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Item 2. Management’s Discussion and Analysis

2022-09-07 compared with 2022-06-07 · 145 added, 122 removed, 74 unchanged (78% of the section changed)

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Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A.

Risk Factors included in the Company's latest Annual Report on Form 10-K. 

The Company's fiscal year ends on January 31. Years and balances described as 2022 and 2021 are for the fiscal years ended January 31, 2023 and 2022, respectively.

This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report.

Percentages set forth below in the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented.

COVID-19 Receding Impacts

The Company’s results of operations, financial condition, liquidity and cash flow in early 2021 were materially adversely affected by the COVID-19 pandemic. During 2021, the Company experienced improved results as the adverse impact of the COVID-19 pandemic diminished and delayed projects were turned to production.

The Company is not currently experiencing any significant negative impacts as a result of the COVID-19 pandemic.

Percentages set forth below in the MD&A have been rounded to the nearest percentage point. 

The war in Ukraine and resulting Russian oil and gas boycotts have added to the surge in oil prices which has impacted some of the Company's material and freight costs.

However, the Company has not experienced any direct impact from the disruption in region.

The Company does not source materials from this region, nor does it serve the market in any material nature. 

However, the Company has not experienced any direct impact from the disruption in this region.

The Company does not source materials from this region, nor does it serve this market in any material nature. 

Oil and Gas Market

Increases in oil prices helped to improve demand for the Company's products as reflected in the Company's results during the three months ended April 30, 2022 as compared to the same period in 2021.

In particular, the Company's activity level in Canada has increased significantly due to the rise in energy prices.  

Increases in oil prices helped to improve demand for the Company's products in the oil and gas markets during the three and six months ended July 31, 2022 as compared to the same periods in 2021.

In particular, the Company's activity level in Canada has increased significantly due to the rise in energy prices.  West Texas Intermediate crude oil average prices have increased from approximately $68 per barrel in 2021 to approximately $100 per barrel in 2022. 

Supply Chain Constraints and Inflationary Impacts

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Liquidity Position

On April 14, 2021, the Company entered into a purchase and sale agreement to sell its land and buildings in Lebanon, Tennessee (the "Property"), and subsequently enter into a fifteen-year lease agreement to lease back the Property.

The transaction generated net cash proceeds of $9.1 million, following the release of the escrowed amount of $0.4 million in June 2021.

The transaction provided significant liquidity for the Company, which used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs.

The Company will lease back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%.

The Company enhanced its liquidity position on September 17, 2021 when it executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”).

See further discussion of the Company's liquidity position as of April 30, 2022 in "Liquidity and capital resources" below.

The Company further enhanced its liquidity position on September 17, 2021 when it executed an extension of a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a new five-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). 

As of July 31, 2022, the Company had borrowed an aggregate of $8.6 million and had $5.9 million available under the Renewed Senior Credit Facility. 

See further discussion of the Company's liquidity position as of July 31, 2022 in "Liquidity and capital resources" below. 

Additionally, as of July 31, 2022, the Company had borrowed $8.7 million and had an additional $8.6 million of borrowing remaining available under its foreign revolving credit arrangements.

RESULTS OF OPERATIONS

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($ in thousands)

Three Months Ended April 30,

Three Months Ended July 31,

Six Months Ended July 31,

Change favorable/(unfavorable)

Percent of Net Sales

General and administrative expenses

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Interest expense, net

Other income, net

Loss from operations before income taxes

Other (expense)/income

Income from operations before income taxes

Income tax expense

Three months ended April 30, 2022 ( " current quarter " ) vs.

Three months ended April 30, 2021 ( " prior year quarter " )

Net sales were $31.2 million in the current quarter, an increase of $6.8 million, or 28%, from $24.4 million in the prior year quarter.

The increase was a result of increased sales volumes, partly due to recovery from the effects of the COVID-19 pandemic. 

Three months ended July 31, 2022 vs.

Three months ended July 31, 2021

Net sales were $37.0 million and $39.8 million in the three months ended July 31, 2022 and 2021, respectively. 

The decrease o f $2.8  million, or 7% , was a result of decreased sales volumes.

Gross profit:

Gross profit increased to $7.0 million, or 23% of net sales, in the current quarter from $4.5 million, or 18% of net sales, in the prior year quarter.

This increase was driven by higher sales volumes and project and product mix.

Gross profit was $9.9 million, or 27% of net sales, and $10.7 million, or 27% of net sales, in the three months ended July 31, 2022 and 2021, respectively.

The decrease of $0.8 million was driven primarily by lower sales volumes with a consistent gross margin.

General and administrative expenses:

General and administrative expenses increased $1.2 million, or 28%, from $4.4 million in the prior year quarter to $5.7 million in the current quarter.

Approximately $0.9 million of this increase was the result of increased incentive compensation.

This amount was based on 2021 actual payouts as compared to estimated amounts previously accrued in addition to accruals made for 2022 forecasted results as compared to the prior year quarter, where no incentive compensation was recorded.

The remainder of the increase was due to additions to headcount in support of the Company's business growth.

General and administrative expenses were $5.2 million and $5.6 million in the three months ended July 31, 2022 and 2021, respectively.

The decrease of $0.4 million, or 6%, was primarily related to lower incentive compensation costs based on 2022 forecasted results.

Selling expenses:

Selling expenses were relatively consistent, increasing slightly to $1.2 million in the current quarter, compared to $1.0 million in the prior year quarter.

Selling expenses slightly increased and were $1.3 million and $1.1 million in the three months ended July 31, 2022 and 2021, respectively.

Interest expense, net:

Net interest expense increased to $0.4 million in the current quarter from $0.2 million in the prior year quarter .

This increase was related primarily to the sale leaseback transaction for our operating facility in Tennessee entered into in April 2021. 

Other income, net:

Other income, net decreased to an income of less than $0.1 million in the current quarter, compared to approximately $0.4 million in the prior year quarter.

In the prior year quarter, the Company received grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") and Canadian Emergency Rent Subsidy ("CERS") programs.

The Company was approved for and received approximately $0.3 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the prior year quarter.

Grants to the Company under both programs ended in the second quarter of 2021.  

Loss from operations before income taxes:

Loss from operations before income taxes decreased by $0.5 million to a loss of $(0.2) million in the current quarter from a loss of $(0.7) million in the prior year quarter.

The improvement was a result of increased sales volumes and margins as described above. 

Net interest expense was $0.5 million and $0.3 million in the three months ended July 31, 2022 and 2021, respectively. 

The increase was related primarily to increased borrowings on the Renewed Senior Credit Facility and higher interest rates.

Other (expense)/income:

Other (expense)/income was expense of less than $0.1 million and income of $0.5 million in the three months ended July 31, 2022 and 2021, respectively.

The decrease was due primarily to the receipt of grants from the Canadian government for approximately $0.3 million during the three months ended July 31, 2021.

Grants to the Company under these programs ended in the second quarter of 2021.  

Income tax expense:

The Company's worldwide effective tax rates ("ETR") were (455.9%) and (24.3%) in the current quarter and the prior year quarter, respectively. The change in the ETR from the prior year quarter to the current year quarter is largely due to changes in the mix of income and loss in various jurisdictions.

The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S.

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

Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested.

The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. As such, the Company has accrued a liability of $0.4 million as of April 30, 2022 related to these taxes.

The Company's worldwide effective tax rates ("ETR") were 32% and 20% in the three months ended July 31, 2022 and 2021, respectively. The change in the ETR was largely due to changes in the mix of income and loss in various jurisdictions.

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

The resulting net loss of $(0.9) million in the current quarter was relatively consistent with the net loss of $(0.8) million in the prior year quarter. 

Net income was $1.9 million and $3.4 million in the three months ended July 31, 2022 and 2021, respectively. 

The decrease of $1.5 million was primarily due to decreased gross profit as a result of decreased sales volumes.

Six months ended  

July 31, 2022  vs. Six months ended  

July 31, 2021

Net sales were $68.2 million and $64.2 million in the six months ended July 31, 2022 and 2021, respectively.

The increase of $4.0 million, or 6%, was a result of increased sales volumes.

Gross profit:

Gross profit was $16.9 million, or 25% of net sales, and $15.2 million, or 24% of net sales, in the six months ended July 31, 2022 and 2021, respectively.

increase of $1.7 million 

was primarily driven by higher sales volumes.

