10-Q 1 ppih2018q210q.htm 10-Q Q2-2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

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

For the quarterly period ended July 31, 2018
Commission File No. 0-18370
Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware | 36-3922969
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
6410 W. Howard Street, Niles, Illinois | 60714
(Address of principal executive offices) | (Zip Code)

(847) 966-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
On September 7, 2018, there were 7,876,237 shares of the registrant's common stock outstanding.

Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended July 31, 2018
TABLE OF CONTENTS

Item |  | Page
Part I | Financial Information |
1. | Financial Statements |
| Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended July 31, 2018 and 2017 | 2
| Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Six Months Ended July 31, 2018 and 2017 | 3
| Consolidated Balance Sheets as of July 31, 2018 (Unaudited) and January 31, 2018 | 4
| Consolidated Statements of Stockholders' Equity as of July 31, 2018 (Unaudited) and January 31, 2018 | 5
| Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July 31, 2018 and 2017 | 6
| Notes to Consolidated Financial Statements (Unaudited) | 8
2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 17
4. | Controls and Procedures | 23
Part II | Other Information |
6. | Exhibits | 24
Signatures | 25

PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

| Three Months Ended July 31, |  | Six Months Ended July 31,
| 2018 | 2017 |  | 2018 | 2017
Net sales |  | $32,325 |  |  | $26,852 |  |  |  | $61,214 |  |  | $50,353 |
Cost of sales | 26,432 |  | 23,794 |  |  | 51,096 |  | 45,510 |
Gross profit | 5,893 |  | 3,058 |  |  | 10,118 |  | 4,843 |
Operating expenses |  |  |  |  |
General and administrative expenses | 3,924 |  | 3,856 |  |  | 7,906 | 8,142 |
Selling expenses | 1,321 |  | 1,307 |  |  | 2,463 | 2,623 |
Total operating expenses | 5,245 |  | 5,163 |  |  | 10,369 |  | 10,765 |
Income/(loss) from operations | 648 |  | (2,105 | ) |  | (251 | ) | (5,922 | )
Interest expense, net | 284 |  | 157 |  |  | 550 |  | 314 |
Income/(loss) from operations before income taxes | 364 |  | (2,262 | ) |  | (801 | ) | (6,236 | )
Income tax expense/(benefit) | 639 |  | (564 | ) |  | 591 |  | (1,049 | )
Net loss |  | ($275 | ) |  | ($1,698 | ) |  |  | ($1,392 | ) | ($5,187)
Weighted average common shares outstanding |  |  |  |  |
Basic and diluted | 7,820 |  | 7,679 |  |  | 7,769 |  | 7,645 |
Loss per share |  |  |  |  |
Basic and diluted | ($0.04) |  | ($0.22 | ) |  | ($0.18) |  | ($0.68 | )

See accompanying notes to consolidated financial statements.
Note: Earnings per share calculations could be impacted by rounding.
2

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)

| Three Months Ended July 31, | Six Months Ended July 31,
| 2018 |  | 2017 |  | 2018 |  | 2017 |
Net loss |  | ($275 | ) |  | ($1,698 | ) |  | ($1,392 | ) |  | ($5,187 | )
Other comprehensive (loss) income |  |  |  |
Foreign currency translation adjustments, net of tax | (324 | ) | 940 |  | (987 | ) | 1,072 |
Unrealized gain on marketable security, net of tax | — |  | (87 | ) | — |  | (92 | )
Other comprehensive (loss) income | (324 | ) | 853 |  | (987 | ) | 980 |
Comprehensive loss |  | ($599 | ) |  | ($845 | ) |  | ($2,379 | ) |  | ($4,207 | )

See accompanying notes to consolidated financial statements.
3

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands except per share data) | July 31, 2018 |  | January 31, 2018 |
ASSETS | Unaudited |  |
Current assets |  |
Cash and cash equivalents |  | $5,247 |  |  | $7,084 |
Restricted cash | 1,108 |  | 1,237 |
Trade accounts receivable, less allowance for doubtful accounts of $435 at July 31, 2018 and $469 at January 31, 2018 | 29,703 |  | 32,936 |
Inventories, net | 14,707 |  | 16,856 |
Prepaid expenses and other current assets | 3,761 |  | 2,703 |
Contract assets | 2,014 |  | 1,502 |
Total current assets | 56,540 |  | 62,318 |
Property, plant and equipment, net of accumulated depreciation | 31,967 |  | 34,509 |
Other assets |  |
Deferred tax assets - long-term | 189 |  | 391 |
Goodwill | 2,287 |  | 2,423 |
Other assets | 5,025 |  | 4,943 |
Total other assets | 7,501 |  | 7,757 |
Total assets |  | $96,008 |  |  | $104,584 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |
Current liabilities |  |
Trade accounts payable |  | $10,806 |  |  | $14,186 |
Accrued compensation and payroll taxes | 1,338 |  | 1,580 |
Commissions and management incentives payable | 1,202 |  | 787 |
Revolving line North America | 8,385 |  | 7,273 |
Current maturities of long-term debt | 1,720 |  | 753 |
Customers' deposits | 2,859 |  | 5,236 |
Outside commissions payable | 1,713 |  | 1,800 |
Contract liability | 546 |  | 1,967 |
Other accrued liabilities | 3,101 |  | 4,259 |
Income taxes payable | 879 |  | 1,339 |
Total current liabilities | 32,549 |  | 39,180 |
Long-term liabilities |  |
Long-term debt, less current maturities | 7,079 |  | 7,728 |
Deferred compensation liabilities | 3,460 |  | 4,098 |
Deferred tax liabilities - long-term | 1,167 |  | 1,242 |
Other long-term liabilities | 542 |  | 524 |
Total long-term liabilities | 12,248 |  | 13,592 |
Stockholders' equity |  |
Common stock, $.01 par value, authorized 50,000 shares; 7,876 issued and outstanding at July 31, 2018 and 7,717 issued and outstanding at January 31, 2018 | 79 |  | 77 |
Additional paid-in capital | 58,080 |  | 56,304 |
Accumulated deficit | (4,495 | ) | (3,103 | )
Accumulated other comprehensive loss | (2,453 | ) | (1,466 | )
Total stockholders' equity | 51,211 |  | 51,812 |
Total liabilities and stockholders' equity |  | $96,008 |  |  | $104,584 |

See accompanying notes to consolidated financial statements.
4

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(In thousands, except share data)

| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity
Total stockholders' equity at January 31, 2018 | $77 | $56,304 | ($3,103) | ($1,466) | $51,812
Net loss |  |  | (1,392 | ) |  | (1,392 | )
Common stock issued under stock plans, net of shares used for tax withholding | 2 |  | 1,065 |  |  |  | 1,067 |
Stock-based compensation expense |  | 711 |  |  |  | 711 |
Foreign currency translation adjustment |  |  |  | (987 | ) | (987 | )
Total stockholders' equity at July 31, 2018 | $79 | $58,080 | ($4,495) | ($2,453) | $51,211

Shares | 2018 |  | 2017 |
Balances at beginning of year | 7,716,542 |  | 7,595,509 |
Treasury stock released | — |  | 26,753 |
Shares issued | 159,477 |  | 94,280 |
Balances at period end | 7,876,019 |  | 7,716,542 |

See accompanying notes to consolidated financial statements.
5

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands) | Six Months Ended July 31,
| 2018 |  | 2017 |
Operating activities |  |
Net loss |  | ($1,392 | ) |  | ($5,187 | )
Adjustments to reconcile net loss to net cash flows used in operating activities |  |
Depreciation and amortization | 2,344 |  | 2,509 |
Deferred tax expense (benefit) | 202 |  | (260 | )
Equity-based compensation expense | 711 |  | 521 |
Loss on disposal of fixed assets | 14 |  | 2 |
Provision on uncollectible accounts | (31 | ) | (298 | )
Gain from sale of marketable securities | — |  | (142 | )
Changes in operating assets and liabilities |  |
Accounts receivable | 2,622 |  | 5,355 |
Inventories | 1,985 |  | (2,317 | )
Change in contract assets and contract liabilities | (1,932 | ) | (1,065 | )
Accounts payable | (4,071 | ) | (713 | )
Accrued compensation and payroll taxes | 257 |  | (1,019 | )
Customers' deposits | (2,370 | ) | 489 |
Income taxes receivable and payable | (405 | ) | (1,442 | )
Prepaid expenses and other current assets | (1,127 | ) | (513 | )
Other assets and liabilities | (263 | ) | 1,252 |
Net cash used in operating activities | (3,456 | ) | (2,828 | )
Investing activities |  |
Capital expenditures | (571 | ) | (1,526 | )
Proceeds from sales of marketable securities | — |  | 142 |
Proceeds from sales of property and equipment | — |  | 1 |
Net cash used in investing activities | (571 | ) | (1,383 | )
Financing activities |  |
Proceeds from revolving lines | 20,082 |  | 16,936 |
Payments of debt on revolving lines of credit | (17,618 | ) | (13,237 | )
Payments of other debt | (176 | ) | (120 | )
(Decrease) increase in drafts payable | (27 | ) | 285 |
Payments (borrowings) on capitalized lease obligations | (154 | ) | 567 |
Release of treasury stock | — |  | 170 |
Stock options exercised and taxes related to restricted shares vested | 252 |  | (256 | )
Net cash provided by financing activities | 2,359 |  | 4,345 |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (298 | ) | 604 |
Net (decrease) increase in cash, cash equivalents and restricted cash | (1,966 | ) | 738 |
Cash, cash equivalents and restricted cash - beginning of period | 8,321 |  | 8,701 |
Cash, cash equivalents and restricted cash - end of period |  | $6,355 |  |  | $9,439 |
Supplemental cash flow information |  |
Interest paid |  | $588 |  |  | $362 |
Income taxes paid | 797 |  | 524 |
Fixed assets acquired under capital leases | — |  | 697 |
Funds held in escrow related to the sale of Filtration assets | — |  | 250 |

6

See accompanying notes to consolidated financial statements.
7

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JULY 31, 2018
(Tabular amounts presented in thousands, except per share amounts)
Note 1 - Basis of presentation
The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries ("PPIH", "Company", or "Registrant", "we", or "us") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2018 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2018 and 2017 are for the three and six months ended July 31, 2018 and 2017, respectively.
Note 2 - Business segment reporting
PPIH is engaged in the manufacture and sale of products in one segment: Piping Systems. Piping Systems engineers, designs, manufactures and sells specialty piping, leak detection and location systems. Specialty piping systems include (i) industrial and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, (ii) insulated and jacketed piping systems for district heating and cooling, municipal freeze protection, oil & gas, mining and industrial applications, and (iii) the coating and/or insulation of oil and gas gathering flow and long lines for oil and mineral transportation. The Company's leak detection and location systems are sold with its piping systems and on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.
Note 3 - Accounts receivable
The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the U.A.E. and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write-off is recorded against the allowance for doubtful accounts.
One of the Company’s accounts receivable in the total amount of $5.4 million as of January 31, 2018 (inclusive of a retention receivable amount of $3.7 million, of which $3.2 million was included in the balance of other long-term assets as of July 31, 2018 and January 31, 2018, due to the long-term nature of the receivables) has been outstanding for several years as of July 31, 2018. The Company completed all of its deliverables in 2015, and has been engaged in ongoing active efforts to collect this amount. In the second quarter of 2018, the Company received a payment of approximately $0.5 million, which reduced the balance of this receivable. As a result, the Company did not reserve any allowance against this receivable as of July 31, 2018. The Company continues to engage with the customer to ensure full payment of open balances. However, if the Company’s efforts to collect on this account are not successful in fiscal 2018, then the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. As of July 31, 2018, this receivable balance, inclusive of a retention receivable amount, was $4.9 million.
8

For the three months ended July 31, 2018 and 2017, one customer accounted for 13%, and no individual customer accounted for more than 10% of the Company's consolidated net sales. For the six months ended July 31, 2018 and 2017, two customers accounted for 23%, and no individual customer accounted for more than 10% of the Company's consolidated net sales.
At July 31, 2018, one customer accounted for 15% of all accounts receivable. Three customers accounted for 35% of all accounts receivable at January 31, 2018.
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 is recorded as an adjustment to the opening balance of retained earnings while periods prior to the adoption date are not adjusted and continue to be reported in accordance with the accounting policies in effect for those periods.
The Company conducted a complete and thorough analysis of each single element of the five-step model of Topic 606 and concluded that there is no material impact to the Company upon the adoption of the new standard. As a result, there was no cumulative adjustment required to the opening balances of retained earnings, contract assets, or contract liabilities as of February 1, 2018.
Revenue from contracts with customers:
The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.
The Company’s standard revenue transactions are classified in to two main categories:

1) | Systems - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated piping systems, insulates subsea flowline pipe or subsea oil production equipment. Additionally, this systems classification also includes coating applied to pipes and structures which are provided by the customer.

2) | Products - which include cables, leak detection products, heat trace products sold under the PermAlert brand name, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

The Systems revenue class has generally accounted for more than 90% of the Company’s total revenue and is recognized over time. The remaining revenue (Product class) is recognized when goods are shipped or services are performed. A breakdown of the Company's revenues by revenue class for the three and six months ended 2018 and 2017 are as follows:
9

| Three Months Ended July 31, | Six Months Ended July 31,
| 2018 | 2017 | 2018 | 2017
| Sales | % to Total | Sales | % to Total | Sales | % to Total | Sales | % to Total
Products | 2,578 |  | 8 | % | 1,995 |  | 7 | % | 5,007 |  | 8 | % | 3,326 |  | 7 | %
Specialty Piping Systems and Coating |  |  |  |  |  |  |  |
Revenue recognized under input method | 9,807 |  | 30 | % | 14,138 |  | 53 | % | 20,909 |  | 34 | % | 23,254 |  | 46 | %
Revenue recognized under output method | 19,940 |  | 62 | % | 10,719 |  | 40 | % | 35,298 |  | 58 | % | 23,773 |  | 47 | %
Total | 32,325 |  | 100 | % | 26,852 |  | 100 | % | 61,214 |  | 100 | % | 50,353 |  | 100 | %

Most of the Company’s revenue is recognized over time as the manufacturing process progresses because one of the following conditions exist:

1) | the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or

2) | the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

The U.S. operating entities measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method (an input method). Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor, and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.
All other operating entities measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract (output method). Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped.
Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.
Contract assets and liabilities:
Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.
10

The Company anticipates that substantially all costs incurred for uncompleted contracts as of July 31, 2018 will be billed and collected within one year.
The following tables set forth the activity in contract assets and liabilities. The Company expects to recognize the remaining balance within one year.

| Contract Assets
Balance January 31, 2018 |  | $1,502 |
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (1,085 | )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 1,417 |
Closing Balance at April 30, 2018 | 1,834 |
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (1,395 | )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 1,575 |
Closing Balance at July 31, 2018 |  | $2,014 |

| Contract Liabilities
Balance January 31, 2018 |  | $1,967 |
Revenue recognized during the period for uncompleted contracts from the prior period | (1,810 | )
New contracts entered into that are uncompleted at the end of the current period | 413 |
Closing Balance at April 30, 2018 | 570 |
Revenue recognized during the period for uncompleted contracts from the prior period | (422 | )
New contracts entered into that are uncompleted at the end of the current period | 398 |
Closing Balance at July 31, 2018 |  | $546 |

Practical expedients:
Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies practical expedient for these types of costs and as such expensed in the period incurred.
As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.
Note 5 - Income taxes
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates ("U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
11

The Company's effective tax rate ("ETR") from operations for the second quarter and year-to-date was 176% and (74)%, compared to 25% and 17% during the respective prior year periods. The change in the ETR from the prior year-to-date to the current year-to-date was in large part due to the changes in net income by jurisdiction. Additional factors include the tax impact of Canadian business combination which occurred in the prior year, and the prior year inclusion of the U.A.E., India, and Saudi Arabia in the annual effective tax rate (“AETR”).
The amount of unrecognized tax benefits, including interest and penalties, at July 31, 2018, recorded in other long-term liabilities was $0.1 million, all of which would impact the Company’s ETR if recognized.
The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018 and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. In addition, in 2017 the Company was subject to the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018 and July 31, 2018. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make future adjustments to its provisional amounts. Furthermore, the Company has considered the impact of the global intangible low-taxed income (GILTI) provision during the quarter and has determined that there was an inclusion of $0.4 million based on year-to-date figures. The Company has elected to account for the impact of GILTI as a current period expense when incurred, however due to the net operating losses ("NOLs") available, along with the valuation allowance in the U.S. this had no impact to the current quarter tax expense, and no additional expense was recorded for this. The accounting for the tax effects of the Tax Act will be completed in 2018.
Provisional amounts for the foregoing income tax effects of the Tax Act have been recorded as of July 31, 2018 and are subject to change during 2018.
Note 6 - Impairment of long-lived assets
The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. The company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards. There was no impairment of long-lived assets for the three and six months ended July 31, 2018 and 2017.
Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of July 31, 2018 and January 31, 2018 was attributable to the purchase of Perma-Pipe Canada, Ltd.

| January 31, 2018 | Foreign exchange change effect | July 31, 2018
Goodwill |  | $2,423 |  |  | ($136 | ) |  | $2,287 |

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 of goodwill for the three and six months ended July 31, 2018 and 2017.
12

Note 7 - Stock-based compensation
At July 31, 2018, the Company had one incentive stock plan under which new equity incentive awards may be granted:

• | 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which stockholders approved in June 2017.

The Company has prior incentive plans under which previously granted awards remain outstanding, but under which no new awards may be granted. At July 31, 2018, the Company had reserved a total of 938,565 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuance pursuant to unvested or unexercised prior awards, and shares for new grants or issuance pursuant to the 2017 Plan.
While the 2017 Plan provides for the grant of deferred shares, non-qualified stock options, incentive stock options, restricted shares, restricted stock units, and performance-based restricted stock units intended to qualify under section 422 of the Internal Revenue Code, to date the Company has issued only restricted shares and restricted stock units under the 2017 Plan and currently intends to continue this practice. The 2017 Plan authorizes awards to officers, employees, consultants, and directors.
The Company has equity-based compensation awards that can be granted to eligible employees, officers or directors. The following is the equity-based compensation expense:

| Three Months Ended July 31, | Six Months Ended July 31,
| 2018 |  | 2017 |  | 2018 |  | 2017 |
Stock-based compensation expense |  | $9 |  |  | $65 |  |  | $23 |  |  | $59 |
Restricted stock-based compensation expense |  | $432 |  |  | $452 |  |  | $688 |  |  | $647 |

Stock Options
The following tables summarize the Company's stock option activity:

Option activity | No. of Shares UnderlyingOptions | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value
Outstanding at January 31, 2018 | 358 |  |  | $9.44 |  | 4.0 |  | $482 |
Exercised | (37 | ) | 6.88 |  |  | 37 |
Expired or forfeited | (53 | ) | 17.14 |  |  |
Outstanding end of period | 268 |  | 8.42 |  | 4.1 | 392 |
Exercisable end of period | 257 |  |  | $8.48 |  | 3.9 |  | $370 |

Unvested option activity | No. of Shares UnderlyingOptions | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value
Outstanding at January 31, 2018 | 31 |  |  | $8.24 |  |  | $50 |
Vested | (14 | ) |  |
Expired or forfeited | (6 | ) |  |  |
Outstanding end of period | 11 |  |  | $7.00 |  |  | $23 |

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As of July 31, 2018, there was less than $0.1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a weighted average period of 1.6 years.
Restricted stock
The following table summarizes the Company's restricted stock activity for the year:

Restricted stock activity | Restricted Shares | Weighted Average Grant Price Per Share | Aggregate Intrinsic Value
Outstanding (unvested) at January 31, 2018 | 360 |  |  | $9.05 |  |  | $3,254 |
Granted | 124 |  | 9.75 |  |
Vested and issued | (88 | ) |  |
Forfeited | (63 | ) | 7.19 |  |
Outstanding (unvested) end of period | 333 |  |  | $9.05 |  |  | $3,022 |

As of July 31, 2018, there was $1.9 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. The expense is expected to be recognized over a period of 4.0 years.
Based upon certain second quarter 2018 matters, including the share settlement to a retiring board director, the Company changed the accounting for the deferred stock compensation arrangements granted to directors from liability accounting treatment to equity accounting treatment and, as such, classified $0.7 million from a liability to additional paid in capital.
Note 8 - Earnings per share

| Three Months Ended July 31, | Six Months Ended July 31,
| 2018 | 2017 | 2018 | 2017
Basic weighted average common shares outstanding | 7,820 |  | 7,679 |  | 7,769 |  | 7,645 |
Dilutive effect of equity compensation plans | — |  | — |  | — |  | — |
Weighted average common shares outstanding assuming full dilution | 7,820 |  | 7,679 |  | 7,769 |  | 7,645 |
Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares | 178 |  | 163 |  | 178 |  | 163 |
Stock options with an exercise price below the average market price | 90 |  | 255 |  | 90 |  | 255 |

Note 9 - Debt
Debt totaled $17.2 million at July 31, 2018, a net increase of $1.4 million since January 31, 2018.
Revolving lines North America. On September 24, 2014, the Company entered into a Credit and Security Agreement with a financial institution (as amended, "Credit Agreement"). Under the terms of the Credit Agreement, which matures on September 25, 2018, the Company can borrow up to a combined $15.0 million in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and require achieving a minimum fixed charge coverage ratio with respective performance metrics as defined by the Credit Agreement if a minimum availability is not met. In a seventh amendment
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to the Credit Agreement executed on December 14, 2017, the lenders increased the borrowing limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017.
On June 5, 2018, the Company completed an eighth amendment to the Credit Agreement. The lenders extended the minimum availability requirements for the Company’s Canadian subsidiary through August 1, 2018. Furthermore, the lenders waived the technical reporting event of default which resulted from the Company applying a non-conforming method in calculating the Canadian availability as of April 30, 2018. Based on the waiver received on June 5, 2018, the Company was in compliance with all covenants under the Credit Agreement as of April 30, 2018, and the lenders extended the minimum availability requirements for the Company’s Canadian subsidiary, through August 1, 2018. On August 1, 2018 the Company received a ninth amendment to the Credit Agreement, in which the lenders adjusted the minimum availability requirements for borrowers in the U.S. and Canada through September 15, 2018. As of July 31, 2018, the Company was in compliance with all covenants under the Credit Agreement. The Credit Agreement balances as of July 31, 2018 and January 31, 2018 were included as current liabilities in the Company's consolidated balance sheets, because the Credit Agreement has a subjective acceleration clause, and expires in less than 12 months.
The Credit Agreement will expire on September 25, 2018. See “Note 13 – Subsequent events” for information on the
Company’s potential new replacement credit facility.
Interest rates vary based on the average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. On July 31, 2018, the Company had borrowed $8.4 million at 10.0% and 8.7% and had $0.9 million available to it under the revolving line of credit. In addition, $0.2 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.
Revolving lines foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On July 31, 2018, the Company was in compliance with the covenants under the credit arrangements. On July 31, 2018, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On July 31, 2018, the Company's interest rates ranged from 5.0% to 6.5%, and the Company could borrow $10.4 million under these credit arrangements. On July 31, 2018, $4.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On July 31, 2018, the Company had borrowed $1.2 million, and had an additional $4.3 million available. The foreign revolving lines balances as of July 31, and January 31, 2018, were included as current maturities of long-term debt in the Company's consolidated balance sheets.
Mortgages. On July 28, 2016, the Company borrowed 8.0 million CAD (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada, that matures on December 23, 2042. The interest rate is variable, currently at 5.8%, with monthly payments of 36 thousand CAD (approximately $28 thousand) for interest; and monthly payments of 27 thousand CAD (approximately $20 thousand) for principal. Principal payments began January 2018.
On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.
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Capital Leases. In 2017, the Company obtained three capital leases for 1.1 million CAD (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these capital leases were from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature from April 30, 2021 to September 29, 2022.
In 2014, the Company obtained two capital leases for 0.9 million CAD (approximately $0.9 million at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 3.25% per annum with monthly principal and interest payments of 14 thousand CAD. These leases matured on June 25, 2018
Note 10 - Restricted cash
Restricted cash held by foreign subsidiaries was $1.1 million as of July 31, 2018 and $1.2 million as of January 31, 2018. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.

| Six Months Ended July 31,
| 2018 |  | 2017 |
Cash and cash equivalents |  | $5,247 |  |  | $8,546 |
Restricted cash | 1,108 |  | 893 |
Cash, cash equivalents and restricted cash shown in the statement of cashflows |  | $6,355 |  |  | $9,439 |

Note 11 - Fair value
The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value, because the majority of the amounts outstanding accrue interest at variable market rates.
Note 12 - Recent accounting pronouncements
In June 2018, the FASB issued an update to Topic 718, which is intended to reduce costs and complexity, and improve financial reporting for share-based payments issued to non-employees. ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company has evaluated the effect that this standard will have on its consolidated financial statements and related disclosures, and has determined that this guidance does not have any impact on its results of operations or financial position.
In March 2017, the FASB issued authoritative guidance which changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, and amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance was effective for the Company starting February 1, 2018 and has been applied retrospectively to the presentation of net periodic benefit cost and prospectively to the capitalization of service cost. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.
In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance was effective for the Company beginning February
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1, 2018. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.
In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This guidance was effective for the Company beginning February 1, 2018. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.
Refer to Note 4 - Revenue recognition for more detail.
The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on its consolidated financial statements and related disclosures.
Note 13 - Subsequent event
On August 31, 2018, the Company entered into a commitment letter with PNC Bank for a new $18 million senior secured replacement credit facility. The Company is actively working to finalize the related credit agreement prior to the expiration of the existing Credit Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
The statements contained under the caption MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results could be negatively impacted in the future as a result of large variations in the level of project activity in reporting periods.
This discussion should be read in conjunction with the 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.
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| Three Months Ended July 31, | Six Months Ended July 31,
($ in thousands) | 2018 |  | 2017 |  | % Favorable (Unfavorable) | 2018 |  | 2017 |  | % Favorable (Unfavorable)
Net sales | $32,325 | $26,852 | 20 | % | $61,214 | $50,353 | 22 | %
Gross profit | 5,893 |  | 3,058 |  | 93 | % | 10,118 | 4,843 | 109 | %
Percentage of net sales | 18 | % | 11 | % |  | 17 | % | 10 | % |
General and administrative expenses | 3,924 |  | 3,856 |  | (2 | )% | 7,906 | 8,142 | 3 | %
Percentage of net sales | 12 | % | 14 | % |  | 13 | % | 16 | % |
Selling expense | 1,321 |  | 1,307 |  | (1 | )% | 2,463 | 2,623 | 6 | %
Percentage of net sales | 4 | % | 5 | % |  | 4 | % | 5 | % |
Interest expense, net | 284 |  | 157 |  | (81 | )% | 550 | 314 | (75 | )%
Income/(Loss) from operations before income taxes |  | $364 |  |  | ($2,262 | ) | 116 | % | (801) | (6,236) | 87 | %

Three months ended July 31, 2018 ("current quarter") vs. Three months ended July 31, 2017 ("prior year quarter")
Net sales:
Net sales increased 20% to $32.3 million in the current quarter, from $26.9 million in the prior year quarter. Higher revenues resulted from increased sales in Canada, the Middle East and India.
Cost of sales and gross profit:
Gross margin increased to 18%, or $5.9 million of net sales, in the current quarter from 11%, or $3.1 million of net sales, in the prior year quarter. This 93% improvement was due to increased volumes, and improved margins.
General and administrative expenses:
General and administrative expenses remained flat at $3.9 million in the current quarter, and the prior year quarter. Higher payroll and accrued incentive expenses were offset by lower professional fees.
Selling expenses:
Selling expenses of $1.3 million in the current quarter, remained unchanged from the prior year quarter.
Interest expense:
Net interest expense increased to $0.3 million in the current quarter from $0.2 million in the prior-year quarter due to higher borrowings, and higher effective interest rates, both domestic and foreign.
Income from operations before income taxes:
Income from operations before income taxes improved by 116%, or $2.7 million, to pre-tax income of $0.4 million in the current quarter, from a pre-tax loss of $2.3 million in the prior year quarter. The positive contributing factors were:
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• | Increased sales of $5.5 million;

• | Improved gross profit of $2.8 million; and

• | Selling, general and administration expenses remaining flat, an improvement as a percentage of sales.

Six months ended July 31, 2018 ("year-to-date") vs. Six months ended July 31, 2017 ("prior year year-to-date")
Net sales:
Net sales increased 22% to $61.2 million in the current year-to-date, from $50.4 million in the prior year year-to-date. Higher revenues resulted from increased sales in the Middle East and India.
Cost of sales and gross profit:
Gross margin increased to 17%, or $10.1 million of sales, in the current year-to-date from 10%, or $4.8 million of sales, in the prior year year-to-date. This improvement, which more than doubled the gross margin, was due to increased volumes in the Middle East and India.
General and administrative expenses:
General and administrative expenses decreased by 3% to $7.9 million in the current year-to-date, from $8.1 million in the prior year year-to-date.
In the prior year-to-date, the Company recognized foreign exchange losses on the payback of an intercompany loan extended to a foreign subsidiary. This was partially offset by higher payroll and accrued incentive expenses in the current year.
Selling expenses:
Selling expenses decreased by 6% to $2.5 million in the current year-to-date from $2.6 million the prior year year-to-date, and an improvement of 1% as a percentage to net sales. This decrease is due to the expiration of a lease in 2017 for a sales office.
Interest expense:
Net interest expense increased to $0.6 million in the current year-to-date from $0.3 million in the prior year year-to-date due to higher borrowings, and higher effective interest rates, both domestic and foreign.
Income from operations before income taxes:
Income from operations before income taxes improved by 87%, or $5.4 million, to a pre-tax loss of $0.8 million in the current year-to-date, from a pre-tax loss of $6.2 million in the prior year year-to-date. The positive contributing factors were:

• | Increased sales of $10.8 million;

• | Improved gross profit of $5.3 million; and

• | Selling, general and administration expenses remaining flat, and an improvement as a percentage of sales.

Accounts receivable:
In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million. The Company completed all of its deliverables in 2015, and has collected approximately $37.0 million, as of July 31, 2018. The remaining balance due as of July 31, 2018 was $4.9 million. Included in this balance is an amount of $3.7 million, which pertains to retention clauses within the agreements of our customer
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(contractor), and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $3.2 million of this retention amount is carried in a long-term receivable account.
The Company has been engaged in ongoing active efforts to collect this outstanding amount, and has received updated acknowledgment of the outstanding balances and assurances of payment from the customer. During the second quarter of 2018, the Company received a payment of approximately $0.5 million. As a result, the Company did not reserve any allowance against this amount, however, if the Company’s efforts to collect on the remaining balance on this account are not successful in fiscal 2018, then the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.
Income taxes:
The Company's effective tax rate ("ETR") from operations for the current quarter and current year-to-date was 176% and (74)%, compared to 25% and 17% during the respective prior year periods. The change in the ETR from the prior year-to-date to the current year-to-date was in large part due to the changes in net income by jurisdiction. Additional factors include the tax impact of Canadian business combination which occurred in the prior year and the prior year inclusion of the U.A.E., India, and Saudi Arabia in the annual effective tax rate. The Company remains in a domestic net operating loss carryforward position. For additional information, see "Notes to Consolidated Financial Statements, Note 5 Income taxes".
Other
The Company has made a bid to provide insulation of pipes to the East Africa Crude Oil Pipeline ("EACOP") project. The EACOP project is a 1450 Km (900 mile) long heavy crude oil pipeline from the Lake Albert Basin in Uganda to the Tanga port in Tanzania being developed by French oil company Total E&P, China National Offshore Oil Corporation (CNOOC) and London-based Tullow Oil. The pipeline is 24 inches in diameter, and is electrically heat traced. Once completed, it will be the longest insulated and heat traced pipeline in the world. There can be no assurance that the Company will be successful in its bid for this project, or what the final terms of any such potential engagement will be until the bid is awarded; the timing of which is uncertain.
Liquidity and capital resources
Cash, cash equivalents and restricted cash as of July 31, 2018 were $6.4 million compared to $8.3 million on January 31, 2018. On July 31, 2018, $0.4 million was held in the U.S., and $6.0 million was held at the Company's foreign subsidiaries. From time to time, the Company repatriates cash held at certain of its foreign subsidiaries as needed to help fund the Company's working capital needs. The Company's working capital was $24.0 million on July 31, 2018 compared to $23.1 million on January 31, 2018.
Cash used in operating activities during the first six months of 2018 was $3.5 million, compared to $2.8 million during the same period in 2017. Net cash used in investing activities during the first six months of 2018 amounted to $0.6 million, compared to $1.4 million during the same period in 2017.
Debt totaled $17.2 million on July 31, 2018, a net increase of $1.4 million compared to the beginning of the current fiscal year. For additional information, see "Notes to Consolidated Financial Statements, Note 9 Debt". Net cash provided by financing activities during the first six months of 2018 was $2.4 million compared to $4.3 million for the same period in 2017.
On September 24, 2014, the Company entered into its Credit Agreement. Under the terms of the Credit Agreement, which matures on September 25, 2018, the Company can borrow up to a combined $15.0 million in the U.S. and Canada, subject to borrowing base availability from secured domestic and certain Canadian assets, such as accounts receivable and inventory, and other requirements, under a revolving line of credit. The Credit Agreement covenants restrict debt, liens, share repurchases and investments, and require achieving a minimum fixed charge coverage ratio with respective performance metrics as defined by the Credit Agreement if a minimum availability is not met. In a seventh amendment to the Credit Agreement executed on December 14, 2017, the lenders increased the borrowing
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limit for the Company’s Canadian subsidiary and adjusted minimum availability requirements for borrowers in the U.S. and Canada with a limited waiver of related covenant non-compliance retroactive to October 31, 2017. On June 5, 2018, the Company completed an eighth amendment to the Credit Agreement. The lenders extended the minimum availability requirements for the Company’s Canadian subsidiary, through August 1, 2018. Furthermore, the lenders waived the technical reporting event of default which resulted from the Company applying a non-conforming method in calculating the Canadian availability as of April 30, 2018. On August 1, 2018 the Company received a ninth amendment to the Credit Agreement, in which the lenders adjusted the minimum availability requirements for borrowers in the U.S. and Canada through September 15, 2018. The Credit Agreement balances as of July 31, 2018 and January 31, 2018 were included as current liabilities in the Company's consolidated balance sheets because the Credit Agreement has a subjective acceleration clause, and expires in less than 12 months.
Interest rates vary based on the average availability in the preceding fiscal quarter and are: (a) a margin in effect plus a base rate, if below certain availability limits; or (b) a margin in effect plus the Eurodollar rate for the corresponding interest period. On July 31, 2018, the Company had borrowed $8.4 million at 10% and 8.7% and had $0.9 million available to it under the Credit Agreement. In addition, $0.2 million of availability was used under the Credit Agreement primarily to support letters of credit to guarantee amounts committed for inventory purchases. Cash required for operations, as needed, is provided by draw downs on the line of credit.
The Credit Agreement will expire on September 25, 2018. On August 31, 2018, the Company entered into a commitment letter with a national bank for a new $18 million senior secured replacement credit facility. The Company is actively working to finalize the related credit agreement prior to the expiration of the Credit Agreement.
Revolving lines foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. These lines are secured by certain equipment, certain assets, such as accounts receivable and inventory, and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On July 31, 2018, the Company was in compliance with the covenants under the credit arrangements. On July 31, 2018, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On July 31, 2018, the Company's interest rates ranged from 5.0% to 6.5%, and the Company can borrow $10.4 million under these credit arrangements. On July 31, 2018, $4.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. As of July 31, 2018, the Company had borrowed $1.2 million, and had an additional $4.3 million remaining unused. The foreign revolving lines balances as of July 31, and January 31, 2018 were included as current maturities of long-term debt in the Company's consolidated balance sheets.
The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. Subsequent to January 31, 2018, the Company's foreign credit lines were renewed with a reduction in facility size of $3.2 million, thus reducing the amount available to borrow by the same amount.
Mortgages. On July 28, 2016, the Company borrowed 8.0 million CAD (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, currently at 4.7%, with monthly payments of 31 thousand CAD (approximately $24 thousand) for interest; and monthly payments of 27 thousand CAD (approximately $20 thousand) for principal. Principal payments began January 2018.
On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.
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Capital Leases. In 2017, the Company obtained three capital leases for 1.1 million CAD (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these capital leases were from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature from April 30, 2021 to September 29, 2022.
In 2014, the Company obtained two capital leases for 0.9 million CAD (approximately $0.9 million at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 3.25% per annum with monthly principal and interest payments of $14 thousand. These leases matured on June 25, 2018.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2018 contained in the Company's most recent Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
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Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of July 31, 2018. This evaluation included consideration of the controls, processes, and procedures that are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management has previously reported on a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company during its preparation and review of the Company's financial statements for the fiscal quarter ended July 31, 2017 related to the Company's accounting for stock-based compensation cost. Specifically, the Company had improperly reversed stock-based compensation costs for vested equity awards that expired, terminated or were cancelled unexercised. This accounting error was attributable to the Company’s lack of technical accounting knowledge and led management to conclude that a material weakness existed with respect to the Company’s internal control over financial reporting.
As described below, the Company has adopted and implemented policies and procedures to ensure that its staff has the necessary technical accounting knowledge.
Notwithstanding the material weakness described above, the Company's management, including it's Chief Executive Officer and Chief Financial Officer, have concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Changes in Internal Control Over Financial Reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation Plan for the Material Weakness in Internal Control over Financial Reporting: To address the material weakness regarding the adjustment for awards that expired unexercised, the Company has completed the following:

• | Expanded the training of employees in financial technical accounting, reporting and disclosure-related positions;

• | Reinforced the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies and procedures;

• | Implemented a catalog of key accounting rules that have been applied during the quarter. In the reviews of any major journal entries for non-standard operational accounting matters, this catalog will be used as a checklist to validate that the required accounting treatment is applied and disclosures are made accordingly. Management will evaluate whether the accounting treatment follows the current rules in the catalog and will decide whether outside firm expertise is warranted in such a review;

• | Validated and updated the catalog quarterly for any changes resulting from changed or newly pronounced accounting rules;

• | Reviewed the categories that are underlying the calculations related to stock-based compensation, and revise procedures for the calculation and review of effects from vested, forfeited and expired options; and

• | Implemented Certent, a comprehensive equity compensation management and reporting solution provider, in the second quarter of 2018.

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to recording equity-based compensation costs and will address the related material weakness described above. However, the material weakness cannot be considered fully remediated
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until the remediation processes have been in operation for a period of time and successfully tested. Testing in this area is continuing and the Company believes that this material weakness with be fully remediated by fiscal year end.
PART II OTHER INFORMATION
Item 6. Exhibits

31.1 | Rule 13a - 14(a)/15d - 14(a) Certifications (1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 | Rule 13a - 14(a)/15d - 14(a) Certifications (2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 | Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
10 (a) | Limited Waiver and Ninth Amendment to Credit and Security Agreement
10 (b) | Restricted stock option agreement
101.INS | XBRL Instance
101.SCH | XBRL Taxonomy Extension Schema
101.CAL | XBRL Taxonomy Extension Calculation
101.DEF | XBRL Taxonomy Extension Definition
101.LAB | XBRL Taxonomy Extension Labels
101.PRE | XBRL Taxonomy Extension Presentation

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Perma-Pipe International Holdings, Inc.

Date: | September 11, 2018 | /s/ David J. Mansfield
|  | David J. Mansfield
|  | President and Chief Executive Officer
|  | (Principal Executive Officer)
Date: | September 11, 2018 | /s/ Karl J. Schmidt
|  | Karl J. Schmidt
|  | Vice President and Chief Financial Officer
|  | (Principal Financial and Accounting Officer)

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