U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PROFIRE ENERGY, INC.
Nevada | | 20-0019425 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | (I.R.S. Employer Identification No.) |
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321 South 1250 West, Suite 1 | | |
Lindon, Utah | | 84042 |
(Address of principal executive offices) | | (Zip code) |
(801) 796-5127 |
(Registrant’s (Registrant’s telephone number, including area code) |
Securities registered pursuant to section 12(b) of the Exchange Act:
NoneCommon Stock, $0.001 par value
Securities registered pursuant to section 12(g) of the Exchange Act:
Common, $0.001 par valueNone
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes xþ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
¨ Yes xþ No
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.
xþ Yes ¨ No
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.)
xþ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xþ
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller Reporting Company x
| Accelerated Filer ¨ |
Non-accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
¨ Yes xþ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which our common stock was last sold, as of the last business day of the our most recently completed second fiscal quarter was approximately $13,421,585.$22,576,213.
As of June 14, 2013,27, 2014, the registrant had 45,250,00048,041,563 shares of common stock, par value $0.001, issued and outstanding
Documents incorporated by reference: None
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Table of Contents
| | Page |
| PART I | |
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Item 1. | Business | 5 |
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Item 1A. | Risk Factors | 12 13 |
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Item 1B. | Unresolved Staff Comments | 15 28 |
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Item 2. | Properties | 15 28 |
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Item 3. | Legal Proceedings | 15 28 |
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Item 4. | Mine Safety Disclosures | 16 28 |
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| PART II | |
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 29 |
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Item 6. | Selected Financial Data | 17 30 |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 30 |
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 23 36 |
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Item 8. | Financial Statements and Supplementary Data | 23 36 |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 23 36 |
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Item 9A. | Controls and Procedures | 23 36 |
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Item 9B. | Other Information | 26 38 |
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| PART III | |
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Item 10. | Directors, Executive Officers and Corporate Governance | 26 38 |
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Item 11. | Executive Compensation | 32 44 |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 36 49 |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence | 38 50 |
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Item 14. | Principal Accounting Fees and Services | 38 51 |
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| PART IV | |
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Item 15. | Exhibits and Financial Statement Schedules | 39 51 |
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| SIGNATURES | 41 54 |
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PROFIRE ENERGY, INC.
Unless otherwise indicated by the context, references herein to the “Company”, “Profire”, “we”, our” or “us” means Profire Energy, Inc., a Nevada corporation, and its corporate subsidiaries and predecessors.
Unless otherwise indicated by the context all dollar amounts stated in this annual report on Form 10-K are in U.S. dollars.
Information Concerning Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on management’s beliefs and assumptions and on information currently available to management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to, statements relating to our future actions, intentions, plans, strategies, objectives, results of operations, cash flows and the adequacy of or need to seek additional capital resources and liquidity. Without limiting the foregoing, words such as “may”, “should”, “expect”, “project”, “plan”, “anticipate”, “believe”, “estimate”, “intend”, “budget”, “forecast”, “predict”, “potential”, “continue”, “should”, “could”, “will” or comparable terminology or the negative of such terms are intended to identify forward-looking statements, however, the absence of these words does not necessarily mean that a statement is not forward-looking. These statements by their nature involve known and unknown risks and uncertainties and other factors that may cause actual results and outcomes to differ materially depending on a variety of factors, many of which are not within our control. Such factors include, but are not limited to, economic conditions generally and in the industry in which we and our customers participate; competition within our industry; legislative requirements or changes which could render our products or services less competitive or obsolete; our failure to successfully develop new products and/or services or to anticipate current or prospective customers’ needs; price increases; employee limitations; or delays, reductions, or cancellations of contracts we have previously entered into; sufficiency of working capital, capital resources and liquidity and other factors detailed herein and in our other filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements and we hereby qualify all our forward-looking statements by these cautionary statements.
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These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to amend this report or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events or circumstances, whether as the result of new information, future events or otherwise.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Item 1. Business
Overview
The Company wasWe were originally incorporated in the State of Nevada on May 5, 2003. Since October 2008 we have been engaged in the business of developing combustion management technologies for the oil and gas industry.
Consistent with our historical objectives, we intend to continue the expansion of our sales and services to the oil and gas industry, and we intend to improve the industry’s burner management technologies. We plan to accelerate the growth of our sales staff to help meet potential demand, especially where such demand could be augmented by recent and potential legislative changes in the United States. We believe that hiring qualified sales personnel will help us generate and fulfill a growing demand for our products. With the addition of such sales personnel, we plan to expand into other regions within the United States to offer our products and services. In particular, we are looking to significantly expand our operations in the states of Colorado and North Dakota, where we believe legislative and business drivers, respectively, may provide for increasing sales. We intend to use some of the additional sales personnel to help establish international sales and distribution channels, including channels that we feel can be highly scalable, such as working with original equipment manufacturers to distribute our products.
In order to facilitate the success of our sales team, we plan to add to our service team throughout the United States and enhance our service presence, especially in high-growth areas. We currently have service personnel located in Colorado, North Dakota, Texas, Pennsylvania, and Utah. With recent legislation in Colorado, we see the need to accelerate the growth of our service staff there and will strategically enhance that of other locations as opportunities arise. Our Canadian office continues to provide oilfield services to support its product sales, as it has done historically.
As we prepare to grow our sales and service teams, we remain dedicated to providing top-quality and innovative products. We plan to add personnel to our current research and development team, and extend our product line by developing new burner management systems with updated capabilities to match market demand. We also plan to use our research and development resources to extend our brand by developing valve technologies that complement our current products.
Principal Products and Services
We manufacture,design, assemble, install, service, and servicesell oilfield combustion management technologies and related products (e.g.such as burner management systems, flare ignitions systems, fuel train components, secondary airplates, etc.).and valve actuators. Our products and services aid oil and natural gas producers in the safe and efficient transportation, refinementproduction and productiontransportation of oil and natural gas. Our primary products are burner management systems, (described below).as described below.
In the oil and natural gas industry there are numerous demands for heat generation and control. Oilfield vessels of all kinds, including storage tanks, separators, line-heaters, dehydrators, separators, treaters, amine reboilers, and free-water knockout systems, etc. require sources of heat to satisfy their various functions, which heat is provided by a burner flame inside the vessel. ThisA burner flame is integral to the proper function of the oilfield vessel because thesethe vessels use the flame’s heat to help separate, store, transport and purify oil and gas (or even water). The viscosity of the oil and gas is critical to a number of oilfield processes, and is directly affected by the heat provided by the burner flame inside the vessel.
Our products help ignite, monitor, and manage this burner flame, reducing the need for employee interaction with the burner, (e.g.such as for re-ignition or temperature monitoring). This results inmonitoring. As a result, oil and gas producers can achieve increased safety, greater operational efficiencies, increased safety, and improved compliance for the oil or gas producer.with changing industry regulations. We believe there is a growing trend in the oil and gas industry toward process automation, including a demand forand burner management automation of burner management. In addition tofits squarely within this demand,trend. Also, there is also aan increasing need for skilled combustion technicians. Profire also trainsIn addition to selling products, we train and dispatchesdispatch combustion technicians to address this industry need in Canada. When we believe there is adequate demand for such services inboth Canada and throughout the U.S. and skilled technicians have been trained, we may also begin to market combustion services through our U.S. offices.United States.
