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Item 7. Management’s Discussion and Analysis

2021-04-15 compared with 2020-04-21 · 458 added, 402 removed, 961 unchanged (47% of the section changed)

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Since the Company's revenues are significantly dependent upon large discrete projects, the Company's operating results in any reporting period could be negatively impacted as a result of variations in the level of the Company's large discrete project orders or delays in the timing of the specific project phases.

In January 2020, an outbreak of novel coronavirus (also known as COVID-19) started in Wuhan, China.

The virus was recognized as a pandemic by the World Health Organization on March 11, 2020.

In response to the rapid spread of the virus, national and local governments have instituted varying levels of actions to contain the virus's spread.

As of this date, all of the Company’s plants are operating with the exception of the plant located in India.

On March 24, 2020 the India plant operations were suspended in compliance with a national 21-day shutdown which has now been extended through April 21, 2020.

We do not expect a shut down over this period to significantly impact our planned production schedules.

To date our global supply chains have not been materially affected by the global pandemic.

Due to the unprecedented actions taken to stem the spread of the virus and the uncertainty of the duration and impact of additional actions that may be required, the resulting future disruptions to the Company’s operations is uncertain.

In response to the extraordinary steps taken to combat the spread of COVID-19 and the impact of decreased demand for oil and the associated collapse of oil prices, the Company undertook a reforecast to determine the potential financial impact of these events on the Company’s results of operations.

The results of the reforecast indicated a risk that the Company could be out of compliance with a debt covenant related to the Senior Credit Facility in the second quarter of 2020.

To address the possible covenant compliance issue the Company has made plans to reduce planned capital expenditures and non-essential operating expenses, and if necessary, to repatriate foreign cash to bring the covenant into compliance.

In addition, the Company has applied for funding under two Small Business Administration programs.

The Paycheck Protection Program provides forgivable funding for payroll and related costs as well as some non-payroll costs.

The Company has applied for funding in the amount of $3.2 million.

The Company has also applied for a Small Business Administration Economic Disaster Loan which could be up to $2 million based on need and repayment capacity.

There is no guarantee that the Company will be granted funds under either program.

The Company’s expected results of operations and financial condition in 2020 will likely be adversely affected by the COVID-19 pandemic and the current depressed market prices for oil and gas.

COVID-19 and Depressed Oil and Gas Market

The Company’s results of operations, financial condition, liquidity and cash flow in 2020 have been materially adversely affected by the COVID-19 pandemic and the current depressed market prices for oil and gas, and will likely continue to be materially adversely affected, the extent to which remains unclear at this time.

Risk Factors for additional information.

As of the date of filing this Form 10-K, all of the Company’s plants are operating and, to date, the Company's global supply chains have not been materially affected by the global pandemic.

In response to the extraordinary steps taken to combat the spread of COVID-19 and the impact of decreased oil prices, the Company has updated its forecasts more frequently during this period to determine the continuing financial impact of these events on the Company’s results of operations, financial condition and liquidity.

As a result of these reforecasts, the Company reduced headcount, planned capital expenditures and non-essential operating expenses.

Due to continued project delays as a result of the COVID-19 pandemic and related disruptions, as of January 31, 2021, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the three-month period ended January 31, 2021 under its Amendment and Waiver for the North American Loan Parties.

Based upon the actions taken by the Company and expected future results, the Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued.

See further discussion below and in Note 5 - Debt, in the Notes to Consolidated Financial Statements.

On May 1, 2020, the Company entered into a loan agreement under the PPP and received proceeds of approximately $3.2 million.

Interest on the loan accrued at a fixed interest rate of 1.0%.

Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses.

During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses.

100% of the PPP loan proceeds were used for payroll related expenses.

The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act, although no assurance to that effect can be provided.

Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit by the SBA to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the PPP rules.

Based on the facts and circumstances of the Company's PPP loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP loan proceeds as a grant that has reasonable assurance of being forgiven.

As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021.

The amounts are recognized in other income in the consolidated statements of operations.

The Company has submitted its application and supporting documentation for forgiveness to its bank, which has submitted the application and supporting documents to the SBA.

We are currently awaiting approval of forgiveness from the SBA.

Beginning in April 2020, the Company's subsidiary, Perma-Pipe Canada, Ltd.

("PPCA"), applied for relief in the form of grants from the Canadian government under the CEWS program.

Based on the CEWS program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month.

Beginning in October 2020, PPCA also applied for grants under the CERS program.

PPCA was approved for and received approximately $1.9 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the year ended January 31, 2021.

Both programs are scheduled to continue through June 2021.

The proceeds from CEWS and CERS are recognized in other income in the consolidated statements of operations.

Results of Operations

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However, this MD&A should be read in conjunction with the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, including the notes thereto and the risk factors contained herein.

The Company's fiscal year ends on January 31.

Years, results and balances described as 2020 and 2019 are for the fiscal years ended January 31, 2021 and 2020, respectively

Consolidated Results of Operations:

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Interest expense, net

Income from operations before income taxes

Income tax expense

Other income, net

Income/(loss) from operations before income taxes

Income tax expense/(benefit)

Net income/(loss)

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Net sales were $ 84.7 million in 2020 , a decrease of $42.9 million, or 33.7% , from $ 127.7 million in 2019 .

Increased revenue in the U.S., Middle East and the expansion into Egypt along with higher demand for leak detection products were offset by lower project revenue in the Canadian operation.

The decrease was a result of lower sales volumes driven by the impact of lower oil prices, combined with project delays arising as a result of the COVID-19 pandemic.

The Company expects these delayed projects to commence in 2021.

Gross profit:

Gross profit increased to $ 29.0 million, or 22.8% of net sales, in 2019 , an increase of $5.7 million, or 24.6% , from $ 23.3 million, or 18.1% of net sales, in 2018 .

This increase was primarily driven by higher project margins in the Middle East.

Gross profit decreased to $ 11.2 million, or 13.2% of net sales, in 2020 , a decrease of $17.8 million, or 61.5% , from $ 29.0 million, or 22.8% of net sales, in 2019 .

This decrease was primarily driven by lower sales volumes.

General and administrative expenses:

General and administrative expenses were $ 17.9 million in 2019 compared to $ 15.4 million in 2018 , an increase of $ 2.5 million, or 16.4% .

This increase was primarily the result of the establishment of the Company's offices in Egypt, relocation of certain corporate personnel to the Company's offices in Spring, Texas and additional incentive compensation related to improved earnings

General and administrative expenses were $ 17.2 million in 2020 compared to $ 18.9 million in 2019 , a decrease of $ 1.7 million, or 9.0% .

This decrease was driven primarily by cost cutting measures enacted as a result of the COVID-19 pandemic.

Selling expenses:

Selling expenses remained flat at $ 5.2 million in 2019 and 2018.

Selling expenses increased by $0.1 million, from $5.2 million in 2019 to $ 5.3 million in 2020 .

This increase was primarily due the addition of new sales employees and severance for terminated employees in the current year, partially offset by lower overall personnel costs.

Interest expense:

Interest expense decreased to $ 0.9 million in 2019 from $ 1.1 million in 2018 due to lower net borrowings and decreased interest rates during 2019.

Income from operations before income taxes:

Income from operations before income taxes improved to $ 5.0 million in 2019 compared to a $1.6 million in 2018 .

The increase was primarily driven by project margin improvements in the Middle East, increased demand for leak detection products, expansion into Egypt and higher sales volume in the U.S.

Interest expense decreased to $ 0.4 million in 2020 from $ 0.9 million in 2019 due to lower net borrowings during 2020 .

Other income, net:

Other income was $4.0 million in 2020 compared to $1.1 million in 2019, an increase of $2.9 million.

This increase was primarily the result of recognition of the Company's reasonable expectation of forgiveness of its PPP loan proceeds during the period of $3.2 million, as well as income recorded for funds received under the CEWS program in Canada.

These amounts were offset partially by the encashment of a performance bond securing one of the Company's contracts with a customer in Qatar.

The Company has recorded the expense related to this encashment of approximately $0.6 million in other income in the consolidated statement of operations.

The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract.

The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract.

Income/(loss) from operations before income taxes:

Income from operations before income taxes decreased to a loss of $ (7.8) million in 2020 compared to income of $5.0 million in 2019 .

The decrease was a result of lower sales volumes driven by the impact of lower oil prices, combined with project delays arising as a result of the COVID-19 pandemic.

The Company expects these delayed projects to commence in 2021.

Income taxes:

The Company's worldwide effective tax rates ("ETR") were 1.7% and 29.0% in 2020 and 2019, respectively.

The change in the ETR from the prior year to the current year was largely due to the overall increase in worldwide pretax book income in low tax or non-taxable jurisdictions.

Additional factors included the Company's valuation allowance against the domestic deferred tax asset and the change in the amounts of income in various jurisdictions between the years.

The unusually large ETR incurred in 2018 was largely due to the overall low pretax income.

Due to this, even relatively small changes to ordinary income have a large impact to the ETR.

As a result of the provisions from the U.S.

Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company expects that future distributions from foreign subsidiaries will no longer 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.

The change in the ETR from the prior year to the current year is largely due to the Company’s valuation allowance against its domestic deferred tax asset and changes to the mix of income in various jurisdictions, including losses in the zero rate jurisdiction of the United Arab Emirates (the "U.A.E.").

As a result of the one-time transition tax from the U.S.

Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company estimates that distributions from foreign subsidiaries will not be subject to incremental U.S.

tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction.

Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested, and earnings in its Indian subsidiary are partially permanently reinvested.

The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of the India dividend distribution tax, Canadian withholding taxes, and Egyptian withholding taxes will be considered.

As such, the Company has accrued a liability of $0.2 million in 2019 related to these taxes.

Earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholdings taxes in these jurisdictions are considered.

As such, the Company has reduced the liability from $0.4 million as of January 31, 2020 to $0.2 million as of January 31, 2021 related to these taxes.

For further information, see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

Net income/(loss):

The resulting net income of $3.6 million in 2019 was a $4.2 million improvement over the net loss of $0.6 million in 2018.

This increase was primarily the result of project margin improvements in the Middle East, increased demand for leak detection, expansion into Egypt and higher sales volume in the U.S.

The resulting net loss of $7.6 million in 2020 was an $11.2 million decrease from the net income of $3.6 million in 2019.

The decrease was a result of lower sales volumes driven by the impact of lower oil prices, combined with project delays arising as a result of the COVID-19 pandemic.

The Company expects these delayed projects to commence in 2021.

Liquidity and capital resources

Cash and cash equivalents as of January 31, 2021 and 2020 were $ 7.2 million and $ 13.4 million, respectively.

On January 31, 2020 , $0.4 million was held in the U.S.

and $13.0 million was held by the Company's foreign subsidiaries.

On January 31, 2021 , $0.1 million was held in the United States and $7.1 million was held by the Company's foreign subsidiaries.

The Company's working capital was $ 25.6 million on January 31, 2021 compared to $ 31.4 million on January 31, 2020 .

Of the working capital components, cash increased $3.2 millio n primarily as a result of increased accounts receivable collections.

Cash provided by operations was $ 4.1 million in 2019 compared to $5.0 million in 2018.

This decrease of $0.9 million was due primarily to the Company purchasing inventory for projects, offset by collections of accounts receivable and an increase in net income during the period.

Of the working capital components, cash decreased $6.2 millio n primarily as a result of the activity discussed below.

Net cash provided by operating activities was $ 0.2 million in 2020 compared to $4.1 million in 2019.

This decrease of $4.0 million was due primarily to the decrease in net income and increases in prepaid expenses and other current assets, partially offset by decreases in inventory and increases in accounts payable in the current period compared to the prior year period.

Net cash used in investing activities during 2020 and 2019 was $2.0 million and $1.9 million, respectively.

This increase was due to an increase in investments in fixed assets needed for the operation of the business, primarily related to the opening of the Company's facility in Egypt.

Net cash used in financing activities in 2019 was $0.3 million as compared to cash provided by financing activities in 2018 of $ 1.1 million.

The primary reason for this change was that during 2018 the Company's borrowings exceeded its repayments under its revolving credit facility by approximately $2.0 million, whereas during 2019, borrowings exceeded repayments by approximately $0.3 million.

Debt totaled $16.9 million as of January 31, 2020.

Since the Company generated cash from operations, the Company required less cash to be provided by financing activities.

Net cash used in financing activities was $4.1 million in 2020 compared to $0.3 million in 2019.

The primary reason for this change was that during the current period the Company had greater net repayments under its revolving credit facility of approximately $3.2 million, as compared to the prior year period where the Company had net borrowings under its revolving credit facility of approximately $0.3 million.

Debt totaled $13.2 million and $16.9 million as of January 31, 2021 and January 31, 2020, respectively.

For additional information , see Note 5 - Debt, in the Notes to Consolidated Financial Statements.

There was no restricted cash held in the U.S.

on January 31, 2020.

Restricted cash held in the U.S.

on January 31, 2019 was $1.5 million, all of which was a cash collateral held by PNC Bank in relation to the Company's credit agreement.

There was no restricted cash held in the United States on January 31, 2021 or January 31, 2020.

Restricted cash held by foreign subsidiaries was $1.2 million and $1.3 million as of January 31, 2021 and 2020, respectively.

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Mortgages (2)

Revolving line - foreign (3)

Revolving lines - foreign (3)

Term loan - foreign

Finance lease obligations

Operating lease obligations (4)

Employment agreements (5)

Uncertain tax position obligations (5)

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Based on the amount of such debt on January 31, 2021 , and the weighted average interest rate of 6.25% on that debt, such interest was being incurred at an annual rate of approximately $0.2 million.

Scheduled maturities, including interest.

Scheduled maturities of foreign revolver line, including interest.

Scheduled maturities, excluding interest.

Scheduled maturities of foreign revolver line, excluding interest.

Minimum contractual amounts, assuming no changes in variable expenses.

Refer to the Exhibit Index for a description of compensation and separation plans.

Refer to Note 7 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.

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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 new Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a new three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

The Senior Credit Facility replaced the Company’s then existing $15 million Credit and Security Agreement, dated September 24, 2014, among various subsidiaries of the Company and Bank of Montreal, as successor by assignment to BMO Harris Bank N.A., as amended (the “Prior Credit Agreement”).

The Company initially used borrowings under the new Senior Credit Facility to pay off outstanding amounts under the Prior Credit Agreement (which totaled approximately USD $3,773,823 plus CAD 4,794,528) and cash collateralize a letter of credit (USD $154,500).

The Company has used proceeds from the new Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs, and other corporate purposes.

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

The Company has used proceeds from the Senior Credit Facility to pay outstanding amounts under a prior credit facility, a cash collateralized letter of credit, and for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes.

Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin.

The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility.

Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally be payable in arrears on the last day of each interest period.

Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period.

Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility.

The facility fee is payable quarterly in arrears.

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of its North American subsidiaries.

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain assets of its North American subsidiaries.

The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc.

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In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve EBITDA of at least $2,462,000 for the period from August 1, 2018 through January 31, 2019; (ii) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 for the nine-month period ending April 30, 2019 and for the quarter ending July 31, 2019 and each quarter end thereafter on a trailing four-quarter basis; and (iii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 for the nine-month period ending October 31, 2018 and for the quarter ending January 31, 2019 and each quarter end thereafter on a trailing four-quarter basis.

The Company was in compliance with these covenants as of January 31, 2020.

As of January 31, 2020, the Company had borrowed an aggregate of $8.6 million at a weighted average interest rate of 6.04%, and had $3.4 million available under the Senior Credit Facility.

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

Due to project delays as a result of the COVID-19 pandemic, as of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries.

On December 18, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC’s waiver of the Company’s failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company’s Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below.

Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the U.A.E.

The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries.

The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.2 million.

The Amendment and Waiver also eliminated the Company’s ability to make LIBOR borrowings and reduced the overall availability by $2.0 million until maturity.

The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six-month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine-month period ending July 31, 2021.

The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three-month period ending January 31, 2021;

(ii) 1.10 to 1.00 for the six-month period ending April 30, 2021;

and (iii) 1.10 to 1.00 for the nine-month period ending July 31, 2021.

In order to cure any future breach of the fixed charge coverage ratio covenant by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Credit Agreement in an amount which, when added to the amount of the Company’s Consolidated Adjusted EBITDA, would result in pro forma compliance with the covenant.

Due to continued project delays as a result of the COVID-19 pandemic, as of January 31, 2021, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the three-month period ended January 31, 2021 under the Amendment and Waiver for the North American Loan Parties.

Per the Amendment and Waiver, the Company will repatriate approximately $0.8 million in cash from its subsidiary in the United Arab Emirates in April 2021 to cure the breach.

The repatriation will not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries.

As of January 31, 2021, the Company’s foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.6 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant.

The Company estimates that it may need to repatriate cash of up to $0.1 million in the next six months.

Any cash required to cure future covenant defaults would be repatriated through the Company’s subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India.

Most of this cash could be repatriated without any tax consequences, however, some repatriation would require payment of withholding taxes.

The Company does not anticipate any material tax impacts of any potential future repatriation.

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

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

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

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

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

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

As of January 31, 2021, the Company had borrowed an aggregate of $2.8 million at a rate of 6.25% and had $1.7 million available under the Senior Credit Facility.

Revolving lines - foreign .

The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E.

and Egypt as discussed further below.

The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at January 31, 2021) from a bank in the U.A.E.

The facility has an interest rate of approximately 3.4% and was originally set to expire in November 2020.

However, the expiration has been extended due to the COVID-19 pandemic and the inability to finalize renewal documentation prior to that time.

The Company is awaiting final documentation to complete the renewal process, which is expected to occur in April 2021.

The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at January 31, 2021) from a bank in the U.A.E.

The facility was renewed in January 2021 under the same terms.

It has an interest rate of approximately 3.9% and is set to expire in January 2022.

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates.

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In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt.

In November 2019, the Company's Egyptian subsidiary entered into credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately USD $12.6 million at January 31, 2020).

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at January 31, 2021).

This credit arrangement was in the form of project financing at rates competitive in Egypt.

The line was secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary.

Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricts the Company's Egyptian subsidiary's ability to undertake any additional debt.

The facility was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the COVID-19 pandemic and the inability to finalize renewal documentation prior to that time.

The Company has not made borrowings under this facility.

The Company is currently negotiating the renewal of the facility under similar terms, with a revolving line of 100.0 million Egyptian Pounds and the renewal process is expected to be completed in April 2021.

In January 2021, the Company entered into a second credit arrangement for project financing with a bank in Egypt for 46.2 million Egyptian Pounds (approximately $2.9 million at January 31, 2021).

This credit arrangement is in the form of project financing at rates competitive in Egypt.

The line is secured by certain assets (such as accounts receivable ).

Among other covenants, the credit arrangement establishes a maximum leverage ratio allowable and restricts the ability to undertake any additional debt.

On January 31, 2020, the Company was in compliance with the covenants under these credit arrangements.

On January 31, 2020, interest rates were based on the EIBOR plus 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E.

credit arrangements and based on the CBE corridor rate plus 1.5% per annum for the Egypt credit arrangement.

On January 31, 2020, the Company's interest rates ranged from 5.4% to 16.3%, with a weighted average rate of 5.9%, and the Company could borrow $21.6 million under these credit arrangements.

On January 31, 2020, $4.2 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees.

On January 31, 2020, the Company had borrowed $0.7 million, and had an additional $16.8 million available.

The foreign revolving lines balances as of January 31, 2020 and 2019, were included as current maturities of long-term debt in the Company's consolidated balance sheets.

The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary.

The facility has an interest rate of approximately 8.0% and is expected to expire in August 2021 in connection with the completion of the project.

The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis.

The Company guarantees the subsidiaries' debt including all foreign debt.

The Company was in compliance with the covenants under the credit arrangements in the U.A.E.

and the 200.0 million Egyptian Pound facility in Egypt as of January 31, 2021.

The Company was not in compliance with a covenant under its 46.2 million Egyptian Pound project financing in Egypt as of January 31, 2021.

The Company did not have a share capital increase registered with the General Authority for Investment, as required by facility covenants, but is in the process of curing the breach and has received a waiver from the bank as of January 31, 2021.

On January 31, 2021, interest rates were based on the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E.

credit arrangements, one of which has a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for the Egypt credit arrangement.

Based on these base rates, as of January 31, 2021, the Company's interest rates ranged from 3.4% to 8.0%, with a weighted average rate of 6.05%, and the Company could borrow $23.1 million under these credit arrangements.

As of January 31, 2021, $5.8 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees.

Additionally, as of January 31, 2021, the Company had borrowed $3.3 million, and had an additional $1.3 million of borrowing remaining available under the foreign revolving credit arrangements.

The foreign revolving lines balances as of January 31, 2021 and 2020 were included as current maturities of long-term debt in the Company's consolidated balance sheets.

Additional liquidity from the PPP

On May 1, 2020, the Company entered into a loan agreement under the SBA's PPP and received proceeds of approximately $3.2 million.

Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022.

During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses.

100% of the PPP loan proceeds were used for payroll related expenses.

The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act, although no assurance to such effect may be provided.

Under the current provisions of the CARES Act, any recipients of a PPP loan may be subject to an audit by the SBA to confirm they qualify for the loan and that the proceeds were used for qualified expenses as prescribed by the program rules.

Based on the facts and circumstances of the Company's loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven.

As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021.

The amounts are recognized in other income in the consolidated statements of operations.

Additional liquidity from the CEWS and CERS Programs

Beginning in April 2020, the Company's subsidiary, PPCA, applied for relief in the form of grants from the Canadian government under the CEWS program.

Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month.

Beginning in October 2020, PPCA also applied for grants under the CERS program.

PPCA was approved for and received approximately $1.9 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the year ended January 31, 2021.

Both programs are scheduled to continue through June 2021.

The proceeds from CEWS and CERS are recognized in other income in the consolidated statements of operations.

Accounts receivable:

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In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $2.4 million of this retention amount was reclassified to a long-term receivable account.

The Company has been engaged in ongoing active efforts to collect the outstanding amount, and has collected $0.5 million during fiscal year 2019, and has certified invoices of $0.5 million in the process of collection subsequent to January 31, 2020.

The Company has been engaged in ongoing active efforts to collect the outstanding amount.

During 2020, the Company received approximately $0.2 million from the customer.

The Company has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer.

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Revenue recognition.

During 2019 and 2018, and in accordance with Accounting Standards Update No.

In accordance with Accounting Standards Update No.

2014-19, “Revenue from Contracts with Customers” (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services.

See Note 5 - Revenue Recognition for more detail.

See Note 4 - Revenue recognition, in the Notes to Consolidated Financial Statements, for more detail.

Percentage of completion revenue recognition.

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The Company assesses its deferred tax assets for realizability at each reporting period.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is a significant benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Fair value of financial instruments .

The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature.

The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable rates.

The Company recognizes a tax position in its consolidated financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

For further information, See Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

New accounting pronouncements.

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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.

Management has identified a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company’s auditors during the audit of the Company’s financial statements for the fiscal year ended January 31, 2020 related to the Company’s revenue recognition under percentage of completion accounting.

Specifically, the Company had improperly recognized revenue for an open project based on imputed sales amounts greater than the total contracted amount.

This accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews.

As described below, the Company will adopt and implement policies and procedures to ensure that personnel will not deviate from the Company's standard accounting policies and monthly reviews will result in appropriate revenue recognition.

Notwithstanding the material weakness described above, the Company's management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

The Company's management, including its Chief Executive Officer and Chief Financial Officer, have further concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company's financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Management's Annual Report on Internal Control Over Financial Reporting.

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2021.

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.

The Company's auditors identified an accounting error during the audit of the Company's financial statements for the fiscal year ended January 31, 2020 related to the Company's revenue recognition under percentage of completion accounting.

Other than as set forth below, there were no changes in the Company's internal control over financial reporting during the Company's most recent year that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management 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’s auditors during the audit of the Company’s financial statements for the fiscal year ended January 31, 2020 related to the Company’s revenue recognition under percentage of completion accounting.

Specifically, the Company had improperly recognized revenue for an open project based on imputed sales amounts greater than the total contracted amount.

The accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews and led management to conclude that a material weakness existed with respect to the Company's internal control over financial reporting.

Remediation Plan for the Material Weakness in Internal Control over Financial Reporting.

To address the material weakness regarding the improper recognition of revenue for open projects, the Company will do the following:

Reinforce the importance of adherence to Company policies regarding entering into and subsequently modifying contracts with customers, and confirm in monthly meetings with managers that no contracts have been entered into that deviate from Company’s accounting policies;

Create additional reports to identify potential system errors and exceptions related to project revenues and costs where higher risk may exist for inappropriate revenue recognition;

Review listing of material request invoices each month to identify if any significant items are included and review with additional scrutiny for appropriate revenue recognition;

Ensure adherence to guidelines for preparation of the Company's monthly revenue and contribution margin presentation to include all components of a project in one line to provide full visibility of total job performance;

Implement a monthly meeting prior to the gross profit meeting between accounting personnel to discuss and analyze the asset and liability work-in-process accounts to identify any specific projects that require further investigation.

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to revenue recognition under percentage of completion accounting 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.

OTHER INFORMATION - None.

This accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews and led management to conclude that a material weakness existed with respect to the Company’s internal control over financial reporting.

The Company considered this material weakness fully remediated as of October 31, 2020, and such material weakness remained fully remediated as of January 31, 2021.

The Company has implemented the following changes in response to the material weakness described above:

Reinforced the importance of adherence to Company policies regarding entering into and subsequently modifying contracts with customers, and confirmed in monthly meetings with managers that no contracts have been entered into that deviate from the Company’s accounting policies;

Created additional reports to identify potential system errors and exceptions related to project revenues and costs where higher risk may exist for inappropriate revenue recognition;

Reviewed listing of material request invoices each month to identify if any significant items are included and reviewed with additional scrutiny for appropriate revenue recognition;

Ensured adherence to guidelines for preparation of the Company's monthly revenue and contribution margin presentation to include all components of a project in one line to provide full visibility of total job performance;

Implemented a monthly meeting between accounting personnel to discuss and analyze the asset and liability work-in-process accounts to identify any specific projects that require further investigation.

OTHER INFORMATION

On April 14, 2021, the Company’s Board of Directors approved a new form of Restricted Stock and Performance Award Agreement (the “Award Agreement”) for use in documenting grants under its 2017 Omnibus Stock Incentive Plan (the “Plan”).

The Board also approved the use of the Award Agreement to formalize long-term incentive awards previously approved for the Company's named executive officers in June 2020.

The Award Agreement consists of two components:

(i) a grant of restricted stock that will vest ratably over three years, contingent on the grant holder’s continuous service until the applicable vesting date (the ”Restricted Stock Award”), and (ii) a grant of a performance-based cash award that will vest ratably over three years, the amount of which may vary, subject to a minimum threshold, based on the Company’s performance against pre-determined net income targets over a three-fiscal-year performance period (the “Performance Award”).

Eighty percent (80%) of the target amount of the Performance Award is a minimum threshold amount that will be earned if the service requirements are satisfied.

This minimum amount will be paid out in three equal installments over the three-year performance period.

The amount earned under the Performance Award may increase, up to 150% of the target, if net income performance above the threshold level is achieved.

The Restricted Stock Award and the Performance Award will generally be forfeited upon a termination of service prior to the date on which such awards are vested or earned, except that some or all of the Restricted Stock Award and the Performance Award may be eligible to be vested or earned following a termination of service as a result of death, disability, retirement or a termination without cause when retirement-eligible if the applicable requirements are met.

The Restricted Stock Award and the Performance Award will be also be deemed vested or earned, as applicable, upon a change in control (as defined in the Plan).

The foregoing description of the Award Agreement is not complete and is qualified in its entirety by the Award Agreement, a copy of which is filed herewith as Exhibit 10(l).

The Company’s named executive officers received grants of Performance Awards in the following amounts pursuant to prior approval of the Board of Directors in June 2020:

Named Executive Officer

Executive officer of the Offices and Positions

Target Value of Performance Award

President and Chief Executive Officer

Bryan Norwood

Vice President and Chief Financial Officer

Vice President and Chief Human Resources Officer

These award amounts are not new or additional grants of long-term incentive compensation in 2021;

rather, they were previously approved in June 2020 as part of the 2020 long-term incentive awards and are now being formalized using the Award Agreement.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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Equity compensation plans approved by stockholders

(1) The amounts shown in columns (a) and (b) of the above table do not include 358,146 outstanding restricted stock granted under the Company's 2013 Omnibus Stock Incentive Plan as amended June 14, 2013 ("2013 Omnibus Plan") or the 2017 Omnibus Stock Incentive Plan as amended June 13, 2017 ("2017 Plan").

(2) Future grants will only be made out of the 2017 Plan until June 12, 2020.

(1) The amounts shown in columns (a) and (b) of the above table do not include 373,059 outstanding shares of restricted stock granted under the Company's 2013 Omnibus Stock Incentive Plan as amended on June 14, 2013 or the 2017 Omnibus Stock Incentive Plan as amended on June 13, 2017 ("2017 Plan").

(2) The 2017 Plan expired in June 2020.

Future grants will be made under a new plan once approved by the Company's Board of Directors and shareholders.

The other information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for its 2021 annual meeting of stockholders.

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In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Change in accounting principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of February 1, 2019 due to the adoption of the Accounting Standards Codification Topic 842, Leases.

Basis for opinion

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue at U.S.

operating entities for specialty piping systems and coating is recognized using the input method over time

As described in Notes 2 and 4 to the consolidated financial statements, the Company’s U.S.

operating entities records specialty piping and coating systems revenue over time based the costs incurred to date relative to the estimated total contract costs.

Significant changes in estimates could have a material effect on the Company’s results of operations.

We identified revenue being recognized using the input method over time as a critical audit matter.

The principal considerations for our determination that revenue recognition using the input method over time is a critical audit matter are the Company’s estimates include all labor and materials necessary to complete the contract to arrive at the total contract costs.

These estimates are based on management’s assessment of the current status of the contract and historical results.

Our audit procedures included the following, among others.

We obtained an understanding over the Company’s accounting for revenue recognition using the input method over time, including the design of internal controls.

Additionally, we obtained supporting documentation for actual costs incurred to date and estimated costs to be incurred;

we investigated significant cost changes by analyzing changes in estimates including those after fiscal year end;

we performed a hindsight analysis of completed contracts to assess management's past cost estimates against actual results;

and we obtained confirmations of significant contract terms and status for a sample of contracts.

Goodwill annual impairment assessment

The Company’s consolidated goodwill balance was $2.3 million as of January 31, 2021.

As described further in Note 2 to the consolidated financial statements, the Company evaluates goodwill for impairment at the Canada reporting unit level annually.

The quantitative impairment assessment involves the comparison of the fair value of the Canada reporting unit to its carrying amount.

The Company used a weighting of the income and market approaches to determine the fair value of the reporting unit.

We identified the goodwill impairment analysis as a critical audit matter because management’s quantitative goodwill impairment test involved a high degree of auditor judgment due to the significant estimation required to determine the fair value of the reporting unit.

In particular, the fair value estimate was sensitive to significant assumptions, such as forecasted revenues, operating income margins and cash flows, discount rate, perpetual growth rate, and estimated valuation multiples.

Our audit procedures related to the goodwill impairment analysis included the following, among others.

We obtained an understanding over the Company’s annual assessment of goodwill for impairment, including the design of internal controls.

We tested the significant assumptions discussed above by assessing the reasonableness of management’s forecasts compared to current results and whether such assumptions were consistent with the evidence obtained in other areas of the audit.

We utilized a valuation specialist to assist in evaluating the appropriateness of the Company’s selection of the valuation methodology and the reasonableness of the significant assumptions used, including the discount rate, perpetual growth rate, weighting of income versus market approach and estimated valuation multiples.

/s/ GRANT THORNTON LLP

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Total operating expenses

Income from operations

Income/(loss) from operations

Interest expense, net

Income from operations before income taxes

Income tax expense

Other income, net

Income/(loss) from operations before income taxes

Income tax expense/(benefit)

Net income/(loss)

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Net income/(loss)

Other comprehensive loss

Other comprehensive income/(loss)

Currency translation adjustments, net of tax

Minimum pension liability adjustment, net of tax

Other comprehensive loss

Other comprehensive income/(loss)

Comprehensive income/(loss)

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Trade accounts receivable, less allowance for doubtful accounts of $474 on January 31, 2021 and $407 on January 31, 2020

Inventories, net

Prepaid expenses and other current assets

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Property, plant and equipment, net of accumulated depreciation

Operating lease right-of-use asset

Operating lease right-of-use assets

Deferred tax assets

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Other Comprehensive

Stockholders'

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Total stockholders' equity on January 31, 2019

Beginning retained earnings revision

Revised stockholders' equity on January 31, 2018

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

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Foreign currency translation adjustment

Tax expense on above items

Total stockholders' equity on January 31, 2020

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Foreign currency translation adjustment

Tax expense on above items

Total stockholders' equity on January 31, 2021

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Depreciation and amortization

Deferred tax (benefit)/expense

Deferred tax benefit

Stock-based compensation expense

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Capital expenditures

Proceeds from sales of property and equipment

Net cash used in investing activities

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Payments of debt on revolving lines

Debt issuance costs

Proceeds from term loan

Payments of other debt

Increase (decrease) in drafts payable

Decrease in drafts payable

Payments on finance lease obligations

Stock options exercised and taxes paid related to restricted shares vested

Net cash (used in)/provided by financing activities

Net cash used in financing activities

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

Net increase in cash, cash equivalents and restricted cash

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

Cash, cash equivalents and restricted cash - beginning of period

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United States

Total property, plant and equipment, net of accumulated depreciation

Note 2 - Significant accounting policies

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Revenues and expenses are translated at average weighted exchange rates prevailing during the year.

Gains or losses on foreign currency transactions and the related tax effects are reflected in net income.

The resulting translation adjustments are included in stockholders' equity as part of accumulated other comprehensive income (loss).

The aggregated foreign exchange transaction gain recognized in the income statement was $0.4 million in 2019 as compared to a loss of $0.1 million recognized in 2018 .

Gains or losses on foreign currency transactions and the related tax effects are reflected in net income.

The aggregated foreign exchange transaction gain recognized in the income statement was less than $0.1 million in 2020 as compared to a gain of $0.4 million recognized in 2019 .

Contingencies.

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Cash and cash equivalents were $7.2 million and $13.4 million as of January 31, 2021 and 2020 , respectively.

On January 31, 2020 , $0.3 million was held in the U.S.

and $13.1 million was held by foreign subsidiaries .

On January 31, 2019 , $0.1 million was held in the U.S.

and $10.1 million was held by foreign subsidiaries.

Accounts payable included drafts payable of $0.1 million and less than $0.2 million on January 31, 2020 and 2019 , respectively.

On January 31, 2021 , $0.1 million was held in the United States and $7.1 million was held by foreign subsidiaries .

On January 31, 2020 , $0.3 million was held in the United States and $13.1 million was held by foreign subsidiaries.

Accounts payable included drafts payable of $0.1 million on both January 31, 2021 and 2020 .

Restricted cash.

There was no restricted cash held in the U.S.

on January 31, 2020 .

Restricted cash held in the U.S.

on January 31, 2019 was $1.5 million, all of which was a cash collateral held by PNC Bank in relation to the Company's credit agreement.

There was no restricted cash held in the United States on January 31, 2021 or January 31, 2020 .

Restricted cash held by foreign subsidiaries was $1.2 million and $1 .3 million as of January 31, 2021 and 2020 , respectively.

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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.

Credit is extended based on an evaluation of a customer's financial condition.

In the United States, collateral is not generally required.

In the 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 at amounts due from customers net of an allowance for claims and doubtful accounts.

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The write off is recorded against the allowance for doubtful accounts.

One of the Company’s accounts receivable in the total amount of $4.7 million as of January 31, 2019 (inclusive of a retention receivable amount of $3.6 million, of which $2.1 million and $3.5 million were included in the balance of other long-term assets in our consolidated balance sheets as of January 31, 2020 and January 31, 2019 , due to the long-term nature of the receivables) has been outstanding for several years.

The Company completed all of its deliverables in 2015, and has been engaged in ongoing active efforts to collect this outstanding amount.

During 2019 , the Company received payments of approximately $ 0.5 million, which reduced the balance of this receivable to $ 4.1 million as of January 31, 2020 .

Subsequent to January 31, 2020 , the Company has certified invoices of $0.5 million in the process of collection.

One of the Company’s accounts receivable in the total amount of $3.8 million and $4.1 million as of January 31, 2021 and January 31, 2020 , respectively, has been outstanding for several years.

Included in this balance is a retention receivable that is payable upon commissioning of the system in the amount of $3.4 million , of which, due to the long-term nature of the receivable, $2.4 million and $2.1 million were included in the balance of other long-term assets in our consolidated balance sheets as of January 31, 2021 and January 31, 2020 , respectively.

The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer.

Nevertheless, the Company has been engaged in ongoing active efforts to collect this outstanding amount.

During 2020 , the Company received payments of approximately $ 0.2 million.

The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2021 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer.

As a result, the Company did not reserve any allowance against this receivable as of January 31, 2021 .

The Company continues to engage with the customer to ensure full payment of open balances, and has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer.

However, if the Company’s efforts to collect on this account are not successful in 2020 , then the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

For the year ended January 31, 2020 , one customer accounted for 11.5% of the Company's consolidated net sales and for the year ended January 31, 2019 , no one customer accounted for more than 10% of the Company's consolidated net sales.

As of January 31, 2020 and 2019, one customer accounted for 13.3% and three customers accounted for 42.0% of accounts receivable, respectively.

However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

For the year ended January 31, 2021 , no one customer accounted for greater than 10% of the Company's consolidated net sales and for the year ended January 31, 2020 , one customer accounted for 11.5% of the Company's consolidated net sales.

As of January 31, 2021 and 2020, no one customer accounted for greater than 10% and one customer accounted for 13.3% of accounts receivable, respectively.

Concentration of credit risk.

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The Company has not experienced any losses in such accounts.

The Company has a broad customer base doing business in all regions of the U.S.

as well as other areas in the world.

The Company has a broad customer base doing business in all regions of the United States as well as other areas in the world.

Accumulated other comprehensive loss.

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Less allowance

Inventories, net

Long-lived assets.

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Impairment of long-lived assets.

The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.

A factor considered important that could trigger an impairment review includes a year-to-date loss from operations.

The Company reported income from operations in 2019 and 2018 .

An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate.

Based on the Company's review of the projected cash flows over the remaining useful lives of the assets, management determined that there was no impairment of long-lived assets as of January 31, 2019 .

Since there was no triggering event in 2019, management determined that there was no impairment of long-lived assets as of January 31, 2020 .

The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets.

At January 31, 2021, the Company performed a qualitative analysis assessment to determine if it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values.

The Company assessed three asset groups as part of this analysis:

United States, Canada and Middle East.

The qualitative assessment indicated that it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values for the United States and Middle East asset groups.

However, triggering events were identified related to the Company's Canada asset group, indicating that further analysis was required in order to determine if it was more likely than not that the fair value of the asset group's long-lived assets exceeded their carrying values.

Therefore, the Company performed a quantitative assessment to determine any potential impairment.

After completion of this additional assessment, it was determined that there was no impairment of the Company's long-lived assets as of January 31, 2021 and 2020.

The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

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.

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January 31, 2021

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.

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 during 2019 or 2018 .

At January 31, 2021, the Company elected to perform a Step 0 qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's Canadian reporting unit was less than its carrying amount, including goodwill.

The qualitative assessment identified triggering events that indicated that further analysis was required in order to determine if it was more likely than not that the fair value of the Company's Canadian reporting unit exceeded its carrying value.

Therefore, the Company proceeded to complete the Step 1 analysis to determine any potential impairment.

The Step 1 analysis involved a quantitative fair valuation of the Company's Canadian reporting unit, including a market approach and discounted cash flow analysis.

After completion of the Step 1 analysis, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment for the years ended January 31, 2021 and 2020;

however, if the reporting unit is unable to achieve its forecasted results, there can be no assurance that a future impairment charge will not be required.

Other intangible assets with definite lives.

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Accumulated amortization was approximately $2.5 million as of January 31, 2021 and 2020 .

The Company expensed less than $0.1 million during the year ended January 31, 2021 for patents that were considered impaired as they are no longer expected to provide future benefits for the Company.

Future amortization over the next five years ending January 31 will be less than $0.1 million in the years 2021 to 2025 and less than $0.1 million thereafter.

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Research and development costs are expensed as incurred.

Research and development expense was approximately $0.3 million and $0.2 million in 2019 and 2018 , respectively.

Research and development expense was approximately $0.3 million in both 2020 and 2019 .

Income taxes.

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The Company assesses its deferred tax assets and liabilities for realizability at each reporting period.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

For further information, see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.

Fair value of financial instruments .

The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature.

Reclassifications.

Certain reclassifications have been made to prior period financial statements to conform to current period presentation.

These reclassifications have no effect on net income.

Other income, net was reclassified from general and administrative expense on the consolidated statements of operations.

Composition of deferred tax assets and liabilities were broken out to conform to current period presentation.

Net income/(loss) per common share.

Earnings per share ("EPS") is computed by dividing net income/(loss) by the weighted average number of common shares outstanding (basic).

The Company reported net income 2019 and a net loss in 2018.

The Company reported a net loss in 2020 and net income in 2019.

Therefore, the Company adjusted for dilutive shares in 2019, while in 2020 the diluted loss per share was identical to the basic loss per share rather than assuming conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share.

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The Company has determined that it operates in one segment.

Fair value of financial instruments .

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.

Recent accounting pronouncements .

In February 2016, the FASB issued Accounting Standard Update ("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.

2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

The adoption of this ASU using the alternative transition approach resulted in the recognition of operating lease right-of-use ("ROU") assets, net of deferred rent of $10.7 million and lease liability for operating leases of $11.0 million as of February 1, 2019.

The Company accounts for existing finance lease assets and liabilities in the same way under the new standard.

Adoption of this ASU did not have an effect on retained earnings.

The Company availed itself of the practical expedients provided under this ASU and its subsequent amendments regarding identification of leases, lease classification, indirect costs and the combination of lease and non-lease components.

The Company continues to account for leases in the prior period financials statements under ASC Topic 840.

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), which provides guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by the scheduled discontinuation of LIBOR on December 31, 2021.

It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform.

The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic.

This ASU is effective for all entities;

however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022.

The Company's Senior Credit Facility which matures on September 20, 2021 bears interest using an alternate base rate or LIBOR plus an applicable margin.

Based on the maturity of the Senior Credit Facility prior to the discontinuation of LIBOR, the Company does not expect a material impact from the adoption of this standard on the financial statements of the Company.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of existing disclosures and adds disclosure requirements identified as relevant.

This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted.

The Company has adopted this standard during the year ended January 31, 2021 and noted that there was no material impact on the financial statements of the Company.

In June 2016, the FASB issued ASU No.

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The Company is currently evaluating this standard and the impact to the financial statements of the Company.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which permits entities to reclassify the disproportionate income tax effects of the Tax Act on items within accumulated other comprehensive income/(loss) to reinvested earnings.

These disproportionate income tax effect items are referred to as "stranded tax effects." The amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act.

Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update.

The Company adopted ASU 2018-02 effective February 1, 2019 and has elected to not reclassify any amounts to retained earnings.

Under the Company's existing policy, any existing stranded tax effects will be eliminated when the underlying circumstances upon which it was premised cease to exist.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences.

This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company has early adopted ASU 2019-12 in 2020, using a prospective application approach, and there was no material impact on the financial statements of the Company.

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

Note 3 - Correction of immaterial errors

In the fourth quarter of 2019, management discovered prior period errors that accumulated over several years relating to accounting for leases with escalation clauses.

The cumulative adjustment for the errors covering the period from February 1, 2018 to January 31, 2020 was approximately $0.6 million.

The adjustment applicable to the beginning retained earnings as February 1, 2018 was approximately $0.6 million and the adjustment to the consolidated statement of operations for the year ended January 31, 2019 was less than $0.1 million.

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No.

99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements.

Although the errors were immaterial to prior periods, the prior period financial statements were revised, in accordance with SAB No.

108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , due to the significance of the out-of-period correction.

A reconciliation of the effects of the adjustments to the previously reported balance sheet at January 31, 2019 follows:

(In thousands)

Other long-term liabilities

Total long-term liabilities

Accumulated deficit

Total stockholders' equity

A reconciliation of the effects of the adjustments to the previously reported statement of operations for the year ended January 31, 2019 follows:

(In thousands)

Cost of Sales

Income from operations

Income from operations before income taxes

A reconciliation of the effects of the adjustments to the previously reported statement of comprehensive loss for the year ended January 31, 2019 follows:

(In thousands)

Comprehensive loss

A reconciliation of the effects of the adjustments to the previously reported statement of cash flows for the year ended January 31, 2019 follows:

(In thousands)

Other assets and liabilities

A reconciliation of the effects of the adjustments to the previously reported statement of stockholders' equity for the year ended January 31, 2019 follows:

(In thousands)

Accumulated deficit

Stockholders' equity

A reconciliation of the effects of the adjustments to the previously reported statement of stockholders' equity for the year ended January 31, 2018 follows:

(In thousands)

Accumulated deficit

Stockholders' equity

Note 3 - Retention

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Note 4 - Revenue recognition

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 was to be recorded as an adjustment to the opening balance of retained earnings, while periods prior to the adoption date were not to be 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 was no material impact to the Company as a result of the adoption of the new standard.

As such, the Company was not required

to make a cumulative adjustment to the opening balances of retained earnings, contract assets or contract liabilities upon its initial application of the new revenue standard.

The Company accounts for its revenues under Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("Topic 606").

Revenue from contracts with customers:

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

Systems - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines.

Systems and Coating - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines.

Additionally, this systems classification also includes coating applied to pipes and structures.

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.

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:

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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 2019 and 2018 are as follows:

A breakdown of the Company's revenues by revenue class for 2020 and 2019 are as follows (in thousands):

Specialty Piping Systems and Coating

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The Company anticipates that substantially all costs incurred for uncompleted contracts as of January 31, 2021 will be billed and collected within one year.

The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated.

The Company expects to recognize the remaining balances as of January 31, 2020 within one year.

Contract Assets

Balance January 31, 2018

Costs and gross profit recognized during the period for uncompleted contracts from the prior period

Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period

Balance January 31, 2019

Costs and gross profit recognized during the period for uncompleted contracts from the prior period

Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period

Closing Balance at January 31, 2020

Contract Liabilities

Balance January 31, 2018

Revenue recognized during the period for uncompleted contracts from the prior period

New contracts entered into that are uncompleted at the end of the current period

Balance January 31, 2019

Revenue recognized during the period for uncompleted contracts from the prior period

New contracts entered into that are uncompleted at the end of the current period

Closing Balance at January 31, 2020

During the year ended January 31, 2021, one of the Company's customers in Qatar made a call on a performance bond held to secure one of the Company's contracts.

The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract.

The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract.

The Company has recorded the expense related to the encashment of approximately $0.6 million in other income in the consolidated statements of operations.

No receivable has been recorded related to the potential reimbursement in the consolidated financial statements as of January 31, 2021.

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

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Costs in excess of billings, net

Substantially all of the $1.2 million and $1.6 million contract liabilities balances at January 31, 2020 and 2019, respectively, were recognized in revenues during 2020 and 2019, respectively.

In addition to these amounts, the Company has recorded $0.2 million of unbilled receivables from its subsidiaries in the Middle East in prepaid expenses and other current assets on its consolidated balance sheet as of January 31, 2021.

The Company had no unbilled receivables recorded as of January 31, 2020.

Practical expedients:

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Revolving lines - foreign

Term loan - foreign

Finance lease obligations

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Revolving lines - foreign

Term loan - foreign

Finance lease obligations

Paycheck Protection Program Loan.

On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million.

Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022.

During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses.

The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program.

Guidance from the American Institute of Certified Public Accountants' ("AICPA") Technical Question and Answer Section 3200.18 states that if a company expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standards ("IAS") 20 - Accounting for Government Grants and Disclosure of Government Assistance to account for the PPP loan.

The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided.

Therefore, the Company has recognized the earnings impact on a systematic basis over the periods in which the Company recognized as expenses the related costs for which the grants were intended to compensate.

We noted that all of these expenses, and thus the related earnings impact, were incurred during the year ended January 31, 2021.

The IAS 20 guidance allows for recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses.

The Company has elected the former option, to make a more clear distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness.

As such, we have recognized the proceeds in earnings during the year ended January 31, 2021.

The amounts are recognized in other income in the consolidated statements of operations.

The Company has submitted its application and supporting documentation for forgiveness to its bank, which has submitted the application and supporting documents to the SBA.

We are currently awaiting approval of forgiveness from the SBA.

Revolving line - North America .

On September 20, 2018, the Company and certain of its U.S.

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

Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or LIBOR, plus, in each case, an applicable margin.

The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility.

Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally be payable in arrears on the last day of each interest period.

Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period.

Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility.

The facility fee is payable quarterly in arrears.

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of its North American subsidiaries.

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of assets of its North American subsidiaries.

The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc.

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In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

The Company was in compliance with these covenants as of January 31, 2020.

As of January 31, 2020, the Company had borrowed an aggregate of $8.6 million at a weighted average interest rate of 6.04%, and had $3.4 million available under the Senior Credit Facility.

The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.2 million.

The Amendment and Waiver also eliminated the Company’s ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity.