SEC Form 10-Q filed by Perma-Pipe International Holdings Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| 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.
Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)
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(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 |
| The |
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.
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).
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 ☐
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
On June 13, 2024, there were
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended April 30, 2024
| Financial Statements |
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative expenses | ||||||||
| Selling expenses | ||||||||
| Total operating expenses | ||||||||
| Income from operations | ||||||||
| Interest expense | ||||||||
| Other (expense) income | ( | ) | ||||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense | ||||||||
| Net income (loss) | ( | ) | ||||||
| Less: Net income attributable to non-controlling interest | ||||||||
| Net income (loss) attributable to common stock | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Earnings per share attributable to common stock | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Other comprehensive income (loss) | ||||||||
| Foreign currency translation adjustments, net of tax | ( | ) | ( | ) | ||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
| Less: Comprehensive income attributable to non-controlling interests | ||||||||
| Total comprehensive income (loss) attributable to common stock | $ | $ | ( | ) | ||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| April 30, 2024 | January 31, 2024 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, less allowance for credit losses of $ at April 30, 2024 and $ at January 31, 2024 | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Unbilled accounts receivable | ||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ||||||||
| Total current assets | ||||||||
| Long-term assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation | ||||||||
| Operating lease right-of-use asset | ||||||||
| Deferred tax assets | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued compensation and payroll taxes | ||||||||
| Commissions and management incentives payable | ||||||||
| Revolving line - North America | ||||||||
| Current maturities of long-term debt | ||||||||
| Customers' deposits | ||||||||
| Operating lease liability short-term | ||||||||
| Other accrued liabilities | ||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Long-term finance obligation | ||||||||
| Deferred compensation liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Operating lease liability long-term | ||||||||
| Loan payable to GIG | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Non-controlling interest | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity | ||||||||
| Common stock, par value, authorized shares; issued and outstanding at April 30, 2024 and at January 31, 2024 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, shares at April 30, 2024 and January 31, 2024 | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||
| Total stockholders' equity at January 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Amount attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Total stockholders' equity at April 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||
| Total stockholders' equity at January 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Total stockholders' equity at April 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Shares | 2024 | 2023 | ||||||
| Balances at beginning of year | ||||||||
| Treasury stock retired | ||||||||
| Shares issued, net of shares used for tax withholding | ||||||||
| Prior period adjustments | ( | ) | ||||||
| Balances at period end | ||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Deferred tax (benefit) expense | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Provision on uncollectible accounts | ( | ) | ||||||
| Gain (loss) from disposal of fixed assets | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued compensation and payroll taxes | ||||||||
| Customers' deposits | ( | ) | ||||||
| Income taxes payable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Unbilled accounts receivable | ( | ) | ||||||
| Other assets and liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from insurance recovery for property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from revolving credit lines | ||||||||
| Payments of debt on revolving credit lines | ( | ) | ( | ) | ||||
| Payments of principal on finance obligation | ( | ) | ( | ) | ||||
| Payments of other debt | ( | ) | ( | ) | ||||
| Increase (decrease) in drafts payable | ( | ) | ||||||
| Payments on finance lease obligations | ( | ) | ( | ) | ||||
| Stock options exercised and taxes paid related to restricted shares vested | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Net increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash interest paid | $ | $ | ||||||
| Cash income taxes paid | ||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2024
(In thousands, except per share data, or unless otherwise specified)
(Unaudited)
Note 1 - Basis of presentation
The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Certain information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2024 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2024 and 2023 are for the fiscal year ending January 31, 2025 and for the fiscal year ended January 31, 2024, respectively.
Significant New Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended January 31, 2024 as filed with the SEC on April 26, 2024 for discussion of the Company's significant accounting policies.
Subsequent Events
The Company has evaluated subsequent events through June 13, 2024, the date the financial statements were issued. Any material subsequent events that occurred during this time have been properly recognized and/or disclosed in these consolidated financial statements.
