15
PROFIRE ENERGY, INC.NOTE 9 – BASIC AND SUBSIDIAIESDILUTED EARNINGS PER SHARE (CONTINUED)
Notes
Options to purchase 1,343,500 shares of common stock at a weighted average price of $2.17 per share were outstanding during the Condensed Consolidated Financial Statements
Junethree-months ending September 30, 2016, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options, which expire Between February 2017 and March 31, 2016May of 2020, were still outstanding at September 30, 2016.
NOTE 7 – STOCK BASED COMPENSATION (CONTINUED)During the six months ended September 30, 2016, options to purchase 2,503,127 shares of common stock at a weighted average price of $1.30 per share were outstanding, but were not included in the computation of diluted EPS because the effect would be anti-dilutive. These options, which expire Between February 2017 and May of 2020, were still outstanding at September 30, 2016.
The following table summarizes information about non-vested options as of the three months ended June 30, 2016:
| Non-vested options | | Options | | | Wtd. Avg. Grant Date Fair Value | |
| Non-vested at March 31, 2016 | | | 510,400 | | | | 1.81 | |
| Stock options granted during the period | | | 315,500 | | | | 1.01 | |
| Stock options canceled | | | (96,000 | ) | | | 1.92 | |
| Cancellation of previously vested stock options | | | 50,700 | | | | 1.59 | |
| Vested during the period ended June 30, 2016 | | | (128,200 | ) | | | 1.68 | |
| Non-vested at June 30, 2016 | | | 659,900 | | | | 1.41 | |
The following table summarizes information about non-vested restricted stock awards as of the three months ended June 30, 2016:
| Non-vested restricted stock | Restricted Stock | | Wtd. Avg.
Grant Date
Fair Value | |
| Non-vested at March 31, 2016 | | | 97,334 | | | | 4.03 | |
| Restricted stock granted during the period | | | - | | | | - | |
| Restricted Stock canceled | | | - | | | | - | |
| Vested, not settled during the period ended June 30, 2016 | | | (24,332 | ) | | | 4.03 | |
| Vested & settled during the period ended June 30, 2016 | | | - | | | | - | |
| Non-vested at June 30, 2016 | | | 73,002 | | | | 4.03 | |
| Non-vested restricted stock units | Restricted Stock Units | | Wtd. Avg.
Grant Date
Fair Value | |
| Non-vested at March 31, 2016 | | | 305,333 | | | | 1.38 | |
| Restricted stock units granted during the period | | | 15,000 | | | | 1.01 | |
| Restricted stock units canceled | | | - | | | | - | |
| Vested, not settled during the period ended June 30, 2016 | | | (48,333 | ) | | | 1.01 | |
| Vested & settled during the period ended June 30, 2016 | | | - | | | | - | |
| Non-vested at June 30, 2016 | | | 272,000 | | | | 1.36 | |
PROFIRE ENERGY, INC. AND SUBSIDIAIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2016 and March 31, 2016
NOTE 810 – SUBSEQUENT EVENTS
On July 18, 2016, Mr. Stephen E. Pirnat notified (the "Company") of his decision notIn accordance with ASC 855 "Subsequent Events," Company management reviewed all material events through the date this report was available to stand for re-election tobe issued and the Company's Board of Directors ("Board") at the Company's 2016 Annual Meeting of Stockholders ("2016 Annual Meeting"). Mr. Pirnat will continue to serve as a Director until the election of Directors at the 2016 Annual Meeting. Mr. Pirnat's decision to resign did not involve any disagreement with the Company, the Company's managers, or the Board of Directors.following subsequent events occurred:
On May 13, 2016, (the "Company") received a letter ("Notice") from The NASDAQ Stock Market LLC ("Nasdaq") notifying the Company that, because the closing bid price for its Common stock was below $1.00 per share for the previous 30 consecutive business days, it no longer complied with the minimum bid price requirement for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Marketplace Rule 5550(a)(2). The letter also stated that the Company was granted an initial compliance period of 180 calendar days, or until November 9, 2016, to regain compliance with the Minimum Bid Price Requirement pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A). The letter indicated that if, at any time during the 180 day compliance period, the closing bid price of the Common Stock is at least $1.00 for a minimum of ten consecutive business days, Nasdaq will provide the Company with written confirmation that it has achieved compliance with the minimum bid price requirement.
On July 8, 2016 the Company received a letter from Nasdaq notifying the Company that for the previous 10 consecutive business days, from June 23 to July 7, 2016, the closing bid price of the Company's common stock was $1.00 per share or greater, and that the Company regained compliance with Marketplace Rule 5550(a)(2) and this matter is now closed.
On June 20,October 18, 2016, the Company issued
50,000 shares of common stock to an employee for exercising previously granted and vested stock options. Compensation expense for these shares had already been recognized during the vesting period.
On November 2, 2016, the Board of Directors approved a totalstock option grant to executives of 9,081 restrictedthe Company with a strike price of $1.17. The options vest 50% annually over two years, with the first vesting occurring on the first anniversary of the grant date. The options expire on November 2, 2019. The Company's CEO was granted 400,000 options, the CFO was granted 200,000 options, and the CTO was granted 75,000 options. The Company estimates the fair value of each option award at the grant date by using the Black-Scholes option pricing model, which will result in approximately $187,000 in compensation expense over each of the next two years.
On November 2, 2016, the Company issued 134,664 shares of stock to its CFO. The shares were issued as a netDirector for settlement of previously granted and vested restricted stock units.
Compensation expense for these shares had already been recognized during the vesting period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three monththree- and six-month periods ended JuneSeptember 30, 2016 and 2015. For a complete understanding, this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Financial Statements and Notes to the Financial Statements contained in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended March 31, 2016.
Forward-Looking Statements
This quarterly report on Form 10-Q 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; limits to employee capabilities; 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.
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.
Recent Developments
On May 26, 2016, Profire announced that its Board of Directors had authorizedapproved a share repurchase program allowingauthorizing the Company to repurchase up to $2,000,000 worth of the Company's common stock from time to time through May 25, 2017. Any purchases under the program will be made at the discretion of management. The size and timing of any purchases will depend on price, market and business conditions and other factors. Open market purchases will be conducted in accordance with applicable legal requirements. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program does not obligate the Company to purchase any particular number of shares.
On May 4,As of September 30, 2016, the Company issued a totalhad repurchased 215,310 shares pursuant to the repurchase program for an aggregate purchase price of 59,953 restricted shares to one$261,544 See Part II, Item 2, "Unregistered Sales of its Independent Directors. The shares were issued in the settlementEquity Securities and Use of previously granted and vested restricted stock units.Proceeds."
Overview of Products & Services
Summary
We design, assemble, install, service, and sell oilfield-management technologies. Our flagship products are burner-management systems that monitor and manage burners found throughout the industry. We believe our products provide major benefits to our customers including improved efficiency, increased safety, and enhanced compliance with evolving industry regulation. We also sell related products such as flare ignition systems, fuel train components, secondary airplates, valve actuators, solar packages, and chemical-management systems. Our products and services aid oil and natural gas producers in the safe and efficient production and transportation of oil and natural gas.
Principal Products and Services
In the oil and natural gas industry, there are numerous demands for heat generation and control. Oilfield vessels of all kinds, including line-heaters, dehydrators, separators, treaters, amine reboilers, and free-water knockout systems require heat to satisfy their various functions, which is provided by a burner flame inside the vessel. This burner flame is integral to the operation of the vessel because these vessels use the flame's heat to facilitate the proper function of the vessel. Such functions include separating, storing, transporting and purifying oil and gas (or even water). For example, the viscosity of oil and moisture content (and temperature) of gas are critical to a number of oilfield processes, and are directly affected by the heat provided by the burner flame inside the vessel. Our burner-management systems help ignite, monitor, and manage this burner flame, reducing the need for employee interaction with the burner, such as for the purposes of re-ignition or temperature monitoring.
As a result, oil and gas producers can achieve increased safety, greater operational efficiencies, and improved compliance with changing industry regulations. We believe, despite the current industry down turn, there is a growing trend in the oil and gas industry toward enhanced control, process automation, and data logging, partly for potential regulatory-satisfaction purposes. We continue to assess compliance-interest in the industry, especially given the budgetary constraints we have observed over the last year. We believe that enhanced burner-management products and services can help our customers be compliant with such regulatory requirements, where applicable. In addition to selling products, we train and dispatch service technicians to address this industry needservice burner flame installations in Canada and throughout the United States.
After providing installation and maintenance services for several years, we decided to pursue the development of burner-management technologies, 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 proprietary 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 |
· | ensure the system could be easily controlled by oilfield operators. |
With these objectives in mind, weWe initially developed our first burner-management system in 2005. Since 2005, we have released several iterations of our initial burner-management system, increasing features and capabilities, while maintaining compliance with Canadian Standards Association (CSA) and Underwriters Laboratories (UL) ratings.
Our burner-management systems have become widely used in Western Canada, and well-receivedthroughout many regions in the United States market, with salesStates. We have sold our burner-management systems to suchmany large energy companies, asincluding Anadarko, Chesapeake Energy, ConocoPhillips, Devon Energy, Encana, Exxon-Mobil, Petro-Canada, Shell and others. Our systems have also been sold or installed in other parts of the world, including France, Italy, Ukraine, India, Nigeria, the Middle East, Australia, and Brazil. While we have an interest in expanding our long-run international distribution capabilities, our current principal focus is on the North American oil and gas market.
Recent Product Extension: PF3100
In September of 2015, the Company unveiled its next generation burner-management system which is designed to operate, monitor, and control more complex, multi-faceted oilfield applications. The newly announced management system, the PF3100, is an advanced management system designed to work with any number of Profire-engineered modules, specific to different applications, thus allowing the system to expertly manage a wide variety of applications and possibly whole new environments in future years.
Throughout the industry, Programmable Logic Controllers (PLC) are used to operate and manage custom-built oilfield applications. Though capable, PLC's can be expensive, tedious, and difficult to use. Our unique solution, the PF3100, can help manage and synchronize custom applications helping oilfield producers meet deadlines and improve profitability through an off-the-shelf solution with dynamic customization. The Company has begunis selling the PF3100 for initial use in the oil and gas industry's natural-draft market, with additional modules, including forced-air modules, planned for the near-future.
The Company frequently assesses market needs by participating in industry conferences and soliciting feedback from existing and potential customers and looks for opportunities to provide quality solutions to the oil and gas producing companies it serves. Upon identifying a potential market need, the Company begins researching the market and developing products that might have feasibility for future sale.
Additional Complementary Products
In addition to our burner-management systems, we also sell complementary oilfield products to help facilitate improved oilfield safety and efficiency. Such products help manage fuel flow (e.g., valves and fuel trains), meter air flow (e.g., airplates), generate power on-site (e.g., solar packages), ignite and direct flame (e.g., flare stack igniter and nozzles), and other necessary functions. We have invested heavily to develop innovative complementary products, which we anticipate will help bolster continued long-term growth.
Some of these products are resold from third parties (e.g., solar packages), while some are proprietary (e.g., flare stack igniter) or patent-pending (e.g., inline pilot and valve technologies). We intend to continue developing proprietary products to help enhance our margin on some of these complementary products.
Chemical-Management Systems
In addition to the burner-management systems and complementary technologies we have sold historically, we extended our product line by acquiring the assets of VIM Injection Management ("VIM") in November 2014, which extended our brandproduct offering to include chemical-management systems.
Chemical injection is used for a wide variety of purposes in the oil and gas industry including down-hole inhibition of wax, hydrates, and corrosion agents, so that product can flow more efficiently to the wellhead. Once at the wellhead, chemical injection can also be used to further process the oil or gas before it is sent into a pipeline, and with other applications.
Currently, a variety of pumps are used to meter the chemicals injected, but are often inaccurate in injecting the proper amount of chemical, as they may not account for all of the variables that affect how much chemical should be injected (e.g., pressure, hydrogen sulfide concentration, etc.) nor the optimal efficiency rates of varying pump systems.
Inaccurate injection levels are problematic because the chemicals injected are expensive;expensive, and over-injection causes unnecessary expense for producers. However, under-injectionUnder-injection can also be problematic because it often resultresults in the creation of poor product (i.e., with wax, hydrate, or corrosion agents) and causecauses problems with pipeline audits.
Our chemical-management systems monitor and manage thisthe chemical-injection process to ensure that optimal levels of chemicals are injected. This improves the efficiency of the pump and production quality of the well, improves safety for workers that would otherwise be exposed to these chemicals, and improves compliance with pipeline operators. Like our burner-management systems, our chemical-management systems can be monitored and managed remotely via SCADA or other remote-communication systems. AWe hold a U.S. patent was issued domestically related to our chemical management system and its process for supplying a chemical agent to a process fluid. Other international patents are pending.
Results of Operations
Comparison of the three monthscurrent and prior fiscal quarters
The oil and gas industry has struggled since the price of oil has fallen. In an effort to provide timely and relevant information to the users of our financial statements, we have evaluated our results this quarter compared to the prior quarter. The table below shows key financial statement items and their changes between quarters:
| | | For the Three Months Ended | | | | | | | |
| | | Sep 2016 | | | Jun 2016 | | | $ Change | | | % Change | |
| Revenues | | $ | 4,990,813 | | | $ | 3,974,043 | | | $ | 1,016,770 | | | | 26 | % |
| Cost of Goods Sold | | | 2,366,154 | | | | 2,059,793 | | | $ | 306,361 | | | | 15 | % |
| Gross Profit Percentage | | | 53 | % | | | 48 | % | | | | | | | | |
| Total Operating Expenses | | | 2,752,028 | | | | 2,795,528 | | | $ | (43,500 | ) | | | -2 | % |
Total Revenues
Despite the ongoing challenging industry conditions, our sales and marketing efforts have focused on securing additional opportunities with our customers, resulting in a revenue increase of 26% over the prior quarter. These efforts have been supported by oil prices stabilizing in the mid to upper $40's for the second quarter in a row.
Total Cost of Goods Sold
Cost of goods sold increased 15% over the prior quarter which was driven by the increase in sales.
Gross Profit
Gross profit improved by 5% in the current quarter over the prior quarter. This improvement was driven primarily by product mix changes between the two periods as well as a reduction in overhead allocated to cost of goods sold.
Total Operating Expenses
Total operating expenses decreased slightly from the prior quarter to $2,752,028. This decrease and level of operating expense has been achieved by ongoing cost management efforts to maintain operating cost reductions achieved over the past nine months.
Comparison of the three- and six-months ended JuneSeptember 30, 2016 and 2015
Total Revenues
Total revenues during the three months ended JuneSeptember 30, 2016 decreased $2,903,200 $3,106,481 or 42%38%, compared to the comparable period in 2015. During the six months ended JuneSeptember 30, 2016, total revenues decreased $6,009,681 or 40% compared to the comparable period in 2015. This decrease wasThese decreases were principally attributable to decreased sales of goods, net, as well as decreased sales of services, net.net, which are explained below. Though we expect to continue to deal with athe difficult industry environment could continue for some time, we are focusing our resources in geographic areas that we believe will producehave the highest level of totalgreatest potential for improved revenues and return on investment.
Sales of Goods, Net
Sales of goods, net during the three months ended JuneSeptember 30, 2016 decreased $2,749,077 $2,784,802 or 44%,38% compared to the comparable period in 2015. During the six months ended JuneSeptember 30, 2016, sales of goods, net decreased $5,533,880 or 41% compared to the comparable period in 2015. This decrease was principally attributable to the reduced purchasing fromby companies in the oil and gas industry stemming from budget constraints due to the drastic declinevolatility and prolonged suppression in the underlying commodity prices year over year.prices.
Sales of Services, Net
Sales of services, net during the three months ended JuneSeptember 30, 2016 decreased $154,123 $321,679 or 23%,40% compared to the comparable period in 2015. During the six months ended JuneSeptember 30, 2016, sales of services, net decreased $475,802 or 32% compared to the comparable period in 2015. The decrease in sales of services, net, was principally attributable to the decrease in overall purchasing by our customers, as services are generally provided on the installation of newly purchased systems. Although the primary purpose of our service team is to support product sales, our service team also provides valuable feedback for our sales and research and development teams as well as a number of auxiliary services for our customers.
Total Cost of Goods Sold
Total cost of goods sold during the three months ended JuneSeptember 30, 2016 decreased $1,503,664 $1,703,027 or 42%, compared to the comparable period in 2015. During the six months ended JuneSeptember 30, 2016, total cost of goods sold decreased $3,206,691 or 42% compared to the comparable period in 2015. As a percentage of total revenues, total cost of goods sold was 52%47% and 50% during the three months ended JuneSeptember 30, 2016 and 2015, respectively and 49% and 51% during the six months ended September 30, 2016 and 2015.2015, respectively. The specific reasons for the change are discussed in detail for each component of cost of goods sold below.
Cost of Goods Sold-Products
Cost of goods sold-products during the three months ended JuneSeptember 30, 2016 decreased $1,255,275 $1,467,530 or 43%, and decreased $2,722,806 or 42%, for the six months then ended, compared to the comparable period ended June 30,in 2015, primarily as a result of decreased sales. As a percentage of revenues from product sales, cost of goods sold-products increaseddecreased to 50%44% and 46% during the three monthsthree- and six-months ended JuneSeptember 30, 2016, respectively compared to 48%47% and 47% for the comparable period ended June 30,periods in 2015. This change isThe decrease in cost of goods sold – products as a percentage of revenues was largely attributable to the improved allocation of overhead costs of some product-related fixed assets associated with storage and improved inventory management.
Given the current and expected industry conditions in the oil and gas industry, we have been and will continue to work with our suppliers to control our inventory costs, which has the largesta significant impact on margin. We have been relatively successful in maintaining our price during the industry volatility, though customers have sought prices reductions. We anticipate holding prices relatively stable, within the confines of normal sales operations. We anticipate returning to a more historical margin in the long-run, especially with increased sales, though quarterly results will vary. We expect this migration to historical margin levels will take several quarters.
Cost of Goods Sold-Services
Cost of goods sold-services during the three months ended JuneSeptember 30, 2016 decreased $248,388 $235,496 or 42%38%, and decreased $483,885 or 40% for the six months then ended, compared to the comparable period ended June 30, 2015, as a result ofsame periods in 2015. These changes were due to decreased sales of service. As a percentage of service revenues, cost of goods sold-service decreased to 68%was 80% and 74% during the three monthsthree- and six-months ended JuneSeptember 30, 2016, respectively, compared to 90%77% and 83% for the comparable period ended June 30,periods in 2015. The changeimprovement in cost of goods sold-service over the six-month period was achieved by cost cutting measures to right size our service division for the current industry context and make it more profitable. The increase during the three-month period was due to lower service revenues and despite cost cutting efforts, some costs remain fixed in nature.
Gross Profit
Gross profit as a percentage of revenues during the three months ended JuneSeptember 30, 2016 remained unchanged at 48% comparedincreased to 53% from 50% in the comparable period during 2015. For the six months ended JuneSeptember 30, 2015.2016, gross profit as a percentage of revenues increased to 51% from 49% in the same period in the prior year. The change in gross profit was primarily due to the changes in cost of goods sold discussed above.
Total Operating Expenses
Our total operating expenses during the three months ended JuneSeptember 30, 2016 decreased $1,057,556 $600,979 or 27%18%, and decreased $1,658,535 or 23% during the six months then ended, compared to the comparable period ended June 30,periods in 2015. As a percentage of total revenues, total operating expenses were 55% and 41% during the three months ended JuneSeptember 30, 2016 increased from 56% to 70%, compared toand 2015, respectively, and 62% and 48% during the comparable periodsix months then ended, June 30, 2015.respectively. Despite significant efforts to control and manage operating costs, which brought total operating costs down by 27%,during those periods, many of our operating expenses are fixed. When revenue also declined, 42% whichit caused total operating expenses as a percentage of total revenues to increase sharply.increase.
General and Administrative Expenses
General and administrative expenses during the three months ended JuneSeptember 30, 2016 decreased by $1,055,573 $591,762 or 31%20%, and decreased $1,647,335 or 26% in the six month period then ended, compared to the comparable period ended June 30,periods in 2015. As a percentage of total operating expenses, general and administrative expenses were 85% and 87% during the three months ended JuneSeptember 30, 2016, decreased from 89% to and 2015, respectively, and 85% compared to and 88% for the comparable periodsix months then ended, June 30, 2015.respectively. The decrease in overall general and administrative costs werewas due to cost management and reduction efforts in, professional fees, sales and marketing expenses, stock based compensation,taxes, travel, and payroll costs. We will continue to closely evaluate expenses and determine what expense-reduction actions, if any, need to be taken.
Research and Development
Research and development expenses during the three months ended JuneSeptember 30, 2016 decreased $53,767 $31,435 or 18%11%, and decreased $85,201 or 14% during the six month period then ended, compared to the comparable period ended June 30,periods in 2015. As a percentage of total operating expenses, research and development expenses remained constant at 10% during the three monthsmonth periods ended JuneSeptember 30, 2016 and 2015, and increased to 9% for the six-months ended September 30, 2016 from 8% to 9% compared to the during comparable period ended June 30,in 2015. This decrease inWe have focused on decreasing total cost was due toresearch and development costs through cost cutting efforts across the department while maintaining the prioritization of research and development projects.
Depreciation and Amortization Expense
Depreciation and amortization expense during the three months ended JuneSeptember 30, 2016 increased $51,784 $22,217 or 48%16%, and increased $74,001 or 30% during the six month period then ended, compared to the comparable period ended June 30,periods in 2015. As a percentage of total operating expenses, depreciation increased from 2.8% to 5.7%was 6% and 4% during the three month periods ended September 30, 2016 and 2015, respectively, and 6% and 3% for the six month periods then ended. This change was due to thea decrease in the allocation of depreciation to cost of goods sold mostly related to operational changes made to the service department.
Total Other Income (Expense)
Total other income during the three months ended JuneSeptember 30, 2016 increased $99,336 decreased $256,462 or 72%, and decreased $157,127 or 54% during the six months then ended, compared to the comparable period ended June 30,periods in 2015. The majority of this increase isthe decrease for each period was due to the impact of Foreign Exchange transaction gains and losses in each period.losses.
Net Income (Loss) Before Income Taxes
The decreases we realized in total revenues gross profit and total operating expenses combined toas well as the other factors discussed above lead to a net loss before income taxes during the three monthsthree- and six-months ended JuneSeptember 30, 2016 of $851,172 $25,249 and $876,420 , respectively, compared to net lossgain before income taxes of $608,527 $1,033,689 and $425,162 during to the comparable period ended June 30,periods in 2015.
Income Tax Expense (Benefit)
Income tax benefit during the three months ended JuneSeptember 30, 2016 increased $96,163 $354,482 or 64%139%, and increased $450,645 or 429% for the six month period then ended, compared to the comparable period ended June 30,periods in 2015. The increase was due to the larger net loss before tax during the periods compared to a net profit before tax in the comparable period and due to changes in various deferred tax items.
Foreign Currency Translation Gain (Loss)
Our consolidated financial statements are presented in United States dollars ("USD"). Our functional currencies are the USD and the Canadian dollar ("CAD"). Transactions initiated in other currencies are translated to USD using period ending exchange rates for the balance sheet and weighted average exchange rates for the statements of operations. Equity transactions were translated using historical rates. 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. Foreign currency translation gains or losses as a result of fluctuations in the exchange rates are reflected in the Statement of Operations and Other Comprehensive Income (Loss).
We recognized a foreign currency translation gainloss of $773 $202,520 during the three months ended JuneSeptember 30, 2016. By comparison, during the three months ended JuneSeptember 30, 2015 we recognized a gainloss of $333,372$1,084,519 in foreign currency translation. We recognized a foreign currency translation loss of $201,747 for the six months ending September 30, 2016 compared to a loss of $751,147 in the same period in the prior year. The changes in translation gain were the result of volatility in foreign exchange rates, specifically between the USD and CAD.
Total Comprehensive Income (Loss)
For the foregoing reasons, we realized a total comprehensive loss during the three months ended JuneSeptember 30, 2016 of $604,522 $148,689 compared to total comprehensive loss lossof $305,612 125,441 duringduring the comparable period in the prior year. During the six month periods ended JuneSeptember 30, 2015.2016 and 2015, we recognized total comprehensive loss of $753,211 and loss of $431,052, respectively.
Liquidity and Capital Resources
Total current assets were
$36,009,336 $30,434,627 and total assets were
$45,936,465 $46,062,544 including cash and cash equivalents of
$22,043,090 $11,674,786 at
JuneSeptember 30 2016., 2016. Total current liabilities were
$979,362$1,280,326 and total liabilities were
$1,612,094 $1,839,155 at
JuneSeptember 30 2016., 2016. Working capital at
JuneSeptember 30, 2016 was
$35,029,974 $29,154,301 compared to
$35,205,517 $35,205,517 at March 31, 2016.
During the threesix months ended JuneSeptember 30, 2016 the increasedecrease in cash was primarily provided from operations.due to a change in our cash management policy, which enabled us to better utilize our excess cash by investing in certificates of deposit, bonds, and mutual funds. We invested $11,143,504 during the period while our net decrease in cash was only $9,617,809. Therefore, if we had not made those investments, we would have experienced a net increase in cash; however, the Company has implemented a conservative investment program that management believes will provide a better return than a savings account while keeping the principal as safe as reasonably possible. In addition, although we do not anticipate liquidating the investments in the short term, all of them either mature within one year or can be sold quickly in response to liquidity needs, if necessary. See below for additional discussion and analysis of cash flow:
| | | For the Three Months Ending June 30, | |
| | | 2016 | | | 2015 | |
| Net cash provided by operating activities | | $ | 736,681 | | | $ | 2,866,505 | |
| Net cash provided by investing activities | | | 16,896 | | | | 40,215 | |
Net cash provided by (used in) financing activities | | | - | | | | (23,526 | ) |
| Effect of exchange rate changes on cash | | | (3,082 | ) | | | 158,248 | |
NET INCREASE IN CASH | | $ | 750,495 | | | $ | 3,041,442 | |
| | | For the Six Months Ended September 30, | |
| | | 2016 | | | 2015 | |
| Net cash provided by operating activities | | $ | 1,845,355 | | | $ | 5,141,171 | |
| Net Cash Provided by (Used in) Investing Activities | | | (11,133,748 | ) | | | 91,363 | |
| Net Cash Provided by (Used in) Financing Activities | | | (261,544 | ) | | | (39,243 | ) |
| Effect of exchange rate changes on cash | | | (67,872 | ) | | | (383,797 | ) |
| NET CHANGE IN CASH | | $ | (9,617,809 | ) | | $ | 4,809,494 | |
Net cash provided by our operating activities was $736,681.$1,845,355. During the threesix months ended JuneSeptember 30, 2016 we realized an increasea decrease in cash compared to the same period in the prior year primarily, derived from changes in accounts receivable and inventory. These increases were partially offset by decreases in cash resulting from our net loss and a significant pay down of accounts payable and accrued liabilities during the period.due to decreased revenues.
During the threesix months ended JuneSeptember 30, 2016, net cash provided byused in investing activities was$16,896 $11,133,748 and was primarily driven by proceeds from disposalreallocating our excess cash into various investments. This was partially offset by a small sale of equipment during the period. We do not have plans to make significant purchases of fixed assets in the short-term.equipment.
During the threesix months ended JuneSeptember 30, 2016 no, the cash was receivedused in financing activities forwas entirely related to our stock repurchase program. The details of the issuance oftreasury stock options.repurchases are discussed in footnotes 2 and 4 to the financial statements and below.
As a result of the net cash provided from operating and investing activities,aforementioned factors, we realized a net increasedecrease in cash during the three months ended JuneSeptember 30, 2016 of $750,495 $9,617,809 compared to a $3,041,442 $4,809,494 net increase during the threesix months ended June September 30, 2015.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
We are exposed to certain market risks in the ordinary course of business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions.
To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. Cash is held in checking, savings, and money market funds, bonds, and mutual funds that primarily invest in bonds, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial, although there can be no guarantee that these market risks will be immaterial to us.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 as of the end of the period covered by this Report. Based on this evaluation, the principal executive officer and principal financial officer concluded that as of the end of the period covered by this Report, our disclosure and control procedures were not effective due to material weaknesses identified as part of our fiscal year 2016 year-end review of internal controls over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. For more information on material weaknesses identified by management during our internal assessment, see our Form 10-K for the fiscal year ended March 31, 2016.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Remediation Initiatives
Management has been actively developing a remediation plan and been implementing new controls and processes to address the aforementioned deficiencies. Upon receiving the results of our internal controls review, we have taken actions to strengthen our internal control structure, including the following:
· | Hired third parties to provide advice on COSO framework and risk control matrices; |
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· | Implemented company-wide trainings over internal controls in relation with new accounting standard operating procedures including the requirement of supplying supporting evidence, proving the level of precision with which a control is performed, etc.; |
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· | Required evidence of review in nearly all controls; and |
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· | Reviewed and updated each employee's access within the enterprise resource management system. |
Management continues to meet with key managers and control owners to evaluate the effectiveness of internal controls and to ensure implementation of remediation initiatives.
Limitations on the Effectiveness of Internal Controls
An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
To the best of our knowledge, there are no legal proceedings pending or threatened against us; and there are no actions pending or threatened against any of our directors or officers that are adverse to us.
Item 1A. Risk Factors
In addition to the other information set forth in this quarterly report on Form10-Q, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the year ended March 31, 2016, which risks could materially affect our business, financial condition or future results. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 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.
We expect to use the proceeds from this offering for expansion of our sales and service team to match the demand for our product in regions where legislation has passed, requiring the use of our technology, and for other working capital purposes. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, solutions or technologies. In addition, 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 net proceeds of this 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.
On August 11, the Company issued 15,000 shares of unregistered restricted common stock to our CFO in settlement of previously granted and vested restricted stock units.
On September 23, 2016, the Company issued 33,698 shares of unregistered restricted common stock to employees in settlement of previously granted and vested restricted stock units.
On May 26, 2016, the Company announced that its Board of Directors had approved a share repurchase program authorizing the Company to repurchase up to $2,000,000 worth of the Company's common stock from time to time through May 25, 2017. The Company began repurchasing stock in July of 2016. As of September 30, 2016, the Company had repurchased 215,310 shares pursuant to the repurchase program for an aggregate purchase price of $261,544 The table below sets forth additional information regarding our share repurchases during the three months ended September 30, 2016:
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 | |
| Jul 1-31, 2016 | | | 29,004 | | | $ | 1.23 | | | | 29,004 | | | $ | 1,964,387 | |
| Aug 1-31, 2016 | | | 88,462 | | | $ | 1.22 | | | | 88,462 | | | $ | 1,856,628 | |
| Sep 1-30, 2016 | | | 97,844 | | | $ | 1.21 | | | | 97,844 | | | $ | 1,738,456 | |
| Total | | | 215,310 | | | | | | | | 215,310 | | | | | |
Item 3. Defaults Upon Senior Securities
We do not have any debt nor any current plans to obtain debt financing.
Item 4. Mine Safety Disclosures
This item is not applicable to our business.
Item 5. Other Information
All events requiring disclosure on form 8-K were properly disclosed during the period; as such, this item is not applicable.
Item 6. Exhibits
Exhibits. The following exhibits are included as part of this report:
| | Exhibit 31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) |
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| | Exhibit 31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) |
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| | Exhibit 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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| | Exhibit 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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| | Exhibit 101.INS | XBRL Instance Document |
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| | Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document |
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| | Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
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| | Exhibit 101.DEF | XBRL Taxonomy Definition Linkbase Document |
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| | Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
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| | Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROFIRE ENERGY, INC.
| Date: | August 10, November 9, 2016 | By: | /s/Brenton W. Hatch |
| | | | Brenton W. Hatch |
| | | | Chief Executive Officer |
| Date: | August 10, November 9, 2016 | By: | /s/Ryan W. Oviatt |
| | | | Ryan W. Oviatt |
| | | | Chief Financial Officer |