PROFIRE ENERGY, INC.
Unless otherwise indicated by the context, any reference herein to the "Company", "Profire", "we", our""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 report on Form 10-K are in U.S. dollars.
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
We initially developed our first burner-management system in 2005. Since 2005,then, we have released several iterations of our initial burner-management system, to increaseincreasing features and capabilities, while maintaining compliance with North American standards, including Canadian Standards Association (CSA) and, Underwriters Laboratories (UL) ratings., and Safety Integrity Level (SIL) standards.
Our burner-management systems have become widely used in Western Canada and throughout many regions in the United States. We have sold our burner-management systems to many large energy companies, including Anadarko, Chesapeake, Energy, ConocoPhillips, Devon, Energy, Encana, Exxon-Mobil, Petro-Canada,XTO, CNRL, Shell, OXY, and others. Our systems have also been sold or installed in other parts of the world, including France, Italy, Ukraine, India, Nigeria,many countries in Europe, South America, Africa, the Middle East Australia, and Brazil. While we have an interestAsia. We are established in expanding our international distribution capabilities, our current principal focus is on the North American oil and gas market.markets, which is our primary focus currently, but we are working to expand further into other international markets.
We have also had success in working with Original Equipment Manufacturers (OEMs) who manufacture the production and processing equipment on which our products are utilized. These products can be used inon new wellswell pads or as replacements for former old or defective products. In addition, weWe have also had success in working with strategic partners that deliver instrumentation and electrical (I&E) services in the industry. When drilling activity is high, these OEMs and I&Es provide us with a relatively easy-to-scale sales and service channel.
In addition to developing a larger presence in international markets in future years, we believe the PF3100 platformand PF2200 platforms will serve as the base for applications outside of the oil and gas industry (as well as for new applications within the oil and gas industry). Although our primary focus is on serving the oil and gas industry, we continue to look for opportunities to expand and diversify our product footprint to other industries. For example, the PF3100these platforms could have applications in the agricultural industry. We intend to continue to explore these opportunities.
We believe most of our competitors have limited sales and service departments to promote and support their products. Most of our competitors are regionally focused, with operations that are limited to areas close to their headquarters. There are several companies marketing burner-management products similar to ours. Our direct competitors include Combustex, SureFire, Platinum, and ACL.
While price is a significant method of competition within our industry, we believe the most important competitive factors are performance, quality, reliability, durability, and installation/service availability and expertise. To that end, we have primarily sought to first create high-quality and innovative products, and then to constrain costs without compromising those primary characteristics.quality and innovation. Relative to our competition, we believe our product-offering tends to be about average in price, but with above-average capability, reliability, and product-support.
We believe this quality-focused approach will help us continue to remain 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, UL, and UL ratings.SIL standards. Additionally, because we were an early-mover in the burner-management market, we have the advantage of established relationships with both suppliers and customers, which help create a barrier to new entrants.
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 becamebecomes constricted, we could experience a material adverse impact on our results of operations or financial condition. We continue to develop proprietary products that could reduce some of our dependency on these limited componentry items. As we anticipate continued development of proprietary products, we expect to review vendor relationships 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 wereare unable to increase our sales prices proportionate to any particular price increase.
We also believe we have adequate alternative manufacturing sources available, and that while such a loss might result in a temporary short-term disruption, we do not anticipate it 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 seekevaluate alternative manufacturing options to ensure our current fabricator isfabricators are competitive in price, manufacturing quality and fulfillment speed, and to ensure we have the ability to scale our production levels based on customer demand and market conditions.
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| Customer | | Year Ended December 31, 2017 | | Nine-Month Transition Period |
| Chesapeake Energy | | 4 | % | | 11 | % |
Patents, Trademarks and Other Intellectual Property
We have filed or acquired several patent applications for various product innovations, both domestically and internationally. Management willWe intend to continue to assess the strategic and financial value of each potential patent as we develop various intellectual properties. The provisional and/or non-provisional applications we have filed thus far are intended to protect:
inline pilot technologies to increase efficiency and reliability of pilot-light performance in a variety of climates;
software technology within a modular burner-management system; and
certain valve-related technologies.
We have a patent that covers our proprietary coil which expires on December 2, 2035, a patent related to our chemical-management system and its process which expires on March 9, 2036, and a patent over the temperature control valve which expires on November 16, 2036.
Need for Governmental Approval of our Principal Products or Services
We are required to obtain certain safety certifications/ratings for our combustion- and chemical-managementcombustion-management systems before they are released to the market. We have received the appropriate certifications including CSA, Intertek and UL certifications for our burner-management and chemical-management systems.
Although sales of our products and services have not been dependent on industry regulations, we believe industry regulations have enhanced our sales environment in certain geographies. We believe that increased regulation in the areas of lower emissions and higher safety standards for our customers—especially when coupled with consistent enforcement—may influence potential customers to purchase our products or services.
Effects of Existing or Probable Governmental Regulation on our Business
We believe that our products can improve regulatory compliance for our customers. Regulations concerning emissions, safe burner ignition methods, data logging, or other regulatory dimensions that could be related to our products, may impact our customers and markets. Examples of such regulations include:
•B149.3-10, which has evolved in recent years and is effective for Alberta, governs the safety precautions that must be met concerning the ignition of the pilot and the main burner in Canada. It requires a programmable control to be used, if the controller complies with certain certification requirements promulgated by the CSA.
•Regulation 7, which was passed during fiscal year 2014 by the Colorado Department of Public Health and Environment, required that combustion devices installed after May 1, 2014, be equipped with an auto-igniter and all existing combustion devices to be equipped with an auto-igniter by May 1, 2016.
•R307-503-4(1) (b) & (c), which was passed during fiscal year 2014 by the Utah Department of Air Quality, mandated that all new open and enclosed flareflares have an auto-igniter. The rule required the two largest oil- and gas-producing counties in the stateUtah to retrofit all existing enclosed flareflares with auto-igniters by December 1, 2015, and all other counties to comply by April 1, 2017.
•Order 25417, which was passed by North Dakota's Industrial Council, is a rule that became effective April 1, 2015, and requires producers to condition crude oil before transportation and prove oil temperature is above 110 degrees Fahrenheit, to burn off toxic gases from the oil.
Our burner-management system's design enables our products to help companies become compliant with the aforementioned and other regulations. While these industry requirements are relatively new,regulations and we intend to continue following their implementation and enforcement. We have assigned sales and service professionals to these specific geographic areas to ensure we have a strong presence in the States and Provinces with specific regulations.
In light of this regulatory environment, weWe are focused on providing products and services that exceed existing regulatory and industry safety standards; therefore, westandards. We believe demand for our products may 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 continue to recognize the operational efficiencies that can be realized through the use of our burner-management systems and related products. However, significant changes in the regulatory environment could materially impact our results of operations and financial condition. For example, a significant portion of our historical Canadian sales has been aided by such regulation, resulting in a higher estimated penetration rate for our products there, and we anticipate such regulatory pressures to continue. Consequently, if the regulatory environment were to become significantly less stringent, we may experience a decline
in the demand for our products, which could 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.
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 fiscal yearyears ended December 31, 20172019 and the nine-month transition period ended December 31, 2016,2018, we spent $1,221,211$1,933,112 and $757,880,$1,397,440, respectively, on research and development programs.
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 existing in the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection.
During the fiscal yearyears ended December 31, 20172019 and the nine-month transition period ended December 31, 2016,2018, respectively, 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 December 31, 2017,2019, we had a total of 98117 employees, 86104 of whom were full-time employees.
Executive Officers of the Registrant
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| Name | | Age | | Positions Held |
| Brenton W. Hatch | | 69 | | | Chief Executive Officer and President (2008 to present) |
| | | | |
Name | | Age | | Positions Held |
Brenton W. Hatch | | 67 | | Chief Executive Officer (2008 to present) |
| | | | |
| Ryan Oviatt | | 4446 | | | Chief Financial Officer (2015 to present) |
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| Cameron Tidball | | 43 | | | Chief Business Development Officer (2018 to present) |
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| Jay Fugal | | 36 | | | Vice President of Operations (2018 to present) |
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| Patrick Fisher | | 42 | | | Vice President of Product Development (2019 to present) |
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available free of charge on our website at www.profireenergy.com as soon as reasonably practicable after we file such information electronically with, or furnish it to, the U.S. Securities and Exchange Commission (the “SEC”).
Item 1A. Risk Factors
In addition to the risks discussed throughout this report we are subject to the following risks.
Forward-looking statements may prove to be inaccurate.
In our effort to make the information in this report more meaningful, this report contains both historical and forward-looking statements. All statements other than statements of historical fact are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 and Section 21E of the 1934 Act. Forward-lookingThe statements in this report are not based on historical facts, but rather reflectsection describe the current expectations ofknown material risks to our management concerning future resultsbusiness and events. We have attempted to qualify our forward-looking statements with appropriate cautionary language to take advantage of the judicially-created doctrine of "bespeaks caution" and other protections.should be considered carefully.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements to be different from any future results, performance and achievements expressed or implied by these statements. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this annual report. Other unknown or unpredictable factors also could have material adverse effects on our future results.
Risks Relating to ourOur 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 that operate in the upstream and midstream space and the OEM'soriginal equipment manufacturers, or OEM’s, that supply the exploration and production companies with burner related equipment. Thus, the results of our 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 reduceoil because the amount of crude oil and natural gas that our customers can economically produce and volatilityalso depends on the prevailing prices for those commodities. Volatility in commodity prices may make our customers reluctant to invest in oilfieldsthe oil and gas industry where our products would be used. Although our products canmay enhance the operational efficiency of producing wells, a prolonged or substantial downturn in market price could lead to reductions or delays in the capital spending of our clientscustomers and therefore reduce the demand for our products and services, which could materially and adversely impact our results of operations, financial condition and cash flow.
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;
•the demand for oil and gas related products;
•domestic and worldwide economic conditions;
•political instability in the Middle East and other oil producingoil-producing regions;
•the actions of the Organization of Petroleum Exporting Countries;Countries (OPEC);
•the price of foreign imports of oil and gas, including liquefied natural gas;
•natural disasters or weather conditions, such as hurricanes;
•technological advances affecting energy consumption;
•the level of oil and gas inventories;inventories globally;
•the cost of producing oil and gas;
•the price and availability of alternative fuels;
•merger and divestiture activity among oil and gas producers; and
•governmental regulations.
The volatility of the oil
These and gasother industry conditions could influence our customers’ willingness to make operating and the consequent impact on the transportation, refinementcapital expenditures to transport, refine and production ofproduce 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. Major declines in oil and natural gas prices since July 2014 (when prices were at approximately $100 per barrel) have resulted in substantial declines in capital spending and drilling programs across the industry. As a result of these declines in oil and natural gas prices over the last couple years, most exploration and production companies have reduced drilling programs from the historic levels seen in 2014.
Our assets and operations, as well as the assets and operations ofgas. If our customers could be adversely affected by weatherreduce or eliminate such operating and other natural phenomena.
Our assets and operations could be adversely affected by natural phenomena, such as tornados, earthquakes, wildfire, floods, and landslides. A significant disruption in our operations or the operations of our customers due to weather or other natural phenomena couldcapital expenditures, it may adversely affect our business and financial condition.
Changes in foreign exchange rates in countries where our business operates could have a material adverse impact on our business and financial condition.
A portion of our consolidated revenue and consolidated operating income is in Canadian dollars. As a result, we are subject to significant risks, including:
foreign•Canadian currency exchange risks resulting from changes in foreignCanadian currency exchange rates and the execution of controls in this area;
•limitations on our ability to reinvest earnings from operations in one countrythe United States to fund our operations in other countries.Canada.
The Canadian Dollar (CAD) lost substantial value compared to the United States Dollar (USD) during the nine-month transition period ended December 31, 2016 and negatively impacted our financial results; however, rates rebounded during the
year ended December 31, 2017, which positively impacted our financial results. If the volatility in the CAD/USD exchange rate causes anothera devaluation in either currency, it could have a material adverse impact on our business and financial condition.
The competitive nature of the oilfield services industry could lead to an increase of direct competitors.
As our segment within the oil and gas exploration and production industry grows and matures weit is reasonable to expect additional companies willmay seek to enter this market. New entrants to our industry may be more highly capitalized, better recognized or better situated to take advantage of market opportunities. Any failure by usIf we are unable to adequately compete against current and future competitors, could have a material adverse effect onor if the competition results in price reductions or decreased demand for our products, our business, financial condition and results of operations.operations may be materially and adversely affected.
We may not realize all of the anticipated benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.
Our future business strategies may include growth through the acquisitions of other businesses. We may not be able to identify attractive acquisition opportunities or successfully acquire those opportunities that are identified. Even if there is successwe are successful in integrating future acquisitions into existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings, obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected returns on the capital. TheAdditionally, the competition for acquisition opportunities may increase which in turn would increase our cost of making acquisitions.
In pursuing our business strategy, from time to time we evaluate targets and enter into agreements regarding possiblefor potential acquisitions. To be successful, weWe conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete transactions and manage post-closing matters such as the integration of acquired businesses. WeHowever, we may incur unanticipated costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities.
The risks associated with our past or future acquisitions also include the following:
•the business culture of the acquired business may not match well with our culture;
•we may fail to retain, motivate and integrate key management and other employees of the acquired business;
•we may experience problems in retaining customers and integrating customer bases;
•we may experience complexities associated with managing the combined businesses; and
•consolidating multiple physical locations.
There can be no assurance as to the extent to which theThe anticipated benefits of these acquisitions willmay not be realized, if at all, or thatand we may incur significant time and costs beyond those anticipated will not be required with the integration of new acquisitions to the existing business. If we are unable to accomplish the integration and management of the combined business successfully, or achieve a substantial portion of the anticipated benefits of these acquisitions within the time frames anticipated by management,Management, it could have a material adverse effect on our business and financial condition.
Many of these factors will beare outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues, and diversion of management'sManagement's time and attention. They may also delay the realization of the benefits we anticipate when we enter into a transaction. Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business and financial condition.
Our operations involve operating hazards, which, if not insured or indemnified against, could harm our results of operations and financial condition.
Our operations are subject to hazards inherent in our technology's use in oilfield service operations, oilfield development and oil production activities, including fire, explosions, blowouts, spills and damage or loss from natural disasters, each of which could result in substantial damage to the oil-producing formations and oil wells, production facilities, other property, equipment and the environment, or in personal injury or loss of life. These hazards could also result in the suspension of purchasing, or in claims by employees, customers or third parties which could have a material adverse effect on our financial condition.
Some of these risks are either not insurable or insurance is available only at rates that we consider uneconomical. Although we will maintain liability insurance in an amount that we consider consistent with industry practice, the nature of these risks is such that liabilities could exceed policy limits. We may not always be successful in obtaining contractual indemnification from
our customers, and customers who provide contractual indemnification protection may not maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. Our insurance or indemnification arrangements may not adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against, or the failure of a
customer to meet its indemnification obligations to us, could materially and adversely affect our results of operations and financial condition.
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 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.
Furthermore, our operations are affected by local, provincial, state, federal, and foreign laws and other regulations relating to oil, gas and electric standards. Such standards can be related to safety, environmental protection, or other regulatory dimensions for the oil and gas industry. We cannot predict the level of enforcement of existingAny change in local, provincial, state, federal and foreign laws and other 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,could adversely affect our business orand financial condition.
Our international operations subject us to certain operating risks, which could adversely impact our results of operations and financial condition.
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;
•regulatory requirements, and other government approvals, permits, and licenses;
•potentially adverse tax consequences;
•political and economic instability, including wars and acts of terrorism, political unrest, boycotts, curtailments of trade, tariffs and sanctions, and other business restrictions;
•expropriation, confiscation, or nationalization of assets;
•renegotiation or nullification of existing contracts;
•difficulties and costs in recruiting and retaining individuals skilled in international business operations;
•foreign exchange restrictions;
•foreign currency fluctuations;
•foreign taxation;
•the inability to repatriate earnings or capital;
•changing foreign and domestic monetary policies;
•cultural and communication challenges;
•industry-process changes in heating and flow of oil;
•regional economic downturns;
•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; and
compliance
•failure to comply with anti-corruption and anti-bribery laws, including the U.S. Foreign Corrupt Practices Act.
Our business has potentialcould result in 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 result in substantial costs and diversion of our management'sManagement's attention and resources, which could have an adverse effect on our business.
Our business may be subject to product liability claims or product recalls, which could be expensive and could result in a diversion of management'sManagement'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, could 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, products or services caused or contributed to the accidents. Product liability claims could result in significant losses as a result of expenses incurred in defending claims or the awarding 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 in an effort to maintain good customer relationships. We cannot be certain that ourOur product liability insurance willmay not be sufficient to cover all product liability claims, that such claims will notmay exceed our insurance coverage limits, or that such insurance willmay not 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 infor which we could be uninsured or underinsured and damages could be 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 willmay not be adequate to cover future claims and assessments that may arise.
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 tornadoes, earthquakes, wildfire, floods, 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.
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 inIn the past we have 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. 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 meet our customers' needs, or could increase the related costs, 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, weWe outsource our manufacturing processes and other functions and continue to evaluate additional outsourcing.outsourcing in order to maintain efficient operations. 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 precludeprevent 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 depended 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. 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. In addition, the same factors that may lead to a reduction in our potential customers' spending may also increase our exposure to the risks of nonpayment and nonperformance by our existing customers. A significant reduction in our customers' liquidity may result in a decrease in their ability to pay or otherwise perform their obligations to us. Any increase in nonpayment or nonperformance by our customers, either as a result of recent changes in financial and economic conditions or otherwise, could have an adverse impact on theour operating results and adversely affect our liquidity.
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 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 same, especially in jurisdictions in which we hope to secure protection, 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.United States and other jurisdictions,jurisdictions. Consequentially, such discoveries are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we weremay not have been the first to make the inventions claimed in our patents or pending patent applications, or that we or weremay not have been the first to file for patent protection of such inventions.
Even if the patent applications we rely on are issued as patents, they may not issuebe issued 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.United States and abroad.internationally. 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 wouldmay not 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 our patents throughout the world would be prohibitively expensive to us.expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection, to develop their own products, and may export otherwise infringing products to territories where we have patent protection but where enforcement is not as strong as in the U.S. TheseUnited States. Competitors' 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, copyrightpatents or patent or copyright applications,copyrights, 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 notcould be disclosed or that competitors will notcould otherwise gain access to our trade secrets, or that technology relevant to our business will notcould be independently developed by a person that is not a party to such agreements. 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.United States. 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 we could require usbe required 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. Such litigation or proceedings could substantially increasedecrease our operating lossesprofits and reduce our resources
available for development activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. As a result of their substantially greater financial resources, some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can. Uncertainties resulting from the initiation and continuation of litigation or other intellectual property relatedproperty-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;
•attract and retain talented research-and-development management and personnel;
•successfully market new products; and
•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. 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. 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 business and financial condition could be negatively impacted if we lose the services of certain members of senior management.
Our development to date has largely depended, and in the future will continue to largely depend, on the efforts of our senior management. We currently do not have key-person insurance on any of our senior management team. Thus, the loss of any member of our senior management could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, results of operations, and financial condition.
Failing to attract and retain skilled employees 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 scale our operations is in part, and at times, impacted bydepends on our ability to increase our labor force. The demand for skilled oilfield employees is high and the supply is limited. As a result of the volatility of the oil fieldoilfield services and technology industry, our ability to offer competitive wages and retain skilled employees may be diminished.
If we are unable to expand in existing or into new markets, our ability to grow our business as profitably as planned could be materially and adversely affected.
While it remains our primary focus there can be no assurance that we will be able to expand our market share in our existing markets or successfully enter new or contiguous markets especially in light of industry volatility. Nor can there be any assurance that such expansion will not adversely affect our profitability and results of operations. If we are unable to enter into new markets, our business 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, depends on a number of factors including:
our ability to market our products and services to new customers;
our ability to provide large-scale support and training materials for a growing customer base;
our ability to hire, train and assimilate new employees;
the adequacy of our financial resources; and
our ability to correctly identify and exploit new geographical markets and to successfully compete in those markets.
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, that we will 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.
Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our
operations.
Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others.
We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber-attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards.
While we believe that our security technology and processes provide adequate measures of protection against security breaches and reduce cybersecurity risks, disruptions in, or failures of, information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees, and those with whom we do business.
Risks Relating to our Stock
Our stock options and other equity-based awards to employees may not have their intended effect.
A portion of our total compensation program for key personnel has historically included awards of options to buy our common stock or other equity-based awards. If the price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract key personnel. In addition, if we are unable to continue to provide attractive equity compensation awards or other compensation incentives for any reason, we may be unable to retain and motivate existing personnel and recruit new personnel.
Our common stock lacks liquidity.If we are unable to expand in existing or into new markets, our ability to grow our business as profitably as planned could be materially and adversely affected.
A significant percentageWe may not be able to expand our market share in our existing markets or successfully enter new or contiguous markets especially in light of our 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 SEC under the Securities Act of 1933. These factorsindustry volatility. In addition, such expansion could adversely affect our profitability and results of operations. If we are unable to enter into new markets, our business 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, depends on a number of factors including:
•our ability to market our products and services to new customers;
•our ability to provide large-scale support and training materials for a growing customer base;
•our ability to hire, train and assimilate new employees;
•the liquidity, trading volume, price and transferabilityadequacy of our common stock.financial resources; and
•our ability to correctly identify and exploit new geographical markets and to successfully compete in those markets.
We may not be able to achieve our planned expansion and our products may not gain access to new markets or be accepted in new marketplaces. We may not achieve greater market penetration in existing markets and we may not achieve planned operating results, or results comparable to those we experience in existing markets, in the new markets we enter.
Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations.
Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing, and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers, and others.
We invest in industry standard security technology to protect our data and business processes against risk of data security breach and cyber-attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security
effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards.
While we believe that our security technology and processes provide adequate measures of protection against security breaches and reduce cybersecurity risks, disruptions in, or failures of, information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber-attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our business, our employees, and those with whom we do business.
Risks Relating to our Common Stock
The market price of our common stock has been and may continue to be volatile.volatile and you may have difficulty reselling any shares of our common stock.
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 underlying price of the commodities in the oil and gas industry;
•announcements of capital budget changes by a major customer;
•the introduction of new products by our competitors;
•announcements of technology advances by us or our competitors;
•current events affecting the political and economic environment in the United States or Canada;
•foreign currency fluctuations;
•conditions or industry trends, including demand for our products, services and technological advances;
•changes to financial estimates by us or by any securities analysts who might cover our stock;
additions or departures of
•changes in our key personnel;
•government regulation of our industry;
•seasonal, economic, or financial conditions;
•our quarterly operating and financial results; or
•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.commodity prices. 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.
A small number of existing stockholders own a significant amount of our common stock, which could limit your ability to influence the outcome of any stockholder vote.
As of December 31, 2019, our executive officers, directors, and certain beneficial owners owned approximately 33% of our common stock. As a result, our insiders have sufficient voting power to significantly influence the outcome of many matters requiring stockholder approval. These matters may include:
•the composition of our Board of Directors, which has the authority to direct our business, appoint and remove our officers, and declare dividends;
• approving or rejecting a merger, consolidation, or other business combination;
• raising future capital; and
• 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 common stock. This concentration of ownership may also adversely affect our share price. The interests of these existing stockholders may differ from the interests of our other stockholders.
While we have no existing agreements or plans for mergers or other corporate transactions that would require a stockholder vote at this time, this concentration of ownership may delay, prevent or deter a change in control, or deprive investors of a possible premium for owned common stock as part of a sale of our Company.
Our existing shareholdersstockholders could experience further dilution if we elect to raise equity capital to meet our liquidity needs or to finance strategic transactions.
As part of our future growth strategy, we may desire to raise capital, issue stock to employees pursuant to our 2014 Equity Incentive Plan, and or utilize our common stock to effect strategic business transactions, any of which will likely require thattransactions. If we issue equity (or debt) securities which wouldin connection with any of these actions, such issuance will result in dilution to our existing stockholders. Although we anticipate attempting to minimize the dilutive impact of any future capital-raising activities or business transactions, we cannot offer any assurance that we will be effectively able to do so.
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.
If any significant number of our outstanding shares of our common stock 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 controlscontrol over financial reporting and to disclose any changes and material weaknesses in those internal controls.control over financial reporting. In Item 9A of this report, we disclose that with
respect to the standards of
Sarbanes-Oxley Section 404
of the Sarbanes-Oxley Act of 2002, the internal controls-standard to which we
were subjected to,are subject, we
reported material weaknesses inconcluded that our internal
controlscontrol over financial
reporting.reporting was effective as of December 31, 2019. For additional information on this item, please see
Item 9A. Controls and Procedures.Procedures.
Although we believe our historical efforts have strengthened our internal control over financial reporting (and we concluded that our internal controls over financial statementsreporting were reliable, notwithstanding theeffective as of December 31, 2019, we have identified and reported material weakness we reported),weaknesses in prior periods, and we cannot be certain that our revised internal control practices will ensure that we will have or maintain adequate internal control over our financial reporting in future periods. Any failure to have or maintain such internal controls could adversely impact our ability to report our financial results accurately and on a timely basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations.
We may be subject to stockholder litigation, thereby diverting our resources, which could materially adversely affect our profitability and results of operations.
The market for our common stock is volatile, and we expect it will continue to be volatile for the indefinite future. Plaintiffs often initiate securities class action litigation against a company following periods of volatility in the market price for its securities. In addition, stockholders may bring actions against companies relating to past transactions or other matters. Any such actions could give rise to substantial damages and thereby materially adversely affect our consolidated financial position, liquidity, or results of operations. Even if an action is not resolved against us, the uncertainty and expense associated with stockholder actions could materially adversely affect our business, prospects, and financial condition. Litigation can be costly, time-consuming and disruptive to business operations. The defense of lawsuits could also result in diversion of Management’s time and attention away from business operations, which could harm our business.
We could issue "blank check"“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"“blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our Board.Board of Directors. Our Board of Directors 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 theour Board of Directors 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.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 of Directors 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.
Our managementAnti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of our company.
Although we are not currently subject to Nevada’s control share law, we could become subject to Nevada’s control share law in the future. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada, and it does business in Nevada or through an affiliated corporation. The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares sufficient, but for the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more. The ability to exercise such voting power may be direct or indirect, as well as individual or in association with others.
The effect of the control share law is that the acquiring person, and those acting in association with it, obtains only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to strip voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law. If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an acquiring person, who has not voted in favor
of approval of voting rights is entitled to demand fair value for such stockholder’s shares. Nevada’s control share law may have the effect of discouraging takeovers of the corporation.
In addition to the control share law, Nevada has a substantial ownership interestbusiness combination law which prohibits certain business combinations between Nevada corporations and “interested stockholders” for two years after the “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s Board of Directors approves the combination in our common stockadvance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the availabilitytwo previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders. The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of our common stock toCompany from doing so if it cannot obtain the investing public may be limited.
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.
Our insiders have significant influence over matters requiring shareholder approval.
Our insiders own over 50% of our common stock as of December 31, 2017. As a result, our insiders have sufficient voting power to control the outcome of many matters requiring shareholder approval. These matters may include:
the compositionapproval of our Board which has the authority to direct our business, appoint and remove our officers, and declare dividends;of Directors.
approving or rejecting a merger, consolidation or other business combination;
raising future capital; and
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 common stock. This concentration of ownership may also adversely affect our share price. The interests of our insiders 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 investors of a possible premium for owned common stock as part of a sale of our company.
We may not be able to maintain compliance with The NASDAQthe Nasdaq Capital Market's continued listing requirements.
Our common stock is listed on The NASDAQthe Nasdaq Capital Market. There are a number of continued listing requirements that we must satisfy in order to maintain our listing on The NASDAQthe Nasdaq Capital Market. Although we intend to comply with all of the continued listing requirements, it is possible we may fail to do so. If we fail to maintain compliance with all applicable continued listing requirements for The NASDAQthe Nasdaq Capital Market and NASDAQ determinesthey determine 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 future debt we could incur, and fund our operations.
If our common stock were to be delisted from NASDAQ, trading of our common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities such as the OTC Bulletin Board. Such trading would likely reduce the market liquidity of our common stock. As a result, an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, our common stock. If our common stock is delisted from NASDAQ and the trading price remains below $5.00 per share, trading in our common stock might also become subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trade involving a stock defined as a "penny stock" (generally, any equity security not listed on a national securities exchange or quoted on NASDAQ that has a market price of less than $5.00 per share, subject to certain exceptions). Many brokerage firms are reluctant to recommend low-priced stocks to their clients. Moreover, various regulations and policies restrict the ability of stockholders to borrow against or "margin" low-priced stocks, and declines in the stock price below certain levels may trigger unexpected margin calls. Additionally, because brokers' commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher priced stocks, the current price of the common stock can result in an individual stockholder paying transaction costs that represent a higher percentage of total share value than would be the case if our share price were higher. This factor may also limit the willingness of institutions to purchase our common stock. Finally, the additional burdens imposed upon broker-dealers by these requirements could discourage broker-dealers from facilitating trades in our common stock, which could severely limit the market liquidity of the stock and the ability of investors to trade our common stock. As a result, the ability of our stockholders to resell their shares of common stock, and the price at which they could sell their shares, could be adversely affected. The delisting of our stock from NASDAQ would also make it more difficult for us to raise additional capital.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The following table lists the location and description of each of our facilities, the current lease expiration date (when applicable), and the facility's principal use, and approximate square footage:
|
| | | | | | | | | | |
| Location | Lease Expiration | Use | Square Footage |
| Lindon, Utah | Owned | Corporate HQ & Warehouse Assembly | 50,500 | |
| Spruce Grove, Alberta | Owned | Office & Warehouse Assembly | 16,000 | |
| Acheson, Alberta | Owned | Office & Warehouse Assembly | 25,500 | |
| Greeley, Colorado | Owned | Office & Warehouse Storage | 2,750 | |
Houston,Victoria, Texas | August 31, 201815, 2020 | Office & Warehouse Assembly | 3,250 | |
Shelocta,Homer City, Pennsylvania | January 31, 2018May 1, 2020 | Office & Warehouse Storage | 2,100 | |
| Millersburg, Ohio | Month-to-Month | Office & Warehouse Assembly | 1,600 | |
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 December 31, 2017,2019, Management is not aware of any 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 that we believe could have a material impact on our operations or financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Registrant's Common Equity and Holders
The Company's common stock is traded on the NASDAQ Capital Market under the symbol "PFIE." As of March 6, 2018,9, 2020, there were approximately 9180 shareholders of record for our common stock. The number of record shareholders was determined from the records of our stock transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, registered clearing houses or agencies, banks, or other fiduciaries. We have never declared dividends and we have no intention of doing so in the foreseeable future.
The table below displays the high and low closing prices of our common stock as quoted by the NASDAQ Capital Market during each quarter presented:
|
| | | | | | | | |
| Quarter Ended | | High | | Low |
| June 30, 2016 | | $ | 1.11 |
| | $ | 0.86 |
|
| September 30, 2016 | | $ | 1.32 |
| | $ | 1.11 |
|
| December 31, 2016 | | $ | 1.43 |
| | $ | 1.08 |
|
| March 31, 2017 | | $ | 1.62 |
| | $ | 1.18 |
|
| June 30, 2017 | | $ | 1.48 |
| | $ | 1.16 |
|
| September 30, 2017 | | $ | 1.99 |
| | $ | 1.20 |
|
| December 31, 2017 | | $ | 2.09 |
| | $ | 1.75 |
|
Dividends
The Company has not declared or paid any dividends in the past two years and does not intend to do so in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below displays information relating to equity compensation:
| | | | | | | | | | | | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | 773,127 | | | $ | 0.41 | | | 2,034,126 | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 773,127 | | | $ | 0.41 | | | 2,034,126 | |
|
| | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | 2,152,402 |
| | $ | 1.49 |
| | 3,014,249 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
|
| Total | | 2,152,402 |
| | $ | 1.49 |
| | 3,014,249 |
|
Unregistered Sales of Securities and Related Stockholder Matters
As previously reported, on June 26, 2014, the SEC declared effective our registration statement on Form S-1 (File No. 333-196462). The registration statement related to the offer and sale of 6,000,000 shares of our common stock; 4,500,000 shares were sold by the Company and 1,500,000 shares were sold by certain selling stockholders. On July 2, 2014, we sold 4,500,000 shares of our common stock at the price of $4.00 per share, for an aggregate sale price of $18,000,000.
Although we have used a portion of the proceeds from the offering to fund our operations, to acquire new technologies and physical assets, and to repurchase shares, a portion of our existing cash balance continues to reflect unused proceeds from the offering. We expect to use the remaining proceeds from the offering for expansion of our sales and service teams to match regional demand for our products and for other working capital purposes. We may also use a portion of the remaining proceeds to fund
possible investments in, or acquisitions of, complementary businesses, solutions or additional technologies. The amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and other factors. Accordingly, our management will have discretion and flexibility in applying the remaining proceeds of the offering. Pending any uses, as described above, we intend to invest the net proceeds in high quality, investment grade, short-term fixed income instruments which include corporate, financial institution, federal agency or U.S. government obligations.
Issuer Purchases of Equity Securities
On May 26, 2016,November 5, 2018, the Company announced that its Board of Directors had approvedauthorized a share repurchase program authorizingallowing the Company to repurchase up to $2,000,000 worth of the Company's common stock from time to time through May 25, 2017. In orderOctober 31, 2019 at Management's discretion. The Company continued to avoidrepurchase stock during October 2019 until the appearanceshare repurchase program expired. As of market manipulations,the date of this report, the Company set up a 10b5-1 plan to facilitate many of the repurchases and began repurchasing stock in July of 2016. On May 25, 2017, when the originaldoes not have an active share repurchase program expired, the Board of Directors approved another repurchase program authorizing the Company to repurchase up to another $2,000,000 worth of common stock through May 31, 2018. As of December 31, 2017, the Company had repurchased 1,624,742 shares pursuant to both of the repurchase programs approved by the Board for an aggregate purchase price of $2,187,349.program.
The table below sets forth additional information regarding our share repurchases during the three months ended December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | (a) Total Number of Shares Purchased | | (b) Weighted Average Price Paid Per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans | | (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans |
| October | | 269,491 | | | $ | 1.83 | | | 269,491 | | | $ | — | |
| November | | — | | | $ | — | | | — | | | $ | — | |
| December | | — | | | $ | — | | | — | | | $ | — | |
| Total | | 269,491 | | | | | 269,491 | | | |
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The table below presents information regarding revenues, cost of goods sold, and gross profit.