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Before we began designing and selling burner management products, our primary focus was on providing installation and maintenance services for the products and systems of other manufacturers. After providing installation and maintenance services for some time, management determined it would be bestseveral years, we decided to pursue the development of burner management technologies, for the industry, and we began work on a proprietary burner management system to ignite, monitor, and manage the burner flames used in oilfield vessels. Our principal objectives in developing our ownproprietary burner management system were to:
· | provide a safe, efficient and code-compliant method to ignite, monitor, and/or manage burner flames in the industry; and |
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· | ensure the system could be easily controlled by oilfield operators. |
With these goalsobjectives in mind, we initially developed the Profire 1100PF1100 burner management system. While we still support our 1100 system it is no longer manufactured or sold by Profire.
in 2005. During our fourth fiscal quarter 2011, we introduced the Profire 2100PF2100 burner management system. The 2100 boastedPF2100 offered increased expandability, remote access and data logging features.data-logging features compared to the PF1100 model. The PF2100 system has proven more versatile and capable than the 1100,PF1100, and allows the end-user to more easily manage a wider variety of combustion vessels. It also complies with CSA and UL ratings. While we still support our PF1100 system, we no longer manufacture or sell it.
During our second fiscal quarter 2013, we also released the Profire 1300.PF1300. The 1300PF1300 is a new flare-ignition system that provides fundamental ignition capabilities for combustor and open-flare vessels, and can relay flame-status.flame-status to a remote site.
In May 2013, we announced the development of a new product to expandexpanded our product line, announcing the Profire 1800.PF1800. The 1800PF1800 is a mid-range burner management system option that provides fundamental burner management functionality, such as burner re-ignition and temperature management. As a simplified burner management system, we do not expect the 1800 is not expectedPF1800 to become a flagship product but is expectedrather to fill a void in the industry’s burner management needs. The 1800PF1800 became available for sale in June 2013.
Our systems have become widely used in Western Canada, and well-received in U.S. markets,the United States market, with sales to such companies as Chesapeake, Anadarko, Exxon-Mobil, Shell, ConocoPhillips, Devon Energy, Petro-Canada, Encana and others, oftenand are sometimes delivered by one of our distributors, such as Cameron. Theydistributors. Our systems have also been sold andor installed in other parts of the world, including the United States, France, Italy, England,Russia, Ukraine, India, Nigeria, the Middle East, Australia, China and Brazil. While we seek to expand our international activities, our principal focus is on the North American oil and gas market.
We believe our burner management systems and flare-ignition system offer certain advantages to other burner management systems on the market, including that they:
· | meet or exceed all current relevant codes and standards (e.g. those established by CSA and UL), while many competing products are often not certified to industry codes; |
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· | easily install with clearly marked component I/O; |
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· | have easily accessible and removable terminal connections; |
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· | rapidly shut down on flame-out; |
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· | use DC voltage spark ignition; |
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· | accommodate solar panel or TEGthermoelectric generator applications with a low-power design; |
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· | enable auto-relight or manual operation; and |
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· | include transient protected fail-safe circuits. |
In addition to the Profire 2100 and 1800our burner management systems (PF2100 and our 1300 flare-ignition system,PF1800) and flare ignition systems (PF1300 and PF2100F), we manufacturedesign (and also re-sell) other technologies and products, for sale, including:
· | specialized burner management systems (e.g. PF2100i) intended for use in specific firetube vessels (e.g., incinerators); |
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· | valve train products, including valves, valve actuators, gauges, and installation products; and |
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· | miscellaneous componentry such as: |
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| o | solar-power generation kits, |
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| o | add-on cards to expand the functionality of a given system, and |
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| o | a proprietary airplate that meters secondary airflow to the burner, allowing for more optimized combustion and reduced emissions. |
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In addition to offering product, we provide maintenance on the burners of vessels where our product is installed.
We continuallyfrequently assess market needs and look for opportunities to provide quality solutions to the oil and gas producing companies we serve. Upon identifying a potential market need, we begin researching the market and developing products that might have feasibility for future sale.
Principal Markets and Distribution Methods
Initially we focused our sales efforts primarily in Western Canada.Canada, with an office in Edmonton, Alberta. Given our success in that market, we determined to expand our sales efforts to other markets, including the U.S. market. Pursuant to our development strategy, we purchased office and warehouse space in Lindon, Utah in 2010 and opened an office in Houston, Texas in 2012 to serve our current and potential clients in those regions. In 2013, we expanded our warehouse space in Texas. In 2014, we opened another warehouse facility in Texas (service center), and opened additional offices in Oklahoma (sales office) and Pennsylvania (service center). We have realized an increase in our U.S. sales during the 2013 fiscal year, and attribute this increase to a)(1) increased salespeople b)sales people, (2) a growing network of sales contacts in the U.S. c), and (3) an increased ability to sell our products on economic merits, rather than regulatory pressures. We anticipate continued sales growth in both Canadian and U.S. markets, but expect the latter will grow more quickly than the former. We anticipate both markets will continue to present suitable demand for our products, partly due to increased energy development and production in those markets, although local environments, regulations, and needs will impact the product mixes that will prevail in individual markets.
Currently, we are looking to increase the scalability of our business model as we prepare to serve an expanding customer base with our growing product lines. Recurring revenue models, sales through distributors, and other high-scale strategies will become increasingly important for us to pursue as we seek new levels of market penetration, revenue and net income.
In additionWhile our primary market is currently the North American oil and gas industry, we also work with various international distributors to distribute our existing network of authorized distributors, which distributeproducts through North America, Brazil, and Brazil, weAustralia, and are pursuing a number of additional distribution relationships in various countries, includingother countries. While we have recently focused on opening distribution channels in Mexico and Russia, (where we recently installed a test-systemthe current political unrest in Russia has led us to curtail our efforts there for the foreseeable future, with a potential distributor).hopes to restore such efforts when the political environment stabilizes. We believe that by maintaining strong relationships with our current customers, consistently delivering exceptional products, and pursuing highly scalable revenue strategies, we will see continued—and increased—growth in year-over-year revenues.
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Competition
Based on our experience, we believe most of the other companies in our industry are either small-sized service companies or product retailers who sell products but have a limited service department to support their products. In the U.S. market, wethere are beginning to see several companies that are marketing related and somewhat similar products. They include SureFire, Platinum, and ACL (note: Some larger conglomerates, such as Siemens, Honeywell, and TitanLogix. others, manufacture BMS for very sophisticated refinery environments and some larger (e.g. forced-air) systems in the oilfield. But they have not, historically, emphasized sales for natural draft smaller- and mid-size oilfield applications). We had previously included TitanLogix as a competitor, but their recent voluntary recall of their FGI 351 burner management system—together with their recent announcements of additional products in other areas of the industry—suggest to us that they currently do not have a directly competitive position in our area of the industry.
These competitors are focused regionally and tend to focus onhave operations that are limited to areas close to their headquarters. While we believe price is a significant component of competition within our industry, we believe the most important competitive factors are performance, quality, reliability, durability, and durability.installation/service expertise. To that end, we have primarily sought to create high-quality innovative products, then sought to constrain costs without comprising those primary characteristics. Wecharacteristics, and we expect to continue to remain highly competitive in the industry. To help assure our customers of our commitment to quality and safety, our burner management systems have been certified to comply with CSA and UL ratings.
We recognize that the oilfield services industry is highly competitive. Ascompetitive, and as our segment within this industry grows and matures we expect additional companies will seek to enter this market. Many of these companies may be more highly capitalized, more experienced, more recognized or better situated to take advantage of market opportunities.
Sources and Availability of Raw Materials
We do not have a limited number of contracts in place with the parties from whom we acquire the parts used to manufacture our products. We believe, however, there are adequate alternative sources for the parts needed to manufacture our products available to us should they be needed. In the past, we have not experienced any sudden or dramatic increase in the prices of the major parts or components for our systems. However, some of the components that we resell, such as some of our valve products, are available from a limited number of suppliers. If our access to such products became constricted, we could experience a material adverse impact on our results of operations or financial condition. We have, however, recently released a proprietary valve-actuator product, and anticipate our dependency on these limited componentry suppliers could diminish in the future, with increased proprietary-product development. As we anticipate increased revenues—and continued development of proprietary products—we expect to review our relationships with certain suppliers, to help ensure we are working with suppliers that best meet our needs and the needs of our customers.
Because many of the component parts we use are relatively low-priced and readily available, we do not anticipate that a sudden or dramatic increase in the price (or decrease in supply) of any particular part would have a material adverse effect on our results of operations or financial condition even if we were unable to increase our sale prices proportionate to any particular price increase. If we experienced a significant increase in the cost of a significant number of the parts we use to build our systems, such could have a material adverse impact on our results of operations or financial condition until we are able to adjust our sales prices accordingly.accordingly, which could potentially help mitigate the effect of such cost increases.
We contract with a third-party fabricator to manufacture our burner management and flare-ignition systems, specifically the Profire 2100, 1800PF2100, PF1800 and 1300.PF1300. This has helped to improve manufacturing efficiencies. Under the direction of our product engineers, the manufacturer is able to procure all electronic parts, specialty cases and components, and from those, assemble the complete system. Using specialty equipment and processes provided by us, the system is tested on-site by the manufacturer and if the finished product is acceptable, it is shipped to us for distribution. OrdersWe subsequently perform our own quality control testing, and ensure the programming for each system is ready for the anticipated environment of the customer. Shipments to the manufacturer are typically made in increments of 500 to 1,000 systems. Shipmentsus (from our manufacturer) are usually limited to 250approximately 400 systems, so that in the event any one shipment is lost or damaged, inventory levels are not seriously impacted. The entire process is typically completed within sixty days of receiving the purchase order. While we have a contract in place with this manufacturer, should we lose its services, for whatever reason, we believe we inventory sufficient product to meet our customers’ needs in the event of short-term supply chain disruptions. We also believe we have adequate alternative manufacturing sources available, that while such a loss might result in a temporary short-term disruption, we do not anticipate such would result in a materially adverse impact in our ability to meet demand for our products or results of operations, financial condition and cash flows for a significant period of time. We periodically surveyare active in seeking alternative manufacturing options to ensure that our current fabricator is competitive in price, manufacturing quality and fulfillment speed.speed, especially as we increase our production levels for a growing customer base throughout North America.
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Dependence upon Major Customers
During the fiscal years ended March 31, 20132014 and 2012,2013, the following customers accounted for more than 10% of our total revenues:
| Year ended March 31, | | Year ended March 31, | |
Customer | 2013 | | 2012 | | 2014 | | | 2013 | |
Chesapeake Energy | | | | 21 | % | | | 1 | % |
Grit Industries/A-Fire Holdings Ltd. | 10% | | 16% | | | 3 | % | | | 10 | % |
Heating Solutions International Inc. | 12% | | 22% | | | 9 | % | | | 12 | % |
Pride of the Hills | 10% | | 2% | | | 6 | % | | | 10 | % |
Guest Controls | 5% | | 12% | |
OftenSome of our customers, as is the case with Grit Industries Inc./A-Fire Holdings Ltd. and Heating Solutions International Inc., are contractors for large oil companies who specify the use of our equipment. Often,In these cases, often, our customers bid for the same jobs, so if one does not get the job, another likely will. Regardless of who wins the contract, if the oil company bidding out the job requires our equipment the winning bidder has to acquire the equipment from us. Of course, the loss of any one or more of these major customers could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Patents, Trademarks and Other Intellectual Property
WhileAlthough we believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent, trademark, or copyright, as part of our ongoing research, development and manufacturing activities, we have pursued the acquisition of intellectual property for a number of our products. Since April 2012, we
We have filed four provisionalseveral patent applications for patents on various product innovations. Collectively, these applications could potentially yield up to ten different patents, though managementManagement will assess the strategic and financial value of each potential patent as the various intellectual properties are developed before applying for appropriate intellectual property protection.developed.
The fourprovisional and/or non-provisional applications we have filed thus far are intended to protect:
· | a secondary airplate that can dynamically meter air with a unique shuttering mechanism;mechanism, and helps ensure enhanced combustion conditions within a firetube; |
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· | an improved coil housing and cover that help prevent arcing and protect the coil within the burner management system’s enclosure;enclosure, and is designed for consistent performance in harsh oilfield conditions, due to its strong sparking capability; |
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· | a mobile demonstration unit that safely stores and displays a functional burner management system for sales and demonstration purposes; and |
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· | certain valve-related technologies that are currently being developed.technologies. |
Need for Governmental Approval of our Principal Products or Services
We are required to obtain certain safety certification/ratingcertifications/ratings for our combustion management systems before they are released to the market. We have received the appropriate CSACanadian Standards Association (CSA) and UL certifications for our burner management systems.
Effects of Existing or Probable Governmental Regulation on our Business
As government and industry continue to heighten safety standards, demand for combustion safety controllers and management systems, such as those we produce, continues to grow. grow—and combustion processes in oilfields have been a topic of historical and current legislative agendas. B149.3-10 of the CSA governs the safety precautions that must be met concerning the ignition of the pilot and the main burner in Canada. It allows a programmable control to be used, if the controller complies with certain certification requirements promulgated by the CSA.
The arenaColorado department of mixing firePublic Health and gasEnvironment recently passed a regulation that requires that combustion devices installed after May 1, 2014 be equipped with an auto-igniter by May 1, 2016. While the law is anrelatively new—to the state and the industry—we intend to follow its implementation and policing in the coming months and years. We have assigned a number of sales/service professionals to the area, of obvious focusto ensure we have a presence in that state.
We are following other potential regulatory changes that could affect our business, and intend to plan for safety regulators. (and respond to) any resulting changes appropriately.
Governing bodies have historically been reticenthesitant to establish standards that were too demanding, as safety products and policing capabilities were not readily available. More recently, however, regulators have begun enacting more stringent compliance, efficiency requirements, emission standards, and efficiency requirements.other standards that are potentially beneficial to our sales. We have alwayshistorically focused on providing products and services that exceed existing safety standards,standards; therefore, we believe demand for our products will increase as regulators continue to tighten safety and efficiency standards in the industry. In addition to satisfying regulatory and safety requirements, we believe oil and gas companies are beginning to recognize the significant increasesimprovements in efficiency, safety and emission control gainscompliance that can be realized through the use of our burner management systems and related products.products, and we believe that such will continue, especially as oil and gas production increases.
Although we believe our growth prospects to be strong in the existing regulatory environments, changes in the regulatory environment could materially impact our results of operations and financial condition. For example, we believe there could be a dramatican increase in our sales if the U.S. were to adopt regulations that requiredsubsequently increased the industry to usedemand for burner management products. We believe that, historically, a significant portion of our Canadian sales have been attributable to such regulation in Canada, resulting in a higher penetration rate for our products there, and we anticipate such regulatory pressures to continue in Canada.continue. Similarly, if the regulatory environment were to become less stringent, we could experience a significant decline in the demand for our products, which we would expect would materially and adversely impact our results of operations and financial condition. As of the date of this report we are not aware of any pending or anticipated major regulatory changes in the near future.
Research and Development
We place strong emphasis on product-oriented research and development relating to the development of new or improved products and systems. During the years ended March 31, 20132014 and March 31, 20122013 we spent $315,045$703,266 and $164,400,$315,045, respectively, on research and development programs. None of these research and development costs were borne by our customers pursuant to customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques.
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Cost and Effects of Compliance with Federal, State and Local Environmental Laws
Our business is affected by local, provincial, state, federal and foreign laws and other regulations relating to the gas and electric safety standards and codes presently extant in the oil and gas industry, as well as laws and regulations relating to worker safety and potentially environmental protection. We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on us, our business or financial condition.
Additionally, our customers are affected by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change and new regulations may curtail or eliminate customer activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact customer activity levels, and ultimately, the demand for our products and services.
During the fiscal year ended March 31, 20132014 we did not incur material direct costs to comply with applicable environmental laws. There can be no assurance, however, that this will continue to be the case in the future as environmental laws and regulations relating to the oil and natural gas industry are routinely subject to change.
Employees
As of March 31, 20132014 we had a total of 5082 employees, 4875 of whom were full-time employees, including employees in the following areas:with a general categorical breakdown as follows:
· | 1118 sales, |
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· | 12 service, |
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· | 52 other |
· | 10 warehouse, purchasing and quality control, |
In addition to these employees, we have also subcontracted with foura limited number of individuals to provide us product service-related servicesservice- and one individual to provide us administrative-related services.
Reports to Security Holders
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information with the Commission. The public may read and copy any materials we file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Alternatively, you may access these reports, proxy statements and information statements and other information regarding issuers that file electronically with the Commission at its internet website www.sec.gov. We provide free access to our filings with the Commission, as soon as reasonably practicable after filing, on our Internet web sitewebsite located at www.profireenergy.comwww.ProfireEnergy.com. Information appearing on our website is not part of any report that we file with the Commission.
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Item 1A. Risk Factors
In addition to the risks discussed throughout this report we are subject to the following risks.
Risks Relating to our Business
Changes in the level of capital-spending by our customers could materially and adversely impact our business and financial condition.
Our principal customers are oil and natural gas exploration and production companies. Our results of operations and financial condition depend on the level of capital spending by our customers. The energy industry’s level of capital spending is tied to the prevailing commodity prices of natural gas and crude oil. Low commodity prices have the potential to reduce the amount of crude oil and natural gas that our customers can economically produce and volatility in commodity prices may make our customers reluctant to invest in oilfields where our products would be required. Although our products enhance the efficiency of producing wells, we believe a prolonged or substantial downturn in market price would lead to reductions or delays in the capital spending of our clients and therefore in the demand for our products and services, which could materially and adversely impact our results of operations, financial condition and cash flow.
Our business depends on spending by the oil and gas industry; this spending and our business may be materially and adversely affected by industry conditions that are beyond our control.
We depend on our customers’ willingness to make operating and capital expenditures to transport, refine and produce oil and natural gas. Industry conditions are influenced by numerous factors over which we have no control, such as:
· | the level of oil and gas production; |
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· | the demand for oil and gas related products; |
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· | domestic and worldwide economic conditions; |
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· | political instability in the Middle East and other oil producing regions; |
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· | the actions of the Organization of Petroleum Exporting Countries; |
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· | the price of foreign imports of oil and gas, including liquefied natural gas; |
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· | natural disasters or weather conditions, such as hurricanes; |
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· | technological advances affecting energy consumption; |
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· | the level of oil and gas inventories; |
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· | the cost of producing oil and gas; |
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· | the price and availability of alternative fuels; |
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· | merger and divestiture activity among oil and gas producers; and |
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· | governmental regulations. |
The volatility of the oil and gas industry and the consequent impact on the transportation, refinement and production of oil and natural gas could cause a decline in the demand for our products and services, which could have a material adverse effect on our business.
Our assets and operations, as well as the assets and operations of our customers, could be adversely affected by weather and other natural phenomena.
Our assets and operations could be adversely affected by natural phenomena, such as tornados, earthquakes, wildfire, and landslides. A significant disruption in our operations or the operations of our customers due to weather or other natural phenomena could adversely affect our business and financial condition.
The attractive nature of the oilfield services industry could lead to an increase of direct competitors.
The oilfield services industry is highly competitive. As our segment within the oil and gas exploration and production industry grows and matures we expect additional companies will seek to enter this market. New entrants to our industry may be more highly capitalized, more experienced, better recognized or better situated to take advantage of market opportunities. Any failure by us to compete against current and future competitors could have a material adverse effect on our business, financial condition and results of operations.
Changes to governmental regulation of the oil and gas industry could materially and adversely affect our business.
If the laws and regulations governing oil and natural gas exploration and production were to become less stringent, we could experience a significant decline in the demand for our products, which we would expect would materially and adversely impact our results of operations and financial condition. These regulations are subject to change and new regulations may curtail or eliminate customer activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact customer activity levels, and ultimately, the demand for our products and services.
Further, our operations are affected by local, provincial, state, federal and foreign laws and other regulations relating to gas and electric safety standards and the oil and gas industry, as well as laws and regulations relating to worker safety and potentially environmental protection. We cannot predict the level of enforcement of existing laws and regulations, how such existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on us, our business or financial condition.
Failure to comply with applicable environmental and other laws and regulations could adversely affect our business and harm our results of operations.
We may use hazardous materials in our research and development and manufacturing processes, and, as a result, are subject to federal, state, local and foreign regulations governing the use, storage, handling and disposal of these materials and hazardous waste products that we generate. Although we believe that our procedures for using, handling, storing and disposing of hazardous materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the event of an accident, including a discharge of hazardous materials into the environment, we could be held liable for damages or penalized with fines, and the liability could exceed our insurance and other resources. We have also incurred and may continue to incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant negative impact on our business, financial condition and results of operations. Further, we cannot assure you that the cost of complying with these laws and regulations will not materially increase in the future.
We are also subject to various other federal, state, local and foreign laws and regulations. Failure to comply with applicable laws and regulations, including new or revised safety or environmental standards, could give rise to significant liability and require us to incur substantial expenses and could materially harm our results of operations.
Our international operations involve additional risks not associated with our domestic operations.
We intend to continue our expansion into international oil and gas producing areas. The effect on our international operations from the risks we describe will not be the same in all countries and jurisdictions. Risks associated with our operations outside of the United States include risks of:
· | multiple, conflicting, and changing laws and regulations, export and import restrictions, and employment laws; |
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· | regulatory requirements, and other government approvals, permits, and licenses; |
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· | potentially adverse tax consequences; |
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· | political and economic instability, including wars and acts of terrorism, political unrest, boycotts, curtailments of trade and sanctions, and other business restrictions; |
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· | expropriation, confiscation or nationalization of assets; |
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· | renegotiation or nullification of existing contracts; |
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· | difficulties and costs in recruiting and retaining individuals skilled in international business operations; |
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· | foreign exchange restrictions; |
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· | foreign currency fluctuations; |
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· | foreign taxation; |
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· | the inability to repatriate earnings or capital; |
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· | changing foreign and domestic monetary policies; |
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· | cultural and communication challenges; |
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· | industry-process differences; |
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· | regional economic downturns; and |
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· | foreign governmental regulations favoring or requiring the awarding of contracts to local contractors or requiring foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction that may harm our ability to compete. |
Sanctions by the U.S. government against certain companies and individuals in Russia and Ukraine may hinder our ability to conduct business with potential or existing customers in these countries.
While we have not historically derived significant revenue from business in either Russia or Ukraine, the continuation or escalation of the current geopolitical instability in Russia and Ukraine could negatively impact our future operations, sales, and future growth prospects in that region. Recently, the U.S. government imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. The sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with existing and potential customers. If we are unable to conduct business with new or existing customers or pursue opportunities in Russia or Ukraine, our business, including revenue, profitability and cash flows, could be adversely affected.
Our business has potential liability for litigation, personal injury and property damage claims assessments.
Most of our products are used in hazardous production applications and involve exposure to inherent risks, including explosions and fires, where an accident or a failure of a product could result in liability for personal injury, loss of life, property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages, including consequential damages, and could impair the market’s acceptance of our products. The frequency and severity of such incidents could affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have an adverse effect on us.
Our business may be subject to product liability claims or product recalls, which could be expensive and could result in a diversion of management’s attention.
The oil industry experiences significant product liability claims. As an installer and servicer of oilfield combustion management technologies and related products, we face an inherent business risk of exposure to product liability claims in the event that our products, or the equipment into which our products are incorporated, malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that our technology or products caused the accidents. Product liability claims could result in significant losses as a result of expenses incurred in defending claims or the award of damages. In addition, we may be required to participate in recalls involving our products if any of our products prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships. We cannot assure you that our product liability insurance will be sufficient to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a material adverse effect on our reputation and business.
Uninsured or underinsured claims or litigation or an increase in our insurance premiums could adversely impact our results of operations.
Although we maintain insurance protection for certain risks in our business and operations, we are not fully insured against all possible risks, nor are all such risks insurable. It is possible an unexpected judgment could be rendered against us in cases in which we could be uninsured or underinsured and beyond the amounts we currently have reserved or anticipate incurring. Significant increases in the cost of insurance and more restrictive coverage may have an adverse impact on our results of operations. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise.
Liability to customers under warranties may materially and adversely affect our earnings.
We provide warranties as to the proper operation and conformance to specifications of the products we sell. Failure of our products to operate properly or to meet specifications may increase our costs by requiring additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received warranty claims, and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation, our ability to obtain future business and our earnings could be adversely affected.
Some of our products use equipment and materials that are available from a limited number of suppliers.
We purchase equipment provided by a limited number of manufacturers who specialize in combustion burner equipment. During periods of high demand, these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in burner management systems, our largest product line. Although these materials are generally available, supply disruptions may occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices could limit our ability to provide services or increase the costs of providing services, thus possibly reducing revenues and profits.
Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.
As part of our efforts to streamline operations and to cut costs, we outsource our manufacturing processes and other functions and continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers’ orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Additionally, changing or replacing our contract manufacturers or other outsourcers could cause disruptions or delays.
Historically, we have been dependent on a few major customers for a significant portion of our revenue and our revenue could decline if we are unable to maintain those relationships, if customers reduce their orders for their products, or if we are unable to secure new customers.
Historically, we have derived a significant portion of our revenue from a limited number of customers. For the years ended March 31, 2014 and 2013, sales to our largest four customers accounted for approximately 47% and 37%, respectively, of our revenue. While we continually seek to broaden our customer base, it is likely that for the foreseeable future we will remain dependent on these customers to supply a substantial portion of our revenue. Relationships with our customers are based on purchase orders rather than long-term formal supply agreements and customers can discontinue or materially reduce orders without warning or penalty. Demand for our products is tied directly to the health of the oil industry. Accordingly, factors that affect the oil industry have a direct effect on our business, including factors outside of our control, such as sales slowdowns due to economic concerns, or as a result of natural disasters. The loss of one or more of our significant customers, or reduced demand from one or more of our significant customers, would result in an adverse effect on our revenue, our profitability, and our ability to continue our business operations.
We are exposed to risks of delay, cancellation, and nonpayment by customers in the ordinary course of our business activities.
We are exposed to risks of loss in the event of delay, cancellation, and nonpayment by our customers. Our customers are subject to their own operating and regulatory risks and may be highly leveraged. We may experience financial losses in our dealings with other parties. Any delay and any increases in the cancellation of contracts or nonpayment by our customers and/or counterparties could adversely affect our results of operations and financial condition.
Our operating results for certain components of our business may fluctuate on a seasonal basis.
Revenues from the sale of our products can fluctuate depending on the season. The demand for oil, natural gas and other fuels peak during the winter months. Since oil and natural gas producers make up our customer base, the demand for our products could fluctuate seasonally with the demand for oil and natural gas and drilling seasonality. Demand for natural gas and other fuels could vary significantly from our expectations depending on the location of our customers.
Our ability to successfully commercialize our technology and products may be materially adversely affected if we are unable to obtain and maintain effective intellectual property rights for our technologies and planned products, or if the scope of the intellectual property protection is not sufficiently broad.
Our success depends in part on our ability to obtain and maintain patent and other intellectual property protection in the U.S. with respect to our proprietary technology and products. In recent years patent rights have been the subject of significant litigation. As a result, the issuance, scope, validity, enforceability and commercial value of the patent rights is highly uncertain. Pending and future patent applications may not result in patents being issued which protect our technology or products or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the U.S. may diminish the value of patents or narrow the scope of patent protection. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the U.S. and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we were the first to make the inventions claimed in our patents or pending patent applications, or that we or were the first to file for patent protection of such inventions. Even if the patent applications we rely on issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. The issuance of a patent is not conclusive as to its scope, validity or enforceability, and patents may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in patent claims being narrowed, invalidated or held unenforceable, which could limit our ability to stop or prevent us from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours or otherwise provide us with a competitive advantage.
While we are not currently engaged in any material intellectual property litigation, in the future we may commence lawsuits against others if we believe they have infringed our rights. We cannot be assured that we would be successful in any such litigation. Our involvement in any intellectual property litigation could require the expenditure of substantial time and other resources, may adversely affect the development of sales of our products or intellectual property, our capital resources, or may divert the efforts of our technical and management personnel, and could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to protect or enforce our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on all of our planned products throughout the world would be prohibitively expensive to us. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the U.S. These products may compete with our products in jurisdictions where we do not have any issued patents and our intellectual property rights may not be effective or sufficient to prevent them from so competing. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries may not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of any patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce any patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected, harming our business and competitive position.
Some of our proprietary intellectual property is not protected by any patent, copyright or patent or copyright applications, and, despite our precautions, it may be possible for third parties to obtain and use such intellectual property without authorization. We rely upon confidential proprietary information, including trade secrets, unpatented know-how, technology, software, and other proprietary information, to develop and maintain our competitive position. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in the market. We seek to protect our confidential proprietary information, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. These agreements are designed to protect our proprietary information, however, we cannot be certain that our trade secrets and other confidential information will not be disclosed or that competitors will not otherwise gain access to our trade secrets, or that technology relevant to our business will not be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees, consultants or collaborators that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could be disclosed, misappropriated or otherwise become known or be independently discovered by our competitors. In addition, intellectual property laws in foreign countries may not protect trade secrets and confidential information to the same extent as the laws of the U.S. If we are unable to prevent disclosure of the intellectual property related to our technologies to third parties, we may not be able to establish or maintain a competitive advantage in our market, which would harm our ability to protect our rights and have a material adverse effect on our business.
Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Our commercial success depends upon our ability and the ability of our distributors, contract manufacturers, and suppliers to manufacture, market, and sell our products, and to use our proprietary technologies without infringing, misappropriating or otherwise violating the proprietary rights or intellectual property of third parties. While we are not aware of any issued or pending patent applications that could restrict our ability to operate, we may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our products and technology. Third parties may assert infringement claims against us based on existing or future intellectual property rights. If we are found to infringe a third-party’s intellectual property rights, we may be temporarily or permanently prohibited from commercializing our products that are held to be infringing. We might, if possible, also be forced to redesign our products so that we no longer infringe the third party intellectual property rights or we could be required to obtain a license from such third-party to continue developing and marketing our products and technology. We may also elect to enter into such a license in order to settle pending or threatened litigation. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors access to the same technologies licensed to us, and could require us to pay significant royalties and other fees. We could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing our products or force us to cease some of our business operations, which could materially harm our business.
Even if we are successful in defending against intellectual property claims, litigation or other legal proceedings relating to such claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce our resources available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property related proceedings could have a material adverse effect on our ability to compete in the marketplace.
If we do not develop and commercialize new competitive products, our revenue may decline.
To remain competitive in the market for oilfield combustion management technologies, we must continue to develop and commercialize new products. If we are not able to develop commercially competitive products in a timely manner in response to industry demands, our business and revenues will be adversely affected. Our future ability to develop new products depends on our ability to:
· | design and commercially produce products that meet the needs of our customers; |
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· | attract and retain talented research-and-development management and personnel; |
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· | successfully market new products; and |
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· | protect our proprietary designs from our competitors. |
We may encounter resource constraints or technical or other difficulties that could delay introduction of new products and services. Our competitors may introduce new products before we do and achieve a competitive advantage.
Additionally, the time and expense invested in product development may not result in commercial products or provide revenues. We could be required to write off our entire investment in a new product that does not reach commercial viability. Moreover, we may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.
New technologies could render our existing products obsolete.
New developments in technology may negatively affect the development or sale of some or all of our products or make our products obsolete. Our success depends upon our ability to design, develop and market new or modified combustion management technologies and related products. Our inability to enhance existing products in a timely manner or to develop and introduce new products that incorporate new technologies, conform to stringent regulatory standards and performance requirements and achieve market acceptance in a timely manner could negatively impact our competitive position. New product development or modification is costly, involves significant research, development, time and expense and may not necessarily result in the successful commercialization of any new products.
Our business and financial condition could be materiallynegatively impacted if we lose the services of certain employeesmembers of senior management. During
Our development to date has largely depended, and in the fiscal year we brought in additional employeesfuture will continue to largely depend, on the efforts of our senior management, including Brenton W. Hatch, CEO, Harold Albert, COO, and are working to cross train employees to lessen our dependence on any particular individual. We believe this has decreased our dependence on any one individual.Andrew W. Limpert, CFO. We currently maintain key-mando not have key-person insurance for these individuals; however, our recent revenue growth, uplisting to Nasdaq, and corporate expansion—and the increased visibility and shareholder expectations entailed with such—could make the risks associated with the departures of such individuals greater than in the past. Departures by members of our senior management could have a negative impact on our CFO, Mr. Limpert but not on our other executive officers or employees. The policy on Mr. Limpert is a term policy with a two million dollar benefit to the Company. Although it would not solve the potential problem of a loss of the services of any particular employee,business, as we may seek key-man insurancenot be able to find suitable personnel to replace departing members on the other key individuals, and perhaps others, to help in the case of such an event.a timely basis or at all. The loss of the servicesany member of any of the executive officers identified in this reportour senior management could impair our ability to execute our business plan and could therefore have a materially detrimental impactmaterial adverse effect on the Company.our business, results of operations and financial condition.
If we are unableFailing to attract and retain skilled employees that could impair our growth potential and profitability.
Our ability to remain productive and profitable depends substantially on our ability to attract and retain skilled employees. Our ability to expand our operations is in part impacted by our ability to increase our labor force. The demand for skilled oilfield employees is high and the supply is limited. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates paid by us, or both. If either of these events were to occur, our capacity and profitability could be diminished, and our growth potential could be impaired.
The concentration of our customers in one region may impact our overall exposure to credit risk. While we are beginning to realize success in our efforts to expand to new markets, the majority of our current customers are located in Western Canada. This concentration of customers in one industry and one region may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables.
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Our business has potential liability for litigation, personal injury and property damage claims assessments. Our operations involve exposure to inherent risks, including explosions and fires. If any of these events were to occur, it could result in liability for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and severity of such incidents could affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences could have a material adverse effect on the Company. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and assessments that may arise.
Some of our products use equipment and materials that are available from a limited number of suppliers. We purchase equipment provided by a limited number of manufacturers who specialize in combustion burner equipment. During periods of high demand these manufacturers may not be able to meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of suppliers for certain materials used in burner management systems, our largest product line. While these materials are generally available, supply disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices could limit our ability to provide services or increase the costs of providing services thus reducing revenues and profits.
If we are unable to expand into new markets, our ability to grow our business and profitability as planned could be materially and adversely effected.
We intend to continue to pursue our aggressive growth strategy for the foreseeable future. Future operating results will depend largely upon our ability to expand to new markets and increase sales. To support this growth, we have and will continue to expand our marketing expenditures, add new employees and open additional offices, as needed.offices. There can also be no assurance that we will be able to expand our market share in our existing markets or successfully enter new or contiguous markets. Nor can there be any assurance that such expansion will not adversely affect our profitability and results of operations. If we are unable to manage our growth effectively,enter into new markets, our business, results of operations, financial condition and cash flow could be materially and adversely affected.
If we are unable to manage growth effectively, our business, results of operations and financial condition could be materially and adversely affected.
Our ability to successfully expand to new markets, or expand our penetration in existing markets, is dependent on a number of factors including:
●· | our ability to market our products and services to new customers; |
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· | our ability to provide increasingly large-scale support and training materials for a growing customer base; |
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· | our ability to hire, train and assimilate new employees; |
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· | the adequacy of our financial resources; and |
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· | our ability to correctly identify and exploit new geographical markets and to successfully compete in those markets. |
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There can be no assurance that we will be able to achieve our planned expansion, that our products will gain access to new markets or be accepted in new marketplaces, achieve greater market penetration in existing markets or that we will achieve planned operating results or results comparable to those we experience in existing markets in the new markets we enter.
Changes inOur awards of stock options to employees may not have their intended effect.
A portion of our total compensation program for key personnel has historically included the levelaward of capital spending byoptions to buy our customers could negatively impact our business and financial condition. Our principal customers are oil and natural gas exploration and production companies. Our results of operations and financial condition are dependent oncommon stock. If the level of capital spending by our customers. The energy industry’s level of capital spending is substantially related to the prevailing commodity price of natural gas and crude oil. Low commodity prices have the potentialour common stock performs poorly, such performance may adversely affect our ability to reduce the amount of crude oil and natural gas thatretain or attract critical personnel. In addition, any changes made to our customers can produce economically. While our products actually enhance the efficiency of their wells, we believe a prolonged downturn in market price will leadstock option policies, or to reductions in the capital spending budgetsany other of our clientscompensation practices, which are made necessary by governmental regulations or competitive pressures could affect our ability to retain and reductions in the demand for our productsmotivate existing personnel and services, which could materially adversely impact our results of operations, financial condition and cash flow.recruit new personnel.
Risks Relating to our Stock
Our common stock lacks liquidity.
Liquidity of Common Stock. Our common stock has limited trading volume on the Over-the-Counter Bulletin Board and OTCQB and is not listed on a national exchange. Moreover, aA significant percentage of theour outstanding common stock is “restricted” and therefore subject to the resale restrictions set forth in Rule 144 of the rules and regulations promulgated by the United States Securities and Exchange Commission (the “SEC” or “Commission”) under the Securities Act.Act of 1933. These factors could adversely affect the liquidity, trading volume, price and transferability of our common stock.
The market price of our common stock has been and may continue to be volatile.
The market price of our common stock has been volatile, and fluctuates widely in price in response to various factors, which are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors such as the following could cause the market price of our common stock to fluctuate substantially:
· | the introduction of new products by our competitors; |
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· | announcements of technology advances by us or our competitors; |
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· | current events affecting the political and economic environment in the United States; |
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· | conditions or trends in the industry, including demand for our products and services and technological advances; |
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· | changes to financial estimates by us or by any securities analysts who might cover our stock; |
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· | additions or departures of our key personnel; |
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· | government regulation of our industry; |
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· | seasonal, economic, or financial conditions; |
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· | our quarterly operating and financial results; or |
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· | litigation or public concern about the safety of our products. |
The realization of any of these risks and other factors beyond our control could cause the market price of our common stock to decline significantly. In particular, the market price of our common stock may be influenced by variations in oil and gas prices, because demand for our products and services is closely related to those products.
The stock market in general experiences from time to time extreme price and volume fluctuations. Periodic and/or continuous market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility may be worse if the trading volume of our common stock is low.
Future sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well.
As of June 27, 2014, the registrant had 48,041,563 shares of our common stock outstanding, and options that are exercisable into 3,184,615 shares of our common stock. If any significant number of our outstanding shares are sold, such sales could have a depressive effect on the market price of our stock. We are unable to predict the effect, if any, that the sale of shares, or the availability of shares for future sale, will have on the market price of the shares prevailing from time to time. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress prevailing market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price, which we deem appropriate.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.
In our Annual Report on Form 10-K for the year ended March 31, 2013, we reported that we had the following material weaknesses in our internal controls: (1) lack of a functioning Audit Committee and lack of independent directors on our Board of Directors (the “Board”), resulting in potentially ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes. Since March 31, 2013, we developed and implemented a remediation plan to address the identified material weakness as follows:
| 1. We have added four independent directors to our Board and on the 7th day of November, 2013, the Board passed a resolution creating a fully functioning Audit Committee comprised of independent directors; |
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| 2. We hired a separate accounts payable and accounts receivable clerks in an effort to provide segregation of duties in accordance with our control objectives; |
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| 3. We implemented several policies to increase the control over accounting and financial reporting; and, |
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| 4. We hired additional employees to supplement our internal finance team and help oversee the filing of quarterly and year-end filings. |
Although we believe that these efforts have strengthened our internal control over financial reporting, we cannot be certain that our revised internal control practices will ensure that we maintain adequate internal control over our financial reporting in future periods. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and The NASDAQ Capital Market, we could face severe consequences from those authorities. In either case, there could result a material adverse effect on our business. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
We could issue “blank check” preferred stock without stockholder approval with the effect of diluting existing stockholders and impairing their voting rights, and provisions in our charter documents and under Nevada corporate law could discourage a takeover that stockholders may consider favorable.
Our articles of incorporation authorize the issuance of up to 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board. Our Board is empowered, without stockholder approval, to authorize the issuance of a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for the Board to authorize preferred stock with voting or other rights or preferences that could impede the success of any attempt to effect a change in control of our company.
Any aspect of the foregoing, alone or together, could delay or prevent unsolicited takeovers and changes in control or changes in our management
We do not anticipate paying cash dividends for the foreseeable future, and therefore investors should not buy our stock if they wish to receive cash dividends.
We have never declared or paid any cash dividends or distributions on our common stock. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any payment of cash dividends in the future will be dependent on the amount of funds legally available, our earnings, financial condition, capital requirements and other factors that our Board may deem relevant. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock. Accordingly, you will need to rely on sales of your common stock after price appreciation, which may never occur, in order to realize a return on your investment.
Our management has a substantial ownership interest in our common stock and the availability of our common stock to the investing public may be limited. Our management owns approximately 78% of our outstanding common stock.
The availability of our common stock to the investing public may be limited to those shares not held by our executive officers, directors and their affiliates, which could negatively impact our trading prices and affect the ability of our minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock.
You may face significant restrictions on the resale of our common stock due to federal regulations of penny stocks. If at any time we have net tangible assets of $5.0 million or less and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the “penny stock” rules promulgated under the Exchange Act. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
● | make a special written suitability determination for the purchaser; |
● | receive the purchaser’s written agreement to a transaction prior to sale; |
● | provide the purchaser with risk disclosure documents that identify certain risks associated with investing in “penny stocks” and that describe the market for the “penny stocks,” as well as a purchaser’s legal remedies: and |
● | obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed. |
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If
Our management has significant influence over matters requiring shareholder approval.
Our management owns, approximately 71.5% of our common stock, is subject to these rules, broker-dealers may find it difficult to effect customer transactions and trading activity in our securities may be adversely affected.as of June 27, 2014. As a result, our management has sufficient voting power to control the outcome of many matters requiring shareholder approval. These matters may include:
· | the composition of our Board, which has the authority to direct our business, appoint and remove our officers, and declare dividends; |
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· | approving or rejecting a merger, consolidation or other business combination; |
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· | raising future capital; and |
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· | amending our articles of incorporation and bylaws. |
This concentration of ownership of our common stock could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our common stock that might otherwise give our other stockholders the opportunity to realize a premium over the then-prevailing market price of our securitiescommon stock. This concentration of ownership may be depressed, andalso adversely affect our share price. The interests of our management may differ from the interests of our other stockholders. Furthermore, this concentration of ownership may delay, prevent or deter a change in control, or deprive you may find it more difficult to sellof a possible premium for your common stock as part of a sale of our securities.company.
We may not be able to maintain compliance with The NASDAQ Capital Market’s continued listing requirements.
Our common stock is listed on The NASDAQ Capital Market. There are a number of continued listing requirements that we must satisfy in order to maintain our listing on The NASDAQ Capital Market. If we fail to maintain compliance with all applicable continued listing requirements for The NASDAQ Capital Market and NASDAQ determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay any debt and fund our operations.
Item 1B. Unresolved Staff Comments
As a smaller reporting company, as defined in Rule 12b-2 promulgated under the Exchange Act, and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 2. Properties
Our principal executive offices are located at 321 South 1250 West, Suite 1, Lindon, Utah, where we ownWe operate within approximately 12,500an aggregate of 62,000 square feet of executive officespace in six facilities. The following table lists the location of each of our six facilities (two of which we own, and warehouse space. four of which are leased by us), the current lease expiration date (to the extent applicable), the facility’s principal use, and the approximate square footage of the facility:
Property Location | Lease Expiration | Use | Approx. Square Footage |
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Lindon, Utah | Owned | Corporate Headquarters Warehouse Assembly | 35,000 |
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Spruce Grove, Alberta | Owned | Office & Warehouse Assembly | 16,000 |
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Houston, Texas | July 31, 2016 | Office & Warehouse Assembly | 5,000 |
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Victoria, Texas | May 31, 2016 | Office & Warehouse | 2,600 |
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Oklahoma City, Oklahoma | February 28, 2015 | Sales Office | 860 |
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Tioga, Pennsylvania | April 30, 2015 | Office & Warehouse Assembly | 2,500 |
We anticipate this facility will be suitablehave expanded and upgraded our facilities, and believe our newly expanded and upgraded facilities are adequate forto meet our current and future needs for at least the next twelve months. If the need arose, however, we believe we could secure additional space on acceptable terms.
We also have operational offices located at Bay 12, 55 Alberta Avenue, Spruce Grove, Alberta, Canada where we own approximately 16,000 square feet of office and warehouse space. We anticipate this facility will be suitable and adequate for our needs for the next twelve months. If the need arose, however, we believe we could secure additional space on acceptable terms.
Subsequent to the year end, we entered into a new lease to lease approximately 5,000 square feet of office and warehouse space located at 19407 Park Row, Suite 100, Houston, Texas 77403. The term of the lease on this space is through June 2016. Our monthly rent is $3,300. We anticipate this space will be suitable and adequate for our needs through the term of the lease. With the execution of this new lease, we are seeking to sublease the 1,250 square feet of office space we lease at 10900 Brittmore Park Drive, Suite C, Houston, Texas. The term of this lease runs through January 31, 2014. Our monthly rent on this space is $1,463.
Item 3. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in matters may arise from time to time that may harm our business. As of the date of this annual report on Form 10-K management is not aware of any material pending legal, judicial or administrative proceedings to which the Company or any of its subsidiaries is a party or of which any properties of the Company or its subsidiaries is the subject. 15
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is presently quoted on The NASDAQ Capital Market under the symbol “PFIE”. From October 2008 to March 27, 2014, our common stock was quoted on the Over-the-Counter Bulletin Board (“OTCBB”) and the OTC Markets OTCQB under the symbol “PFIE.” Since March 27, 2014, our common stock has been quoted on The NASDAQ Capital Market under the symbol “PFIE”.
The following table presents thepublished high and low bid quotations for the fiscal years endedperiods before March 31, 2013 and 2012. The published high and low bid quotations27, 2014 were furnished to us by OTC Markets Group, Inc. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The table below sets forth the range of high and low bid information of our common stock as reported on the OTC Bulletin Board and OTCQB for the periods before March 27, 2014 and the range of high and low sales price of our common stock as reported on The NASDAQ Capital Market for the periods after March 27, 2014.
| BID PRICES | | BID PRICES | |
| | | HIGH | | | LOW | |
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Fiscal year ending March 31, 2014 | | | | | | | |
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Fourth Quarter | | | $ | 4.10 | | | $ | 3.17 | |
Third Quarter | | | $ | 4.13 | | | $ | 2.21 | |
Second Quarter | | | $ | 2.70 | | | $ | 1.26 | |
First Quarter | | | $ | 1.61 | | | $ | 1.15 | |
| HIGH | | LOW | | | | | | | | |
Fiscal year ended March 31, 2013 | | | | | | | | | | | |
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Fourth Quarter | $ 1.42 | | $ 1.05 | | $ | 1.42 | | | $ | 1.05 | |
Third Quarter | 1.40 | | 1.02 | | $ | 1.40 | | | $ | 1.02 | |
Second Quarter | 1.40 | | 0.77 | | $ | 1.40 | | | $ | 0.77 | |
First Quarter | 1.55 | | 0.77 | | $ | 1.55 | | | $ | 0.77 | |
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Fiscal year ended March 31, 2012 | | | | |
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Fourth Quarter | $ 1.75 | | $ 0.67 | |
Third Quarter | 0.95 | | 0.30 | |
Second Quarter | 0.80 | | 0.28 | |
First Quarter | 1.11 | | 0.275 | |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Our consolidated financial statements are presented in U.S. dollars. Our functional currencies are the U.S. dollar (USD) and the Canadian dollar, and our reporting currency is Canadian dollars.the USD. Our financial statements were translated to U.S. dollars using year-end exchange rates for the balance sheet and weighted average exchange rates for the statements of operations. Equity transactions were translated using historical rates. Foreign currency translation gains or losses as a result of fluctuations in the exchange rates are reflected in the statement of operations and comprehensive income.
Therefore, the translation adjustment in our consolidated financial statements represents the translation differences from translation of our financial statements. As a result, the translation adjustment is commonly, but not always, positive if the average exchange rates are lower than exchange rates on the date of the financial statements and negative if the average exchange rates are higher than exchange rates on the date of the financial statements.