General and administrative expenses:

General and administrative expenses were $10.9 million and $10.0 million in the six months ended July 31, 2022 and 2021, respectively.

The majority of the increase of $0.9 million, or 9%, was the result of increased incentive compensation costs and additions to headcount in support of the Company's business growth. 

Selling expenses:

Selling expenses were $2.6 million and $2.1 million in the six months ended July 31, 2022 and 2021, respectively. 

The increase of $0.5 million was due primarily to increased payroll and commission expenses and the additional expenses related to marketing and trade shows.

Interest expense, net:

Net interest expense was $0.9 million and $0.4 million in the six months ended July 31, 2022 and 2021, respectively.

This increase was related to the sale leaseback transaction for our operating facility in Tennessee entered into in April 2021, increased borrowings on the Renewed Senior Credit Facility and higher interest rates. 

Other (expense)/income:

Other (expense)/income was expense of less than $0.1 million and income of $0.9 million in the six months ended July 31, 2022 and 2021, respectively.

The decrease was primarily due to the receipt of grants from the Canadian government for approximately $0.7 million in the six months ended July 31, 2021.

Grants to the Company under these programs ended in the second quarter of 2021.  

Income tax expense:

The Company's worldwide ETRs were 62% and 29% in the six months ended July 31, 2022 and 2021, respectively. The change in the ETR is largely due to changes in the mix of income and loss in various jurisdictions.

Net income was $1.0 million and $2.6 million in the six months ended July 31, 2022 and 2021, respectively. The decrease of $1.6 million, or 62% was primarily the result of the increased income tax expense and the cessation of government grants in Canada.

Liquidity and capital resources

Cash and cash equivalents as of April 30, 2022 were $6.4 million compared to $8.2 million on January 31, 2022.

On April 30, 2022, $0.6 million was held in the United States, and $5.8 million was held at the Company's foreign subsidiaries. The Company's working capital was $38.7 million on April 30, 2022 compared to $40.0 million on January 31, 2022.

Of the working capital components, accounts receivable decreased by $5.6 million and cash and cash equivalents decreased by $1.8 million as the result of the movements discussed below.

As of April 30, 2022, the Company had $4.9 million of borrowing capacity under its Senior Credit Facility in North America and $6.5 million of borrowing capacity under its foreign revolving credit agreements.

The Company had $5.2 million borrowed under its Senior Credit Facility and $6.1 million borrowed under its foreign revolving credit agreements at April 30, 2022.

Net cash used in operating activities in the three months ended April 30, 2022 and in the prior year period was $7.1 million and $2.4 million, respectively.

This decrease of $4.7 million was due primarily to an increases in costs and estimated earnings in excess of billings on uncompleted contracts and a decrease in accounts receivable, partially offset by an increase in accounts payable and changes in other assets and liabilities in the current period compared to the prior year period. 

Net cash used in investing activities in the three months ended April 30, 2022 and in the prior year period was $0.3 million and $0.4 million, respectively. 

Net cash provided by financing activities in the three months ended April 30, 2022 and in the prior year period was $5.1 million and $3.9 million, respectively.

The main source of cash from financing activities during the period was net proceeds from borrowings of approximately $5.3 million under the Senior Credit Facility, as compared to the prior year period, where net repayments were approximately $4.1 million. The increase in cash provided by financing activities was offset by net proceeds of $9.1 million as a result of the sale and leaseback of the Company's land and buildings in Lebanon, Tennessee during the prior year period.

Debt totaled $26.3 million and $21.9 million as of April 30, 2022 and January 31, 2022, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.

Cash and cash equivalents as of July 31, 2022 were $6.2 million compared to $8.2 million on January 31, 2022.

On July 31, 2022, $0.2 million was held in the United States, and $6.0 million was held at the Company's foreign subsidiaries. The Company's working capital was $41.3 million on July 31, 2022 compared to $40.0 million on January 31, 2022.

Of the working capital components, accounts receivable increased by $3.3 million and cash and cash equivalents decreased by $2.0 million as the result of the movements discussed below.

As of July 31, 2022, the Company ha d $ 5 .9 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $ 8.2  million of borrowing capacity under its foreign revolving credit agreements.

The Company had $ 8.6  million borrowed under the Renewed Senior Credit Facility and $ 8.7  million borro wed under its foreign revolving credit agreements at July 31, 2022.

Net cash used in operating activities in the six months ended July 31, 2022 and 2021 was $11.2 million and $5.2 million, respectively.

This increase of $6.0 million was due primarily to increases in accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts and unbilled accounts receivable, as well as a decrease in accounts payable. 

Net cash used in investing activities in the six months ended July 31, 2022 and 2021 was $2.0 million and $0.9 million, respectively.

The increase of $1.1 million was due primarily to expansion activities in the United Arab Emirates in preparation for the Company's intended relocation from Fujairah to Abu Dhabi, as well as capital expenditures in Canada. 

Net cash provided by financing activities in the six months ended July 31, 2022 and 2021 was $10.7 million and $4.3 million, respectively.

The main source of cash from financing activities during the six months ended July 31, 2022 was net proceeds from borrowings of approximately $11.3 million under the Company's credit facilities, as compared to the six months ended July 31, 2021, when net repayments were approximately $3.6 million.

Additionally, during the six months ended July 31, 2021, the Company received net proceeds of $9.5 million as a result of the sale and leaseback of its land and buildings in Lebanon, Tennessee (the "Property") . Debt totaled $32.1 million and $21.9 million as of July 31, 2022 and January 31, 2022, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.

Treasury stock.

There were no purchases of shares of the Company's common stock made by or on behalf of the Company during the three months ended April 30, 2022.

On October 4, 2021, the Company's Board of Directors approved a share repurchase program, which authorizes the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock.

Stock repurchases are permitted to be executed through open market or privately negotiated transactions over the course of 12 months, depending upon current market conditions and other factors. As of April 30, 2022, the Company has used $2.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock.

Stock repurchases are permitted to be executed through open market or privately negotiated transactions over the course of 12 months, depending upon current market conditions and other factors. As of July 31, 2022, the Company has used $ 2.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock.

On July 26, 2022, the Company retired all treasury stock previously repurchased under this share repurchase program.

The retirement was recorded as a reduction to common stock based on the par value of the shares, and the excess over par value was recorded as 

an increase to accumulated deficit in accordance with ASC 505-30, Equity -Treasury Stock.

Revolving lines - North America

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

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

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”).

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

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million Renewed Senior Credit Facility.

The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc.

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is a borrower under the Renewed Senior Credit Facility (collectively, the “Borrowers”).

The Borrowers will use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures;

The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures;

(ii) to fund ongoing working capital needs;

and (iii) for other corporate purposes, including potentially additional stock repurchases.

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

The applicable margin will be based on an FCCR range.

Interest on alternate base rate borrowings will be the alternate base rate as defined in the Renewed Senior Credit Facility plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period.

Interest on LIBOR or LIBOR successor rate borrowings will be the LIBOR rate as defined in the Renewed Senior Credit Facility plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period. Additionally, the Borrowers will pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility. 

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility will be secured by substantially all of the North American Loan Parties’

The Renewed Senior Credit Facility will mature on September 20, 2026.

Borrowings under the Renewed Senior Credit Facility bears interest at a rate equal to an alternate base rate, London Inter-Bank Offered Rate ("LIBOR") or a LIBOR successor rate index, plus, in each case, an applicable margin.

The applicable margin is based on a fixed charge coverage ratio ("FCCR") range.  Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period.

Interest on LIBOR or LIBOR successor rate borrowings is the LIBOR rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility.

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’

The Renewed Senior Credit Facility matures on September 20, 2026.

Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’

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Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million. 

The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 if for any five consecutive days the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million.

As of April 30, 2022, the calculated ratio was greater than 1.10 to 1.00.

In order to cure any future breach of the FCCR 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 Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the covenant.

The Company was in compliance with these covenants as of April 30, 2022.

The Renewed Senior Credit Facility also contains a free cash flow financial covenant (the "FCCR covenant") requiring the North American Loan Parties to achieve a ratio of its EBITDA to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million.

As of July 31, 2022, the calculated ratio was

greater than 1.10 to 1.00.

