Profire Energy (PFIE) 10-Q2022 Q3 Quarterly report

 

As of November 1, 2022, the registrant had 52,078,283 shares of common stock issued and 47,040,153 shares of common stock outstanding, par value $0.001.

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 subsidiaries, taken together.

The accompanying consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments have been made (which include only normal recurring adjustments) which are necessary to present fairly the financial position, results of operations, stockholders' equity, and cash flows at September 30, 2022 and for all periods presented herein.

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, 2021 ("Form 10-K").  The results of operations for the three- and nine-month periods ended September 30, 2022 and 2021 are not necessarily indicative of the operating results for the full years.

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 "US GAAP."

The Company provides burner-management products, solutions and services primarily for the oil and gas industry within the US and Canadian markets. The Company has begun expanding outside of these markets to other international locations and into other industries with combustion and burner management requirements.

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.

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.

Inventories consisted of the following at each balance sheet date:

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 for purposes of determining our lease liabilities. The weighted average discount rate applied to our financing leases is 4.50% and the weighted average remaining lease term is 3.6 years.

The following table shows the components of financing lease cost:

The Company leases one warehouse space with a two-year lease, which is recorded as an operating lease. The remainder of our office space leases are considered to be short-term, and we have elected not to recognize those on our balance sheet under the short-term recognition exemption. Operating lease expense recognized during the three- and nine months ended September 30, 2022 and September 30, 2021 was $13,356 and $50,270, and $19,000 and $35,263, respectively.

Supplemental operating lease information as of September 30, 2022 is as follows:

As of September 30, 2022, maturities of lease liabilities are as follows:

As of September 30, 2022 and December 31, 2021, the Company held 5,038,130 and 4,076,909 shares of its common stock in treasury at a total cost of $7,336,323 and $6,107,593, respectively.

On September 15, 2021, the Board of Directors of the Company (the "Board") authorized a share repurchase program allowing the Company to repurchase up to $2,000,000 worth of the Company’s common stock from time to time through September 30, 2022. All purchases under this program were made at the discretion of management. The size and timing of purchases were dependent on price, market and business conditions and other factors. As of June 2022, the Company had spent the full allotment under the program.

As of September 30, 2022, the Company had 536,361 restricted stock units ("RSUs"), 735,512 performance-based RSUs, and 827,500 stock options outstanding with $746,570 in remaining compensation expense to be recognized over the next 1.4 years. See further details below about certain subsets of these outstanding equity-based awards.

Under the terms of the 2022 EIP, each participating executive officer has been assigned a target incentive compensation amount for fiscal 2022. The target incentive compensation amount for Mr. Oviatt is $198,000, the target incentive compensation amount for Mr. Tidball is $198,000, and the target incentive compensation for Mr. Fisher is $64,750 CAD.

Participants will be eligible to receive incentive compensation based upon reaching or exceeding performance goals established by the Compensation Committee for fiscal 2022. The performance goals in the 2022 EIP are based on the Company’s total revenue, EBITDA, and a non-financial milestone relating to revenue source diversification to be determined by the Compensation Committee. Each of these performance goals will be weighted one third in calculating incentive compensation amounts.

The incentive compensation amounts earned under the 2022 EIP, if any, will be paid 50% in cash and 50% in shares of restricted stock under the Plan. In no event shall the total award exceed 200% of the target incentive compensation amount for each participant, or exceed any limitations otherwise set forth in the Plan. The actual incentive compensation amounts, if any, will be determined by the Compensation Committee upon the completion of fiscal 2022 and paid by March 15, 2023, subject to all applicable tax withholding.

One-third of such performance-vesting RSUs, consisting of 51,163 RSUs for Mr. Oviatt, 51,163 RSUs for Mr. Tidball, and 9,561 RSUs for Mr. Fisher, may vest for each of the three performance metrics identified in the table above. The number of RSUs that will vest for each performance metric on the 2022 LTIP Performance Vesting Date shall be determined as follows:

On May 28, 2021, the Compensation Committee approved the 2021 Executive Incentive Plan (the “2021 EIP”) for Brenton W. Hatch, the Company’s former Executive Chairman, Ryan W. Oviatt, Cameron M. Tidball, Jay G. Fugal, the Company’s former Vice President of Operations, and Patrick D. Fisher. The 2021 EIP provided for the potential award of incentive compensation to the participants based on the Company’s financial performance in fiscal 2021. The incentive compensation was payable in cash and stock, and the stock portion of the incentive compensation was intended to constitute an award under the Plan.

Participants were eligible to receive incentive compensation based upon reaching or exceeding performance goals established by the Compensation Committee for fiscal 2021. The performance goals in the 2021 EIP were based on the Company’s total revenue, EBITDA, and a non-financial milestone relating to revenue source diversification. Each of these performance goals were weighted one third in calculating incentive compensation amounts.

On March 2, 2022, the Compensation Committee approved the incentive compensation amounts based on achieving certain targets pursuant to the 2021 EIP. The incentive compensation amounts earned under the 2021 EIP were paid 50% in cash and 50% in shares of restricted stock under the Plan. The incentive compensation amounts resulted in the Compensation Committee approving a one-time bonus for Company executives that was settled by issuing a total of 182,626 shares of common stock, or 120,097 shares net of tax withholding. These shares were fully vested as of March 2, 2022.