Note 2 - Business segment reporting
The Company is engaged in the manufacture and sale of products in
Note 3 - Accounts receivable
The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition. In the United States, collateral is not generally required. In the United Arab Emirates ("U.A.E."), Saudi Arabia, Egypt and India letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated as amounts due from customers net of an allowance for claims and doubtful accounts. Standard payment terms are generally net 30 to 60 days. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write off is recorded against the allowance for doubtful accounts.
In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $
The Company has been actively involved in ongoing efforts to collect this outstanding balance. The Company continues to engage with the customer to ensure full payment of the open balances, and during the three months ended April 30, 2024, and at various times throughout 2023, the Company received partial payments to settle $
For the three months ended April 30, 2024 and 2023, respectively,
As of April 30, 2024 and January 31, 2024, customer accounted for
Note 4 - Revenue recognition
The Company accounts for its revenues under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers.
Revenue from contracts with customers
The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.
The Company’s standard revenue transactions are classified into two main categories:
| 1) | Systems and Coating - which include all bundled products in which Perma-Pipe engineers, and manufactures pre-insulated specialty piping systems mainly relating to the district heating and cooling and oil & gas markets. |
| 2) | Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract. |
In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:
|
| 1) | the customer owns the material that is being coated, so the customer controls the asset and thus the work-in-process; or |
|
| 2) | the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured, which has no alternative future use, and there is a right to payment for work performed to date plus profit margin. |
Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).
A breakdown of the Company's revenues by revenue class for the three months ended April 30, 2024 are as follows:
| Three Months Ended April 30, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Sales | % of Total | Sales | % of Total | |||||||||||||
| Products | $ | % | $ | % | ||||||||||||
| Specialty Piping Systems and Coating | ||||||||||||||||
| Revenue recognized under input method | % | % | ||||||||||||||
| Revenue recognized under output method | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
The input method as noted in ASC 606-10-55-20 is used by certain operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the "over time" method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor, and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.
The output method as noted in ASC 606-10-55-17 is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped.
Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above.
Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions are made for estimated losses on uncompleted contracts in the contract liabilities account in the period in which such losses are determined.
The transaction price associated with the Company's contracts with customers are generally determined based on the fixed amount of consideration as specified in a contract. This may also include variable consideration in certain instances where it is considered probable that a significant reversal of cumulative revenue recognized will not occur. As a result, the amount of consideration ultimately received from the customer can fluctuate due to the variability of future events stated in a contract. Therefore, the aggregate amount of the transaction price includes the fixed consideration contained in a contract that is generally not subject to change and excludes sales and value added taxes, or amounts collected on behalf of third parties, along with any variable consideration. The total transaction price is then allocated to the performance obligations which is eventually recognized as revenue based on the project type and the method that is used to measure the transfer of promised goods and services to customers. Additionally, transaction prices relating to cost-plus contracts are determined by applying the applicable profit margin to costs incurred on contracts, whereas transaction prices relating to fixed price contracts are determined on a lump-sum basis. Further, standard payment terms are generally net 30 to 60 days, which is customer specific.
Contract assets and liabilities
Contract assets represent revenue recognized in excess of amounts billed for work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs for work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impact the period end balances in these accounts. In addition, contract assets include receivables or amounts that are billable beyond the passage of time. For additional information, see Note 3 in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended January 31, 2024 as filed with the SEC on April 26, 2024, and Unbilled accounts receivable, as further described below.
The following table shows the reconciliation of costs in excess of billings and billings in excess of costs:
| April 30, 2024 | January 31, 2024 | |||||||
| Costs incurred on uncompleted contracts | $ | $ | ||||||
| Estimated earnings | ||||||||
| Earned revenue | ||||||||
| Less billings to date | ||||||||
| Costs in excess of billings, net | $ | $ | ||||||
| Balance sheet classification | ||||||||
| Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts | $ | $ | ||||||
| Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts | ( | ) | ( | ) | ||||
| Costs in excess of billings, net | $ | $ | ||||||
The Company anticipates that substantially all costs incurred on uncompleted contracts as of April 30, 2024 will be billed and collected within year.
Unbilled accounts receivable
The Company has recorded $
Practical expedients
Costs to obtain a contract are not considered to be incremental or material, and project duration generally does not span more than one year. Accordingly, the Company applies the practical expedient for these types of costs and as such, are expensed in the period incurred.
As a result of the Company's contracts having a duration of less than one year, a practical expedient was applied regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.
Note 5 - Income taxes
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. The relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The Company's worldwide effective tax rates ("ETR") for the three months ended April 30, 2024 and 2023 were
The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. As such, the Company has accrued a liability of $
Note 6 - Impairment of long-lived assets
The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. At April 30, 2024, the Company performed an assessment to determine whether there were any triggering events that may have occurred which could indicate that the carrying value of the Company's long-lived assets are not recoverable, and an impairment may exist. Based on this assessment, the Company did not identify any triggering events that would indicate that the carrying amounts may not be recoverable with respect to long-lived assets at April 30, 2024. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.
Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of April 30, 2024 and January 31, 2024 is attributable to the purchase of the remaining
The following table provides a reconciliation of changes in the carrying amount of goodwill:
| January 31, 2024 | Foreign exchange change effect | April 30, 2024 | ||||||||||
| Goodwill | $ | $ | ( | ) | $ | |||||||
The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. During the period ended April 30, 2024, the Company performed a periodic assessment to determine whether there were any triggering events that may have occurred which could indicate that more likely than not that the fair value of the reporting unit did not exceed its carrying value, resulting in an impairment. Based on this assessment, the Company did not identify any triggering events that would indicate that the fair value is less than the carrying value of the reporting unit at April 30, 2024 and 2023. Accordingly, the Company did not proceed with performing an impairment test as a result of this periodic assessment. the Company will continue testing for impairment at least annually as of January 31, or as otherwise required by applicable accounting standards.
Note 7 - Stock-based compensation
The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), expired in June 2020.
The Company has prior incentive plans under which previously granted awards remain outstanding, including the 2017 Plan, but under which no new awards may be granted. At April 30, 2024 the Company had reserved a total of
While the 2017 Plan provided for the grant of deferred shares, non-qualified stock options, incentive stock options, restricted shares, restricted stock units, and performance-based restricted stock units intended to qualify under section 422 of the Internal Revenue Code, the Company issued only restricted shares and restricted stock units under the 2017 Plan. The 2017 Plan authorized awards to officers, employees, consultants, and independent directors.
The Company's 2021 Omnibus Stock Incentive Plan, dated May 26, 2021, was approved by the Company's stockholders in May 2021 ("2021 Plan"). The 2021 Plan will expire in May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors. Grants were made to the Company's employees, officers, and independent directors under the 2021 Plan, as described below.
Stock-based compensation expense
The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The Company recognized the following stock-based compensation expense for the periods presented:
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Restricted stock-based compensation expense | $ | $ | ||||||
Stock options
The Company did grant any stock options during the three months ended April 30, 2024. The following table summarizes the Company's stock option activity:
| Options | Weighted Average Exercise Price (Per share) | Weighted Average Remaining Contractual Term (In years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 31, 2024 | $ | $ | ||||||||||||||
| Exercised | ( | ) | - | |||||||||||||
| Expired or forfeited | - | - | ||||||||||||||
| Outstanding and exercisable at April 30, 2024 | $ | $ | ||||||||||||||
There was
Restricted stock
The following table summarizes the Company's restricted stock activity for the three months ended April 30, 2024:
| Restricted Shares | Weighted Average Price (Per share) | Aggregate Intrinsic Value | ||||||||||
| Outstanding at January 31, 2024 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested and issued | ||||||||||||
| Forfeited or retired for taxes | ||||||||||||
| Outstanding at April 30, 2024 | $ | $ | ||||||||||
As of April 30, 2024, there was $
Note 8 - Earnings per share
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Basic weighted average common shares outstanding at April 30, 2024 | ||||||||
| Dilutive effect of equity compensation plans | ||||||||
| Weighted average common shares outstanding assuming full dilution | ||||||||
| 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 | ||||||||
| Stock options and restricted stock with exercise prices or grant date prices below the average market prices | ||||||||
| Net income (loss) attributable to common stock | $ | $ | ( | ) | ||||
| Earnings per share attributable to common stock | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
Note 9 - Debt
Debt totaled $
Revolving lines - North America. On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a -year $
On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new -year $
The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, SOFR rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from
Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $
The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than
The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of
As of April 30, 2024, the Company had borrowed an aggregate of $
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 $
In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying assets. The Company utilized an incremental borrowing rate of
Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt and Saudi Arabia as discussed further below.
United Arab Emirates
The Company has a revolving line for
The Company has a revolving line for
Egypt
Saudi Arabia
In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of
These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. The amount of foreign subsidiary debt guaranteed by the Company was approximately $
The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of April 30, 2024, with the exception of those arrangements that have expired or are set to expire and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On April 30, 2024, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus
In June 2023, the Company assumed a promissory note of approximately $
Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 2042. As of April 30, 2024, the remaining balance on the mortgage in Canada is approximately CAD
Note 10 - Leases
The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheets. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities short-term, and operating lease liabilities long-term in the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt less current maturities in the Company's consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.
In calculating the ROU asset and lease liability, the Company elects to combine lease and non-lease components. Additionally, the Company excludes short-term leases having an initial term of 12 months or less in accordance with the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.
Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company built a facility. The initial annual payments were approximately
In March and December 2022, the Company served Notices of Termination to its lessor for the Company's lease of land and buildings in Fujairah in the U.A.E. The Company served the Notices of Termination in connection with the Company's intended relocation to a different facility in Abu Dhabi. The Company vacated portions of the leased space in December 2022 and expects to vacate the remaining space in December 2024. The first Notice of Termination required that the Company pay an additional amount equal to three months' rent after that termination to enable the lessor to prepare the assets for lease by another party. As a result of the termination, the Company has recognized adjustments to the amounts recorded in the consolidated financial statements as of April 30, 2024. The termination resulted in decreases of $
At April 30, 2024, the Company had total operating lease liabilities of $
Finance Leases. The Company has several significant operating lease agreements, with lease terms of to years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and ROU assets as the Company is not reasonably certain to exercise the options. The Company does not have any arrangements where it acts as a lessor.
At April 30, 2024, the Company also had finance lease liabilities of $
Supplemental balance sheet information related to leases is as follows:
| Operating and Finance leases: | April 30, 2024 | January 31, 2024 | ||||||
| Finance leases assets: | ||||||||
| Property and Equipment - gross | $ | $ | ||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and Equipment - net | $ | $ | ||||||
| Finance lease liabilities: | ||||||||
| Finance lease liability short-term | $ | $ | ||||||
| Finance lease liability long-term | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Operating lease assets: | ||||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liabilities: | ||||||||
| Operating lease liability short-term | $ | $ | ||||||
| Operating lease liability long-term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Total lease costs consist of the following:
| Three Months Ended April 30, | |||||||||
| Lease costs | Consolidated Statements of Operations Classification | 2024 | 2023 | ||||||
| Finance Lease Costs | |||||||||
| Amortization of ROU assets | Cost of sales | $ | $ | ||||||
| Interest on lease liabilities | Interest expense | ||||||||
| Operating lease costs | Cost of sales, SG&A expenses | ||||||||
| Short-term lease costs (1) | Cost of sales, SG&A expenses | ||||||||
| Sub-lease income | SG&A expenses | ( | ) | ||||||
| Total Lease costs | $ | $ | |||||||
(1) Includes variable lease costs, which are not material.
Supplemental cash flow information related to leases is as follows:
| Three Months Ended April 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Financing cash outflows from finance leases | $ | $ | ||||||
| Operating cash outflows from finance leases | ||||||||
| Operating cash outflows from operating leases | ||||||||
| ROU assets obtained in exchange for new lease obligations: | ||||||||
| Operating leases liabilities | $ | $ | ||||||
Weighted-average lease terms and discount rates are as follows:
| April 30, 2024 | ||||
| Weighted-average remaining lease terms (in years): | ||||
| Finance leases | ||||
| Operating leases | ||||
| Weighted-average discount rates: | ||||
| Finance leases | % | |||
| Operating leases | % | |||
Maturities of lease liabilities as of April 30, 2024, is as follows:
| Operating Leases | Finance Leases | |||||||
| For the nine months ending January 31, 2024 | $ | $ | ||||||
| For the year ended January 31, 2026 | ||||||||
| For the year ended January 31, 2027 | ||||||||
| For the year ended January 31, 2028 | ||||||||
| For the year ended January 31, 2029 | ||||||||
| For the year ended January 31, 2030 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | $ | ||||||
| Less: amount representing interest | ( | ) | ( | ) | ||||
| Total lease liabilities at April 30, 2024 | $ | $ | ||||||
Rent expense on operating leases, which is recorded on straight-line basis, was $
Note 11 - Restricted cash
| April 30, 2024 | January 31, 2024 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | $ | ||||||
Note 12 - Fair value
The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered reasonable estimates of fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving lines of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.
Note 13 - Recent accounting pronouncements
The Company evaluated recent accounting pronouncements and does not expect any to have a material impact on its consolidated financial statements or related disclosures.
Note 14 - Treasury stock
The repurchase program approved on October 4, 2021 authorized the Company to use up to $
Note 15 - Noncontrolling interest
On June 1, 2023, the Company closed on its formation of a joint venture ("the JV", and the agreement governing the JV, "the JV Agreement") with Gulf Insulation Group ("GIG"), a leading provider of pre-insulated piping systems and pipe fabrication, in which the Company acquired a
Pursuant to the applicable guidance in ASC 805, Business Combinations and Noncontrolling Interests, the Company determined that the transaction did not meet the necessary conditions to be considered a business as the set of assets acquired did not contain an organized workforce and therefore was recorded as an asset acquisition. The assets transferred by the Company to the JV were recorded at historical cost, and no gain was recognized as a result of this exchange since the Company has a controlling interest in the JV. The Company’s measurement of the acquired assets is comprised of the fair value of the contributed net assets given up by the Company and the fair value of the non-controlling interest excluding the contributed assets. The non-controlling interest attributable to the other party was recorded as of the investment date and was measured as part of the carrying amount of the ownership interest in the net assets given up by the Company plus the fair value of the non-controlling interest excluding the contributed assets. No gain or loss was recognized as a result of this exchange. The Company also assumed a promissory note payable to GIG issued as part of the formation of the JV in the principal amount of $
The Company has a 60% controlling financial interest in the JV which is not considered a wholly owned subsidiary. Accordingly, there remains a minority portion of the equity interest that is owned by a third party, GIG. Pursuant to the applicable guidance contained in ASC 810, Consolidations, the balance sheets and operating activities of this investment are included in the Company's consolidated financial statements. The carrying amount of the assets and liabilities of the JV that are consolidated by the Company totaled $
The Company adjusts net income in the consolidated statements of operations to exclude the proportionate share of results that is attributable to the non-controlling interest. Additionally, the Company presents the proportionate share that is attributable to the redeemable non-controlling interest as temporary equity within the consolidated balance sheets. This mezzanine presentation is the result of the non-controlling interest being subject to a put option that is not solely within the Company's control and in connection with the equity shares of the business arrangement that is redeemable at any time after five years following the date of formation. The redemption amount per the JV Agreement is at fair value of the non-controlling interest which represents the fair value of ordinary shares of the JV that is owned by GIG. Further, neither the call option or put option contained in the JV Agreement met the definition of a derivative as a result of not containing a net settlement provision and the shares not being readily convertible to cash, thereby being considered embedded with respect to non-controlling interest and not a freestanding instrument.
As a result of the non-controlling interest being subject to redemption rights that are not entirely within the Company's control, it was concluded that the necessary conditions were met to be accounted for in accordance with ASC 480, Distinguishing Liabilities from Equity. Pursuant to this accounting standard, the Company determined that the only criteria for the security to become redeemable is the passage of time and, therefore, is considered probable of redemption. The Company made a policy election to measure changes in the non-controlling interest immediately as they occur and adjust the carrying amount of non-controlling interest equal to its redemption amount as the non-controlling interest has no stated fixed price or fixed date. As such, at each subsequent balance sheet date following the formation of the JV, the Company must determine whether further adjustment is required to increase the carrying value of the redeemable non-controlling interest. If the Company determines that the fair value of the redeemable non-controlling interest exceeds its carrying value, an adjustment is made to reflect this change. However, if the value is determined to be less than its carrying value, such adjustment is limited to its original carrying value at the formation of the business arrangement. Additionally, adjustments made to reflect the change in the value of the redeemable non-controlling interest are offset against permanent equity within the Company's consolidated balance sheets.
Net income attributable to GIG was $
The Company is the ultimate parent of the JV through its 60% controlling financial interest and as part of the JV Agreement majority control of the operational activities of the JV and no joint control exists. The JV Agreement has no veto or kickout rights and board voting is proportional to the ownership interest. Certain activities do include a two-thirds majority affirmative vote of shareholders of the JV and include acquiring another company, establishing new subsidiaries, entering another partnership or joint venture, engaging in any merger or materially changing the business of the JV. These are considered protective rights. The 60% equity ownership of the JV by the Company allows it to receive its proportionate share of losses and residual returns.
The non-controlling interest as measured at fair value was $
| Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") |
The statements contained in this MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2024 and 2023 are for the fiscal year ending January 31, 2025 and the fiscal year ended January 31, 2024, respectively.
This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in this MD&A have been rounded to the nearest percentage point.
CONSOLIDATED RESULTS OF OPERATIONS
(In thousands, except per share data, or unless otherwise specified)
(Unaudited)
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.
| Three Months Ended April 30, |
||||||||||||||||||||
| 2024 |
2023 |
Change favorable (unfavorable) |
||||||||||||||||||
| Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
||||||||||||||||
| Net sales |
$ | 34,321 | $ | 29,657 | $ | 4,664 | ||||||||||||||
| Gross profit |
10,517 | 31 | % | 6,774 | 23 | % | 3,743 | |||||||||||||
| General and administrative expenses |
6,148 | 18 | % | 5,460 | 18 | % | (688 | ) | ||||||||||||
| Selling expense |
1,235 | 4 | % | 1,239 | 4 | % | 4 | |||||||||||||
| Interest expense |
507 | 512 | 5 | |||||||||||||||||
| Other (expense) income |
(67 | ) | 72 | (139 | ) | |||||||||||||||
| Loss before income taxes |
2,560 | (365 | ) | 2,925 | ||||||||||||||||
| Income tax expense |
770 | 758 | (12 | ) | ||||||||||||||||
| Net income (loss) |
1,790 | (1,123 | ) | 2,913 | ||||||||||||||||
| Less: Net income attributable to non-controlling interest |
347 | - | (347 | ) | ||||||||||||||||
| Net income (loss) attributable to common stock |
1,443 | (1,123 | ) | 2,566 | ||||||||||||||||
Gross profit:
Gross profit was $10.5 million, or 31% of net sales, and $6.8 million, or 23% of net sales, in the three months ended April 30, 2024 and 2023, respectively. The increase of $3.7 million was primarily driven by increased sales volumes in the Middle East and India.
General and administrative expenses:
General and administrative expenses were $6.1 million and $5.5 million in the three months ended April 30, 2024 and 2023, respectively. The increase of $0.6 million, or 11%, was due to higher professional service fees in the quarter.
Selling expenses:
Interest expense:
Net interest expense remained consistent and was $0.5 million in the three months ended April 30, 2024 and 2023, respectively.
Other (expense) income:
Other (expense) income was $(0.1) million and $0.1 million for the three months ended April 30, 2024 and 2023, respectively. The change was primarily due to exchange rate fluctuations in foreign currency transactions.
Income tax expense:
The Company's worldwide effective tax rate ("ETR") was 30% and (208%) in the three months ended April 30, 2024 and 2023, respectively. The change in the ETR is due to the inability to recognize tax benefits and losses in the United States due to a partial valuation allowance in the prior period and changes in the mix of income and loss in various jurisdictions.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income (loss) attributable to common stock:
Net income (loss) attributable to common stock was $1.4 million and $(1.1) million in the three months ended April 30, 2024 and 2023, respectively. The increase of $2.5 million was mainly due to increased sales activity in the quarter, and better project execution.
Liquidity and capital resources
Cash and cash equivalents as of April 30, 2024 were $7.7 million compared to $5.8 million on January 31, 2024. On April 30, 2024, $0.3 million was held in the United States, and $7.4 million was held at the Company's foreign subsidiaries. The Company's working capital was $39.6 million on April 30, 2024 compared to $41.1 million on January 31, 2024. Of the working capital components, accounts receivable decreased by $2.3 million and cash and cash equivalents increased by $1.9 million as the result of the movements discussed below. As of April 30, 2024, the Company had $5.0 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $13.0 million of borrowing capacity under its foreign revolving credit agreements. The Company had $5.3 million borrowed under the Renewed Senior Credit Facility and $8.4 million borrowed under its foreign revolving credit agreements at April 30, 2024.
Net cash from operating activities was $1.4 million and $3.8 million in the three months ended April 30, 2024 and 2023, respectively. The decrease of $2.5 million was due primarily attributable to increases in prepaid expenses and other current assets and inventory, partially offset by changes to accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts.
Net cash from investing activities in the three months ended April 30, 2024 and 2023 was $2.0 million and $3.2 million, respectively. The decrease of $1.2 million was due primarily to fewer investments in the United States and Canada.
Net cash from financing activities in the three months ended April 30, 2024 and 2023 was $2.6 million and $2.5 million, respectively. The main source of cash from financing activities during the three months ended April 30, 2024 consisted of net proceeds from borrowings of approximately $1.9 million under the Company's credit facilities, an increase in drafts payable of $0.9 million, and approximately $0.1 million attributable to fewer payments on finance lease obligations, as compared to net proceeds of approximately $2.8 million during the three months ended April 30, 2023. Debt totaled $27.3 million and $25.7 million as of April 30, 2024 and January 31, 2024, respectively. See Note 9 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic.
Treasury stock. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. See Note 14 - Treasury stock, for further discussion relating to this topic.
The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.
The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.8%, and is set to expire in July 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.2 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The Company had unused borrowing availability of approximately $1.9 million as of April 30, 2024 and January 31, 2024, respectively.
The Company has a revolving line for 20.5 million U.A.E. Dirhams (approximately $5.6 million at April 30, 2024) from a bank in the U.A.E. As of April 30, 2024 the facility has an interest rate of approximately 8.7%, and is set to expire in August 2024, with intentions to be subsequently renewed and extended thereafter. The Company had borrowed an aggregate of $0.1 million as of April 30, 2024 and January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of April 30, 2024 and January 31, 2024, the Company had unused borrowing availability of approximately $1.6 million and $1.0 million, respectively.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of April 30, 2024, with the exception of those arrangements that have expired or are set to expire and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On April 30, 2024, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of April 30, 2024, the Company's interest rates ranged from 8.7% to 20.8%, with a weighted average rate of 11.5%, and the Company had facility limits totaling $24.7 million under these credit arrangements. As of April 30, 2024, $6.7 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2024, the Company had borrowed $8.4 million and had an additional $13.0 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances were included as a component of current maturities of long-term debt in the Company's consolidated balance sheets as of April 30, 2024 and January 31, 2024.
In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with Gulf Insulation Group (see Note 15). In accordance with the promissory note, all principal is due and payable on the maturity date of April 9, 2026, with the option to prepay, in whole or in part, at any time prior to the maturity date, without premium or penalty.
Accounts receivable:
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2024 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
| Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 30, 2024. This evaluation included consideration of the controls, processes and procedures that are designed to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, the certifying officers have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective because of the material weakness described below.
Management has previously reported on material weaknesses in the Company's internal control over information technology general controls ("ITGC"), financial reporting relating to the review and approval of manual journal entries, timely review of the financial close process, and timely review of certain financial policies and procedures and respective HR policies. The Company also did not maintain effective controls at certain operating locations in the Middle East and North Africa ("MENA"), specifically the Company did not maintain sufficient documentation to support an evaluation that controls over business processes were operating effectively. These deficiencies led management to conclude that a material weakness existed with respect to the Company's internal control over financial reporting. The material weakness did not result in any material misstatements to the Company’s consolidated financial statements. As a result, at January 31, 2024 and April 30, 2024, and on the date of this Quarterly Report on Form 10-Q, the Company's internal control over financial reporting is not effective.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of the material weaknesses identified, the Company has begun updating its internal control over financial reporting as discussed in its remediation plan as further described below.
Remediation Plan for the Material Weaknesses in Internal Control over Financial Reporting. To address these matters, the Company has begun implementing its remediation plan. Specifically, the Company is executing on the following:
The remediation plans related to ITGCs include: (i) addressing the identified issues with control owners, including Company leadership and IT personnel; (ii) engaging outside consultants with expertise relating to ITGCs to document processes, assist in addressing the design and operating business process controls, monitoring and testing reviews focusing on systems supporting our financial reporting process (iii) developing and maintaining documentation underlying ITGCs for knowledge transfer and function changes, including access control and change management; (iv) outsourcing certain functions to third-party providers, specifically relating to servers and firewalls, and managed detection and response.
The remediation plans related to the entity level controls and business process controls over MENA locations include: (i) addressing issues with control owners, including company leadership; (ii) evaluating and updating the Company's evidence of internal control policies and procedures as needed and providing necessary guidance to applicable locations; (iii) assessing the adequacy and determine whether enhancements are needed to the design of corporate and / or operating locations business process controls; and (iv) augmenting our internal audit function by hiring an additional resource to assist in overseeing the remediation process, including updating policies and procedures, and implementing internal controls; (v) engaging outside consultants to conduct training sessions.
The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and will address the related material weaknesses described above. However, the material weaknesses cannot be considered fully remediated until the remediation processes have been in operation for a period of time and successfully tested.
Change in Internal Control over Financial Reporting. While the Company continues to implement design enhancements to our internal control procedures, we believe that, other than the changes described above regarding the ongoing remediation efforts, there were no changes to our internal control over financial reporting which were identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act during the fiscal quarter ended April 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Exhibits |
| 31.1 |
Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |
Rule 13a - 14(a)/15d - 14(a) Certifications (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 |
|
| 101.INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Perma-Pipe International Holdings, Inc. | ||
| Date: |
June 13, 2024 |
By: /s/ David J. Mansfield |
|
|
|
David J. Mansfield |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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| Date: |
June 13, 2024 | By: /s/ Matthew E. Lewicki |
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Matthew E. Lewicki |
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Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |