Perma-Pipe International Holdings Inc.

09/09/2026 | Press release | Distributed by Public on 09/09/2026 14:39

Quarterly Report for Quarter Ending July 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

The statements contained in this MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2026 and 2025 are for the fiscal year ending January 31, 2027 and the fiscal year ended January 31, 2026, respectively.

This MD&A should be read in conjunction with the Company's Condensed Consolidated Financial Statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in this MD&A have been rounded to the nearest percentage point.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

(In thousands unless otherwise specified)

(Unaudited)

The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.

Three Months Ended July 31,

Six Months Ended July 31,

2026

2025

Change favorable (unfavorable)

2026

2025

Change favorable (unfavorable)

Amount

Percent of Net Sales

Amount

Percent of Net Sales

Amount

Amount

Percent of Net Sales

Amount

Percent of Net Sales

Amount

Net sales

$ 59,567 $ 47,902 $ 11,665 $ 109,831 $ 94,648 $ 15,183

Gross profit

17,406 29 % 14,423 30 % 2,983 32,041 29 % 31,147 33 % 894

General and administrative expenses

11,870 20 % 10,033 21 % (1,837 ) 20,705 19 % 17,781 19 % (2,924 )

Selling expenses

1,283 2 % 1,203 3 % (80 ) 2,447 2 % 2,289 2 % (158 )

Interest expense, net

507 415 (92 ) 1,111 821 (290 )

Other (income) expense, net

(122 ) 21 143 (12 ) 70 82

Income before income taxes

3,868 2,751 1,117 7,790 10,186 (2,396 )

Income tax expense

604 1,489 885 1,935 3,070 1,135

Net income

3,264 1,262 2,002 5,855 7,116 (1,261 )

Less: Net income attributable to non-controlling interest

717 411 (306 ) 1,506 1,313 (193 )

Net income attributable to common stock

2,547 851 1,696 4,349 5,803 (1,454 )
Three months ended July 31, 2026 vs. Three months ended July 31, 2025
Net sales:
Net sales were $ 59.6 million and $ 47.9 million in the three months ended July 31, 2026 and 2025 , respectively. The increase of $ 11.7 million was driven by higher sales volumes in both North America and the Middle East and North Africa ("MENA") region.

Gross profit:

Gross profit was $17.4 million, or 29% of net sales and $14.4 million, or 30% of net sales, in the three months ended July 31, 2026 and 2025, respectively. The increase of $3.0 million was driven by higher sales volumes and consistent gross margins globally.

General and administrative expenses:

General and administrative expenses were $11.9 million and $10.0 million in the three months ended July 31, 2026 and 2025, respectively. The increase of $1.9 million was primarily due to a $3.9 million write-off of a customer receivable during the second quarter of 2026, partially offset by a $2.0 million non-recurring acceleration of certain executive compensation expense recorded during the second quarter of fiscal 2025 in connection with an executive departure.

Selling expenses:

Selling expenses remained consistent and were $ 1.3 million and $ 1.2 million in the three months ended July 31, 2026 and 2025 , respectively.

Interest expense:

Net interest expense was $0.5 million and $0.4 million in the three months ended July 31, 2026 and 2025, respectively. The increase of $0.1 was due to an increase in debt.

Income tax expense:

The Company's ETR was 16% and 54% in the three months ended July 31, 2026 and 2025, respectively. The lower ETR for the three months ended July 31, 2026 is due to the mix of income and loss in various jurisdictions.

For further information, see Note 6 - Income taxes, in the Notes to Condensed Consolidated Financial Statements.

Net income attributable to common stock:

Net income attributable to common stock was $2.5 million and $0.9 million in the three months ended July 31, 2026 and 2025, respectively. The increase of $1.6 million was the result of the changes discussed above, net of amounts attributable to non-controlling interest.

Six months ended July 31, 2026 vs. Six months ended July 31, 2025
Net sales:
Net sales were $ 109.8 million and $ 94.6 million in the six months ended July 31, 2026 and 2025 , respectively. The increase of $ 15.2 million was driven by higher sales volumes in both North America and the MENA region.

Gross profit:

Gross profit was $32.0 million, or 29% of net sales and $31.1 million, or 33% of net sales, in the six months ended July 31, 2026 and 2025, respectively. The increase of $0.9 million was primarily driven by higher sales volumes, and is partially offset with the product mix across various jurisdictions in the first quarter, particularly in Canada due to seasonal factors, together with start-up and ramp-up costs associated with the Company's new Ohio manufacturing facility as well as ongoing project ramp-up costs in Qatar.

General and administrative expenses:

General and administrative expenses were $20.7 million and $17.8 million in the six months ended July 31, 2026 and 2025, respectively. The increase of $2.9 million was primarily due to a $3.9 million write-off of a customer receivable during the second quarter of fiscal 2026, partially offset by a non-recurring acceleration of certain executive compensation expenses recorded in the second quarter of fiscal 2025 in connection with an executive departure. This decrease was partially offset by higher IT and office-related costs in the current year.

Selling expenses:

Selling expenses remained consistent and were $ 2.4 million and $ 2.3 million in the six months ended July 31, 2026 and 2025 , respectively.

Interest expense:

Net interest expense was $1.1 million and $0.8 million in the six months ended July 31, 2026 and 2025, respectively. The increase of $0.3 million was due to an increase in debt.

Income tax expense:

The Company's ETR was 25% and 30% in the six months ended July 31, 2026 and 2025, respectively.

For further information, see Note 6 - Income taxes, in the Notes to Condensed Consolidated Financial Statements.

Net income attributable to common stock:

Net income attributable to common stock was $4.3 million and $5.8 million in the six months ended July 31, 2026 and 2025, respectively. The decrease of $1.5 million was the result of the changes discussed above, net of amounts attributable to non-controlling interest.

Public Float

The Company qualifies as both an accelerated filer and a Smaller Reporting Company ("SRC"), as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Based on the Company's public float as of July 31, 2026, the Company will continue to qualify as both an accelerated filer and an SRC, consistent with its filer status for the fiscal year ended January 31, 2026. Accordingly, the Company remains subject to the filing deadlines applicable to accelerated filers while continuing to be eligible for the scaled disclosure accommodations available to SRCs.

Accounts Receivable Write-Off

During the quarter, the Company directly wrote off a $3.9 million customer receivable after determining that the receivable was uncollectible. This determination was based on the updated information received during the quarter regarding the customer's ability and intent to pay.

Any future recoveries will be recognized if realized. The $3.9 million write-off is included as a component of bad debt expense for the period and is presented within general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended July 31, 2026.

Liquidity and capital resources

Cash and cash equivalents as of July 31, 2026, were $31.8 million, compared to $18.7 million as of January 31, 2026. As of July 31, 2026, $1.7 million of this total was held in the United States, and $30.1 million was held by the Company's foreign subsidiaries. The Company's working capital increased $16.5 million to $83.4 million at July 31, 2026, from $66.9 million at January 31, 2026. The increase primarily reflected a $13.8 million decrease in short-term borrowings and current maturities of long-term debt, a $13.1 million increase in cash and cash equivalents, a $9.1 million increase in unbilled accounts receivable, and decreases of $3.7 million in customers' deposits and $1.5 million in billings in excess of costs and estimated earnings on uncompleted contracts. These favorable movements, together with other current asset and liability movements that increased working capital by $3.7 million, net, were partially offset by a $17.2 million decrease in trade accounts receivable and an $11.1 million increase in trade accounts payable. Overall, current assets increased $6.8 million and current liabilities decreased $9.7 million.

Net cash provided by (used in) operating activities was $13.3 million and $(1.3) million in the six months ended July 31, 2026 and 2025, respectively. The increase of $14.6 million was primarily attributable to favorable changes in operating assets and liabilities, most notably through accounts receivable and accounts payable.

Net cash used in investing activities in the six months ended July 31, 2026 and 2025 was $3.2 million and $3.5 million, respectively. The change of $0.3 million was primarily due to decreases in the amount of capital expenditures during the current year.

Net cash provided by financing activities in the six months ended July 31, 2026 and 2025 was $2.5 million and $6.3 million, respectively. Debt totaled $36.1 million and $32.5 million as of July 31, 2026 and January 31, 2026, respectively. See Note 10 - Debt, in the Notes to Condensed Consolidated Financial Statements for further discussion relating to this topic.

The Company believes it will have the ability to satisfy all working capital needs and any planned capital expenditures for the twelve months following the issuance of the Condensed Consolidated Financial Statements, based on its existing cash on hand, cash flows from operations, and available credit facilities.

Restricted cash was $3.0 million as of July 31, 2026 and $3.6 million as of January 31, 2026. This balance primarily relates to fixed deposits utilized as security deposits and financial guarantees.

Debt

Debt consisted of the following:

July 31, 2026

January 31, 2026

Short-term debt

Revolving credit agreement - North America

$ - $ 10,749

Revolving credit agreement - United Arab Emirates

1,489 2,573

Revolving credit agreement - Egypt

- 190

Revolving credit agreement - Saudi Arabia

803 2,909

Current maturities of long-term debt

1,041 669

Loan payable to GIG

2,753 2,753

Total short-term debt

$ 6,086 $ 19,843

Long-term debt

Revolving credit agreement - North America

$ 17,332 $ -

Finance obligation - buildings and land

8,367 8,527

Mortgage note

3,517 3,737

Finance lease obligation

862 541

Unamortized debt issuance costs

(103 ) (109 )

Total long-term debt

$ 29,975 $ 12,696

Revolving lines - North America. On April 8, 2026, the Company entered into a Credit Agreement (the "Credit Agreement") by and among the Company, as borrower, the other loan parties thereto, and JPMorgan Chase Bank, N.A., as lender ("JPMorgan"). The Credit Agreement effectively replaced the Company's previous credit facility (the "PNC Credit Facility") with PNC Bank, National Association. On April 9, 2026, the Company drew $15.3 million under the Credit Agreement to pay off the remaining $15.2 million outstanding balance under the PNC Credit Facility and to fund $0.1 million of cash collateral required for cash management and purchasing card solutions. As of January 31, 2026, the Company had borrowed an aggregate of $10.7 million at a rate of 7.8% and had $2.7 million available under the PNC Credit Facility.

The Credit Agreement provides for a senior secured asset-based revolving credit facility with aggregate revolving commitments of $18.0 million, including a sublimit of up to $1.5 million for letters of credit. The revolving credit facility matures on October 7, 2027, unless earlier terminated in accordance with its terms.

As of July 31, 2026, the outstanding balance under the Credit Agreement was $17.3 million with a weighted-average interest rate of 6.9% and there were no outstanding letters of credit under the sublimit. Borrowings under the Credit Agreement are limited to the lesser of the revolving commitment and a borrowing base calculated as (i) 80% of eligible North American accounts receivable, plus (ii) 25% of eligible North American inventory (valued at the lower of cost or market), in each case subject to customary eligibility criteria and reserves established by JPMorgan.

Loans under the Credit Agreement bear interest, at the Company's election, at either (i) a rate based on the CB Floating Rate (as defined in the Credit Agreement) or (ii) an adjusted term SOFR rate, in each case plus an applicable margin determined by the Company's leverage ratio. The applicable margin for CB Floating Rate loans ranges from 1.50% to 2.00%, and for SOFR loans ranges from 2.50% to 3.00%. In addition, the Company is required to pay a commitment fee ranging from 0.20% to 0.30% on the unused portion of the revolving commitment.

The obligations under the Credit Agreement are secured by substantially all North American assets of the Company and the guarantor subsidiaries, subject to customary exclusions, and are guaranteed on a joint and several basis by certain existing and future subsidiaries of the Company, subject to customary exceptions

The Credit Agreement contains customary affirmative and negative covenants, including, among other things, limitations on additional indebtedness, liens, investments, acquisitions, asset sales, restricted payments, and transactions with affiliates. The Credit Agreement also includes financial maintenance covenants requiring the Company to maintain both a minimum Fixed Charge Coverage Ratio and a maximum Leverage Ratio (each as defined in the Credit Agreement), which are tested upon the occurrence of certain availability thresholds.

The Credit Agreement includes customary events of default, including, among others, nonpayment of principal or interest, breaches of representations or covenants, cross-defaults to other material indebtedness, insolvency events, judgments in excess of specified thresholds, certain ERISA and pension events, and a change in control. Upon the occurrence of an event of default, the Lender may terminate commitments, accelerate outstanding obligations, require cash collateralization of letters of credit, and exercise remedies against the collateral.

As of July 31, 2026, the Company was in compliance with all covenants under the Credit Agreement.

Subsequent Event - 2026 Credit Agreement
On August 25, 2026, the Company, as borrower, certain subsidiaries of the Company party thereto as loan parties, the lenders party thereto and JPMorgan as administrative agent, entered into a Credit Agreement (the "2026 Credit Agreement"). The 2026 Credit Agreement replaces the Company's existing Credit Agreement dated April 8, 2026 with JPMorgan, as lender (the "Existing Credit Agreement"), which was terminated concurrently with the closing of the 2026 Credit Agreement. In connection with the closing, all outstanding borrowings under the Existing Credit Agreement were repaid in full. The 2026 Credit Agreement provides for a secured credit facility consisting of a $75.0 million revolving credit facility, which includes availability for letters of credit up to $30.0 million and swingline loans up to $5.0 million, and a $14.0 million term loan facility. Subject to the terms and conditions set forth in the 2026 Credit Agreement, the Company may also request increases in the revolving commitments or incremental term loans in an aggregate amount not to exceed $50.0 million. On the closing date, the Company borrowed $14.0 million under the term loan facility, and the proceeds thereof, together with other available cash, were used to repay outstanding borrowings under the Existing Credit Agreement. As of the closing date, $23.0 million was outstanding under the revolving credit facility. The Company intends to use borrowings under the 2026 Credit Agreement for working capital and general corporate purposes, which may include, from time to time, permitted acquisitions and other investments.
The revolving loans may be borrowed, repaid and reborrowed from time to time prior to the revolving credit maturity date, and the term loans are scheduled to amortize in quarterly installments beginning September 30, 2026, with the remaining unpaid principal due on the term loan maturity date. The revolving credit facility and term loan facility mature on August 25, 2031, unless earlier terminated or accelerated in accordance with the terms of the 2026 Credit Agreement.
Borrowings under the 2026 Credit Agreement bear interest, at the Company's option and subject to the terms of the 2026 Credit Agreement, at rates based on the Alternate Base Rate or applicable term benchmark rates, including Adjusted Term SOFR, Adjusted EURIBOR or Adjusted Term CORRA, plus an applicable margin (each as defined in the 2026 Credit Agreement). The applicable margin is determined by reference to the Company's leverage ratio and ranges from 1.50% to 2.00% for Alternate Base Rate loans and from 2.50% to 3.00% for term benchmark and RFR loans (each as defined in the 2026 Credit Agreement). The Company is also required to pay a commitment fee on the unused portion of the revolving commitments at a rate ranging from 0.20% to 0.30%, based on the Company's leverage ratio, as well as customary fees with respect to letters of credit and administrative agent fees.
The obligations under the 2026 Credit Agreement are guaranteed by certain subsidiaries of the Company and are secured by liens on collateral granted by the loan parties. The 2026 Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default. The covenants include, among others, restrictions on indebtedness, liens, investments, dispositions, restricted payments and certain other transactions, as well as financial covenants requiring compliance with a leverage ratio and a fixed charge coverage ratio. The 2026 Credit Agreement requires the Company to maintain a consolidated leverage ratio of not more than 3.00 to 1.00 and a fixed charge coverage ratio of not less than 1.25 to 1.00, subject to the terms and exceptions thereof. As the 2026 Credit Agreement was executed after the balance sheet date, no amounts were outstanding under this facility as of July 31, 2026.
Credit facilities - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as further described below.
United Arab Emirates ("U.A.E.")
The Company maintains a credit facility with a financial institution in the U.A.E. totaling 65.2 million U.A.E. Dirhams ("AED") (approximately $17.7 million at July 31, 2026 ). Borrowings under the facility bear interest at the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.5% per annum, subject to minimum interest rates ranging from 4.5% to 8.0% per annum, depending on the type of financing utilized. The facility is stratified by instrument type and expires at various dates through October 2026. While certain portions of the credit arrangement have expired, the subsidiary continues to access the facility under the same terms while formal documentation of a renewal is being finalized with the lender. As of July 31, 2026 , the Company was in compliance with all financial covenants under the Facility, including a maximum Adjusted Leverage Ratio and a minimum Adjusted Tangible Net Worth requirement. As of July 31, 2026 and January 31, 2026 , the Company had outstanding borrowings of 5.5 million AED (approximately $1.5 million) and 9.4 million AED (approximately $2.6 million), respectively, which are included in "Short-term borrowings and current maturities of long-term debt" on the Condensed Consolidated Balance Sheets. Additionally, as of July 31, 2026 and January 31, 2026 , the Company had issued guarantees totaling 28.0 million AED (approximately $7.6 million) and 30.9 million AED (approximately $8.4 million). After accounting for outstanding borrowings and issued guarantees, the Company had unused availability of approximately $8.6 million and $6.8 million under the credit facility as of July 31, 2026 and January 31, 2026 , respectively.
The Company maintains a letter of credit facility with a financial institution in the U.A.E. totaling 100.0 million AED (approximately $27.2 million at July 31, 2026 ). While the credit arrangement had a scheduled expiration date in July 2026, the subsidiary continues to access the facility under the same terms while formal documentation of a renewal is being finalized with the lender. T he facility is non-interest bearing; however, the Company incurs a commission ranging from 0.8% to 1.0% per annum on the face value of issued instruments and is required to maintain cash collateral (margins) ranging from 10% to 15% depending on the type of instrument utilized. As of July 31, 2026 , the Company had outstanding guarantees under this facility of 39.3 million AED (approximately $10.7 million). The remaining available balance under the facility was approximately $16.5 million as of July 31, 2026 .
Egypt
In June 2021, the Company's Egyptian subsidiary entered into a credit facility with a financial institution in Egypt, which has been subsequently amended. The facility provides project-based financing and expires in December 2026. The facility has a maximum borrowing capacity of 120.0 million Egyptian Pounds (approximately $2.4 million at July 31, 2026 ). The line is secured by certain assets of the subsidiary, including accounts receivable, and contains various covenants, including a maximum leverage ratio and restrictions on incurring additional indebtedness. Covenants under this facility are measured annually at year-end, and the Company was in compliance with all such covenants at its most recent measurement date.
As of July 31, 2026 , borrowings under the Company's credit facility in Egypt bore interest at rates ranging from 15.0% to 20.8%. The 15.0% rate relates to specific government-sponsored initiatives, while the 20.8% rate applies to our general facility limits. The Company had no amount outstanding and $0.2 million outstanding under this arrangement as of July 31, 2026 and January 31, 2026 , respectively. These amounts are included in "Short-term borrowings and current maturities of long-term debt" on the Condensed Consolidated Balance Sheets. As of July 31, 2026 and January 31, 2026 , the Company had unused availability of approximately $2.4 million and $2.2 million, respectively.
Saudi Arabia
In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a financial institution in Saudi Arabia for a revolving line totaling 37.0 million Saudi Riyals ("SAR") (approximately $9.9 million at July 31, 2026 ). The credit arrangement provides project-based financing at interest rates competitive in Saudi Arabia and is secured by certain assets of the subsidiary including accounts receivable. While the credit arrangement had a scheduled expiration date of April 27, 2026, the subsidiary continues to access the facility under the same terms while formal documentation of a renewal is being finalized with the lender.
As of July 31, 2026 , the facility bore interest at a rate of approximately 8.5%. As of July 31, 2026 and January 31, 2026 , the Company had outstanding borrowings of 3.0 million SAR (approximately $0.8 million) and 10.9 million SAR (approximately $2.9 million), respectively, which are included in "Short-term borrowings and current maturities of long-term debt" on the Condensed Consolidated Balance Sheets. Additionally, as of July 31, 2026 and January 31, 2026 , the Company had issued guarantees totaling 5.0 million SAR (approximately $1.3 million) and 6.3 million SAR (approximately $1.7 million), respectively. After accounting for outstanding borrowings and issued guarantees, the Company had unused availability of approximately $7.8 million and $5.3 million under the credit facility as of July 31, 2026 and January 31, 2026 , respectively.
Foreign credit facilities - overall
These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As of July 31, 2026 and January 31, 2026 , the amount of foreign subsidiary debt guaranteed by the Company was approximately $5.0 million and $8.4 million, respectively.
The Company was in compliance with respect to the financial covenants under the foreign credit arrangements as of July 31, 2026 . Certain of these arrangements are subject to periodic renewal; while such renewals are being processed, the Company remains in regular communication with the lenders, and the arrangements have historically continued without interruption or penalty. On July 31, 2026 , interest rates were based on (i) the EIBOR plus 3.5% per annum for the U.A.E. credit arrangements, which have minimum interest rates ranging from 4.5% to 8.0% per annum; (ii) interest rates ranging from 15.0% to 20.8% for the Egypt credit arrangements; and (iii) an interest rate of 8.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of July 31, 2026 , the Company's interest rates ranged from 7.4% to 20.8%, with a weighted average rate of 8.0%, and the Company had facility limits totaling $57.2 million under these credit arrangements. As of July 31, 2026 , $19.6 million of the facility limits were utilized to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of July 31, 2026 , the Company had borrowed $2.3 million and had an additional $35.3 million of borrowing availability remaining under the foreign revolving credit arrangements. The foreign revolving lines balances were included as a component of "Short-term borrowings and current maturities of long-term debt" on the Condensed Consolidated Balance Sheets as of July 31, 2026 and January 31, 2026 .
Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement") to sell its land and building in Lebanon, Tennessee (the "Property"). 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 PNC 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 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. As of July 31, 2026 and January 31, 2026 , the Company had a net book value relating to this asset of $1.6 million and $1.7 million, respectively.
In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying 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 $0.3 million is recognized in "Short-term borrowings and current maturities of long-term debt" and the long-term portion of $8.4 million is recognized in "Long-term debt, less current maturities " on the Condensed Consolidated Balance Sheets as of July 31, 2026 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Mortgage Note. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. As of July 31, 2026 , the remaining balance on the mortgage in Canada is approximately 5.3 million Canadian Dollars ("CAD") (approximately $3.7 million). The interest rate is variable, and was 6.3% at July 31, 2026 . The principal balance is included as a component of "Short-term borrowings and current maturities of long-term debt" and "Long-term debt, less current maturities" on the Condensed Consolidated Balance Sheets and is presented net of issuance costs of $0.1 million as of July 31, 2026 and January 31, 2026 . Subsequent to July 31, 2026, the mortgage note was repaid in full on August 28, 2026, using proceeds from the 2026 Credit Agreement.
Loan Payable to GIG. In June 2023, in connection with the formation of a joint venture with Gulf Insulation Group ("GIG"), the Company assumed a promissory note with an aggregate principal amount of approximately $2.8 million, which matured on April 9, 2026. Through the date of this filing, the Company and GIG are engaged in constructive discussions to reach an agreement on renewal or settlement of the promissory note. Because a definitive agreement has not been executed as of the balance sheet date, the Company did not possess a contractual, unconditional right to defer settlement of the obligation for at least twelve months following July 31, 2026 . Accordingly, the full obligation is classified within "Short-term borrowings and current maturities of long-term debt" on the Condensed Consolidated Balance Sheets as of July 31, 2026 .

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Condensed Consolidated Financial Statements for the year ended January 31, 2026 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Condensed 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 Condensed 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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