The Company was in compliance with these covena nts as of July 31, 2022.

The Renewed Senior Credit Facility contains customary events of default.

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Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.

As of April 30, 2022, the Company had borrowed an aggregate of $5.2 million at a rate of 4.5% and had $4.9 million available under the Renewed Senior Credit Facility.

As of January 31, 2022, the Company had borrowed an aggregate of $0.6 million and had $8.5 million available under the Renewed Senior Credit Facility, before application of a $2.5 million availability block that has subsequently been removed completely based on the Company's financial performance.

As of July 31 , 2022, the Company had borrowed an aggregate of $ 8.6  million at a rate of 6.50 % and had $ 5 .9 million available under the Renewed Senior Credit Facility.

As of January 31, 2022, the Company had borrowed an aggregate of $0.6 million and had $8.5 million available under the Renewed 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 also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as discussed further below.

The Company has a revolving line for 8.0 million U.A.E.

Dirhams (approximately $2.2 million at April 30, 2022) from a bank in the U.A.E.

Dirhams (approximately $2.2 million at July 31, 2022) from a bank in the U.A.E.

The facility has an interest rate of approximately 5.05% and was originally set to expire in November 2020, however, the expiration was extended due to the COVID-19 pandemic.

The Company has submitted final documentation to complete the renewal process, and is awaiting official notification from the bank of the renewal completion.

This process is expected to be completed in June 2022.

The Company has a second revolving line for 17.5 million U.A.E.

Dirhams (approximately $4.8 million at April 30, 2022) from a bank in the U.A.E.

The facility was renewed in July 2022 and is now set to expire in July 2025.

The Company has a revolving line for 17.5 million U.A.E.

Dirhams (approximately $4.8 million at July 31, 2022) from a bank in the U.A.E.

The facility has an interest rate of approximately 5.78% and is set to expire in January 2023.

The Company has a third credit agreement for project financing with a bank in the U.A.E.

The Company has a credit agreement for project financing with a bank in the U.A.E.

for 1.0 million U.A.E.

Dirhams (approximately $0.8 million at April 30, 2022).

Dirhams (approximately $0.3 million at July 31, 2022).

This credit arrangement is in the form of project financing at rates competitive in the U.A.E.

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The facility has an interest rate of approximately 5.78% and is expected to expire in June 2023 in connection with the completion of the project.

The Company has a credit agreement for project financing with a bank in the U.A.E.

for 2.0 million U.A.E.

Dirhams (approximately $0.5 million at July 31, 2022).

This credit arrangement is in the form of project financing at rates competitive in the U.A.E.

The line is secured by the contract for a project being financed by the Company's U.A.E.

The facility has an interest rate of approximately 6.53% and is expected to expire in May 2024 in connection with the completion of the project.

In June 2021, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $5.

3  million at July 31, 2022).

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) of the Company's Egyptian subsidiary.

Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 8.00% and expired in June 2022, however t he Company has started the renewal process for this credit arrangement.

In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds.

As this project has progressed and the Company has made collections, the facility has decreased to a current amount of 22.7 million Egyptian Pounds (approximatel y $1.

2  mi llion at July 31, 2022).

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

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

The facility has an interest rate of approximately 8.00% and is expected to expire in November 2022 in connection with the completion of the project.

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 20.0 million Saudi Riyal (approximately $5.3 million at July 31, 2022) This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia.

The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary.

The facility has an interest rate of approximately 6.5% and is set to expire in April 2023.

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 June 2021, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $5.4 million at April 30, 2022).

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

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

In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds (approximately $1.5 million at April 30, 2022).

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

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

The facility has an interest rate of approximately 8.00% and is expected to expire in June 2022 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 only a portion of the subsidiaries' debt, including foreign debt.

As of April 30, 2022, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 million. 

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

and Egypt as of April 30, 2022. On April 30, 2022, 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, two of which have a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for the Egypt credit arrangement.

Based on these base rates, as of April 30, 2022, the Company's interest rates ranged from 4.50% to 8.0%, with a weighted average rate of 7.63%, and the Company had facility limits totaling $14.9 million under these credit arrangements.

As of April 30, 2022, $2.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees.

Additionally, as of April 30, 2022, the Company had borrowed $6.1 million, and had an additional $6.5 million of borrowing remaining available under the foreign revolving credit arrangements.

The foreign revolving lines balances as of April 30, 2022 and January 31, 2022, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

As of July 31, 2022, the amount of foreign subsidiary debt guaranteed by the Company was approxim ately $0.6 million. 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of July 31, 2022. On July 31, 2022, 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, two of which have a minimum interest rate of 4.5% per annum, based on the stated interest rate in the agreement for the Egypt credit arrangement, and based on the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement.

Based on these base rates, as of July 31, 2022, the Company's interest rates ranged from 5.05% to 8.0%, with a weighted average rate of 7.21%, and the Company had facility limits totaling $ 19.6  million under these credit arrangements.

As of July 31, 2022 , 

$2.6  million o f availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees.

Additionally, as of July 31, 2022 , the Company had borrow ed $ 8.7  million  and had an additional $ 8.2  million of borrowing remaining available under the foreign revolving credit arrangements.

The foreign revolving lines balances as of July 31, 2022 and January 31, 2022, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

Finance obligation - buildings and land.

 On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement").

Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for a purchase price of $10.4 million.

The transaction generated net cash proceeds of $9.1 million, following the release of the escrowed amount in June 2021 discussed below.

The Company used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs.

Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%.

Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.

At closing, $0.4 million was placed in a short-term escrow account to cover certain post-closing contingencies that may arise.

The contingencies were resolved in May 2021 and the Company received the escrowed funds in June 2021.

Pursuant to the terms of the Purchase and Sale Agreement, the Company sold the Property for $10.4 million.

The transaction generated net cash proceeds of $9.1 million.

Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender. 

The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs.

Concurrent with the sale of the Property, the Company entered into a 15-year lease agreement (the “Lease Agreement”), whereby the Company is leasing back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%.

Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  

In accordance with ASC Topic 842, "Leases", this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset.

The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.1 million is recognized in current maturities of long-term debt and the long-term portion of $9.3 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of January 31, 2022. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

Prior additional liquidity from the CEWS and CERS Programs

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

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

PPCA was approved for and received approximately $0.6 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the year ended January 31, 2022.

Grants to the Company under both programs ended in the second quarter of 2021.

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

The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. 

The current portion of the finance obligation of $0.1 million is recognized in current maturities of long-term debt and the long-term portion of $9.3 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of January 31, 2022. T he net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

Liquidity from Canadian government grants

During 2020 and 2021, the Company's subsidiary, Perma-Pipe Canada, Ltd., received relief in the form of grants from the Canadian government of approximately $0.7 million during the year ended January 31, 2022.

Grants to the Company ended in the second quarter of 2021.

The proceeds from these grants were recognized in other (expense)/income in the consolidated statement of operations.

Accounts receivable: 

In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million.

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

Nevertheless, the Company has collected approximately $38.3 million as of April 30, 2022, with a remaining balance due in the amount of $3.6 million.

Included in this balance is an amount of $3.4 million, which pertains to retention clauses within the agreements of the Company's customer, and which become payable by the customer when this project is fully tested and commissioned.

In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $1.4 million of this retention amount was reclassified to a long-term receivable account.

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million.

The system has not yet been commissioned by the customer.

Nevertheless, the Company has settled appro ximately $ 39.2  million as of July 31, 2022 , with a remaining balance due in the amount of $ 2.7  million , all of w hich pertains to retention clauses within the agreements of the Company's customer, and which become payable by the customer when this project is fully tested and commissioned.

1  million of this retention amount is reclassified to a long-term receivable account.

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

The Company continues to engage with the customer to ensure full payment of open balances, and during April 2022 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer.

The Company continues to engage with the customer to ensure full payment of open balances, and during June 2022 received a partial payment to settle $0.9 million of the customer's outstanding balances.

Further, the Company has been engaged by the customer to perform additional work in 2022 under customary trade terms that supports the continued cooperation between the Company and the customer.

As a result, the Company did not reserve any allowance against this amount as of April 30, 2022.

As a result, the Company did not reserve any allowance against the remaining outstanding balances as of July 31, 2022.

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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis