PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended
April 30, 2018
Commission File No. 0-18370
Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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36-3922969
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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6410 W. Howard Street, Niles, Illinois
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60714
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(Address of principal executive offices)
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(Zip Code)
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(847) 966-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company) Smaller reporting company
x
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
On
June 8, 2018
, there were
7,725,842
shares of the registrant's common stock outstanding.
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended
April 30, 2018
TABLE OF CONTENTS
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Item
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Page
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Part I
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1.
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Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 30, 2018 and 2017
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Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended April 30, 2018 and 2017
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Consolidated Balance Sheets as of
April 30, 2018 (Unaudited) and January 31, 2018
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Consolidated Statements of Stockholders' Equity as of April 30, 2018 (Unaudited) and January 31, 2018
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Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 30, 2018 and 2017
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Notes to Consolidated Financial Statements
(Unaudited)
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2.
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4.
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Part II
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6.
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PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
(In thousands, except per share data)
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Three Months Ended April 30,
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||||||
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2018
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2017
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Net sales
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$28,889
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$23,501
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Cost of sales
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24,664
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21,716
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Gross profit
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4,225
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1,785
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Operating expenses
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||||||
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General and administrative expenses
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3,982
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4,286
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Selling expenses
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1,142
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1,316
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Total operating expenses
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5,124
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5,602
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Loss from operations
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(899
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)
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(3,817
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)
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Interest expense, net
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266
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157
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Loss from operations before income taxes
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(1,165
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)
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(3,974
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)
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Income tax benefit
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(48
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)
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(485
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)
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Net loss
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($1,117
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)
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($3,489
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)
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Weighted average common shares outstanding
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||||||
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Basic and diluted
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7,718
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7,610
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Loss per share
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||||||
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Basic and diluted
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($0.14)
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($0.46
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)
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See accompanying notes to consolidated financial statements.
Note: Earnings per share calculations could be impacted by rounding.
2
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)
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Three Months Ended April 30,
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||||||
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2018
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2017
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Net loss
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($1,117
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)
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($3,489
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)
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Other comprehensive (loss) income
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||||||
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Foreign currency translation adjustments, net of tax
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(665
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)
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132
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Unrealized gain on marketable security, net of tax
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—
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(5
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)
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Other comprehensive (loss) income
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(665
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)
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127
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Comprehensive loss
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($1,782
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)
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($3,362
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)
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See accompanying notes to consolidated financial statements.
3
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
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(In thousands except per share data)
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April 30, 2018
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January 31, 2018
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ASSETS
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Unaudited
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Current assets
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Cash and cash equivalents
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$9,879
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$7,084
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Restricted cash
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1,101
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1,237
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Trade accounts receivable, less allowance for doubtful accounts of $438 at April 30, 2018 and $469 at January 31, 2018
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29,337
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32,936
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Inventories, net
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15,804
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16,856
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Prepaid expenses and other current assets
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2,775
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2,703
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Contract assets
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1,834
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1,502
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Total current assets
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60,730
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62,318
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Property, plant and equipment, net of accumulated depreciation
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33,097
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34,509
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Other assets
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Deferred tax assets - long-term
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330
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391
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Goodwill
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2,321
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2,423
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Other assets
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5,051
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4,943
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Total other assets
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7,702
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7,757
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Total assets
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$101,529
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$104,584
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LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||
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Current liabilities
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Trade accounts payable
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$12,301
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$14,186
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Accrued compensation and payroll taxes
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1,484
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1,580
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Commissions and management incentives payable
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1,301
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787
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Revolving line North America
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7,755
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7,273
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Current maturities of long-term debt
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3,408
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753
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Customers' deposits
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6,207
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5,236
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Outside commissions payable
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1,964
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1,800
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Contract liability
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569
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1,967
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Other accrued liabilities
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2,339
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4,259
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Income taxes payable
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643
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1,339
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Total current liabilities
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37,971
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39,180
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Long-term liabilities
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Long-term debt, less current maturities
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7,309
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7,728
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Deferred compensation liabilities
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4,212
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4,098
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Deferred tax liabilities - long-term
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1,187
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1,242
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Other long-term liabilities
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546
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524
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Total long-term liabilities
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13,254
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13,592
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Stockholders' equity
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||||||
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Common stock, $.01 par value, authorized 50,000 shares; 7,720 issued and outstanding at April 30, 2018 and 7,717 issued and outstanding at January 31, 2018
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77
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77
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Additional paid-in capital
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56,578
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56,304
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(Accumulated deficit) retained earnings
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(4,220
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)
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(3,103
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)
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Accumulated other comprehensive loss
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(2,131
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)
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(1,466
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)
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Total stockholders' equity
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50,304
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51,812
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Total liabilities and stockholders' equity
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$101,529
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$104,584
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See accompanying notes to consolidated financial statements.
4
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(In thousands, except share data)
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Common Stock
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Additional Paid-in Capital
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(Accumulated Deficit) Retained Earnings
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Accumulated Other Comprehensive Income (Loss)
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Total Stockholders' Equity
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Total stockholders' equity at January 31, 2018
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$77
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$56,304
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($3,103)
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($1,466)
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$51,812
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||||||
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Net loss
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($1,117
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)
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(1,117
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)
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||||||
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Common stock issued under stock plans, net of shares used for tax withholding
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—
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25
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25
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|||||
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Stock-based compensation expense
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249
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249
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|||||||
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Foreign currency translation adjustment
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(665
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)
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(665
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)
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|||||||
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Total stockholders' equity at April
30
, 2018
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$77
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$56,578
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($4,220)
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($2,131)
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$50,304
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Shares
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2018
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2017
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Balances at beginning of year
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7,716,542
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7,595,509
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Treasury stock released
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—
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26,753
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Shares issued
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3,600
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94,280
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Balances at period end
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7,720,142
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7,716,542
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See accompanying notes to consolidated financial statements.
5
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
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(In thousands)
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Three Months Ended April 30,
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|||||
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2018
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2017
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|||
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Operating activities
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||||||
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Net loss
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($1,117
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)
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($3,489
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)
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Adjustments to reconcile net loss to net cash flows used in operating activities
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||||||
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Depreciation and amortization
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1,183
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1,215
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Deferred tax benefit
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61
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(290
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)
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Equity-based compensation expense
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254
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203
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Loss on disposal of fixed assets
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40
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1
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Provision on uncollectible accounts
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(28
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)
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(329
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)
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Changes in operating assets and liabilities
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||||||
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Accounts receivable
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3,219
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7,546
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Inventories
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934
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(1,775
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)
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Change in contract assets and contract liabilities
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(1,728
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)
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(978
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)
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Accounts payable
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(2,925
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)
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(936
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)
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Accrued compensation and payroll taxes
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524
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(584
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)
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Customers' deposits
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974
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(191
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)
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Income taxes receivable and payable
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(706
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)
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(755
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)
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Prepaid expenses and other current assets
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147
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(1,122
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)
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Other assets and liabilities
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(835
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)
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472
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Net cash used in operating activities
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(3
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)
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(1,012
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)
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Investing activities
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||||||
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Capital expenditures
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(376
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)
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(267
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)
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Proceeds from sales of property and equipment
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—
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1
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Net cash used in investing activities
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(376
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)
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(266
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)
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Financing activities
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||||||
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Proceeds from revolving lines
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9,990
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8,612
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Payments of debt on revolving lines of credit
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(6,571
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)
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(6,763
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)
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Payments of other debt
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(90
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)
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(70
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)
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(Decrease) increase in drafts payable
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(33
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)
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50
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Payments on capitalized lease obligations
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(93
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)
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(72
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)
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Release
of treasury stock
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—
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13
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Stock options exercised and taxes related to restricted shares vested
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25
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114
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Net cash provided by financing activities
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3,228
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1,884
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Effect of exchange rate changes on cash, cash equivalents and restricted cash
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(190
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)
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892
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Net increase in cash, cash equivalents and restricted cash
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2,659
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1,498
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Cash, cash equivalents and restricted cash - beginning of period
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8,321
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8,701
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Cash, cash equivalents and restricted cash - end of period
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$10,980
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$10,199
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Supplemental cash flow information
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Interest paid
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$242
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$177
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Income taxes paid
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568
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530
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Fixed assets acquired under capital leases
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—
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—
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Funds held in escrow related to the sale of Filtration assets
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—
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502
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See accompanying notes to consolidated financial statements.
6
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
APRIL 30, 2018
(Tabular amounts presented in thousands, except per share amounts)
The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries ("PPIH", "Company", or "Registrant", "we", or "us") 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, 2018
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
2018
and
2017
are for the
three months ended April 30,
2018
and
2017
, respectively.
PPIH is engaged in the manufacture and sale of products in
one
segment: Piping Systems.
Piping Systems engineers, designs, manufactures and sells specialty piping, leak detection and location systems
. Specialty piping systems include (i) industrial and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed piping systems for district heating and cooling, municipal freeze protection, oil & gas, mining and industrial applications, and (iii) the coating and/or insulation of oil and gas gathering flow and long lines for oil and mineral transportation. The Company's leak detection and location systems are sold with its piping systems and on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.
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 U.A.E. 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
$5.4 million
(inclusive of a retention receivable amount of
$3.7 million
, of which
$3.2 million
was included in the balance of other long-term assets as of April 30, 2018 and January 31, 2018 due to the long-term nature of the receivables) has been
outstanding for several years as of April 30, 2018. The Company completed all of its deliverables in 2015, and has been engaged in ongoing active efforts to collect this amount, and has recently 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, 2018. However, if the Company’s efforts to collect on this account are not successful in fiscal 2018, then the Company may be required to recognize an allowance for all, or substantially all, of any such then uncollected amounts in the future.
7
For the three months ended
April 30, 2018
, one customer accounted for
13.5%
of the Company's consolidated net sales, and for the three months ended
April 30, 2017
one customer accounted for
11%
of the Company's consolidated net sales.
At
April 30, 2018
, one customer accounted for
16.3%
of all accounts receivable. Three customers accounted for
34.9%
of all accounts receivable at
January 31, 2018
.
On February 1, 2018, the Company adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers," ("Topic 606") using the modified retrospective method applied to contracts that were not completed as of that date. Under this methodology the effect, if any, of initially applying the new revenue standard is recorded as an adjustment to the opening balance of retained earnings while periods prior to the adoption date are not adjusted and continue to be reported in accordance with the accounting policies in effect for those periods.
The Company conducted a complete and thorough analysis of each single element of the five-step model of Topic 606 and concluded that there is no material impact to the Company upon the adoption of the new standard. As a result, there is no cumulative adjustment required to the opening balances of retained earnings, contract assets, or contract liabilities.
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 in to two main categories:
|
1)
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Systems which include
all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated piping systems, insulates subsea flowline pipe or subsea oil production equipment. Additionally, the systems classification will also include coating applied to pipes and structures which are provided by the customer.
|
|
2)
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Products which include
cables, leak detection products, heat trace products sold under the PermAlert brand name, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.
|
The Systems revenue class accounts for more than 90% of the Company’s total revenue and is recognized over time. The remaining revenue (Product class) is recognized when goods are shipped or services are performed. A breakdown of our revenues for the first quarter of 2018 and 2017 are as follows:
|
April 30, 2018
|
April 30, 2017
|
|||||||
|
Sales
|
% to Total
|
Sales
|
% to Total
|
|||||
|
Products
|
2,429
|
|
8
|
%
|
1,331
|
|
6
|
%
|
|
Specialty Piping Systems and Coating
|
||||||||
|
Revenue recognized under input method
|
11,102
|
|
38
|
%
|
9,117
|
|
39
|
%
|
|
Revenue recognized under output method
|
15,358
|
|
54
|
%
|
13,053
|
|
55
|
%
|
|
Total
|
28,889
|
|
100
|
%
|
23,501
|
|
100
|
%
|
8
Materially all of the Company’s revenue is recognized 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 they control 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.
|
The U.S. operating entities measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method (an input method). Generally, these contracts are considered a single performance obligation satisfied overtime 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.
All other operating entities measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract (output method). 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.
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 contact 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, 2018 will be billed and collected within one year.
The Company recognized revenue of
$1.8 million
during the three months ended April 30, 2018 that was included in contract liabilities as of January 31, 2018 and fully expects the remaining
$0.6 million
of revenue to be recognized within one year.
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 practical expedient for these types of costs and as such expensed in the period incurred.
9
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.
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The Company's effective tax rate ("ETR") from operations for the
first
quarter was
4.1%
compared to
12.2%
during the respective prior-year periods. The change in the ETR from the prior year-to-date to the current year-to-date was mainly due to tax impact of Canadian business combination which occurred in the prior year.
The amount of unrecognized tax benefits, including interest and penalties, at
April 30, 2018
, recorded in other long-term liabilities was
$0.1 million
, all of which would impact the Company’s ETR if recognized.
The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. In addition, in 2017 the Company was subject to the onetime transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018 and April 30, 2018. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make future adjustments to the provisional amounts. Furthermore, the Company has considered the impact of the global intangible low-taxed income (GILTI) provision during the quarter and has determined that there is no inclusion based on year-to-date figures. The Company has not elected a method of accounting for GILTI and will continue to monitor the effects of the new provision in future periods.The accounting for the tax effects of the Tax Act will be completed in 2018.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of April 30, 2018 and are subject to change during 2018.
The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. A factor considered important that could trigger an impairment review includes a year-to-date loss from operations. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. The Company has a year-to-date loss, but based on the Company's review,
there was no impairment of long-lived assets as of April 30, 2018 or January 31, 2018
.
10
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, 2018
and
January 31, 2018
was attributable to the purchase of Perma-Pipe Canada, Ltd.
|
January 31, 2018
|
Foreign exchange change effect
|
April 30, 2018
|
|||||||
|
Goodwill
|
|
$2,423
|
|
|
($102
|
)
|
|
$2,321
|
|
The Company performs an
impairment assessment of goodwill annually as of January 31
, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
There was no impairment to goodwill as of April 30, 2018 or January 31, 2018.
At April 30, 2018, the Company had one incentive stock plan under which new equity incentive awards may be granted:
|
•
|
2017 Omnibus Stock Incentive Plan as Amended June 13, 2017, which stockholders approved in June 2017.
|
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, 2018, the Company had reserved a total of
1,135,007
shares for grants and issuance under these incentive stock plans, which includes a reserve for issuance pursuant to unvested or unexercised prior awards, and shares for issuance pursuant to new grants under the 2017 Plan.
The 2017 Plan provide 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 2017 Plan authorizes awards to officers, employees, consultants, and directors.
The Company has stock-based compensation awards that can be granted to eligible employees, officers or directors.
|
Three Months Ended April 30,
|
||||||
|
2018
|
|
2017
|
|
|||
|
Stock-based compensation expense
|
|
$13
|
|
|
($6
|
)
|
|
Restricted stock-based compensation expense
|
|
$241
|
|
|
$192
|
|
Stock Options
The following tables summarize the Company's stock option activity:
|
Option activity
|
Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
Aggregate Intrinsic Value
|
|||||
|
Outstanding at January 31, 2018
|
358
|
|
|
$9.44
|
|
4.5
|
|
$534
|
|
|
Exercised
|
(4
|
)
|
6.88
|
|
37
|
|
|||
|
Expired or forfeited
|
(5
|
)
|
9.23
|
|
|||||
|
Outstanding end of period
|
349
|
|
9.47
|
|
4.3
|
338
|
|
||
|
Exercisable end of period
|
322
|
|
|
$9.57
|
|
3.9
|
|
$303
|
|
11
|
Unvested option activity
|
Options
|
Weighted Average Grant Date Fair Value
|
Aggregate Intrinsic Value
|
|||||
|
Outstanding at January 31, 2018
|
31
|
|
|
$8.24
|
|
|
$50
|
|
|
Vested
|
(4
|
)
|
||||||
|
Expired or forfeited
|
|
|
|
|
||||
|
Outstanding end of period
|
27
|
|
|
$8.28
|
|
|
$44
|
|
As of
April 30, 2018
, there was less than
$0.1 million
of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a period of
2.3
years.
Restricted stock
The following table summarizes the Company's restricted stock activity for the year:
|
Restricted stock activity
|
Restricted Shares
|
Weighted Average Grant Price Per Share
|
Aggregate Intrinsic Value
|
|||||
|
Outstanding at January 31, 2018
|
360
|
|
|
$9.05
|
|
|
$3,254
|
|
|
Granted
|
—
|
|
|
|
||||
|
Issued
|
—
|
|
||||||
|
Forfeited
|
(1
|
)
|
8.00
|
|
||||
|
Outstanding end of period
|
359
|
|
|
$9.10
|
|
|
$3,274
|
|
As of
April 30, 2018
, there was
$1.2 million
of unrecognized compensation expense related to unvested restricted stock granted under the plans. The expense is expected to be recognized over a period of
3.3 years
.
|
Three Months Ended April 30,
|
||||
|
2018
|
|
2017
|
|
|
|
Basic weighted average common shares outstanding
|
7,718
|
|
7,610
|
|
|
Dilutive effect of equity compensation plans
|
—
|
|
—
|
|
|
Weighted average common shares outstanding assuming full dilution
|
7,718
|
|
7,610
|
|
|
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares
|
137
|
|
229
|
|
|
Stock options with an exercise price below the average market price
|
212
|
|
263
|
|
Debt totaled
$18.5 million
at
April 30, 2018
, a net
increase
of
$2.7 million
since
January 31, 2018
.
Revolving lines North America
.
On
September 24, 2014
, the Company entered into the Credit and Security Agreement with a financial institution (as amended, "Credit Agreement"). Under the terms of the Credit Agreement, which matures on
September 25, 2018
, the Company can borrow up to a combined
$15.0 million
in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and
require achieving a minimum fixed charge coverage ratio with respective
12
performance metrics as defined by the Credit Agreement if a minimum availability is not met
. In a seventh amendment to the Credit Agreement executed on
December 14, 2017
, the
lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017
. Based on the waiver received on June 5, 2018 (refer to Note 13 - Subsequent event), the Company was
in compliance
with all covenants under the Credit Agreement as of
April 30, 2018
. The North American revolving line balances as of
April 30, 2018
and
January 31, 2018
were included as current liabilities in the consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause, and expires in less than 12 months.
The Credit Agreement will expire on
September 25, 2018
. The Company has engaged a financial advisor and is actively pursuing refinancing the Credit Agreement and replacement financing sources.
Interest rates vary based on the average availability in the preceding fiscal quarter and are:
(a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period.
On
April 30, 2018
, the Company had borrowed
$7.8 million
at
8.75%
and
7.45%
and had
$1.2 million
available to it under the revolving line of credit. In addition,
$0.2 million
of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.
Revolving lines foreign
.
The Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. 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. On
April 30, 2018
, the Company was
in compliance with the covenants under the credit arrangements.
On
April 30, 2018
,
interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On April 30, 2018, the Company's interest rates ranged from 5.0% to 6.5%
, and the Company could borrow
$11.1 million
under these credit arrangements. On
April 30, 2018
,
$3.6 million
of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On
April 30, 2018
, the Company had borrowed
$2.7 million
and had, an additional
$4.8 million
available. The foreign revolving lines balances as of January 31, 2018, and April 30, 2018 were included as current maturities of long-term debt in the consolidated balance sheets.
Mortgages.
On
July 28, 2016
, the Company borrowed
8.0 million
CAD (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 manufacturing facility located in Alberta, Canada that matures on
December 23, 2042
. The interest rate is variable, currently at
4.7%
, with monthly payments of
31 thousand
CAD (approximately
$24 thousand
) for interest; and monthly payments of
27 thousand
CAD (approximately
$20 thousand
) for principal. Principal payments began January 2018.
On
June 19, 2012
, the Company borrowed
$1.8 million
under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at
4.5%
with monthly payments of
$13 thousand
for both principal and interest and matures
July 1, 2027
. On
June 19, 2022
, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than
2.0%
per annum and shall be subject to a ceiling of
18.0%
and a floor of
4.5%
.
Capital Leases.
In 2017, the Company obtained three capital leases for
1.1 million
CAD (approximately
$0.8 million
at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these capital leases were from
4.0%
to
7.8%
per annum with monthly principal and interest payments of less than
$0.1 million
. These leases mature from
April 30, 2021
to
September 29, 2022
.
In 2014, the Company obtained two capital leases for
0.9 million
CAD (approximately
$0.9 million
at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is
3.25%
13
per annum with monthly principal and interest payments of
14 thousand
CAD, and these leases mature on
June 25, 2018
.
Restricted cash held by foreign subsidiaries was
$1.1 million
as of
April 30, 2018
and
$1.2 million
as of
January 31, 2018
. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.
|
Three Months Ended April 30,
|
||||||
|
2018
|
|
2017
|
|
|||
|
Cash and cash equivalents
|
|
$9,879
|
|
|
$9,059
|
|
|
Restricted cash
|
1,101
|
|
1,140
|
|
||
|
Cash, cash equivalents and restricted cash shown in the statement of cashflows
|
|
$10,980
|
|
|
$10,199
|
|
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.
In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting February 1, 2018 and has been applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The adoption of this guidance did not have a material impact on the results of operations or financial position.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning February 1, 2018. The adoption of this guidance did not have a material impact on the results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.
In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity
14
expects to be entitled in exchange for those goods or services. The mandatory adoption will require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for the Company beginning February 1, 2018. Refer to Note 4 - Revenue recognition for more detail.
The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.
On June 5, 2018, the Company completed an eighth amendment to the Credit Agreement. The Lenders extended the minimum availability requirements for the Company’s Canadian subsidiary, through August 1, 2018. Furthermore, the lenders waived the technical reporting event of default which resulted from the Company applying a non-conforming method in calculating the Canadian availability as of April 30, 2018.
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.
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results could be negatively impacted in the future as a result of large variations in the level of project activity in reporting periods.
This discussion should be read in conjunction with the consolidated financial statements, including the notes thereto, contained elsewhere in this report.
15
|
Three Months Ended April 30,
|
||||||||
|
($ in thousands)
|
2018
|
|
2017
|
|
% Favorable (Unfavorable)
|
|||
|
Net sales
|
$28,889
|
$23,501
|
22.9
|
%
|
||||
|
Gross profit
|
4,225
|
|
1,785
|
|
136.7
|
%
|
||
|
Percentage of net sales
|
14.6
|
%
|
7.6
|
%
|
||||
|
General and administrative expenses
|
3,982
|
|
4,286
|
|
7.1
|
%
|
||
|
Percentage of net sales
|
13.8
|
%
|
18.2
|
%
|
||||
|
Selling expense
|
1,142
|
|
1,316
|
|
13.2
|
%
|
||
|
Percentage of net sales
|
4.0
|
%
|
5.6
|
%
|
||||
|
Interest expense, net
|
266
|
|
157
|
|
(69.4
|
)%
|
||
|
Loss from operations before income taxes
|
|
($1,165
|
)
|
|
($3,974
|
)
|
70.7
|
%
|
Three months ended
April 30, 2018
(
"
current quarter
"
) vs.
Three months ended
April 30, 2017
(
"
prior-year quarter
"
)
Net sales:
Net sales increased
22.9%
to
$28.9 million
in the current quarter, from
$23.5 million
in the prior-year quarter. Higher revenues resulted from increased sales in the domestic oil and gas business, and in the Middle East.
Cost of sales and gross profit:
Gross margin increased to
14.6%
, or
$4.2 million
of net sales, in the current quarter from
7.6%
, or
$1.79 million
of net sales, in the prior-year quarter. This
136.7%
improvement was due to increased volumes, North American product mix, and the utilization of previously reserved inventory of $0.4 million.
General and administrative expenses:
General and administrative expenses decreased by
7.1%
to
$4.0 million
in the current quarter, from
$4.3 million
in the prior-year quarter. In the prior-year quarter, the Company recognized a $0.4 million realized exchange rate loss on the payback of an intercompany loan extended to a foreign subsidiary.
Selling expenses:
Selling expenses decreased by
13.2%
to
$1.1 million
in the current quarter, from
$1.3 million
in the prior-year quarter. This improvement was due to management changes in the Middle East and realignment of the North American sales organization.
Interest expense:
Net interest expense
increased
to
$0.3 million
in the current quarter from
$0.2 million
in the prior-year quarter due to higher borrowings, and higher effective interest rates, both domestic and foreign.
Operating results from operations before income taxes:
Operating results from operations before income taxes improved by
70.7%
, or $2.8 million, to a pre-tax loss of
$1.2 million
in the current quarter, from a pre-tax loss of
$4.0 million
in the prior-year quarter. The positive contributing factors were:
16
|
•
|
Increased sales of $5.4 million;
|
|
•
|
Improved gross profit of $2.4 million; and
|
|
•
|
Utilization of previously reserved inventory of $0.4 million.
|
Accounts receivable:
In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately
$41.9 million
. The Company completed all of its deliverables in 2015, and has collected approximately
$36.5 million
, with a remaining balance due in the amount of
$5.4 million
. Included in this balance is an amount of
$3.7 million
, which pertains to retention clauses within the agreements of our 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,
$3.2 million
of this retention amount is carried in a long-term receivable account.
The Company has been engaged in ongoing active efforts to collect the outstanding amount, and has recently 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, 2018. However, if the Company’s efforts to collect on this account are not successful in fiscal 2018, then the Company may be required to recognize an allowance for all, or substantially all, of any such then uncollected amounts in the future.
Income taxes:
The Company's ETR from continuing operations for the current quarter was 4.1% compared to 12.2%. The change in the ETR from the prior year-to-date to the current year-to-date was mainly due to tax impact of the Canadian business combination which occurred in the prior year. . The Company remains in a domestic net operating loss carryforward position. For additional information, see "Notes to Consolidated Financial Statements, Note 5 Income taxes".
Other
The Company has made a bid to provide insulation of pipes to the East Africa Crude Oil Pipeline ("EACOP") project. The EACOP project is a 1450 Km (900 mile) long heavy crude oil pipeline from the Lake Albert Basin in Uganda to the Tanga port in Tanzania being developed by French oil company Total E&P, China National Offshore Oil Corporation (CNOOC) and London-based Tullow Oil. The pipeline is 24 inches in diameter, and is electrically heat traced. Once completed, it will be the longest insulated and heat traced pipeline in the world. There can be no assurance that the Company will be successful in its bid for this project, or what the final terms of any such potential engagement will be until the bid is awarded; the timing of which is uncertain.
Liquidity and capital resources
Cash, cash equivalents and restricted cash as of
April 30, 2018
were
$11.0 million
compared to
$8.3 million
on
January 31, 2018
. On
April 30, 2018
,
$0.4 million
was held in the U.S., and
$10.6 million
was held at the foreign subsidiaries. The Company repatriated, cash held at its foreign subsidiaries as needed to help fund the Company's working capital needs. The Company's working capital was
$22.8 million
on
April 30, 2018
compared to
$23.1 million
on
January 31, 2018
.
There was no cash used or provided by operating activities during the current quarter, compared to cash used in operations of
$1.0 million
during the prior-year quarter.
Net cash used in investing activities during the current quarter of 2018 was
$0.4 million
.
Debt totaled
$18.5 million
on
April 30, 2018
, a net
increase
of
$2.7 million
compared to the beginning of the current fiscal year. For additional information, see "Notes to Consolidated Financial Statements, Note 10 Debt". Net cash
17
provided by financing activities during the current quarter was
$3.2 million
compared to
$1.9 million
for the prior-year quarter.
On September 24, 2014, the Company entered into the Credit Agreement. Under the terms of the Credit Agreement, which matures on
September 25, 2018
, the Company can borrow up to a combined
$15.0 million
in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and
require achieving a minimum fixed charge coverage ratio with respective performance metrics as defined by the Credit Agreement if a minimum availability is not met
. In a seventh amendment to the Credit Agreement executed on
December 14, 2017
, the
lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017
. On June 5, 2018, the Company completed an eighth amendment to the Credit Agreement. The Lenders extended the minimum availability requirements for the Company’s Canadian subsidiary, through August 1, 2018. Furthermore, the lenders waived the technical reporting event of default which resulted from the Company applying a non-conforming method in calculating the Canadian availability as of April 30, 2018. The North American revolving line balances as of
April 30, 2018
and January 31, 2018 were included as current liabilities in the consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause, and expires in less than 12 months.
Interest rates vary based on the average availability in the preceding fiscal quarter and are:
(a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period.
On
April 30, 2018
, the Company had borrowed
$7.8 million
at
8.75%
and
7.45%
and had
$1.2 million
available to it under the revolving line of credit. In addition,
$0.2 million
of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.
The Credit Agreement will expire on September 25, 2018. The Company has engaged a financial advisor and is actively pursuing refinancing the Credit Agreement and obtaining replacement financing sources.
In the event the Company's refinancing of the Credit Agreement is delayed or unavailable, the Company believes that its cash positions outside of North America could be repatriated and that such cash, together with projected cash flow from operations, would be sufficient to satisfy the Company's repayment obligations under the Credit Agreement and to support the near-term operating cash needs of the Company going forward.
Revolving lines foreign
.
The Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. 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 intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On
April 30, 2018
, the Company was in compliance with the covenants under the credit arrangements. On
April 30, 2018
, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On
April 30, 2018
, the Company's interest rates ranged from 5.0% to 6.5%, and the Company can borrow
$11.1 million
under these credit arrangements. On
April 30, 2018
,
$3.6 million
of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. As there were no borrowings under these credit arrangements, an additional
$4.8 million
remained unused. The foreign revolving lines balances as of January 31, 2018 were included as current maturities of long-term debt in the consolidated balance sheets.
The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. Subsequent to January 31, 2018, the Company reduced one of the foreign credit lines by
$2.5 million
, thus reducing the amount available to borrow by
$2.4 million
.
18
Mortgages.
On
July 28, 2016
, the Company borrowed 8.0 million CAD (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 manufacturing facility located in Alberta, Canada that matures on
December 23, 2042
. The interest rate is variable, currently at
4.7%
, with monthly payments of 31 thousand CAD (approximately
$24 thousand
) for interest; and monthly payments of 27 thousand CAD (approximately
$20 thousand
) for principal. Principal payments began January 2018.
On
June 19, 2012
, the Company borrowed
$1.8 million
under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at
4.5%
with monthly payments of
$13 thousand
for both principal and interest and matures
July 1, 2027
. On
June 19, 2022
, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than
2.0%
per annum and shall be subject to a ceiling of
18.0%
and a floor of
4.5%
.
Capital Leases.
In 2017, the Company obtained three capital leases for 1.1 million CAD (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these capital leases were from
4.0%
to
7.8%
per annum with monthly principal and interest payments of less than $0.1 million. These leases mature from
April 30, 2021
to
September 29, 2022
.
In 2014, the Company obtained two capital leases for 0.9 million CAD (approximately
$0.9 million
at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is
3.25%
per annum with monthly principal and interest payments of
$14 thousand
, and these leases mature on
June 25, 2018
.
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, 2018
contained in the Company's most recent Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
19
Item 4.
Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of
April 30, 2018
. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management has previously reported on a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company during its preparation and review of the Company's financial statements for the fiscal quarter ended July 31, 2017 related to the Company's accounting for stock-based compensation cost. Specifically, the Company had improperly reversed stock-based compensation costs for vested equity awards that expired, terminated or were cancelled unexercised. This accounting error was attributable to the Company’s lack of technical accounting knowledge and led management to conclude that a material weakness existed with respect to the Company’s internal control over financial reporting.
As described below, the Company has adopted and implemented policies and procedures to ensure that the staff has the necessary technical accounting knowledge.
Notwithstanding the material weaknesses described above, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Changes in Internal Control Over Financial Reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation Plan for the Material Weakness in Internal Control over Financial Reporting:
To address the material weakness regarding the adjustment for awards that expired unexercised, the Company has done the following:
|
•
|
Expanded the training of employees in financial technical accounting, reporting and disclosure-related positions;
|
|
•
|
Reinforced the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies and procedures;
|
|
•
|
Implemented a catalog of key accounting rules that have been applied during the quarter. In the reviews of any major journal entries for non-standard operational accounting matters, this catalog will be used as a checklist to validate that the required accounting treatment is applied and disclosures are made accordingly. Management will evaluate whether the accounting treatment follows the current rules in the catalog and will decide whether outside firm expertise is warranted in such a review; and
|
|
•
|
Validated and updated the catalog quarterly for any changes resulting from changed or newly pronounced accounting rules;
|
|
•
|
Reviewed the categories that are underlying the calculations related to stock-based compensation, and revise procedures for the calculation and review of effects from vested, forfeited and expired options;
|
|
•
|
Implementation of Certent; an equity compensation management and reporting tool, to be completed in the second quarter of 2018.
|
The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to recording stock-based compensation cost and will address the related material weakness described above. However, the material weakness cannot be considered fully remediated until the remediation processes have been in operation for a period of time and successfully tested.
20
Item 6.
Exhibits
|
Rule 13a - 14(a)/15d - 14(a) Certifications
(1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
Rule 13a - 14(a)/15d - 14(a) Certifications
(2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
Limited Waiver and Eighth Amendment to Credit and Security Agreement
|
|
|
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
|
21
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 12, 2018
|
/s/ David J. Mansfield
|
|
David J. Mansfield
|
||
|
President and Chief Executive Officer
|
||
|
(Principal Executive Officer)
|
||
|
Date:
|
June 12, 2018
|
/s/ Karl J. Schmidt
|
|
Karl J. Schmidt
|
||
|
Vice President and Chief Financial Officer
|
||
|
(Principal Financial and Accounting Officer)
|
||
22
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 - Basis Of PresentationNote 2 - Business Segment ReportingNote 3 - Accounts ReceivableNote 4 - Revenue RecognitionNote 5 - Income TaxesNote 6 - Impairment Of Long-lived AssetsNote 7 - Stock-based CompensationNote 8 - Earnings Per ShareNote 9 - DebtNote 10 - Restricted CashNote 11 - Fair ValueNote 12 - Recent Accounting PronouncementsNote 13 - Subsequent EventItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations ( " Md&a " )Item 4. Controls and ProceduresPart II Other InformationItem 6. Exhibits