UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended | September 30, 20192020 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition Period From ________ to _________ | |
Commission File Number 001-36378
PROFIRE ENERGY, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
Nevada | 20-0019425 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
321 South 1250 West, Suite 1 | |
Lindon, Utah | 84042 |
(Address of principal executive offices) | (Zip Code) |
(801) 796-5127
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated Filer ☒☐ | |
Non-accelerated filer ☐☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common, $0.001 Par Value | | PFIE | | NASDAQ |
As of November 5, 2019,6, 2020, the registrant had 50,807,83151,371,960 shares of common stock issued and 47,395,45347,959,582 shares of common stock outstanding, par value $0.001.
PROFIRE ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION | | |
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Item 1. Financial Statements | | |
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| Condensed Consolidated Balance Sheets | |
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| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) | |
| | |
| Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | |
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| Condensed Consolidated Statements of Cash Flows (Unaudited) | |
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| Condensed Consolidated Statements of Stockholders' Equity (Unaudited) | |
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| Notes to the Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations | | |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk | | |
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Item 4. Controls and Procedures | | |
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PART II — OTHER INFORMATION | | |
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Item 1. Legal Proceedings | | |
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Item 1A. Risk Factors | | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | |
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Item 3. Defaults Upon Senior Securities | | |
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Item 4. Mine Safety Disclosures | | |
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Item 5. Other Information | | |
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Item 6. Exhibits | | |
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Signatures | | |
PART I. FINANCIAL INFORMATION
Item 1 Financial Information
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PROFIRE ENERGY, INC. AND SUBSIDIARIES | | | | |
Condensed Consolidated Balance Sheets | | | | |
| | As of | | |
| | September 30, 2019 | | December 31, 2018 |
| | (Unaudited) | | |
CURRENT ASSETS | | | | |
Cash and cash equivalents | | $ | 9,944,128 | | | $ | 10,101,932 | |
Short-term investments | | 864,629 | | | 961,256 | |
Short-term investments - other | | 2,000,000 | | | 3,596,484 | |
Accounts receivable, net | | 6,568,599 | | | 6,885,296 | |
Inventories, net (note 3) | | 9,782,643 | | | 9,659,571 | |
Prepaid expenses & other current assets | | 1,076,138 | | | 473,726 | |
Income tax receivable | | 524,695 | | | 173,124 | |
Total Current Assets | | 30,760,832 | | | 31,851,389 | |
LONG-TERM ASSETS | | | | |
Net deferred tax asset | | — | | | 85,092 | |
Long-term investments | | 7,319,099 | | | 7,978,380 | |
| | | | |
Financing right-of-use asset | | 128,738 | | | — | |
Property and equipment, net | | 10,896,855 | | | 8,020,462 | |
Intangible assets, net | | 3,934,727 | | | 429,956 | |
Goodwill | | 1,120,381 | | | 997,701 | |
Total Long-Term Assets | | 23,399,800 | | | 17,511,591 | |
TOTAL ASSETS | | $ | 54,160,632 | | | $ | 49,362,980 | |
| | | | |
CURRENT LIABILITIES | | | | |
Accounts payable | | $ | 2,181,592 | | | $ | 1,177,985 | |
Accrued vacation | | 446,451 | | | 311,435 | |
Accrued liabilities | | 2,209,303 | | | 1,445,510 | |
Current financing lease liability (note 8) | | 67,984 | | | — | |
Income taxes payable | | 627,010 | | | 1,172,191 | |
Total Current Liabilities | | 5,532,340 | | | 4,107,121 | |
LONG-TERM LIABILITIES | | | | |
Net deferred income tax liability | | 134,046 | | | — | |
Long-term financing lease liability | | 63,951 | | | — | |
TOTAL LIABILITIES | | 5,730,337 | | | 4,107,121 | |
| | | | |
STOCKHOLDERS' EQUITY (note 4) | | | | |
Preferred stock: $0.001 par value, 10,000,000 shares authorized: no shares issued or outstanding | | — | | | — | |
Common stock: $0.001 par value, 100,000,000 shares authorized: 50,761,491 issued and 47,618,604 outstanding at September 30, 2019, and 49,707,805 issued and 47,932,305 outstanding at December 31, 2018 | | 50,762 | | | 49,708 | |
Treasury stock, at cost | | (4,859,230) | | | (2,609,485) | |
Additional paid-in capital | | 29,608,685 | | | 28,027,742 | |
Accumulated other comprehensive loss | | (2,629,369) | | | (2,895,683) | |
Retained earnings | | 26,259,447 | | | 22,683,577 | |
TOTAL STOCKHOLDERS' EQUITY | | 48,430,295 | | | 45,255,859 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 54,160,632 | | | $ | 49,362,980 | |
| | | | | | | | | | | | | | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES |
Condensed Consolidated Balance Sheets |
| | As of |
| | September 30, 2020 | | December 31, 2019 |
ASSETS | | (Unaudited) | | |
CURRENT ASSETS | | | | |
Cash and cash equivalents | | $ | 7,919,545 | | | $ | 7,358,856 | |
Short-term investments | | 2,239,256 | | | 1,222,053 | |
Short-term investments - other | | 600,000 | | | 2,600,000 | |
Accounts receivable, net | | 2,397,985 | | | 5,597,701 | |
Inventories, net (note 3) | | 8,780,571 | | | 9,571,807 | |
Prepaid expenses and other current assets (note 4) | | 2,178,682 | | | 1,672,422 | |
Income tax receivable | | 465,828 | | | 77,385 | |
Total Current Assets | | 24,581,867 | | | 28,100,224 | |
LONG-TERM ASSETS | | | | |
| | | | |
Long-term investments | | 6,450,891 | | | 7,399,963 | |
| | | | |
Financing right-of-use asset | | 61,347 | | | 107,991 | |
Property and equipment, net | | 11,595,366 | | | 12,071,019 | |
Intangible assets, net | | 1,827,553 | | | 1,989,782 | |
Goodwill | | 2,579,381 | | | 2,579,381 | |
Total Long-Term Assets | | 22,514,538 | | | 24,148,136 | |
TOTAL ASSETS | | $ | 47,096,405 | | | $ | 52,248,360 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
CURRENT LIABILITIES | | | | |
Accounts payable | | $ | 980,601 | | | $ | 2,633,520 | |
Accrued liabilities (note 5) | | 1,061,515 | | | 2,089,391 | |
Current financing lease liability (note 6) | | 43,024 | | | 59,376 | |
Income taxes payable | | 0 | | | 403,092 | |
Total Current Liabilities | | 2,085,140 | | | 5,185,379 | |
LONG-TERM LIABILITIES | | | | |
Net deferred income tax liability | | 484,115 | | | 439,275 | |
Long-term financing lease liability (note 6) | | 20,927 | | | 52,120 | |
TOTAL LIABILITIES | | 2,590,182 | | | 5,676,774 | |
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STOCKHOLDERS' EQUITY (note 7) | | | | |
Preferred stock: $0.001 par value, 10,000,000 shares authorized: 0 shares issued or outstanding | | 0 | | | 0 | |
Common stock: $0.001 par value, 100,000,000 shares authorized: 51,371,960 issued and 47,959,582 outstanding at September 30, 2020, and 50,824,355 issued and 47,411,977 outstanding at December 31, 2019 | | 51,371 | | | 50,824 | |
Treasury stock, at cost | | (5,353,019) | | | (5,353,019) | |
Additional paid-in capital | | 30,208,082 | | | 29,584,172 | |
Accumulated other comprehensive loss | | (2,873,765) | | | (2,415,460) | |
Retained earnings | | 22,473,554 | | | 24,705,069 | |
TOTAL STOCKHOLDERS' EQUITY | | 44,506,223 | | | 46,571,586 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 47,096,405 | | | $ | 52,248,360 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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PROFIRE ENERGY, INC. AND SUBSIDIARIES | | | | | | | |
Condensed Consolidated Statements of Operations and Comprehensive Income | | | | | | | |
(Unaudited) | | | | | | | |
| For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
REVENUES (note 6) | | | | | | | |
Sales of goods, net | $ | 9,251,947 | | | $ | 10,830,592 | | | $ | 29,009,837 | | | $ | 33,009,616 | |
Sales of services, net | 653,814 | | | 669,310 | | | 1,853,013 | | | 1,999,764 | |
Total Revenues | 9,905,761 | | | 11,499,902 | | | 30,862,850 | | | 35,009,380 | |
| | | | | | | |
COST OF SALES | | | | | | | |
Cost of goods sold-product | 4,326,335 | | | 4,917,449 | | | 13,465,989 | | | 15,434,698 | |
Cost of goods sold-services | 410,130 | | | 484,327 | | | 1,275,655 | | | 1,437,749 | |
Total Cost of Goods Sold | 4,736,465 | | | 5,401,776 | | | 14,741,644 | | | 16,872,447 | |
| | | | | | | |
GROSS PROFIT | 5,169,296 | | | 6,098,126 | | | 16,121,206 | | | 18,136,933 | |
| | | | | | | |
OPERATING EXPENSES | | | | | | | |
General and administrative expenses | 3,256,023 | | | 3,180,725 | | | 9,984,251 | | | 9,887,451 | |
Research and development | 641,716 | | | 377,676 | | | 1,503,645 | | | 1,097,897 | |
Depreciation and amortization expense | 130,105 | | | 143,327 | | | 357,238 | | | 401,114 | |
Total Operating Expenses | 4,027,844 | | | 3,701,728 | | | 11,845,134 | | | 11,386,462 | |
| | | | | | | |
INCOME FROM OPERATIONS | 1,141,452 | | | 2,396,398 | | | 4,276,072 | | | 6,750,471 | |
| | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | |
Gain on sale of fixed assets | 34,826 | | | 43,904 | | | 73,166 | | | 129,989 | |
Other expense | (2,065) | | | (1,506) | | | (3,029) | | | (7,462) | |
Interest income | 38,478 | | | 85,167 | | | 216,068 | | | 310,646 | |
Total Other Income | 71,239 | | | 127,565 | | | 286,205 | | | 433,173 | |
| | | | | | | |
INCOME BEFORE INCOME TAXES | 1,212,691 | | | 2,523,963 | | | 4,562,277 | | | 7,183,644 | |
| | | | | | | |
INCOME TAX EXPENSE | 290,943 | | | 864,874 | | | 986,407 | | | 1,934,057 | |
| | | | | | | |
NET INCOME | $ | 921,748 | | | $ | 1,659,089 | | | $ | 3,575,870 | | | $ | 5,249,587 | |
| | | | | | | |
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Foreign currency translation gain (loss) | $ | (91,397) | | | $ | 170,641 | | | $ | 160,453 | | | $ | (223,431) | |
Unrealized gains (losses) on investments | (12,386) | | | (11,963) | | | 105,861 | | | (35,972) | |
Total Other Comprehensive Income (Loss) | (103,783) | | | 158,678 | | | 266,314 | | | (259,403) | |
| | | | | | | |
COMPREHENSIVE INCOME | $ | 817,965 | | | $ | 1,817,767 | | | $ | 3,842,184 | | | $ | 4,990,184 | |
| | | | | | | |
BASIC EARNINGS PER SHARE (note 7) | $ | 0.02 | | | $ | 0.03 | | | $ | 0.08 | | | $ | 0.11 | |
FULLY DILUTED EARNINGS PER SHARE | $ | 0.02 | | | $ | 0.03 | | | $ | 0.07 | | | $ | 0.11 | |
| | | | | | | |
BASIC WEIGHTED AVG NUMBER OF SHARES OUTSTANDING | 47,739,192 | | | 48,082,506 | | | 47,509,357 | | | 48,337,517 | |
