     9,138       -  
Payments of principal on finance obligation     (34 )     -  

Payments of other debt

    (65 )     (79 )

Decrease in drafts payable

    16       (44 )

Payments on finance lease obligations

    (117 )     (105 )

Net cash provided by/(used in) financing activities

    3,947       (1,045 )

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

    176       120  

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

    1,272       (1,104 )

Cash, cash equivalents and restricted cash - beginning of period

    8,375       14,659  

Cash, cash equivalents and restricted cash - end of period

  $ 9,647     $ 13,555  

Supplemental cash flow information

               

Interest paid

  $ 153     $ 196  

Income taxes paid

    (35 )     49  

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

April 30, 2021

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

 

 

Note 1 - Basis of presentation

 

The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2021 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 2021 and 2020 are for the three months ended April 30, 2021, and for the fiscal years ended January 31, 2022 and 2021, respectively.

 

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one segment: Piping Systems. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

 

Note 3 - Accounts receivable

 

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

 

One of the Company’s accounts receivable in the total amount of $3.8 million as of April 30, 2021 and January 31, 2021, respectively, has been outstanding for several years. Included in this balance is a retention receivable that is payable upon the commissioning of the system in the amount of $3.4 million, of which, due to the long-term nature of the receivable, $2.1 million was included in the balance of other long-term assets as of April 30, 2021 and January 31, 2021, 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. Nevertheless, the Company has been engaged in ongoing active efforts to collect this outstanding amount. During the first quarter of 2021, the Company received approximately $0.1 million from the customer and additional receipts are expected throughout the rest of 2021. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2021 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this receivable as of April 30, 2021. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

For the three months ended April 30, 2021one individual customer accounted for 10% of the Company’s consolidated net sales, and during the same period in 2020, no individual customer accounted for greater than 10% of the Company's consolidated net sales. 

 

As of April 30, 2021 and January 31, 2021, one customer accounted for 11% and no one customer accounted for greater than 10% of the Company's accounts receivable, respectively. 

 

 

 

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under Accounting Standards Codification ("ASC") Topic 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 designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. 

 

 

2)

Products - which include cables, leak detection products, heat trace products, 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 as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

 

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

 

A breakdown of the Company's revenues by revenue class for the three months ended April 30, 2021 and 2020 are as follows (in thousands):

 

   

Three Months Ended April 30,

 
   

2021

   

2020

 
   

Sales

   

% to Total

   

Sales

   

% to Total

 
Products   $ 2,587       10 %   $ 4,465       19 %
                                 

Specialty Piping Systems and Coating

                               
Revenue recognized under input method     9,952       41 %     8,562       38 %
Revenue recognized under output method     11,884       49 %     9,714       43 %

Total

  $ 24,423       100 %   $ 22,741       100 %

 

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

 

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

 

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

 

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

 

 

Contract assets and liabilities:

 

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of April 30, 2021 will be billed and collected within one year.

 

During the year ended January 31, 2021, one of the Company's customers in Qatar made a call on a performance bond held to secure one of the Company's contracts. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract. The Company has recorded the expense related to the encashment of approximately $0.6 million in other income in the consolidated statement of operations for the year ended January 31, 2021. No receivable has been recorded related to the potential reimbursement in the consolidated financial statements as of April 30, 2021.

 

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

 

(In thousands)

 

April 30, 2021

 

January 31, 2021

Costs incurred on uncompleted contracts

 

$ 18,035

 

$ 17,543

Estimated earnings

 

9,825

 

9,651

Earned revenue

 

27,860

 

27,194

Less billings to date

 

26,421

 

23,949

Costs in excess of billings, net

 

$ 1,439

 

$ 3,245

Balance sheet classification

       

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

 

$ 3,473

 

$ 4,007

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

 

(2,034)

 

(762)

Costs in excess of billings, net

 

$ 1,439

 

$ 3,245

 

Substantially all of the $1.2 million contract liabilities balance as of January 31, 2020 was recognized in revenues during 2020 and substantially all of the $0.8 million contract liabilities balance as of January 31, 2021 is expected to be recognized in revenues during 2021.

 

Additionally, included in prepaid expenses and other current assets on the consolidated balance sheet, the Company has recorded $4.2 million and $0.2 million of unbilled receivables as of April 30, 2021 and January 31, 2021, respectively, from revenues generated by its Middle East subsidiaries.

 

Practical expedients:

 

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

 

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

 

 

 

Note 5 - Income taxes 

 

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

 

The Company's effective tax rate ("ETR") from operations in the first quarter in fiscal 2021 was (24.3%) compared to 7.8% during the prior year period. The change in the ETR from the prior year quarter to the current year quarter is largely due to changes in the mix of income and loss in various jurisdictions.

 

The amount of unrecognized tax benefits, including interest and penalties at April 30, 2021, recorded in other long-term liabilities was $0.1 million, all of which would impact the Company’s ETR if recognized.

 

 

Note 6 - Impairment of long-lived assets

 

The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. At April 30, 2021, the Company performed a qualitative analysis assessment to determine if it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values. The Company assessed three asset groups as part of this analysis: United States, Canada and Middle East. The qualitative assessment indicated that it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values for all three asset groups. Therefore, it was determined that there was no impairment of the Company's long-lived assets for the three months ended April 30, 2021. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

 

Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of April 30, 2021 and January 31, 2021 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.

 

(In thousands)     January 31, 2021       Foreign exchange change effect       April 30, 2021  

Goodwill

  $ 2,332     $ 95     $ 2,427  

 

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 April 30, 2021, the Company elected to perform a qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's Canadian reporting unit exceeded its carrying value, including goodwill. The qualitative assessment did not identify any triggering events that would indicate potential impairment of the Company's Canadian reporting unit. Therefore, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment for the three months ended April 30, 2021. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

 

 

 

Note 7 - Stock-based compensation 

 

The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), expired in June 2020. Prior to the 2017 Plan's expiration, grants were made to the Company's employees, officers and independent directors, as described below. 

 

The Company has prior incentive plans under which previously granted awards remain outstanding, but under which no new awards may be granted. At April 30, 2021 the Company had reserved a total of 479,182 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 Plan will expire in May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors.

 

Stock-based compensation expense

 

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

 

   

Three Months Ended April 30,

 
(In thousands)     2021       2020  

Stock-based compensation expense

  $ -     $ 2  

Restricted stock-based compensation expense

    272       217  

Total stock-based compensation expense

  $ 272     $ 219  

 

Stock Options

 

The Company did not grant any stock options during the three months ended April 30, 2021. The following tables summarizes the Company's stock option activity:

 

(Shares in thousands)

  Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value  

Outstanding at January 31, 2021

    107     $ 9.24       2.5     $ 5  
Expired or forfeited     -       -       -       -  

Outstanding at April 30, 2021

    107       9.24       2.2       10  
                                 

Options exercisable at April 30, 2021

    107     $ 9.24       2.2     $ 10  

 

No stock options were exercised during the three months ended April 30, 2021

 

There was no vesting, expiration or forfeiture of previously unvested stock options during the three months ended April 30, 2021. As of April 30, 2021, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.

 

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the three months ended April 30, 2021:

(Shares in thousands)

  Restricted Shares     Weighted Average Price     Aggregate Intrinsic Value  

Outstanding at January 31, 2021

    372     $ 7.62     $ 2,843  
Forfeited or retired for taxes     (1 )     6.95          
Outstanding at April 30, 2021     371     $ 7.62     $ 2,835  

 

The Company did not grant any restricted stock, nor were any shares of restricted stock vested and issued during the three months ended April 30, 2021. As of April 30, 2021, there was $1.0 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 1.7 years.

 

 

Note 8 - Loss per share

 

   

Three Months Ended April 30,

 
(In thousands)     2021       2020  

Basic weighted average common shares outstanding

    8,165       8,048  

Dilutive effect of equity compensation plans

    -       -  

Weighted average common shares outstanding assuming full dilution

    8,165       8,048  
                 

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

    103       77  

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

    279       274  

 

 

Note 9 - Debt

 

Debt totaled $8.3 million and $13.2 million at April 30, 2021 and January 31, 2021, respectively.

 

Paycheck Protection Program Loan. On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses.  The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided.

 

Guidance from the American Institute of Certified Public Accountants' ("AICPA") Technical Question and Answer Section 3200.18 states that if a company expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standards ("IAS") 20 - Accounting for Government Grants and Disclosure of Government Assistance to account for the PPP loan.  The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Therefore, the Company has recognized the earnings impact on a systematic basis over the periods in which the Company recognized as expenses the related costs for which the grants were intended to compensate. We noted that all of these expenses, and thus the related earnings impact, were incurred during the year ended January 31, 2021.

 

The IAS 20 guidance allows for recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected the former option, to make a more clear distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness. As such, we have recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were recognized in other income in the consolidated statements of operations. The Company has submitted its application and supporting documentation for forgiveness to its bank, which has submitted the application and supporting documents to the Small Business Administration ("SBA"). We are currently awaiting approval of forgiveness from the SBA.

 

12

 

Revolving lines - North AmericaOn September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a three-year $18.0 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

 

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

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of the assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. The Company has engaged a consultant to assist with the search for, communication with and selection of a new lender or a replacement facility with PNC. We have been in communications and shared data with PNC and others. The Company expects to negotiate a renewal to or replacement for its existing credit facility prior to maturity.

 

Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

 

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

 

As of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries.

 

On December 18, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC’s waiver of the Company’s failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company’s Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below.  Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1.0 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the United Arab Emirates. The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.1 million. The Amendment and Waiver also eliminates the Company’s ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity. 

 

The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six-month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine-month period ending July 31, 2021. The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three-month period ending January 31, 2021; (ii) 1.10 to 1.00 for the six-month period ending April 30, 2021; and (iii) 1.10 to 1.00 for the nine-month period ending July 31, 2021.  In order to cure any future breach of the fixed charge coverage ratio covenant 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 Credit Agreement in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the covenant. 

 

As of April 30, 2021, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the six-month period ended April 30, 2021 under the Amendment and Waiver for the North American Loan Parties. Per the Amendment and Waiver, the Company will repatriate approximately $0.9 million in cash from its subsidiary in the United Arab Emirates in June 2021 to maintain compliance with the Amendment and Waiver. The repatriation will not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries.  As of April 30, 2021, the Company’s foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.0 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant. Any cash required to cure future covenant defaults would be repatriated through the Company’s subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India. Most of this cash could be repatriated without any tax consequences, however, some repatriation would require payment of withholding taxes.  The Company does not anticipate any material tax impacts of any potential future repatriation.

 

 

The Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued based on the following:

 

 

The Company’s execution of the Amendment and Waiver described above,

 

The Company’s ability to repatriate cash from its foreign subsidiaries to cure any future covenant defaults without any material cost or tax consequences,

 

The Company expects an increase in business activity and cash flow from operations over the remaining term of the Amendment and Waiver,

 

Management expects to be able to borrow within the reduced availability parameters noted above,

  The Company’s flexibility in deciding when to incur its planned capital expenditures, allowing the Company to defer cash spending if necessary to ensure compliance with loan covenants in the future, and
 

The Company's entry into the Purchase and Sale Agreement to sell its land and buildings in Lebanon, Tennessee. The Company used a portion of the proceeds to repay its borrowings under the Senior Credit Facility. The Company expects to use its liquidity for strategic investments and general corporate needs, as discussed further below.

 

As of April 30, 2021, as a result of the repayment of borrowings with proceeds from the sale of its land and buildings in Lebanon, Tennessee, the Company had no borrowings and had $7.6 million available under the Senior Credit Facility, before application of the $2.0 million availability block noted above in connection with the Amendment and Waiver. As of January 31, 2021, the Company had borrowed an aggregate of $2.8 million and had $1.7 million available under the 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 its land and buildings in Lebanon, Tennessee (the "Property") for a purchase price of $10.4 million. The transaction generated net cash proceeds of $8.7 million. The Company used a portion of the proceeds to repay its borrowings under the Senior Credit Facility. The Company expects to use its liquidity for strategic investments and 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 will lease back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.

 

In accordance with ASC Topic 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 $8.9 million is recognized in long-term finance obligation on the Company's consolidated balance sheet as of April 30, 2021. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. Concurrently with the sale, the Company paid off the approximately $0.9 million mortgage note on the Property to its lender. At closing, $0.4 million was placed in a short-term escrow account to cover certain post-closing contingencies that may arise. The contingencies were resolved in May 2021 and the Company received the escrowed funds in June 2021.

 

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

 

The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at April 30, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 3.5% and was originally set to expire in November 2020, however, the expiration has been extended due to the COVID-19 pandemic and inability to finalize renewal documentation prior to that time. The Company is awaiting final documentation to complete the renewal process, which is expected to occur in June 2021.

 

The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at April 30, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 4.5% and is set to expire in January 2022.

 

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt.

 

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at April 30, 2021). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line was 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. The facility was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the COVID-19 pandemic and the inability to finalize renewal documentation prior to that time. The Company has not made any borrowings under this facility. The Company is currently negotiating the renewal of the facility under similar terms, with a revolving line of 100.0 million Egyptian Pounds. The renewal process is expected to be completed in June 2021.

 

14

 

In January 2021, the Company entered into a second credit arrangement for project financing with a bank in Egypt for 46.2 million Egyptian Pounds (approximately $2.9 million at April 30, 2021). 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 8.0% and is expected to expire in August 2021 in connection with the completion of the project.

 

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

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E. as of April 30, 2021The Company was not in compliance with a covenant under its 46.2 million Egyptian Pound project financing in Egypt as of April 30, 2021. The Company did not have a share capital increase registered with the General Authority for Investment, as required by facility covenants, but is in the process of curing the breach and has received a waiver from the bank as of April 30, 2021. On April 30, 2021, interest rates were based on the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, one of which has a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for the Egypt credit arrangement. Based on these base rates, as of April 30, 2021, the Company's interest rates ranged from 3.5% to 8.0%, with a weighted average rate of 5.13%, and the Company could borrow $5.8 million under these credit arrangements. As of April 30, 2021, $5.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2021, the Company had borrowed $2.0 million, and had an additional $5.8 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of April 30, 2021 and January 31, 2021, were included as current maturities of long-term debt in the Company's consolidated balance sheet. 

 

Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, and was 4.55% at April 30, 2021Principal payments began in January 2018.

 

On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for repayment of amounts borrowed. On April 14, 2021, the Company entered into the Purchase and Sale Agreement, discussed further in Note 9 - Debt, above. Concurrently with the sale, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.

 

 

Note 10 - Leases

 

Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company intends to build a facility. The annual payments are initially expected to be approximately 1.2 million Dirhams (approximately $0.3 million at October 31, 2020), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments are deferred until August 2022. The lease expires in August 2050.

 

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

 

The Company has several significant operating lease agreements, with lease terms of one to 30 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 right-of-use ("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 April 30, 2021, the Company had total operating lease liabilities of $13.5 million and total operating ROU assets of $12.2 million, which are reflected in the consolidated balance sheet. At April 30, 2021, the Company also had total finance lease liabilities of $0.6 million included in current maturities of long-term debt and long-term debt less current maturities, and total finance ROU assets of $0.7 milliowhich were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.

 

 

Supplemental balance sheet information related to leases is as follows (in thousands): 

 

Operating and Finance leases:

 

April 30, 2021

   

January 31, 2021

 

Finance leases assets:

               

Property and Equipment - gross

  $ 1,061     $ 879  

Accumulated depreciation and amortization

    (311 )     (96 )

Property and Equipment - net

  $ 750     $ 783  
                 

Finance lease liabilities:

               

Finance lease liability short-term

  $ 262     $ 300  

Finance lease liability long-term

    350       401  

Total finance lease liabilities

  $ 612     $ 701  
                 

Operating lease assets:

               

Operating lease ROU assets

  $ 12,178     $ 13,384  
                 

Operating lease liabilities:

               

Operating lease liability short-term

  $ 1,311     $ 1,402  

Operating lease liability long-term

    12,185       13,174  

Total operating lease liabilities

  $ 13,496     $ 14,576  

 

Total lease costs consist of the following (in thousands): 

 

Lease costs

Consolidated Statements of Operations Classification

 

Three Months Ended April 30, 2021

   

Three Months Ended April 30, 2020

 

Finance Lease Costs

                 

Amortization of ROU assets

Cost of sales

  $ 54     $ 48  

Interest on lease liabilities

Interest expense

    13       19  

Operating lease costs

Cost of sales, SG&A expenses

    648       612  

Short-term lease costs (1)

Cost of sales, SG&A expenses

    93       23  

Sub-lease income

SG&A expenses

    (20 )     (20 )

Total Lease costs

  $ 788     $ 682  

 

(1) Includes variable lease costs, which are immaterial

 

 

Supplemental cash flow information related to leases is as follows (in thousands):

 

   

Three Months Ended April 30, 2021

   

Three Months Ended April 30, 2020

 

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

               

Financing cash outflows from finance leases

  $ 117     $ 105  

Operating cash outflows from finance leases

    13       19  

Operating cash outflows from operating leases

    501       954  

 

   

Three Months Ended April 30, 2021

   

Three Months Ended April 30, 2020

 

ROU Assets obtained in exchange for new lease obligations:

               

Finance leases liabilities

  $ -     $ -  

Operating leases liabilities

    52       27  

 

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

 

   

April 30, 2021

 

Weighted-average remaining lease terms (in years):

       

Finance leases

    2.3  

Operating leases

    13.4  
         

Weighted-average discount rates:

       

Finance leases

    7.7 %

Operating leases

    7.5 %

 

Maturities of lease liabilities as of April 30, 2021, are as follows (in thousands):

 

Year:

 

Operating Leases

   

Finance Leases

 

For the nine months ended January 31, 2022

  $ 1,676     $ 224  

For the year ended January 31, 2023

    2,279       288  

For the year ended January 31, 2024

    2,265       156  

For the year ended January 31, 2025

    1,516       -  

For the year ended January 31, 2026

    1,326       -  

For the year ended January 31, 2027

    1,333       -  
                 

Thereafter

    12,322       -  

Total lease payments

    22,717       668  

Less: amount representing interest

    (9,221 )     (56 )

Total lease liabilities at April 30, 2021

  $ 13,496     $ 612  

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million for the three months ended April 30, 2021 and 2020, respectively. 

 

 

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries was $1.2 million and $1.1 million as of April 30, 2021 and 2020, respectively, and is related to fixed deposits that also serve as security deposits and guarantees. 

 

(In thousands)     April 30, 2021       April 30, 2020  

Cash and cash equivalents

  $ 8,483     $ 12,450  

Restricted cash

    1,164       1,105  

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

  $ 9,647     $ 13,555  

 

 

Note 12 - Fair value

 

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

 

 

Note 13 - Recent accounting pronouncements

 

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

 

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

 

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

 

 

Note 14 - Subsequent events

 

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 Plan will expire in May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors.

 

 

 

Item 2.

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

 

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

 

This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented.

 

COVID-19 and Depressed Oil and Gas Market Impact

 

The Company's results of operations, financial condition, liquidity and cash flow in 2020 and the three months ended April 30, 2021 have been materially adversely affected by the COVID-19 pandemic and the current depressed market prices for oil and gas, and may continue to be materially adversely affected, the extent to which remains unclear at this time. See Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K for additional information.

 

As of the date of filing this Form 10-Q, all of the Company’s plants are operating. The Company's global supply chains have been adversely affected by the COVID-19 pandemic and the effects of recent weather events in the Gulf Coast region. The Company is taking steps to ensure continuity of supply. Due to the unprecedented actions taken to stem the spread of the virus and the uncertainty of the duration and impact of additional actions that may be required, the resulting future disruptions to the Company’s operations are uncertain.

 

In response to the extraordinary steps taken to combat the spread of COVID-19 and the impact of decreased oil prices, the Company has updated its forecasts more frequently during this period to determine the continuing financial impact of these events on the Company’s results of operations, financial condition and liquidity. As a result of anticipated conditions, the Company reduced headcount, planned capital expenditures and non-essential operating expenses. Due to project delays and the adverse impacts of COVID-19, as of April 30, 2021, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the six-month period ended April 30, 2021 under its Amendment and Waiver for the North American Loan Parties. Based on the actions taken by the Company and expected future results, the Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued.  See further discussion below and in Note 9 - Debt, in the Notes to Consolidated Financial Statements.

 

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

 

Based on the facts and circumstances of the Company's PPP loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP loan proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were recognized in other income in the consolidated statements of operations during the year ended January 31, 2021. The Company has submitted its application and documentation for forgiveness to its bank, which has submitted the application and supporting documents to the SBA. We are currently awaiting approval of forgiveness from the SBA.

 

Beginning in April 2020, the Company's subsidiary, Perma-Pipe Canada, Ltd. ("PPCA"), applied for relief in the form of grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. Beginning in October 2020, PPCA also applied for grants under the Canadian Emergency Rent Subsidy ("CERS") program. PPCA was approved for and received approximately $0.4 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the three months ended April 30, 2021. Both programs are expected to continue through September 2021. PPCA plans to apply for additional grants under the program, however there is no guarantee that PPCA will be granted any additional funds under the program. The proceeds from the CEWS and CERS programs are recognized in other income in the consolidated statements of operations. 

 

19

 

RESULTS OF OPERATIONS

 

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

 

($ in thousands)

 

Three Months Ended April 30,

 
   

2021

   

2020

   

Change favorable/(unfavorable)

 
   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

 

Net sales

  $ 24,423             $ 22,741             $ 1,682  
                                         

Gross profit

    4,505       18 %     3,466       15 %     1,039  
                                         

General and administrative expenses

    4,404       18 %     4,304       19 %     (100 )
                                         

Selling expense

    1,042       4 %     1,647       7 %     605  
                                         

Interest expense, net

    178               186               8  
                                         

Other income, net

    441               (65 )             506  
                                         

Loss from operations before income taxes

    (678 )             (2,736 )             2,058  
                                         

Income tax expense/(benefit)

    165               (215 )             (380 )
                                         

Net loss

    (843 )             (2,521 )             1,678  

 

Three months ended April 30, 2021 ("current quarter") vs. Three months ended April 30, 2020 ("prior year quarter")

 

Net sales:

 

Net sales were $24.4 million in the current quarter, an increase of $1.7 million, or 7%, from $22.7 million in the prior year quarter. The increase was largely a result of increased sales volumes in the Company's U.A.E. business driven by the introduction of a new product line and project timing in its Saudi Arabian business. 

 

 

Gross profit:

 

Gross profit increased to $4.5 million, or 18% of net sales, in the current quarter from $3.5 million, or 15% of net sales, in the prior year quarter. This increase was driven by higher sales volumes and the impact of cost reduction strategies implemented in 2020. 

 

General and administrative expenses:

 

General and administrative expenses were approximately the same in the current quarter and the prior year quarter. 

 

Selling expenses:

 

Selling expenses decreased to $1.0 million in the current quarter, compared to $1.6 million in the prior year quarter due primarily to cost reduction strategies implemented in 2020. 

 

Interest expense, net:

 

Net interest expense remained consistent at $0.2 million in both the current quarter and the prior year quarter.

 

Other income, net:

 

Other income, net increased to an income of $0.4 million in the current quarter, compared to expense of $0.1 million in the prior year quarter. This increase was a result of income recorded for funds received under the CEWS and CERS programs in Canada.  

 

Loss from operations before income taxes:

 

Loss from operations before income taxes decreased by $2.1 million to a loss of ($0.7 million) in the current quarter from a loss of ($2.8 million) in the prior year quarter. The reduced loss was a result of increased sales volumes in the Company's U.A.E. business driven by the introduction of a new product line and project timing in its Saudi Arabian business. 

 

Income tax expense/(benefit):

 

The Company's worldwide effective tax rates ("ETR") were (24.3%) and 7.8% in the current quarter and the prior year quarter, respectively. The change in the ETR from the prior year quarter to the current year quarter is largely due to changes in the mix of income and loss in various jurisdictions.

 

The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends-received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested, and earnings in its Indian subsidiary are partially permanently reinvested. The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of Indian, Canadian and Egyptian withholding taxes will be recorded. As such, the Company has accrued a liability of $0.3 million as of April 30, 2021 related to these taxes.

 

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

 

 

Net loss:

 

The resulting net loss of ($0.9 million) in the current quarter was an improvement of $1.6 million over the net loss of ($2.5 million) in the prior year quarter. The reduced net loss was a result of increased sales volumes in the Company's U.A.E. business driven by the introduction of a new product line and project timing in its Saudi Arabian business.  

 

Liquidity and capital resources

 

Cash and cash equivalents as of April 30, 2021 were $8.5 million compared to $7.2 million on January 31, 2021. On April 30, 2021, $2.5 million was held in the U.S., and $6.0 million was held at the Company's foreign subsidiaries. The Company's working capital was $34.1 million on April 30, 2021 compared to $25.6 million on January 31, 2021. Of the working capital components, cash increased by $1.3 million as the result of the movements discussed below. As of April 30, 2021, the Company had $7.6 million of borrowing capacity under its Senior Credit Facility in North America and $5.8 million of borrowing capacity under its foreign revolving credit agreements. 

 

Net cash used in operating activities in the three months ended April 30, 2021 was $2.4 million, as compared to net cash provided by operating activities of $0.6 million in the prior year period. This decrease was due primarily to increases in net working capital requirements in the current period compared to the prior year period.

 

Net cash used in investing activities in the three months ended April 30, 2021 and in the prior year period was $0.4 million and $0.8 million, respectively. This reduction was due primarily to a decrease in investments in fixed assets as a result of cost preservation initiatives to safeguard against the impacts of the COVID-19 pandemic.

 

Net cash provided by financing activities in the three months ended April 30, 2021 was $3.9 million, as compared to net cash used in financing activities of $1.0 million in the prior year period. The main source of cash from financing activities during the period was net proceeds of $8.2 million as a result of the sale and leaseback of the Company's land and buildings in Lebanon, Tennessee during the period. This increase was also impacted by increased net repayments of approximately $4.1 million under the revolving credit facility, as compared to the prior year period, where net repayments were approximately $0.8 million. Debt totaled $8.3 million and $13.2 million as of April 30, 2021 and January 31, 2021, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.

 

Revolving line - North America. On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender, providing for a three-year $18.0 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”). 

 

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

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. The Company has engaged a consultant to assist with the search for, communication with and selection of a new lender or a replacement facility with PNC. We have been in communications and shared data with PNC and others. The Company expects to negotiate a renewal to or replacement for its existing credit facility prior to maturity.

 

Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

 

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

 

As of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries.

 

22

 

On December 18, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC’s waiver of the Company’s failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company’s Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below.  Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1.0 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the United Arab Emirates. The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.1 million. The Amendment and Waiver also eliminates the Company’s ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity. 

 

The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six-month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine-month period ending July 31, 2021. The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three-month period ending January 31, 2021; (ii) 1.10 to 1.00 for the six-month period ending April 30, 2021; and (iii) 1.10 to 1.00 for the nine-month period ending July 31, 2021. In order to cure any future breach of the fixed charge coverage ratio covenant 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 Credit Agreement in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the covenant. 

 

As of April 30, 2021, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the six-month period ended April 30, 2021 under the Amendment and Waiver for the North American Loan Parties. Per the Amendment and Waiver, the Company will repatriate approximately $0.9 million in cash from its subsidiary in the United Arab Emirates in June 2021 to maintain compliance with the Amendment and Waiver. The repatriation will not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. As of April 30, 2021, the Company’s foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.0 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant. Any cash required to cure future covenant defaults would be repatriated through the Company’s subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India. Most of this cash could be repatriated without any tax consequences, however, some repatriation would require payment of withholding taxes.  The Company does not anticipate any material tax impacts of any potential future repatriation.

 

The Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued based on the following:

 

 

The Company’s execution of the Amendment and Waiver described above,

 

The Company’s ability to repatriate cash from its foreign subsidiaries to cure any future covenant defaults without any material cost or tax consequences,

 

The Company expects an increase in business activity and cash flow from operations over the remaining term of the Amendment and Waiver,

 

Management expects to be able to borrow within the reduced availability parameters noted above,

 

The Company’s flexibility in deciding when to incur its planned capital expenditures, allowing the Company to defer cash spending if necessary to ensure compliance with loan covenants in the future, and

 

The Company's entry into the Purchase and Sale Agreement to sell its land and buildings in Lebanon, Tennessee. The Company used a portion of the proceeds to repay its borrowings under the Senior Credit Facility. The Company expects to use its liquidity for strategic investments and general corporate needs, as discussed in Note 9- Debt, in the Notes to Consolidated Financial Statements.

 

As of April 30, 2021, the Company had no borrowings and had $7.6 million available under the Senior Credit Facility, before application of the $2.0 million availability block noted above in connection with the Amendment and Waiver.  

 

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

 

The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at April 30, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 3.5% and was originally set to expire in November 2020, however, the expiration has been extended due to the COVID-19 pandemic and inability to finalize renewal documentation prior to that time. The Company is awaiting final documentation to complete the renewal process, which is expected to occur in June 2021.

 

The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at April 30, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 4.5% and is set to expire in January 2022.

 

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt.

 

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at April 30, 2021). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line was 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. The facility was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the COVID-19 pandemic and the inability to finalize renewal documentation prior to that time. The Company has not made any borrowings under this facility. The Company is currently negotiating the renewal of the facility under similar terms, with a revolving line of 100.0 million Egyptian Pounds. The renewal process is expected to be completed in June 2021.

 

 

In January 2021, the Company entered into a second credit arrangement for project financing with a bank in Egypt for 46.2 million Egyptian Pounds (approximately $2.9 million at April 30, 2021). 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 8.0% and is expected to expire in August 2021 in connection with the completion of the project.

 

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

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E. as of April 30, 2021. The Company was not in compliance with a covenant under its 46.2 million Egyptian Pound project financing in Egypt as of April 30, 2021. The Company did not have a share capital increase registered with the General Authority for Investment, as required by facility covenants, but is in the process of curing the breach and has received a waiver from the bank as of April 30, 2021. On April 30, 2021, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, one of which has a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for the Egypt credit arrangement. Based on these base rates, as of April 30, 2021, the Company's interest rates ranged from 3.5% to 8.0%, with a weighted average rate of 5.13%, and the Company could borrow $5.8 million under these credit arrangements. As of April 30, 2021, $5.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2021, the Company had borrowed $2.0 million, and had an additional $5.8 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of April 30, 2021 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheet. 

 

Additional Liquidity from Sale and Leaseback Transaction

On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee for a purchase price of $10.4 million. The transaction generated net cash proceeds of $8.7 million.  The Company used a portion of the proceeds to repay all its borrowings under the Senior Credit Facility.  The Company intends to use the additional liquidity to fund strategic investments and general corporate needs.

 

Additional liquidity from the PPP

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

 

Based on the facts and circumstances of the Company's loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were recognized in other income in the consolidated statements of operations during the year ended January 31, 2021. 

 

Additional liquidity from the CEWS Program

Beginning in April 2020, the Company's subsidiary, PPCA, applied for relief in the form of grants from the Canadian government under the CEWS program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. Beginning in October 2020, PPCA also applied for grants under the CERS program. PPCA was approved for and received approximately $0.4 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the three months ended April 30, 2021. Both programs are expected to continue through September 2021. The proceeds from CEWS and CERS are recognized in other income in the consolidated statements of operations. 

 

Accounts receivable: 

In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million. The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer. Nevertheless, the Company has since then collected approximately $38.1 million as of April 30, 2021, with a remaining balance due in the amount of $3.8 million. Included in this balance is an amount of $3.4 million, which pertains to retention clauses within the agreements of the Company's customer (contractor), and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $2.1 million of this retention amount was reclassified to a long-term receivable account.

 

The Company has been engaged in ongoing active efforts to collect the outstanding amount. During the three months ended April 30, 2021, the Company received approximately $0.1 million from the customer. The Company has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this amount as of April 30, 2021. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2021 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

 

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 30, 2021. Based upon the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and Chief Financial Officer, based on the remediation activities implemented by the Company as described below, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Changes in Internal Control over Financial Reporting. There were no changes in the Company's internal control over financial reporting during the Company's most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company's 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.

 

 

PART II OTHER INFORMATION

 

Item 6.

Exhibits

 

10.1 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]
10.2 Real Estate Purchase and Sale Agreement with Escrow Instructions dated January 22, 2021, between the Company and Winkler [Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on April 22, 2021]
10.3 First Amendment to Real Estate Purchase and Sale Agreement with Escrow Instructions dated February 23, 2021, between the Company and Winkler [Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on April 22, 2021]
10.4 Second Amendment to Real Estate Purchase and Sale Agreement with Escrow Instructions dated April 12, 2021, between the Company and Nash88 [Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K/A filed on April 22, 2021]
10.5 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]

31.1

Rule 13a - 14(a)/15d - 14(a) Certifications
(1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Rule 13a - 14(a)/15d - 14(a) Certifications
(2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

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

101.INS

XBRL Instance

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

 

 

SIGNATURES

 

 

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

 

 

    Perma-Pipe International Holdings, Inc.
     
     

Date:

June 8, 2021

/s/ David J. Mansfield

 

 

David J. Mansfield

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:

June 8, 2021

/s/ D. Bryan Norwood

 

 

D. Bryan Norwood

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

27