FULLY DILUTED WEIGHTED AVG NUMBER OF SHARES OUTSTANDING | 48,469,246 | | | 48,852,167 | | | 48,259,900 | | | 49,107,178 | |
| | | | | | | | | | | | | | | | | | | | | | | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
(Unaudited) |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
REVENUES (note 9) | | | | | | | |
Sales of goods, net | $ | 3,517,280 | | | $ | 9,251,947 | | | $ | 14,377,377 | | | $ | 29,009,837 | |
Sales of services, net | 482,826 | | | 653,814 | | | 1,429,350 | | | 1,853,013 | |
Total Revenues | 4,000,106 | | | 9,905,761 | | | 15,806,727 | | | 30,862,850 | |
| | | | | | | |
COST OF SALES | | | | | | | |
Cost of goods sold-product | 2,141,888 | | | 4,326,335 | | | 7,919,959 | | | 13,465,989 | |
Cost of goods sold-services | 337,795 | | | 410,130 | | | 1,114,804 | | | 1,275,655 | |
Total Cost of Goods Sold | 2,479,683 | | | 4,736,465 | | | 9,034,763 | | | 14,741,644 | |
| | | | | | | |
GROSS PROFIT | 1,520,423 | | | 5,169,296 | | | 6,771,964 | | | 16,121,206 | |
| | | | | | | |
OPERATING EXPENSES | | | | | | | |
General and administrative expenses | 2,247,614 | | | 3,256,023 | | | 8,273,925 | | | 9,984,251 | |
Research and development | 433,800 | | | 641,716 | | | 1,073,074 | | | 1,503,645 | |
Depreciation and amortization expense | 168,507 | | | 130,105 | | | 496,976 | | | 357,238 | |
Total Operating Expenses | 2,849,921 | | | 4,027,844 | | | 9,843,975 | | | 11,845,134 | |
| | | | | | | |
INCOME (LOSS) FROM OPERATIONS | (1,329,498) | | | 1,141,452 | | | (3,072,011) | | | 4,276,072 | |
| | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | |
Gain on sale of fixed assets | 36,483 | | | 34,826 | | | 193,938 | | | 73,166 | |
Other expense | (48,349) | | | (2,065) | | | (49,667) | | | (3,029) | |
Interest income | 103,364 | | | 38,478 | | | 255,289 | | | 216,068 | |
Total Other Income | 91,498 | | | 71,239 | | | 399,560 | | | 286,205 | |
| | | | | | | |
INCOME (LOSS) BEFORE INCOME TAXES | (1,238,000) | | | 1,212,691 | | | (2,672,451) | | | 4,562,277 | |
| | | | | | | |
INCOME TAX BENEFIT (EXPENSE) | 180,252 | | | (290,943) | | | 440,936 | | | (986,407) | |
| | | | | | | |
NET INCOME (LOSS) | $ | (1,057,748) | | | $ | 921,748 | | | $ | (2,231,515) | | | $ | 3,575,870 | |
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OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Foreign currency translation gain (loss) | $ | 233,170 | | | $ | (91,397) | | | $ | (336,986) | | | $ | 160,453 | |
Unrealized gains (losses) on investments | (36,840) | | | (12,386) | | | (121,319) | | | 105,861 | |
Total Other Comprehensive Income (Loss) | 196,330 | | | (103,783) | | | (458,305) | | | 266,314 | |
| | | | | | | |
COMPREHENSIVE INCOME (LOSS) | $ | (861,418) | | | $ | 817,965 | | | $ | (2,689,820) | | | $ | 3,842,184 | |
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BASIC EARNINGS (LOSS) PER SHARE (note 10) | $ | (0.02) | | | $ | 0.02 | | | $ | (0.05) | | | $ | 0.08 | |
FULLY DILUTED EARNINGS (LOSS) PER SHARE (note 10) | $ | (0.02) | | | $ | 0.02 | | | $ | (0.05) | | | $ | 0.07 | |
| | | | | | | |
BASIC WEIGHTED AVG NUMBER OF SHARES OUTSTANDING | 47,933,318 | | | 47,739,192 | | | 47,717,114 | | | 47,509,357 | |
FULLY DILUTED WEIGHTED AVG NUMBER OF SHARES OUTSTANDING | 47,933,318 | | | 48,469,246 | | | 47,717,114 | | | 48,259,900 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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PROFIRE ENERGY, INC. AND SUBSIDIARIES | | | |
Condensed Consolidated Statements of Cash Flows | | | |
(Unaudited) | | | |
| For the Nine Months Ended September 30, | | |
| 2019 | | 2018 |
OPERATING ACTIVITIES | | | |
Net income | $ | 3,575,870 | | | $ | 5,249,587 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 732,396 | | | 667,085 | |
Gain on sale of fixed assets | (73,166) | | | (120,825) | |
Bad debt expense | 255,943 | | | 134,901 | |
Stock awards issued for services | 358,270 | | | 916,795 | |
Changes in operating assets and liabilities: | | | |
Changes in accounts receivable | 1,244,104 | | | (184,951) | |
Changes in income taxes receivable/payable | (890,523) | | | (432,575) | |
Changes in inventories | 1,711,446 | | | (3,863,287) | |
Changes in prepaid expenses | (586,576) | | | (172,497) | |
Changes in deferred tax asset/liability | 219,138 | | | 22,564 | |
Changes in accounts payable and accrued liabilities | 855,207 | | | 1,506,396 | |
Net Cash Provided by Operating Activities | 7,402,109 | | | 3,723,193 | |
| | | |
INVESTING ACTIVITIES | | | |
Proceeds from sale of equipment | 75,310 | | | 219,269 | |
Sale (purchase) of investments | 2,476,227 | | | (876,463) | |
Purchase of fixed assets | (3,309,191) | | | (1,271,997) | |
Payments for acquisitions | (4,322,722) | | | — | |
Net Cash Used in Investing Activities | (5,080,376) | | | (1,929,191) | |
| | | |
FINANCING ACTIVITIES | | | |
Value of equity awards surrendered by employees for tax liability | (185,004) | | | (737,024) | |
Cash received in exercise of stock options | 8,870 | | | 174,002 | |
Purchase of treasury stock | (2,249,745) | | | (4,000,000) | |
Principal paid towards lease liability | (53,190) | | | — | |
Net Cash Used in Financing Activities | (2,479,069) | | | (4,563,022) | |
| | | |
Effect of exchange rate changes on cash | (468) | | | (38,941) | |
| | | |
NET DECREASE IN CASH | (157,804) | | | (2,807,961) | |
CASH AT BEGINNING OF PERIOD | 10,101,932 | | | 11,445,799 | |
CASH AT END OF PERIOD | $ | 9,944,128 | | | $ | 8,637,838 | |
| | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
| | | |
CASH PAID FOR: | | | |
Interest | $ | 4,469 | | | $ | — | |
Income taxes | $ | 1,793,281 | | | $ | 2,164,149 | |
NON-CASH FINANCING AND INVESTING ACTIVITIES: | | | |
Issuance of common stock - Midflow acquisition | $ | 1,020,000 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Stockholders' Equity |
(Unaudited) |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | | | |
Balance, December 31, 2019 | | 47,411,977 | | | $ | 50,824 | | | $ | 29,584,172 | | | $ | (2,415,460) | | | $ | (5,353,019) | | | $ | 24,705,069 | | | $ | 46,571,586 | |
Stock based compensation | | | | | | 66,348 | | | | | | | | 66,348 |
Stock issued in exercise of stock options | | 2,000 | | | 2 | | | 2,018 | | | | | | | | | 2,020 | |
Stock issued in settlement of RSUs and accrued bonuses | | 271,684 | | | 272 | | | 419,101 | | | | | | | | | 419,373 | |
Tax withholdings paid related to stock based compensation | | | | | | (148,879) | | | | | | | | | (148,879) | |
| | | | | | | | | | | | | | |
Foreign currency translation | | | | | | | | (945,423) | | | | | | | (945,423) | |
Unrealized losses on investments | | | | | | | | (157,354) | | | | | | | (157,354) | |
Net loss | | | | | | | | | | | | (365,264) | | | (365,264) | |
Balance, March 31, 2020 | | 47,685,661 | | | $ | 51,098 | | | $ | 29,922,760 | | | $ | (3,518,237) | | | $ | (5,353,019) | | | $ | 24,339,805 | | | $ | 45,442,407 | |
Stock based compensation | | | | | | $ | 183,850 | | | | | | | | | 183,850 | |
| | | | | | | | | | | | | | |
Stock issued in settlement of RSUs | | 227,454 | | | 227 | | | (227) | | | | | | | | | 0 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Foreign currency translation | | | | | | | | 375,267 | | | | | | | 375,267 | |
Unrealized gains on investments | | | | | | | | 72,875 | | | | | | | 72,875 | |
Net loss | | | | | | | | | | | | $ | (808,503) | | | (808,503) | |
Balance, June 30, 2020 | | 47,913,115 | | | $ | 51,325 | | | $ | 30,106,383 | | | $ | (3,070,095) | | | $ | (5,353,019) | | | $ | 23,531,302 | | | $ | 45,265,896 | |
Stock based compensation | | | | | | 101,745 | | | | | | | | | 101,745 | |
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Stock issued in settlement of RSUs | | 46,467 | | | 46 | | | (46) | | | | | | | | | 0 | |
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Foreign currency translation | | | | | | | | 233,170 | | | | | | | 233,170 | |
Unrealized losses on investments | | | | | | | | (36,840) | | | | | | | (36,840) | |
Net loss | | | | | | | | | | | | (1,057,748) | | | (1,057,748) | |
Balance, September 30, 2020 | | $ | 47,959,582 | | | $ | 51,371 | | | $ | 30,208,082 | | | $ | (2,873,765) | | | $ | (5,353,019) | | | $ | 22,473,554 | | | $ | 44,506,223 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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PROFIRE ENERGY, INC. AND SUBSIDIARIES | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Stockholders' Equity | | | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | | | | | | | | |
Balance, December 31, 2018 | | 47,932,305 | | | $ | 49,708 | | | $ | 28,027,742 | | | $ | (2,895,683) | | | $ | (2,609,485) | | | $ | 22,683,577 | | | $ | 45,255,859 | |
Stock based compensation | | | | | | 66,714 | | | | | | | | 66,714 |
Stock issued in exercise of stock options | | 2,483 | | | 2 | | | (2) | | | | | | | | | — | |
Stock issued in settlement of RSUs | | 148,723 | | | 149 | | | 379,712 | | | | | | | | | 379,861 | |
Tax withholdings paid related to stock based compensation | | | | | | (143,022) | | | | | | | | | (143,022) | |
Treasury stock repurchased | | (775,287) | | | | | | | | | (1,333,578) | | | | | (1,333,578) | |
Foreign currency translation | | | | | | | | 149,415 | | | | | | | 149,415 | |
Unrealized gains on investments | | | | | | | | 68,752 | | | | | | | 68,752 | |
Net income | | | | | | | | | | | | 1,668,618 | | | 1,668,618 | |
Balance, March 31, 2019 | | 47,308,224 | | | $ | 49,859 | | | $ | 28,331,144 | | | $ | (2,677,516) | | | $ | (3,943,063) | | | $ | 24,352,195 | | | $ | 46,112,619 | |
Stock based compensation | | | | | | 297,127 | | | | | | | | | 297,127 | |
Stock issued in exercise of stock options | | 9,174 | | | 9 | | | 6,841 | | | | | | | | | 6,850 | |
Stock issued in settlement of RSUs | | 148,794 | | | 149 | | | (149) | | | | | | | | | — | |
Tax withholdings paid related to stock based compensation | | | | | | (41,411) | | | | | | | | | (41,411) | |
Foreign currency translation | | | | | | | | 102,435 | | | | | | | 102,435 | |
Unrealized gains on investments | | | | | | | | 49,495 | | | | | | | 49,495 | |
Net income | | | | | | | | | | | | 985,504 | | | 985,504 | |
Balance, June 30, 2019 | | 47,466,192 | | | $ | 50,017 | | | $ | 28,593,552 | | | $ | (2,525,586) | | | $ | (3,943,063) | | | $ | 25,337,699 | | | $ | 47,512,619 | |
Stock based compensation | | | | | | | | (5,571) | | | | | | | | | | | | (5,571) | |
Stock issued in exercise of stock options | | 4,836 | | | 5 | | | 2,015 | | | | | | | | | | | | 2,020 | |
Stock issued in settlement of RSUs | | 546 | | | 1 | | | (1) | | | | | | | | | | | | — | |
Stock issued in acquisition (note 9) | | 739,130 | | | 739 | | | 1,019,261 | | | | | | | | | | | | 1,020,000 | |
Tax withholdings paid related to stock based compensation | | | | | | | | (571) | | | | | | | | | | | | (571) | |
Treasury stock repurchased | | (592,100) | | | | | | | | | | | | (916,167) | | | | | | (916,167) | |
Foreign currency translation | | | | | | | | | | | (91,397) | | | | | | | | | (91,397) | |
Unrealized losses on investments | | | | | | | | | | | (12,386) | | | | | | | | | (12,386) | |
Net income | | | | | | | | | | | | | | | | | 921,748 | | | 921,748 | |
Balance, September 30, 2019 | | $ | 47,618,604 | | | | $ | 50,762 | | | | $ | 29,608,685 | | | | $ | (2,629,369) | | | | $ | (4,859,230) | | | | $ | 26,259,447 | | | $ | 48,430,295 | |
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|
|
|
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | | | |
Balance, December 31, 2018 | | 47,932,305 | | | $ | 49,708 | | | $ | 28,027,742 | | | $ | (2,895,683) | | | $ | (2,609,485) | | | $ | 22,683,577 | | | $ | 45,255,859 | |
Stock based compensation | | | | | | 66,714 | | | | | | | | 66,714 |
Stock issued in exercise of stock options | | 2,483 | | | 2 | | | (2) | | | | | | | | | 0 | |
Stock issued in settlement of RSUs and accrued bonuses | | 148,723 | | | 149 | | | 379,712 | | | | | | | | | 379,861 | |
Tax withholdings paid related to stock based compensation | | | | | | (143,022) | | | | | | | | | (143,022) | |
Treasury stock repurchased | | (775,287) | | | | | | | | | (1,333,578) | | | | | (1,333,578) | |
Foreign currency translation | | | | | | | | 149,415 | | | | | | | 149,415 | |
Unrealized gains on investments | | | | | | | | 68,752 | | | | | | | 68,752 | |
Net income | | | | | | | | | | | | 1,668,618 | | | 1,668,618 | |
Balance, March 31, 2019 | | 47,308,224 | | | $ | 49,859 | | | $ | 28,331,144 | | | $ | (2,677,516) | | | $ | (3,943,063) | | | $ | 24,352,195 | | | $ | 46,112,619 | |
Stock based compensation | | | | | | 297,127 | | | | | | | | | 297,127 | |
Stock issued in exercise of stock options | | 9,174 | | | 9 | | | 6,841 | | | | | | | | | 6,850 | |
Stock issued in settlement of RSUs | | 148,794 | | | 149 | | | (149) | | | | | | | | | 0 | |
Tax withholdings paid related to stock based compensation | | | | | | (41,411) | | | | | | | | | (41,411) | |
| | | | | | | | | | | | | | |
Foreign currency translation | | | | | | | | 102,435 | | | | | | | 102,435 | |
Unrealized gains on investments | | | | | | | | 49,495 | | | | | | | 49,495 | |
Net income | | | | | | | | | | | | 985,504 | | | 985,504 | |
Balance, June 30, 2019 | | 47,466,192 | | | $ | 50,017 | | | $ | 28,593,552 | | | $ | (2,525,586) | | | $ | (3,943,063) | | | $ | 25,337,699 | | | $ | 47,512,619 | |
Stock based compensation | | | | | | (5,571) | | | | | | | | | (5,571) | |
Stock issued in exercise of stock options | | 4,836 | | | 5 | | | 2,015 | | | | | | | | | 2,020 | |
Stock issued in settlement of RSUs | | 546 | | | 1 | | | (1) | | | | | | | | | 0 | |
Stock issues in acquisition (note 9) | | 739,130 | | | 739 | | | 1,019,261 | | | | | | | | | 1,020,000 | |
Tax withholdings paid related to stock based compensation | | | | | | (571) | | | | | | | | | (571) | |
Treasury stock repurchased | | (592,100) | | | | | | | | | (916,167) | | | | | (916,167) | |
Foreign currency translation | | | | | | | | (91,397) | | | | | | | (91,397) | |
Unrealized losses on investments | | | | | | | | (12,386) | | | | | | | (12,386) | |
Net income | | | | | | | | | | | | 921,748 | | | 921,748 | |
Balance, September 30, 2019 | | $ | 47,618,604 | | | $ | 50,762 | | | $ | 29,608,685 | | | $ | (2,629,369) | | | $ | (4,859,230) | | | $ | 26,259,447 | | | $ | 48,430,295 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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PROFIRE ENERGY, INC. AND SUBSIDIARIES | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Stockholders' Equity (Continued) | | | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Retained Earnings | | Total Stockholders' Equity |
| | Shares | | Amount | | | | | | | | | | |
Balance, December 31, 2017 | | 48,606,425 | | | $ | 53,931 | | | $ | 27,535,469 | | | $ | (2,200,462) | | | $ | (6,890,349) | | | $ | 25,548,835 | | | $ | 44,047,424 | |
Stock based compensation | | | | | | 575,235 | | | | | | | | 575,235 |
Stock issued in exercise of stock options | | 81,213 | | | 81 | | | 74,161 | | | | | | | | | 74,242 | |
Stock issued in settlement of RSUs | | 118,778 | | | 119 | | | (119) | | | | | | | | | — | |
Tax withholdings related to stock based compensation | | | | | | (83,600) | | | | | | | | | (83,600) | |
Foreign currency translation | | | | | | | | (239,129) | | | | | | | (239,129) | |
Unrealized losses on investments | | | | | | | | (33,235) | | | | | | | (33,235) | |
Net income | | | | | | | | | | | | 1,876,228 | | | 1,876,228 | |
Balance, March 31, 2018 | | 48,806,416 | | | $ | 54,131 | | | $ | 28,101,146 | | | $ | (2,472,826) | | | $ | (6,890,349) | | | $ | 27,425,063 | | | $ | 46,217,165 | |
Stock based compensation | | | | | | 281,012 | | | | | | | | | 281,012 | |
Stock issued in exercise of stock options | | 410,421 | | | 410 | | | 99,350 | | | | | | | | | 99,760 | |
Stock issued in settlement of RSUs | | 143,540 | | | 144 | | | (144) | | | | | | | | | — | |
Tax withholdings related to stock based compensation | | | | | | (652,560) | | | | | | | | | (652,560) | |
Treasury stock repurchased | | (1,277,954) | | | | | | | | | (4,000,000) | | | | | (4,000,000) | |
Foreign currency translation | | | | | | | | (154,943) | | | | | | | (154,943) | |
Unrealized gains on investments | | | | | | | | 9,226 | | | | | | | 9,226 | |
Net income | | | | | | | | | | | | 1,714,270 | | | 1,714,270 | |
Balance, June 30, 2018 | | | $ | 48,082,423 | | | $ | 54,685 | | | $ | 27,828,804 | | | $ | (2,618,543) | | | $ | (10,890,349) | | | $ | 29,139,333 | | | $ | 43,513,930 | |
Stock based compensation | | | | | | | | 62,232 | | | | | | | | | | | | 62,232 | |
Stock issued in settlement of RSUs | | 640 | | | 1 | | | (1) | | | | | | | | | | | | — | |
Tax withholdings related to stock based compensation | | | | | | | | (864) | | | | | | | | | | | | (864) | |
Foreign currency translation | | | | | | | | | | | 170,641 | | | | | | | | | 170,641 | |
Unrealized losses on investments | | | | | | | | | | | (11,963) | | | | | | | | | (11,963) | |
Net income | | | | | | | | | | | | | | | | | 1,659,089 | | | 1,659,089 | |
Balance, September 30, 2018 | | $ | 48,083,063 | | | | $ | 54,686 | | | | $ | 27,890,171 | | | | $ | (2,459,865) | | | | $ | (10,890,349) | | | | $ | 30,798,422 | | | | $ | 45,393,065 | |
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PROFIRE ENERGY, INC. AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows |
(Unaudited) |
| For the Nine Months Ended September 30, |
| 2020 | | 2019 |
OPERATING ACTIVITIES | | | |
Net income (loss) | $ | (2,231,515) | | | $ | 3,575,870 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization expense | 860,028 | | | 732,396 | |
Gain on sale of fixed assets | (193,938) | | | (73,166) | |
Bad debt expense | 182,179 | | | 255,943 | |
Stock awards issued for services | 351,943 | | | 358,270 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 3,404,439 | | | 1,244,104 | |
Income taxes receivable/payable | (404,304) | | | (890,523) | |
Inventories | 714,245 | | | 1,711,446 | |
Prepaid expenses | 43,099 | | | (586,576) | |
Deferred tax asset/liability | 44,840 | | | 219,138 | |
Accounts payable and accrued liabilities | (2,648,339) | | | 855,207 | |
Net Cash Provided by Operating Activities | 122,677 | | | 7,402,109 | |
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INVESTING ACTIVITIES | | | |
Proceeds from sale of equipment | 16,313 | | | 75,310 | |
Sale of investments | 1,814,070 | | | 2,476,227 | |
Purchase of fixed assets | (1,146,400) | | | (3,309,191) | |
Payments for acquisitions, net of cash acquired | 0 | | | (4,322,722) | |
Net Cash Provided by (Used in) Investing Activities | 683,983 | | | (5,080,376) | |
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FINANCING ACTIVITIES | | | |
Value of equity awards surrendered by employees for tax liability | (148,879) | | | (185,004) | |
Cash received in exercise of stock options | 2,020 | | | 8,870 | |
Purchase of treasury stock | 0 | | | (2,249,745) | |
Principal paid towards lease liability | (45,965) | | | (53,190) | |
Net Cash Used in Financing Activities | (192,824) | | | (2,479,069) | |
| | | |
Effect of exchange rate changes on cash | (53,147) | | | (468) | |
| | | |
NET CHANGE IN CASH | 560,689 | | | (157,804) | |
CASH AT BEGINNING OF PERIOD | 7,358,856 | | | 10,101,932 | |
CASH AT END OF PERIOD | $ | 7,919,545 | | | $ | 9,944,128 | |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | |
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CASH PAID FOR: | | | |
Interest | $ | 4,946 | | | $ | 4,469 | |
Income taxes | $ | 402,510 | | | $ | 1,793,281 | |
NON-CASH FINANCING AND INVESTING ACTIVITIES | | | |
Common stock issued in settlement of accrued bonuses | $ | 419,373 | | | $ | 379,861 | |
Issuance of common stock - Midflow acquisition | $ | 0 | | | $ | 1,020,000 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
For the three and nine months ended September 30, 2019,2020 and as of December 31, 20182019
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
Except where the context otherwise requires, all references herein to the "Company," "Profire," "we," "us," "our," or similar words and phrases are to Profire Energy, Inc. and its wholly owned subsidiary,subsidiaries, taken together.
The accompanying financial statements have been prepared by the Company without audit. In the opinion of Management,management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, stockholders' equity, and cash flows at September 30, 20192020 and for all periods presented herein have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements contained in its annual report on Form 10-K for the year ended December 31, 20182019 ("Form 10-K"). The results of operations for the three and nine month periods ended September 30, 20192020 and 20182019 are not necessarily indicative of the operating results for the full years.
NOTE 2 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
This Organization and Summary of Significant Accounting Policies of the Company is presented to assist in understanding the Company's condensed consolidated financial statements. The Company's accounting policies conform to accounting principles generally accepted in the United States of America ("US GAAP")."US GAAP."
The Company provides burner- and chemical-managementburner-management products, solutions and services for the oil and gas industry primarily in the US and Canadian markets.
Significant Accounting Policies
There have been no changes to the significant accounting policies of the Company from the information provided in Note 1 of the Notes to the Consolidated Financial Statements in the Company's most recent Form 10-K, except as discussed below.
Leases
In February of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-02 - Leases (Topic 842), which significantly amends the way companies are required to account for leases. Under the updated leasing guidance, some leases that did not have to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest expense. The Company adopted this update as of January 1, 2019 using the modified retrospective transition method. Prior periods have not been restated. Upon implementation, the Company recognized an initial right-of-use asset of $132,488 and lease liability of $132,488. Due to the simple nature of the Company's leases, no change to retained earnings was required. See Note 8 for further details.10-K.
Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and determined that the adoption of pronouncements applicable to the Company has not had or is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
Reclassification
NOTE 3 – INVENTORIES
Certain balances in previously issued consolidated financial statements have been reclassified to be consistent withInventories consisted of the current period presentation. The reclassification had no impact on financial position, net income, or stockholders' equity.following at each balance sheet date:
| | | | | | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
Raw materials | $ | 328,945 | | | $ | 0 | |
Finished goods | 9,494,074 | | | 10,517,858 | |
Work in process | 0 | | | 0 | |
Subtotal | 9,823,019 | | | 10,517,858 | |
Reserve for obsolescence | (1,042,448) | | | (946,051) | |
Total | $ | 8,780,571 | | | $ | 9,571,807 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at each balance sheet date:
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| As of |
| September 30, 2020 | | December 31, 2019 |
Assets classified as held for sale | 791,180 | | | 0 | |
Prepaid Inventory | 659,084 | | | 1,291,577 | |
Prepaid insurance | 275,623 | | | 133,611 | |
Vehicle trade-in credits | 156,607 | | | 0 | |
Interest receivables | 64,600 | | | 80,609 | |
Other | 231,588 | | | 166,625 | |
Total | $ | 2,178,682 | | | $ | 1,672,422 | |
In the first quarter of 2020, we completed the construction of a new office building and research and development facility in Acheson, Canada. As a result, during the second quarter of 2020 we started the process of selling our old office building in Spruce Grove, Canada. In the table above, the assets classified as held for sale as of September 30, 2020, consist of this old office building which we intend to sell within a one year period from the most recent balance sheet date. The amount shown above is recorded at cost, less accumulated depreciation.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following at each balance sheet date:
| | | | | | | | | | | |
| As of |
| September 30, 2020 | | December 31, 2019 |
Employee-related payables | $ | 792,050 | | | $ | 1,657,826 | |
Warranty liabilities | 98,354 | | | 166,301 | |
Inventory-related payables | 80,641 | | | 0 | |
Acquisition liabilities | 0 | | | 162,907 | |
Other | 90,470 | | | 102,357 | |
Total | $ | 1,061,515 | | | $ | 2,089,391 | |
NOTE 6 – LEASES
We have leases for office equipment and office space. The leases for office equipment are classified as financing leases and the typical term is 36 months. We have the option to extend most office equipment leases, but we do not intend to do so. Accordingly, no extensions have been recognized in the right-of-use asset or lease liability. The office equipment lease payments are not variable and the lease agreements do not include any non-lease components, residual value guarantees, or restrictions. There are no interest rates implicit in the office equipment lease agreements, so we have used our incremental borrowing rate to determine the discount rate to be applied to our financing leases. The weighted average discount rate applied to our financing leases is 4.50% and the weighted average remaining lease term is 17.8 months.
The following table shows the components of financing lease cost:
| | | | | | | | | | | | | | |
Financing Lease Cost | | For the Three Months Ended September 30, 2020 | | For the Nine Months Ended September 30, 2020 |
Amortization of right-of-use assets | | $ | 11,567 | | | $ | 45,064 | |
Interest on lease liabilities | | 699 | | | 4,946 | |
Total financing lease cost | | $ | 12,266 | | | $ | 50,010 | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019,2020 and as of December 31, 20182019
NOTE 3 – INVENTORYThe following table reconciles future minimum lease payments to the discounted finance lease liability:
Inventories consisted of the following at each balance sheet date: | | | | | | | | |
Years ending December 31, | | Amount |
2020 - remaining | | $ | 12,506 | |
2021 | | 40,921 | |
2022 | | 12,803 | |
2023 | | 0 | |
2024 | | 0 | |
Thereafter | | 0 | |
Total future minimum lease payments | | $ | 66,230 | |
Less: Amount representing interest | | 2,279 | |
Present value of future payments | | $ | 63,951 | |
Current portion | | $ | 43,024 | |
Long-term portion | | $ | 20,927 | |
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| As of | | |
| September 30, 2019 | | December 31, 2018 |
Raw materials | $ | 457,549 | | | $ | 76,319 | |
Finished goods | 10,168,955 | | | 10,474,522 | |
Work in process | — | | | — | |
Subtotal | 10,626,504 | | | 10,550,841 | |
Reserve for obsolescence | (843,861) | | | (891,270) | |
Total | $ | 9,782,643 | | | $ | 9,659,571 | |
Because our office space leases are short-term, we have elected not to recognize them on our balance sheet under the short-term recognition exemption. During the three and nine months ended September 30, 2020, we recognized $19,189 and $57,719, respectively, in short-term lease costs associated with office space leases.
NOTE 47 – STOCKHOLDERS' EQUITY
As of September 30, 2019,2020 and December 31, 2018,2019, the Company held 3,142,887 and 1,775,5003,412,378 shares of its common stock in treasury at a total cost of $4,859,230 and $2,609,485,$5,353,019, respectively.
As of September 30, 2020 , the Company had 275,203 restricted stock units, 252,701 performance based restricted stock units, and 934,700 stock options outstanding with $593,361 in remaining compensation expense to be recognized over the next 2.3 years.
2020 EIP and LTIP
Due to economic uncertainties including those caused by the COVID-19 pandemic, the Board of Directors of the Company (the "Board"), with the support of the Company's executives, has elected to not adopt an executive incentive plan ("EIP") or long-term incentive plan ("LTIP") for 2020. The Board and executives believe this is an appropriate short-term measure that will help to align the Company's cost structure with the current extraordinary conditions affecting the industry in which we operate.
2019 EIP
On April 22, 2019, the Board of Directors (the “Board”) of the Company approved the 2019 Executive Incentive Plan (the “EIP”“2019 EIP”) for Brenton W. Hatch, the Company’s then President and Chief Executive Officer, Ryan W. Oviatt, the Company’s Chief Financial Officer, Cameron M. Tidball, the Company’s Chief Business Development Officer, Jay G. Fugal, the Company’s Vice President of Operations, and Patrick D. Fisher, the Company’s Vice President of Product development.Development. The 2019 EIP providesprovided for the potential award of bonuses to the participants based on the Company’s financial performance in fiscal year 2019. If earned,On March 4, 2020, the bonuses will be payableCompany's Board of Directors approved a one-time executive bonus in the amount of $828,787 for meeting targets pursuant to the 2019 EIP. Half of the bonus was paid in cash and stock, and the stock portionhalf of the bonuses is intended to constitute an awardbonus was settled by issuing 343,748 shares of common stock under the Company’sCompany's 2014 Equity Incentive Plan, as amended (the “Plan”"2014 Plan"). In addition to which was fully vested on the EIP, the Board also approved as a long-term incentive the grantsdate of restricted stock unit awards to Messrs. Oviatt, Tidball, Fugal, and Fisher pursuant to the Plan (the “2019 LTIP”).
grant.
2019 EIP
Under the terms of the EIP, each participating executive officer has been assigned a target bonus amount for fiscal 2019. The target bonus amount for Mr. Hatch is $412,000, the target bonus amount for Mr. Oviatt is $90,125, the target bonus amount for Mr. Tidball is $84,357, the target bonus for Mr. Fugal is $41,200, and the target bonus for Mr. Fisher is $38,750 CAD. Under no circumstance can the participants receive more than two times the target bonus amount assigned to such participant.
Participants will bewere eligible to receive bonuses based upon reaching or exceeding performance goals established by the Board or its Compensation Committee for fiscal 2019. The performance goals in the 2019 EIP arewere based on the Company’s total revenue, net income, free cash flow, and product development milestones. Each of these performance goals will bewere weighted 25% in calculating bonus amounts.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
The bonus amounts earned underNotes to the EIP, if any, will be paid 50% in cashCondensed Consolidated Financial Statements
For the three and 50% in shares of Restricted Stock under the Plan. In no event shall the total award exceed 200% of the target bonus amount for each participant, or exceed any limitations otherwise set forth in the Plan. The actual bonus amounts, if any, will be determined by the Compensation Committee of the Board upon the completion of fiscalnine months ended September 30, 2020 and 2019 and paid by March 15, 2020, subject to all applicable tax withholding.
2019 LTIP
On April 22, 2019 the Board also adopted the 2019 Long-Term Incentive plan (the "2019 LTIP") for certain of the Company's executive officers. The 2019 LTIP consists of total awards of up to 66,213 restricted stock units (“Units”RSUs”) to Mr. Oviatt, up to 51,646 UnitsRSUs to Mr. Tidball, up to 35,313 UnitsRSUs to Mr. Fugal, and up to 24,862 UnitsRSUs to Mr. Fisher pursuant to two separate Restricted Stock Unit Award Agreements to bethat were entered into between the Company and each participant.participant under the 2014 Plan. One agreement covers 33% of each award recipient’s UnitsRSU's that are subject to time-based vesting, and the other agreement covers the remaining 67% of such award recipient’s UnitsRSU's that may vest based on performance metrics. Upon vesting, the award agreements entitle the award recipients to receive one share of the Company’s common stock for each vested Unit.RSU. The vesting period of the 2019 LTIP began on January 1, 2019 and terminates on December 31, 2021.
2017 LTIP
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019, and as of December 31, 2018
On March 14, 2019,4, 2020, the Board approved a one-time executive bonus that was settled by issuing 16,689 shares of common stock for meeting targets pursuant to the previously announced "2017 Long-Term Incentive Plan", which shares were issued under the 2014 Plan. These shares were fully vested as of March 4, 2020.
2020 RSUs
On June 17, 2020, pursuant to the annual renewal of Director compensation, the Board approved a grant of 85,000 restricted stock units ("RSUs") to various employees. The awards vest annually over five years and will result in a total compensation expense of $149,600 to be recognized over the vesting period.
On June 12, 2019, the Board approved a grant of 183,942270,966 RSUs to Independent Directors. Half of the RSUs vestvested immediately on the date of grant and the remaining 50% of the RSUs will vest on the first anniversary of the grant date or at the Company's next Annual Meeting of Stockholders, whichever is earlier. The awards will result in total compensation expense of $252,000 to be recognized over the vesting period.
NOTE 5 – SEGMENT INFORMATIONOn July 30, 2020 Mr. Arlen B. Crouch notified the Chairman of the Board of the Company of his decision to resign, effective August 3, 2020, from his position as a member of the Board. Mr. Crouch’s resignation did not result from any disagreements with Management or the Board. On Mr. Crouch's resignation date all of his unvested RSUs were forfeited and the related compensation expense will be recaptured. On July 30, 2020, the Board appointed Colleen Larkin Bell to serve as a director to fill the vacancy resulting from Mr. Crouch’s resignation, effective August 3, 2020. Ms. Bell will serve as Chair of the Nominating Committee and will serve on the Audit and Compensation Committees. As compensation for her service on the Board and Committee Assignments, on August 21, 2020, the board approved a grant of 92,934 RSUs. Half of the RSUs vested immediately on the date of the grant and the remaining 50% of the RSUs will vest on the first anniversary of the grant date. The awards will result in total compensation expense of $72,953 to be recognized over the vesting period.
The Company operates in the United States and Canada. Segment information for these geographic areas is as follows:2019 RSUs
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
Sales | | 2019 | | 2018 | | 2019 | | 2018 |
Canada | | $ | 1,890,592 | | | $ | 1,803,957 | | | $ | 3,883,010 | | | $ | 4,374,844 | |
United States | | 8,015,169 | | 9,695,945 | | 26,979,840 | | 30,634,536 |
Total Consolidated | | $ | 9,905,761 | | | $ | 11,499,902 | | | $ | 30,862,850 | | | $ | 35,009,380 | |
| | | | | | | | |
| | For the Three Months Ended September 30, | | | | For the Nine Months Ended September 30, | | |
Profit (Loss) | | 2019 | | 2018 | | 2019 | | 2018 |
Canada | | $ | (242,182) | | | $ | 24,224 | | | $ | (1,171,424) | | | $ | (676,268) | |
United States | | 1,163,930 | | 1,634,865 | | 4,747,294 | | 5,925,855 |
Total Consolidated | | $ | 921,748 | | | $ | 1,659,089 | | | $ | 3,575,870 | | | $ | 5,249,587 | |
| | | | | | | | |
| | | | | | As of | | |
Long-Lived Assets | | | | | | September 30, 2019 | | December 31, 2018 |
Canada | | | | | | $ | 5,281,869 | | | $ | 2,509,129 | |
United States | | | | | | 18,117,931 | | | 15,002,462 | |
Total Consolidated | | | | | | $ | 23,399,800 | | | $ | 17,511,591 | |
| | | | | | | | |
On March 14, 2019, the Board approved a grant of 85,000 RSUs to various employees. The awards vest annually over five years and will result in a total compensation expense of $149,600 to be recognized over the vesting period.
On June 12, 2019, pursuant to the annual renewal of Director compensation, the Board approved a grant of 183,942 RSUs to Independent Directors. Half of the RSUs vested immediately on the date of grant and the remaining 50% of the RSUs vested on the first anniversary of the grant date. The awards have resulted in total compensation expense of $252,000 that was recognized over the vesting period.
2020 Stock Options
On March 17, 2020 (the "March Grant Date"), the Board approved a grant of options to purchase 115,200 shares of the Company's common stock at a strike price of $0.81 to various employees (the "March 2020 Options"). The Options terminate four years from the March Grant Date and the March 2020 Options become exercisable as to one-third of the shares of common stock covered thereby on each anniversary of the March Grant Date for the next three years following the March Grant Date. The March 2020 Options will result in a total compensation expense of $40,280 to be recognized over the vesting period.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
On July 2, 2020 (the "July Grant Date"), upon the recommendation of the Compensation Committee, the Board approved the grant of a non-qualified stock option to purchase 100,000 shares of the Company’s common stock to each of Mr. Oviatt and Mr. Tidball under the Company’s 2014 Plan and pursuant to the standard form of Notice of Stock Option Grant and Stock Option Agreement under the plan (the “July Options”). The exercise price of the July Options is equal to the closing bid price of the Company's common stock on July 2, 2020 or $0.8439 per share. The July Options shall vest equally over a period of three years from the July Grant Date. Vesting occurs on the anniversary date of the July Grant Date, with one-third of the total shares vesting on each of the first three anniversaries of the July Grant Date. Vesting is contingent upon the executive’s continued employment with the Company on each applicable vesting date. The July Options expire on July 2, 2024. These July Options will result in a total compensation expense of $79,431 to be recognized over the vesting period.
On August 21, 2020 (the "August Grant Date"), the Board approved a grant of options to purchase 630,000 shares of the Company's common stock at a strike price of $0.785 to various employees (the "August Options"). The Options terminate four years from the August Grant Date and the August Options shall become exercisable as to one-third of the shares of common stock covered thereby on each anniversary of the August Grant Date for the next three years following the August Grant Date. The August Options will result in a total compensation expense of $233,111 to be recognized over the vesting period.
NOTE 8 – ACQUISITIONS
Millstream Energy Products
On June 18, 2019, our wholly-owned subsidiary, Profire Combustion, Inc., acquired substantially all the assets of Millstream Energy Products, LTD., a Canadian corporation ("MEP"). MEP is a privately-held Canadian company that developed a line of high-performance burners, economy burners, flame arrestor housings, secondary air control plates, and other related combustion components. MEP’s full line of products became available for sale by Profire’s existing sales team immediately after closing of the transaction. These products complement our burner-management system (BMS) product offerings and enable us to supply a larger portion of the total BMS package sale to our customers.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase price of $2,219,782 was funded through existing cash. A portion of the cash purchase amount equal to $140,257 was held back for 6 months pending satisfaction of seller obligations under the purchase agreement and was paid to the seller on February 20, 2020. The seller is also entitled to receive a 4.5% annual royalty on proprietary MEP product revenue generated during the next five years period from June 18, 2019 to June 18, 2024.
Profire hired a valuation firm to perform the purchase price allocation based on net assets received and the price paid. Based on the fair value of net assets at the time of purchase, the Company recorded intangible assets in the amount of $990,000 and goodwill of $17,681. Intangible assets include customer relationships, the trade name and developed technology.
| | | | | |
The purchase price calculation is a follows: | |
Cash | $ | 2,079,525 | |
Liabilities | 140,257 | |
| $ | 2,219,782 | |
| |
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of purchase: | |
Accounts receivable | $ | 207,145 | |
Inventory | 1,119,143 | |
Intangible assets | 990,000 |
Goodwill | 17,681 | |
Accounts payable | (114,187) | |
| $ | 2,219,782 | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
Transaction and other costs directly related to the acquisition of MEP, consisting primarily of professional fees and integration expenses, have amounted to approximately $136,811, were expensed as incurred and are included in general and administrative expenses.
Midflow Services
On August 5, 2019, we acquired all of the outstanding membership interests of Midflow Services, LLC ("Midflow"). Midflow provides packaged combustion solutions and services to the upstream and midstream oil and gas industry.
The Midflow acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase price of $3,439,371 was funded through a combination of existing cash and shares of the Company's common stock. The cash portion of the purchase price includes $500,000 placed in an escrow account for 12 months pending satisfaction of certain obligations under the purchase agreement which was settled in August 2020.
Profire hired a valuation firm to perform the purchase price allocation based on the net assets received and the price paid. Based on the fair value of the net assets at the time of purchase, the Company recorded intangible assets in the amount of $1,110,000 and goodwill of $1,564,000. Intangible assets include customer relationships, the trade name and developed technology.
| | | | | |
The purchase price calculation is as follows: | |
Cash | $ | 2,419,371 | |
Stock | 1,020,000 | |
| $ | 3,439,371 | |
| |
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of purchase: | |
Cash | $ | 172,850 | |
Accounts receivable | 324,989 | |
Inventory | 269,746 | |
Prepaid expenses | 13,180 | |
Property and equipment | 126,000 | |
Intangible assets | 1,110,000 | |
Goodwill | 1,564,000 | |
Accounts payable | (134,956) | |
Accrual liabilities | (6,438) | |
| $ | 3,439,371 | |
Transaction costs directly related to the acquisition of Midflow, consisting primarily of professional fees and integration expenses, amounted to approximately $44,087. All of these costs were expensed as incurred and are included in general and administrative expenses.
NOTE 9 – REVENUE
Performance Obligations
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
Our performance obligations include providing product and servicing our product. We recognize product revenue performance obligations in most cases when the product is delivered to the customer. Occasionally, if we are shipping the product on a customer’s account, we recognize revenue when the product has been shipped. At that point in time, the control of the product is transferred to the customer. When we perform service work, we apply the practical expedient that allows us to recognize service revenue when we have the right to invoice the customer for the work completed. We do not engage in transactions acting as an agent. The time needed to complete our performance obligations varies based on the size of the project; however, we typically satisfy our performance obligations within a few months of entering into the applicable sales contract or service contract.
Our customers have the right to return certain unused and unopened products within 90 days for a restocking fee. We provide a warranty on some of our products ranging from 90 days to 2 years, depending on the product. See note 5 for the amount accrued for expected returns and warranty claims as of September 30, 2020.
Contract Balances
We have elected to use the practical expedient in ASC 340-40-25-4 (regarding recognition of the incremental costs of obtaining a contract) for costs related to contracts that are estimated to be completed within one year. All of our current sales contracts and service contracts are expected to be completed within one year, and as a result, we have not recognized a contract asset account. If we had chosen not to use this practical expedient, we would not expect a material difference in the contract balances. We also did not have any material contract liabilities because we typically do not receive payments in advance of recognizing revenue.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019, and as of December 31, 2018
Disaggregation of Revenue
All revenue recognized in the income statement is considered to be revenue from contracts with customers. The table below shows revenue by category:
| | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Electronics | Electronics | | $ | 3,880,542 | | | $ | 4,988,293 | | | $ | 12,632,170 | | | $ | 14,208,867 | | Electronics | | $ | 1,406,681 | | | $ | 3,880,542 | | | $ | 5,708,436 | | | $ | 12,632,170 | |
Manufactured | Manufactured | | 519,990 | | | 599,951 | | | 1,456,789 | | | 2,369,461 | | Manufactured | | 139,057 | | | 519,990 | | | 682,149 | | | 1,456,789 | |
Re-Sell | Re-Sell | | 4,851,415 | | | 5,242,348 | | | 14,920,878 | | | 16,431,288 | | Re-Sell | | 1,971,542 | | | 4,851,415 | | | 7,986,792 | | | 14,920,878 | |
Service | Service | | 653,814 | | | 669,310 | | | 1,853,013 | | | 1,999,764 | | Service | | 482,826 | | | 653,814 | | | 1,429,350 | | | 1,853,013 | |
Total Revenue | Total Revenue | | $ | 9,905,761 | | | $ | 11,499,902 | | | $ | 30,862,850 | | | $ | 35,009,380 | | Total Revenue | | $ | 4,000,106 | | | $ | 9,905,761 | | | $ | 15,806,727 | | | $ | 30,862,850 | |
NOTE 10 – BASIC AND DILUTED EARNINGS PER SHARE
The following table is a reconciliation of the numerator and denominators used in the earnings per share calculation:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, |
| | 2020 | | 2019 |
| | Income (loss) (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount | | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount |
Basic EPS | | | | | | | | | | | | |
Net income (loss) available to common stockholders | | $ | (1,057,748) | | | 47,933,318 | | | $ | (0.02) | | | $ | 921,748 | | | 47,739,192 | | | $ | 0.02 | |
| | | | | | | | | | | | |
Effect of Dilutive Securities | | | | | | | | | | | | |
Stock options & RSUs | | 0 | | | 0 | | | | | 0 | | | 730,054 | | | |
| | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | |
Net income (loss) available to common stockholders + assumed conversions | | $ | (1,057,748) | | | 47,933,318 | | | $ | (0.02) | | | $ | 921,748 | | | 48,469,246 | | | $ | 0.02 | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
RSUs to obtain 527,904 shares of common stock were outstanding during the three months ended September 30, 2020, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These RSUs, which expire between March 2021 and March 2024, were still outstanding at September 30, 2020.
Stock options to purchase 244,600 shares of common stock at a weighted average price of $3.88 per share were outstanding during the three months ended September 30, 2019, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These options, which expired between November 2019 and May 2020, were still outstanding at September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2020 | | 2019 |
| | Income (loss) (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount | | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount |
Basic EPS | | | | | | | | | | | | |
Net income (loss) available to common stockholders | | $ | (2,231,515) | | | 47,717,114 | | | $ | (0.05) | | | $ | 3,575,870 | | | 47,509,357 | | | $ | 0.08 | |
| | | | | | | | | | | | |
Effect of Dilutive Securities | | | | | | | | | | | | |
Stock options & RSUs | | 0 | | | 0 | | | | | 0 | | | 750,543 | | | |
| | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | |
Net income (loss) available to common stockholders + assumed conversions | | $ | (2,231,515) | | | 47,717,114 | | | $ | (0.05) | | | $ | 3,575,870 | | | 48,259,900 | | | $ | 0.07 | |
Stock options and RSUs to purchase 666,714 shares of common stock at a weighted average price of $0.85 per share were outstanding during the nine months ended September 30, 2020, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These stock options and RSUs, which expire between March 2021 and August 2024, were still outstanding at September 30, 2020.
Stock options to purchase 244,600 shares of common stock at a weighted average price of $3.88 per share were outstanding during the nine months ended September 30, 2019, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These options, which expired between November 2019 and May 2020, were still outstanding at September 30, 2019.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
NOTE 711 – BASIC AND DILUTED EARNINGS PER SHARESEGMENT INFORMATION
The following table is a reconciliation of the numerator and denominators usedCompany operates in the earnings per share calculation:United States and Canada. Segment information for these geographic areas is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | | | | | | | | |
| | 2019 | | | | | | 2018 | | | | |
| | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount | | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount |
Basic EPS | | | | | | | | | | | | |
Net income available to common stockholders | | $ | 921,748 | | | 47,739,192 | | | $ | 0.02 | | | $ | 1,659,089 | | | 48,082,506 | | | $ | 0.03 | |
| | | | | | | | | | | | |
Effect of Dilutive Securities | | | | | | | | | | | | |
Stock options & RSUs | | — | | | 730,054 | | | | | — | | | 769,661 | | | |
| | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | |
Net income available to common stockholders + assumed conversions | | $ | 921,748 | | | 48,469,246 | | | $ | 0.02 | | | $ | 1,659,089 | | | 48,852,167 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
Sales | | 2020 | | 2019 | | 2020 | | 2019 |
Canada | | $ | 755,701 | | | $ | 1,890,592 | | | $ | 2,365,118 | | | $ | 3,883,010 | |
United States | | 3,244,405 | | 8,015,169 | | 13,441,609 | | 26,979,840 |
Total Consolidated | | $ | 4,000,106 | | | $ | 9,905,761 | | | $ | 15,806,727 | | | $ | 30,862,850 | |
| | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
Profit (Loss) | | 2020 | | 2019 | | 2020 | | 2019 |
Canada | | $ | (473,395) | | | $ | (242,182) | | | $ | (1,059,627) | | | $ | (1,171,424) | |
United States | | (584,353) | | 1,163,930 | | (1,171,888) | | 4,747,294 |
Total Consolidated | | $ | (1,057,748) | | | $ | 921,748 | | | $ | (2,231,515) | | | $ | 3,575,870 | |
| | | | | | | | |
| | | | | | As of |
Long-Lived Assets | | | | | | September 30, 2020 | | December 31, 2019 |
Canada | | | | | | $ | 5,733,180 | | | $ | 6,068,061 | |
United States | | | | | | 16,781,358 | | | 18,080,075 | |
Total Consolidated | | | | | | $ | 22,514,538 | | | $ | 24,148,136 | |
| | | | | | | | |
Options to purchase 244,600 and 251,600 shares of common stock at a weighted average price of $3.88 and $3.89 per share were outstanding during the three months ended September 30, 2019, and 2018, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These options, which expire between November 2019 and May 2020, were still outstanding at September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, | | | | | | | | | | |
| | 2019 | | | | | | 2018 | | | | |
| | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount | | Income (Numerator) | | Weighted Average Shares (Denominator) | | Per-Share Amount |
Basic EPS | | | | | | | | | | | | |
Net income available to common stockholders | | $ | 3,575,870 | | | 47,509,357 | | | $ | 0.08 | | | $ | 5,249,587 | | | 48,337,517 | | | $ | 0.11 | |
| | | | | | | | | | | | |
Effect of Dilutive Securities | | | | | | | | | | | | |
Stock options & RSUs | | — | | | 750,543 | | | | | — | | | 769,661 | | | |
| | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | |
Net income available to common stockholders + assumed conversions | | $ | 3,575,870 | | | 48,259,900 | | | $ | 0.07 | | | $ | 5,249,587 | | | 49,107,178 | | | $ | 0.11 | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019, and as of December 31, 2018
Options to purchase 244,600 and 251,600 shares of common stock at a weighted average price of $3.88 and $3.89 per share were outstanding during the nine months ended September 30, 2019 and 2018, respectively, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These options, which expire between November 2019 and May 2020, were still outstanding at September 30, 2019.
NOTE 8 – LEASES
We have leases for office equipment and office space. The leases for office equipment are classified as financing leases and the typical term is 36 months. We have the option to extend most office equipment leases, but we do not intend to do so. Accordingly, no extensions have been recognized in the right-of-use asset or lease liability. The office equipment lease payments are not variable and the lease agreements do not include any non-lease components, residual value guarantees, or restrictions. There are no interest rates implicit in the office equipment lease agreements, so we have used our incremental borrowing rate to determine the discount rate to be applied to our financing leases. The weighted average discount rate applied to our financing leases is 4.50% and the weighted average remaining lease term is 25.3 months.
The following table shows the components of financing lease cost:
| | | | | | | | | | | | | | |
Financing Lease Cost | | For the Three Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2019 |
Amortization of right-of-use assets | | $ | 20,746 | | | $ | 56,387 | |
Interest on lease liabilities | | 1,627 | | | 4,459 | |
Total financing lease cost | | $ | 22,373 | | | $ | 60,846 | |
The following table reconciles future minimum lease payments to the discounted finance lease liability:
| | | | | | | | |
Years ending December 31, | | Amount |
2019 - remaining | | $ | 21,847 | |
2020 | | 62,995 | |
2021 | | 40,921 | |
2022 | | 12,803 | |
2023 | | — | |
Thereafter | | — | |
Total future minimum lease payments | | $ | 138,566 | |
Less: Amount representing interest | | 6,631 | |
Present value of future payments | | $ | 131,935 | |
Current portion | | $ | 67,984 | |
Long-term portion | | $ | 63,951 | |
Because our office space leases are short-term, we have elected not to recognize them on our balance sheet under the short-term recognition exemption. During the three and nine months ended September 30, 2019, we recognized $18,779 and $41,097, respectively in short-term lease costs associated with office space leases.
NOTE 9 – ACQUISITIONS
Millstream Energy Products
On June 18, 2019, our wholly-owned subsidiary, Profire Combustion, Inc., acquired substantially all the assets from Millstream Energy Products, LTD., a Canadian corporation ("MEP"). MEP is a privately-held Canadian company that develops a line of high-performance burners, economy burners, flame arrestor housings, secondary air control plates, and other related combustion components. MEP’s full line of products became available for sale by Profire’s existing sales team
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019, and as of December 31, 2018
immediately after closing of the transaction. These products complement our burner-management system (BMS) product offerings and should enable us to supply a larger portion of the total BMS package sale to our customers.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase accounting process has not been completed primarily because the valuation of acquired assets has not been finalized. We expect to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. We do not believe there will be material adjustments. The purchase price of $2,325,846 USD was funded through existing cash. Of this cash purchase amount $246,322 USD has been held back for 6 months pending satisfaction of seller obligations under the purchase agreement. MEP will also receive a 4.5% royalty on proprietary MEP product revenue generated during the next five years. Based on the estimated fair value at the time of purchase, the Company recorded an estimate of intangible assets in the amount of $885,000 USD and estimated goodwill of $122,680 USD pending completion of the final valuation analysis.
| | | | | |
The purchase price calculation is a follows: | |
Cash | $ | 2,079,524 | |
Liabilities | 246,322 | |
| $ | 2,325,846 | |
| |
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of purchase: | |
Accounts receivable | $ | 308,431 | |
Inventory | 1,123,922 | |
Intangibles assets | 885,000 |
Goodwill | 122,680 | |
Accounts payable | (114,187) | |
| $ | 2,325,846 | |
Transaction and related costs directly related to the acquisition of MEP, consisting primarily of professional fees and integration expenses, have amounted to approximately $66,430, were expensed as incurred and are included in general and administrative expenses.
Midflow Services
On August 5, 2019, we acquired all of the outstanding membership interests of Midflow Services, LLC ("Midflow"). Midflow is based in Millersburg, Ohio. Midflow provides packaged combustion solutions and services to the upstream and midstream oil and gas industry.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase accounting process has not been completed primarily because the valuation of the acquired assets has not been finalized. We expect to complete the purchase accounting as soon as practicable but no later than one year from the acquisition date. We do not believe there will be material adjustments. The purchase price of $3,419,617 was funded through a combination of existing cash and shares of the Company's common stock. The cash portion of the purchase price includes $500,000 placed in an escrow account for 12 months pending satisfaction of certain obligations under the purchase agreement. Based on the estimated fair value at the time of purchase, the Company recorded an estimate of intangible assets in the amount of $2,648,808 which may include goodwill once the final valuation analysis is completed.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2019, and as of December 31, 2018
| | | | | |
The purchase price calculation is as follows: | |
Cash | $ | 2,399,617 | |
Stock | 1,020,000 | |
| $ | 3,419,617 | |
| |
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of purchase: | |
Cash | $ | 172,850 | |
Accounts receivable | 324,989 | |
Inventory | 264,986 | |
Prepaid expenses | 14,878 | |
Property and equipment | 134,500 | |
Intangibles and goodwill | 2,648,808 | |
Accounts payable | (134,956) | |
Accrual liabilities | (6,438) | |
| $ | 3,419,617 | |
Transaction costs directly related to the acquisition of Midflow, consisting primarily of professional fees and integration expenses, amounted to approximately $44,087. All of these costs were expensed as incurred and are included in general and administrative expenses.
NOTE 1012 – SUBSEQUENT EVENTS
In accordance with ASC 855 "Subsequent Events," Company Management reviewed all material events through the date this report was issued and there were no subsequent events to report.
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 and nine-month periods ended September 30, 20192020 and 2018.2019. 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 December 31, 2018.2019.
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'smanagement's beliefs and assumptions and on information currently available to Management.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. 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. Forward-looking 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 oil and gas 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. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our risk factors in Item 1A. Risk Factors, included elsewhere in this report.
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. Due to risks and uncertainties associated with our business, our actual results could differ materially from those stated or implied by such forward-looking statements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements and we hereby qualify all of our forward-looking statements by these cautionary statements.
Forward-looking statements in this report are based only on information currently available to us and speak only as of the date on which they are made. We undertake no obligation to amend this report or revise publicly these forward-looking statements (other than as required by law) 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.
Overview
We are an oilfield technology company providing products that enhance the efficiency, safety, and compliance of the oil and gas industry. We specialize in the engineering and design of burner management systems and combustion management solutions utilizedused on heated applicances throughout the oila variety of oilfield natural-draft fire-tube and gas industry.forced-air applications. We sell our products and services primarily throughout North America. Our experienced team of industry service professionals also provides supporting services for our products.
Principal Products and Services
Across the energy industry, there are numerous demands for heat generation and control. Applications such as combustors, enclosed flares, gas production units, treaters, glycol and amine reboilers, indirect line-heaters, heated tanks, and process heaters require heat as part of their production or processing functions. This heat is provided by a burner flame. This burner flame isgenerated through the process of combustion which must be controlled, managed and supervised. Combustion and the resulting generation of heat are integral to the process of separating, treating, storing, and transporting oil and gas. Factors such as thepetroleum's specific gravity, the presence of hydrates, temperature and hydrogen sulfide content contribute to the requirementneed for heat in oil and gas production and processing applications. Our burner-management systems ignite, monitor, and manage pilots and burners that are utilized in this burner flame, which can be operated remotely,process. Our technology affords remote operation, reducing the need for employee interaction with the appliance's burner, such as for the purposes of re-ignition or temperature monitoring. In addition, our burner-management systems can help reduce gas emissions by quickly reigniting a failed flame.flame and improving application efficiencies and up-time.
Oil and gas producers utilize burner-management systems to achieve increased safety, greater operational efficiencies, and improved compliance with changing industry regulations. Without a burner-management systems,system, an employee must discover and reignite an extinguished burner flame, then restart the application manually. Therefore, without burner-management systems, all application monitoring is done directly on-site. Such on-site monitoring can result in the interruption of production for longer periods of time, risk ofincreased risks associated with reigniting a flame, which can lead to burns and explosions, and the possibility of raw gas being vented into the atmosphere when the flame fails. In addition, without a burner-management system, burners often run longer, incurring significant fuel costs. We believe there is a growing trend in the oil and gas industry toward enhanced control, process automation, and data logging, largely for improved efficiency and operational cost savings, and partly for potential regulatory-satisfaction purposes. Our burner-management systems are designed to be always on standby to make sure the burner flame is lit and managed properly, which can reduce how often a burner is running and may reduce fuel costs. We continue to assess compliance-interest in the industry, and 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 service burner flame installations throughout the United States and Canada.
We initially developed our first burner-management system in 2005. Since then, we have released several iterations of our initial burner-management system, increasing features and capabilities, while maintaining compliance with North American standards, including Canadian Standards Association (CSA), Underwriters Laboratories (UL), 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.States and Western Canada. We have sold our burner-management systems to many large energy companies, including Anadarko, Chesapeake,Chevron, EQT, Antero, Concho Resources, ConocoPhillips, Devon, Encana, XTO, CNRL, Shell, OXY, and others. Our systems have also been sold or installed in other parts of the world, including many countries in Europe, South America, Africa, the Middle East and Asia. We are established in the North American oil and gas markets, which is our current primary focus currently, but we are working to expand further into other international markets.
Product Extensions:
The PF3100 is an advanced burner and combustion management system which is designed to operate, monitor, control, and manage a wide variety of complex, heated appliances. Throughout the industry, Programmable Logic Controllers, or PLCs, are used to operate and manage custom-built oilfield applications. Though capable, PLCsWhile PLC's perform these intended functions, they can be expensive, difficult to install and maintain. The PF3100 can help oilfield producers meet deadlines and improve profitability through an off-the-shelf solution with dynamic customization. We are selling the PF3100 for initial use in the oil and gas industry's natural-draft and forced-draft applications.
WeOur latest BMS solution, the PF2200, was built to address what we recognized as the area of burner management most in need of innovation wasinnovation: the user experience. The PF2200 is designed to optimize installation, commissioning, troubleshooting and daily operation. This focus on the user will optimizedoptimize the time required on-site for both installation and operator training. With the user focuseduser-focused design being combined with an expanded feature set, the PF2200 becomes a very powerful tool to reduce downtime and lessen the burden on producers in a wide variety of applications, ranging from dual-burner to forced draft, to a variety of waste-gas destruction applications.
We frequently assess market needs by participating in industry conferences and soliciting feedback from existing and potential customers, allowing us to provide quality solutions to the oil-oil and gas-producinggas producing companies we serve. Upon
identifying a potential market need, we begin researching the market and developing products that are likely to have feasibility for future sale.
Additional Complementary Products
In addition to our burner- and combustion-management systems, we also supply complementary products that provide our customers with a complete solution. These products include safety and monitoring devices such as shut-down and temperature valves, pressure transmitters and switches, burners, pilots, flame arrestor housings and other combustion related equipment. We continue to invest in the development of innovative, complementary products which we anticipate will help bolster continued long-term growth.
Chemical-Management Systems
In addition to the burner-management systems and complementary technologies we sell, we also offer 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 volume 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, and over-injection causes unnecessary expense for producers. Under-injection can also be problematic because it often results in the creation of poor product (i.e., with wax, hydrate, or corrosion agents) and causes problems with pipeline operations.
Our chemical-management systems monitor and manage the 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 supervisory control and data acquisition or other remote-communication systems. We hold a U.S. patent related to our chemical management system and its process for supplying a chemical agent to a process fluid.
Results of Operations
Comparison quarter over quarter
The table below presents certain financial data comparing the most recent quarter to prior quarters:
| | | For the three months ended | | | For the three months ended |
| | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 |
Total Revenues | Total Revenues | $ | 9,905,761 | | | $ | 10,124,031 | | | $ | 10,833,058 | | | $ | 10,605,155 | | | $ | 11,499,902 | | Total Revenues | $ | 4,000,106 | | | $ | 4,359,479 | | | $ | 7,447,142 | | | $ | 8,118,463 | | | $ | 9,905,761 | |
Gross Profit Percentage | Gross Profit Percentage | 52.2 | % | | 51.2 | % | | 53.2 | % | | 44.9 | % | | 53.0 | % | Gross Profit Percentage | 38.0 | % | | 47.9 | % | | 42.5 | % | | 42.0 | % | | 52.2 | % |
Operating Expenses | Operating Expenses | $ | 4,027,844 | | | $ | 4,190,479 | | | $ | 3,626,811 | | | $ | 3,541,209 | | | $ | 3,701,728 | | Operating Expenses | $ | 2,849,921 | | | $ | 3,164,318 | | | $ | 3,829,736 | | | $ | 4,518,825 | | | $ | 4,027,844 | |
Net Income | $ | 921,748 | | | $ | 985,504 | | | $ | 1,668,618 | | | $ | 831,404 | | | $ | 1,659,089 | | |
Net Income (Loss) | | Net Income (Loss) | $ | (1,057,748) | | | $ | (808,503) | | | $ | (365,264) | | | $ | (1,554,378) | | | $ | 921,748 | |
Operating Cash Flow | Operating Cash Flow | $ | 2,094,454 | | | $ | 2,699,154 | | | $ | 2,608,501 | | | $ | 1,829,363 | | | $ | 599,862 | | Operating Cash Flow | $ | (724,342) | | | $ | 575,941 | | | $ | 271,078 | | | $ | 311,093 | | | $ | 2,094,454 | |
Revenues for the quarter ended September 30, 20192020 decreased by 14%60% or $1,594,141$5,905,655 compared to the quarter ended September 30, 2018,2019, which was mostly driven by macro industry changes over that same period. The average oil price induring the first ninethree months of 2019ended September 30, 2020 was only $57.04$40.89 per barrel compared to $66.93$56.34 per barrel infor the first nine monthssame period of 2018last year, representing a decrease of 14.8%27.4%. The Q3 2019third quarter of 2020 weekly average rig count for North America was 1,024287 compared to 1,2391,024 in the same period of last year, which represents a decrease of 62%. These decreases have followed the declineThe historic fall in oil prices which accelerated toward the end of March 2020, continued into the third quarter of 2020 due to a flood of supply from Russia and Saudi Arabia and a dramatic drop in Q4 2018.global demand due to the COVID-19 pandemic. On April 20, 2020, short-term futures contracts for oil reflected negative oil prices for the first time in history. Although oil prices improved slightly in the third quarter of 2020, the operating environment was still characterized by uncertainty surrounding economic recovery from the COVID-19 pandemic and geopolitical factors which caused a continued strain in oil supply and demand dynamics. It is uncertain when oil prices will return to levels consistent with the third quarter of 2019. As a result of these extraordinary macro trends, we believe manypressures and uncertainties, exploration and production companies have pulled back even further on capital expenditure budgets or deferred
cancelled planned spending. Somespending all together. Until our customers have indicatedreturn to us that they intendmore normal capital expenditure levels, our business is likely to use cash in the near futurecontinue to fund further debt reductions, increasing dividend payments or to initiate or expand stock repurchase programs.be adversely affected.
Our gross profit margin for the third quarter of 2020 was down slightly from the same quarter of last year but remains withinand is below our normally exepectedexpected range for a completedtypical quarter. The gross margin percentage normally fluctuates each quarter due to changes in product mix and product related reserves. Overreserves, which contributed to the past yearchange in the decline in gross profit has stayed fairly consistent, withinmargin for the third quarter of 2020. In addition, the significant decrease in revenue for the third quarter of 2020 compared to the same quarter last year also caused the fixed cost portion of cost of goods and services to push the product margin lower than historic levels. During the second and third quarters of 2020 we took actions to reduce costs and adjust the cost structure of the Company to reduce the fixed cost burden on gross margin. In the current economic environment, we intend to continue to evaluate the Company's cost structure in an expected range, except for Q4 2018 when grosseffort to improve profit decreased due to inventory adjustments related to our chemical-management system product line. We anticipate gross margin will stay within the expected range going forward, assuming normal product mix fluctuations.margins in future periods.
Operating expenses increased $326,116decreased $1,177,923 from the same quarter of last year, which was consistent with our previously announced strategic investment plan for 2019. As reportedreflected a focus on cost control measures as we navigate the uncertainty caused by the COVID-19 pandemic and the resulting oil market supply and demand imbalance. We have been focused on reducing labor costs, travel costs and other non-essential expenditures in our Annual Report on Form 10-K for the year ended December 31, 2018, we initiated investments during 2019 in the areas of research and development efforts in order to expand our product offerings, international market evaluation and expansion and an expanded sales and labor force to meet expected market demand and support our expanding product offerings. We intend to continue to fund these activities during the fourth quarter.this current environment.
Due to the significantly lower revenues and higher operating cost to support strategic initiatives discussed above, we reported a net income decreased 44% duringloss of $1,057,748 for the quarter ended September 30, 20192020 compared to net income of $921,748 for the same quarter in 2018. 2019.
Operating cash flows increaseddecreased significantly during the third quarter of 20192020 compared to the third quarter of 2018, despite lower revenue and increased costs.2019, due to the 60% drop in revenue. This increase isdecrease was primarily due to favorable movements in net working capital during the third quarter of 2019 compared to unfavorable movements in net working capital in the third quarter of 2018.
Despite the ongoing volatility in the oil and gasextraordinary industry and macro trends inglobal economic crisis conditions that persisted throughout the short term, we remain focused on the Company's future. Assuming we successfully implement our planned investments in researchsecond and development, in international market expansion and an expanded sales and labor force, we believe we are well-positioned for continued growth in future periods, particularly if oil prices improve and allow our customers to make higher levelsthird quarters of capital expenditures.2020.
Comparison of the nine-monthsnine months ended September 30, 20192020 and 20182019
The table below presents certain financial data comparing the nine months ended September 30, 20192020 to the same period ended September 30, 2018:2019:
| | | For the Nine Months Ended September 30, | | | | For the Nine Months Ended September 30, | |
| | 2019 | | 2018 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
Total Revenues | Total Revenues | $ | 30,862,850 | | | $ | 35,009,380 | | | $ | (4,146,530) | | | (11.8) | % | Total Revenues | $ | 15,806,727 | | | $ | 30,862,850 | | | $ | (15,056,123) | | | (48.8) | % |
Gross Profit Percentage | Gross Profit Percentage | 52.2 | % | | 51.8 | % | | 0.4 | % | Gross Profit Percentage | 42.8 | % | | 52.2 | % | | (9.4) | % |
Operating Expenses | Operating Expenses | $ | 11,845,134 | | | $ | 11,386,462 | | | $ | 458,672 | | | 4.0 | % | Operating Expenses | $ | 9,843,975 | | | $ | 11,845,134 | | | $ | (2,001,159) | | | (16.9) | % |
Net Income | $ | 3,575,870 | | | $ | 5,249,587 | | | $ | (1,673,717) | | | (31.9) | % | |
Net Income (Loss) | | Net Income (Loss) | $ | (2,231,515) | | | $ | 3,575,870 | | | $ | (5,807,385) | | | (162.4) | % |
Operating Cash Flow | Operating Cash Flow | $ | 7,402,109 | | | $ | 3,723,193 | | | $ | 3,678,916 | | | 98.8 | % | Operating Cash Flow | $ | 122,677 | | | $ | 7,402,109 | | | $ | (7,279,432) | | | (98.3) | % |
Revenues during the nine-month period ended September 30, 20192020 compared to the same period last year declined 11.8%48.8% which iswas largely due to a 14.8%33.3% drop in the average oil price over the same time frame which causedresulting from the global COVID-19 pandemic and the corresponding reduction in spending by our customers to reduce capital expenditure.customers. Operating expenses increased 4.0% year-over-year as a result of ongoing strategic investmentsdeclined 16.9% during the period. As a result of the revenue and operating cost changes, there was a 31.9% decline in net income. Our gross profit percentage increased slightly by 0.4% during the nine-monthsnine-month period ended September 30, 2019,2020 compared to the same period in 2018,2019 due to our focus on cost reduction and control measures in 2020. As a result of revenue and operating cost changes, we reported a net loss of $2,231,515 for the nine months ended September 30, 2020, compared to net income of $3,575,870 for the same period in 2019. Our gross profit percentage declined by 9.4% during the nine months ended September 30, 2020, compared to the same period in 2019, primarily due to changes in product mix, direct labor costs,cost increases, inventory adjustments and inventory adjustments.the fixed burden within cost of goods and services.
Liquidity and Capital Resources
Working capital at September 30, 20192020 was $25,228,492,$22,496,727, compared to $27,744,268$22,914,845 at December 31, 2018. This decrease resulted from a combination of decreases in accounts receivable and inventory which were partially offset by decreases in accrued liabilities such as income taxes payable.2019.
We acquired land for a new office building and research and development facility in Canada in June of 2018 and completed construction of the facility is ongoing.in March 2020. Excluding the cost of the land, the total cost of the building is expected to bewas approximately $4,600,000 USD. As of September 30, 2019,2020, only minimal costs remained related to final landscaping.
Our liquidity position is impacted by operating, investing and financing activities. During the nine months ended September 30, 2020, we had spent approximately $3,165,000 USD towardsgenerated $122,677 of positive cash flow from operating activities, primarily due to cash received from customer sales, partially offset by cash outflows for accounts payable and accrued liabilities. Operating activity trends consist of cash inflows and outflows related to changes in operating assets and liabilities. During the nine months ended September 30, 2020, we generated $683,983 of positive cash flow from investing activities, primarily due to investment sales, partially offset by costs incurred for the construction of the building.new office building in Canada. Investing activity trends consist of changes in the mix of our investment portfolio, purchases or sales of fixed assets, and acquisition activities. During the nine months ended September 30, 2020, we used $192,824 of cash in financing activities, primarily related to equity awards issued to management. Financing activity trends consist of transactions related to equity awards and purchases or sales of treasury stock. The global COVID-19 pandemic has impacted our business in 2020 and as a result, we have focused on cost control measures as we navigate the uncertainty caused by the pandemic and the resulting oil market supply and demand imbalance. We believe our available cash resources are sufficient to cover constructionhave focused on decreasing operating, investing and financing costs. We have reduced labor costs, for the buildingtravel and other expected capitalnon-essential expenditures forin this current environment. We have also completed the foreseeable future,construction of the new office building in Canada, and as a result we expect fewer costs related to investing activities in the near future. Thus far in 2020, we have no current plansnot purchased any treasury stock in order to incur debt financing.reduce costs related to financing activities. The extent to which the global COVID-19 pandemic will continue to affect our liquidity position will depend on future developments, which are highly uncertain and cannot be predicted with confidence. As of September 30, 2020, we hold $17,209,692 of cash and investments
that form our core excess liquidity which could be utilized, if required, due to the issues described above. See also Item 1A. Risk Factors for further discussion on the impact of COVID-19 on our business.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet arrangements, nor do we plan to engage in any in the foreseeable future.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
This section is not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Management,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 Exchange Act, as of the end of the period covered by this Report. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our Management,management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on the evaluation performed, our Management,management, including the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of September 30, 2019.2020.
Changes in Internal Control over Financial Reporting
Our Management,management, with the participation of our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer, evaluated the changes in our internal control over financial reporting that occurred during the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Managementmanagement concluded that no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 20192020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
To the best of our knowledge, there are no legal proceedings pending or threatened against us that may have a material impact on 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 Form 10-Q, you should carefully consider the risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, 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 may also have a material, adverse effect on our business, financial condition or future results. Except as described below, there have been no material changes to the risk factors disclosed in our most recent Form 10-K.
The global COVID-19 pandemic has and will likely continue to adversely affect us, and it could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Since the beginning of 2020, the COVID-19 pandemic has spread across the globe and disrupted economies around the world, including the oil and gas industry in which we operate. The rapid spread of the virus has led to the implementation of various responses, including federal, state and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health and safety measures, nearly all of which have materially reduced global demand for crude oil. The extent to which the global COVID-19 pandemic will continue to affect our business, financial condition, liquidity, results of operations, prospects, and the demand for our products will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration or any recurrence of the outbreak and responsive measures, additional or modified government actions, new information which may emerge concerning the severity of the global COVID-19 pandemic and the effectiveness of actions taken to contain the coronavirus or treat its impact now or in the future, among others.
Some impacts of the global COVID-19 pandemic that could have an adverse effect on our business, financial condition, liquidity and results of operations, include:
•significantly reduced prices for oil production, resulting from a world-wide decrease in demand and a resulting oversupply of existing production;
•further decreases in the demand for oil production, resulting from significantly decreased levels of global, regional and local travel as a result of federal, state and local government-imposed quarantines, including shelter-in-place mandates, enacted to slow the spread of the virus;
•increased likelihood that our customers will reduce capital expenditures due to reduced oil prices, decreases in demand for oil production and other factors that could curtail production;
•increased potential that our customers may seek to invoke force majeure provisions as a result of significantly adverse market conditions to avoid the performance of contractual obligations;
•increased costs and staffing requirements related to facility modifications, social distancing measures or other best practices implemented in connection with federal, state or local government, and voluntarily imposed quarantines or other regulations or guidelines concerning physical gatherings; and
•increased legal and operational costs related to compliance with significant changes in federal, state, and local laws and regulations.
To the extent the global COVID-19 pandemic continues to adversely affect the global economy, and/or adversely affects our business, financial condition, liquidity, results of operations and prospects it may also have the effect of increasing the likelihood and/or magnitude of other risks described in Risk Factors in Part I, Item 1A of our 2019 Form 10-K and in this Form 10-Q.
The ability or willingness of the Organization of the Petroleum Exporting Countries (“OPEC”), Russia and other oil exporting nations to set, maintain and enforce production levels has a significant impact on oil and gas commodity prices, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
OPEC is an intergovernmental organization that seeks to manage the price and supply of oil on the global energy market. Actions taken by OPEC member countries, including those taken along with other oil exporting nations, have a significant impact on global oil supply and pricing. In March 2020, members of OPEC and ten other oil producing countries (“OPEC+”) met to discuss how to respond to the potential market effects of the global COVID-19 pandemic. The meeting ended on March 6, 2020, as Saudi Arabia failed to convince Russia to reduce production to offset falling demand due to slowing economic activity resulting from the global COVID-19 pandemic. In response to Russia’s refusal to accept the production cut, Saudi Arabia announced an immediate reduction in its export prices and Russia announced that all previously agreed oil production cuts would expire on April 1, 2020. These actions flooded the global market with an oversupply of crude oil, and led to an immediate and steep decrease in global oil prices. In early April 2020, in response to significantly depressed global oil prices, 23 countries, led by Saudi Arabia, Russia and the United States, committed to implement reductions in world oil production. In June 2020, the first phase of production cuts that were put in place in April, were extended through July 31, 2020. In July OPEC agreed to further production cuts through the end of 2020.
There can be no assurance that the production cuts will stabilize oil prices or that they will be maintained, and recent indications suggest that oil prices will be largely unaffected. The global COVID-19 pandemic has destroyed global oil demand to an unprecedented degree, and despite the concerted action to reduce global production, the relative magnitude of the production cuts as compared to the degree of demand destruction may be wholly insufficient to mitigate or even impact the over-supplied oil market. Further, there is a lack of transparency regarding production volumes among oil-producing nations, and there are limited enforcement mechanisms for real or perceived violations of the production cuts. In connection with past production cuts, OPEC has, at times, failed to enforce its own production limits on violating members, with no official mechanism for punishing member countries that do not comply. There can be no assurance that OPEC and non-OPEC member countries will abide by the quotas or that OPEC will enforce the quotas. Additionally, certain other countries with free-market economies that agreed to reduce production, are unable to impose mandatory production cuts on non-OPEC oil producers operating in their countries, but instead expect to realize a decrease in production through market forces, as companies tend to cut production voluntarily when prices drop. For such countries, there can be no assurance that oil producers will react in the desired manner or that the market will behave as expected. Uncertainty regarding the effectiveness and enforcement of the production cuts is likely to lead to increased volatility in the supply and demand of oil and the price of oil, all of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We may not be able to maintain compliance with The Nasdaq Capital Market's continued listing requirements.
Our common stock is listed on the Nasdaq Capital Market. There are a number of continued listing requirements that we must satisfy in order to maintain our listing on the Nasdaq Capital Market. If we fail to maintain compliance with all applicable continued listing requirements for the Nasdaq Capital Market and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, our ability to obtain financing to repay any future debt we could incur and fund our operations.
On April 24, 2020, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the NasdaqCapital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), we have an initial period of 180 calendar days to regain compliance. However, given the extraordinary market conditions in the financial markets, Nasdaq tolled the compliance period for the bid price requirement through June 30, 2020. The compliance period resumed on July 1, 2020 and we will have 180 calendar days, or until December 28, 2020 (the “Compliance Date”), to regain compliance with the Minimum Bid Price Requirement. If, at any time before the Compliance Date, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will provide us with written notification of compliance with the Bid Price Rule, unless the Staff exercises its discretion to extend this 10 day period pursuant to Nasdaq Listing Rule 5810(c)(3)(G).
The Notice also provides that, if we do not regain compliance with the Minimum Bid Price Requirement by December 28, 2020, we may be eligible for additional time to regain compliance. To qualify for additional time, we will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and provide written notice of our intention to
cure the minimum bid price deficiency during the second compliance period, by effecting a reverse split, if necessary. If we meet these requirements, we will be granted an additional compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. If the Nasdaq staff determines that we will not be able to cure the deficiency, or if we are otherwise not eligible for such additional compliance period, Nasdaq will provide notice that our Common Stock will be subject to delisting.
As of the date of this report, we have not made any determination with respect to any action or response regarding our noncompliance with the Minimum Bid Price Requirement. We intend to consider available options to regain compliance with the Minimum Bid Price Requirement and continued listing on the Nasdaq Capital Market. If our common stock were to be delisted from the Nasdaq Capital Market, 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 the Nasdaq Capital Market 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 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 the Nasdaq Capital Market would also make it more difficult for us to raise additional capital.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 5, 2018, the Company announced that the Board had authorized a share repurchase program allowing the Company, at Management's discretion, to repurchase up to $2,000,000 worth of the Company's common stock from time to time through October 31, 2019. The repurchase program expired on October 31, 2019 and the Company doesThis item is not have an active repurchase program as of the date of this report.
On August 1, 2019 the Board approved Management to purchase up to an additional $2,000,000 worth of the Company's Common stock pursuant to the Company's existing share repurchase program.
The table below sets forth additional information regarding our share repurchases during the three months ended September 30, 2019:
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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 |
July | | — | | | $ | — | | | — | | | $ | — | |
August | | 308,915 | | | $ | 1.42 | | | 308,915 | | | $ | 1,561,626 | |
September | | 283,185 | | | $ | 1.69 | | | 283,185 | | | $ | 1,083,833 | |
Total | | 592,100 | | | | | 592,100 | | | |
applicable
Item 3. Defaults Upon Senior Securities
We doThis item is not have any debt nor any current plans to obtain debt financing.applicable.
Item 4. Mine Safety Disclosures
This item is not applicable.
Item 5. Other Information
This item is not applicable.
Item 6. Exhibits
Exhibits. The following exhibits are included as part of this report:
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| Membership Interest Purchase Agreement between Profire Energy, Inc. and Midflow Services, LLC dated August 5, 2019*Certification of Co-Principal Executive Officer Pursuant to Rule 13a-14(a) Ryan W. Oviatt |
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| Certification of PrincipalCo-Principal Executive Officer Pursuant to Rule 13a-14(a) Cameron M. Tidball |
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| Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) |
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| Certification of Brenton W. Hatch, Principal Executive OfficerOfficers pursuant to 18 U.S.C. Section 1350 |
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| Certification of Ryan W. Oviatt, 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 |
* Filed herewith
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.
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| | | PROFIRE ENERGY, INC. |
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Date: | November 6, 20199, 2020 | By: | /s/ BrentonRyan W. HatchOviatt |
| | | BrentonRyan W. HatchOviatt |
| | | ChiefCo-Chief Executive Officer and Chief Financial Officer |
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Date: | November 6, 20199, 2020 | By: | /s/ Ryan W. OviattCameron M. Tidball |
| | | Ryan W. OviattCameron M. Tidball |
| | | Chief FinancialCo-Chief Executive Officer |