In addition to the 2021 EIP, the Board also approved as a long-term incentive plan, the grants of restricted stock unit awards to Messrs. Oviatt, Tidball, Fugal, and Fisher pursuant to the Plan (the “2021 LTIP”). The 2021 LTIP consists of total awards of up to 204,543 RSUs to Mr. Oviatt, up to 204,543 RSUs to Mr. Tidball, up to 85,908 RSUs to Mr. Fugal, and up to 47,973 RSUs to Mr. Fisher, pursuant to two separate restricted stock unit award agreements (collectively, the “2021 LTIP Restricted Stock Unit Award Agreements”) between the Company and each participant. One agreement covers the 33% of each award recipient’s RSUs that are subject to time-based vesting, and the other agreement covers the remaining 67% of such award recipient’s RSUs 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 RSU. The vesting period of the 2021 LTIP began on January 1, 2021 and terminates on December 31, 2023 (the “2021 LTIP Performance Vesting Date”).

Mr. Fugal resigned, effective October 31, 2021, from his position as Vice President of Operations to pursue an opportunity as CEO of another company. Accordingly, Mr. Fugal did not receive incentive compensation under the 2021 EIP and will not receive incentive compensation under the 2021 LTIP, and his unvested RSUs have been forfeited.

The foregoing summary of the 2021 EIP, the 2021 LTIP and the Restricted Stock Unit Award Agreements is qualified in its entirety by the text of the 2021 EIP and each of the Restricted Stock Unit Award Agreements, which the Company filed as exhibits to its quarterly report on Form 10-Q for the quarter ended June 30, 2021.

On February 18, 2021, the Board, upon the recommendation of the Compensation Committee, approved a restricted stock award of 18,852 shares of common stock to each of Cameron M. Tidball and Ryan W. Oviatt. Messrs. Tidball and Oviatt entered into Restricted Stock Award Agreements, the forms of which were approved pursuant to the Plan. These restricted stock awards, which vested immediately, were settled by the issuance of a total of 27,334 shares of common stock, net of tax withholding and resulted in $45,999 of compensation expense.

On June 16, 2021, pursuant to the annual renewal of director compensation, the Board approved a grant of 189,471 RSUs to the Company's independent directors. Half of the RSUs vested immediately on the date of grant and the remaining 50% of the RSUs vested as the Company's annual meeting of stockholders on June 15, 2022. The awards resulted in total compensation expense of approximately $216,000 recognized over the vesting period.

Our performance obligations include providing product and servicing our product as well as other combustion related equipment. 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.

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. Occasionally, we collect milestone payments up front from customers on larger jobs. These payments are classified as deferred revenue until the deliverables have been met and revenue can be properly recognized in our financial statements. Each of the contracts related to these milestone payments is short-term in nature and we expect to recognize associated revenues within one year. As a result, we consider it appropriate to record deferred revenue for these transactions and do not have any other contract liability balances.

The following table is a reconciliation of the numerator and denominators used in the earnings per share calculation:

Stock options and RSUs to purchase 1,773,776 shares of common stock at a weighted average price of $1.13 per share were outstanding during the nine months ended September 30, 2021, but were not included in the computation of diluted EPS because the impact of these shares would be antidilutive. These RSUs, which expire between December 2022 and December 2024, were still outstanding at September 30, 2021.

The Company operates in the United States and Canada. Segment information for these geographic areas is as follows:

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, 2022 and 2021. 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, 2021.

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.

We are a technology company providing solutions that enhance the efficiency, safety, and reliability of industrial combustion appliances while mitigating potential environmental impacts related to the operation of these devices. Our legacy business is primarily focused in the upstream, midstream, and downstream transmission segments of the oil and gas industry; however, we continue to gain traction in several diversified non-oil and gas markets as well. We specialize in the engineering and design of burner and combustion management systems and solutions used on a variety of natural and forced draft applications. We sell our products and services primarily throughout North America. Our experienced team of sales and service professionals are strategically positioned across the United States and Canada providing support and service for our products.

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 and or processing functions. This heat is generated 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, incinerating, and transporting oil and gas. Factors such as specific gravity, the presence of hydrates, temperature and hydrogen sulfide content contribute to the need for heat generation in oil and gas production and processing applications. Our burner-management systems ignite, monitor, and manage pilot and burner systems that are utilized in this process. Our technology affords remote operation, reducing the need for employee interaction with the appliance's burner for purposes such as re-ignition or temperature monitoring. In addition, our burner-management systems can help reduce emissions by efficiently reigniting a failed flame, thereby improving efficiencies and up-time. Our extensive service and combustion experience provides customers with solutions that are consistent with industry trends and regulatory requirements to mitigate environmental impacts and reduce emissions through increased efficiency.

Oil and gas companies, including upstream, midstream, downstream, pipeline, and gathering operators, utilize burner-management systems to achieve increased safety, greater operational efficiencies, and improved compliance with industry regulations. Without a burner-management system, a field employee must discover and reignite an extinguished burner flame, then restart the application manually. Therefore, without a proper burner-management system, all application monitoring must be accomplished in-person, directly on-site. This requirement for on-site monitoring, in an environment with limited field personnel, can result in the potential interruption of production for long periods of time and increased risks associated with reigniting a flame, which can lead to site hazards, including explosions and the possibility of venting gas into the atmosphere. In addition, without a burner-management system, burners often operate for longer durations, frequently with lower efficiency, resulting in increased equipment fatigue and greater expense related to fuel consumption. We continue to assess regulatory requirements on behalf of our customers. We believe that burner-management systems and services offer solutions for customers to meet compliance standards where applicable. In addition to product sales, we dispatch specialized service technicians to provide maintenance and installation support throughout the United States and Canada.

We initially developed our first burner-management controller in 2005. Since that time, our systems have become widely adopted throughout the United States and Western Canada. Profire burner-management systems have been designed to comply with widely accepted safety and industrial codes and standards in North America, including those prescribed and certified by the Canadian Standards Association (CSA), Underwriters Laboratories (UL), and Safety Integrity Level (SIL) standards.

Our systems and solutions have been widely adopted by exploration and production companies, midstream operators, pipeline operators, as well as downstream transmission and utility providers. Our customers include Antero, ATCO, Chevron, CNRL, Concho Resources, Devon Energy, Dominion Energy, EQT, Kinder Morgan, National Grid, Ovintiv, Oxy, Range Resources, Williams, XTO, and others. Our systems have also been sold and installed in other parts of the world including many countries in South America, Europe, Africa, the Middle East, and Asia. Though firmly established and primarily focused on North American oil and gas markets, we continue to invest in expansion efforts in international markets and other industries with significant combustion requirements.

Our products and solutions are developed with a focus on safety, environmental impacts, reliability and efficiency. Protecting human life, protecting the environment, and protecting our customers’ investments are key guiding principles. Our products play a crucial role in supporting our customers’ existing and future initiatives regarding improving workplace safety and environmental impacts.

Our burner-management technology is designed to monitor, operate, and manage a wide array of complex industrial heat -applications. Providing our customers with safety-approved and certified technology, purposefully designed and built to meet regulatory requirements and process needs, is a critical component of our customers’ safety protocols and initiatives.

Proper burner and combustion management control, coupled with peripheral solutions, increase site and location safety while reducing emissions. Profire technology and solutions are integrated into a variety of applications to significantly reduce the release of methane and volatile organic compounds into the environment.

Profire burner-management controls and complementary solutions provide users with the ability to monitor field equipment remotely. This reduces truck rolls and the need for field personnel to travel to and manually inspect burner malfunctions in remote sites and locations. Our automated solutions help our customers improve safety, reduce emissions, and decrease operating costs.

Operator safety is at the heart of our burner-management solution technology. Integration of our solutions and products helps our customers increase the likelihood that their employees return home safely each day. Adding greater physical distance between humans and the combustion process, as well as ensuring gas supplies are properly shut off when no flame is present, are two of the critical elements of how our burner-management solutions help protect human life.

Our gross profit margin for the third quarter of 2022 was up 2.8% from the same quarter of last year and up 2.0% from quarter ended June 30, 2022. The gross margin percentage was impacted by normal fluctuations in product mix and product related reserves. The gross margin of the third quarter of 2022 also benefited from greater fixed cost coverage from the significant increase in revenue over prior quarters. These improvements were partially offset by significant inflationary cost pressure including higher costs of freight, and shipping and direct labor.

Operating expenses for the quarter ended September 30, 2022 increased $563,226 from the same quarter of last year, which primarily results from increases in headcount and cost inflation across the business. Operating expenses for the quarter ended September 30, 2022 decreased $307,354 from the prior quarter ended June 30, 2022 primarily due to the recognition of an employee retention payroll tax credit, that became available to the Company through the CARES Act. The Company has filed amended payroll tax returns for this credit and expects to receive the refund within the next twelve months.

Due to the factors discussed above, we reported income from operations of $2,117,893 for the quarter ended September 30, 2022 compared to a loss from operations of $318,289 for the same quarter in 2021, and income from operations of $94,806 in the quarter ended June 30, 2022.

Due to the combination of factors discussed above relating to revenues, gross profit margin and operating expenses, we reported net income of $1,210,748 for the quarter ended September 30, 2022 compared to net income of $92,246 for the same quarter in 2021 and net income of $284,829 in the quarter ended June 30, 2022.

Operating cash flows decreased $1,818,322 during the quarter ended September 30, 2022 compared to a decrease of $598,001 during the same quarter of 2021 and an increase in operating cash flow of $1,814,039 during the quarter ended June 30, 2022 due primarily to changes in working capital balances, including increases in customer accounts receivable and inventory.

Revenues during the nine-month period ended September 30, 2022, increased 76.9% compared to the same period of last year. The increase in revenue was largely due to significant rises in oil and natural gas prices, an increase in drilling and completion activity and ongoing reinvestment activity by the oil and gas producers in response to years of underinvestment to support production. Such nine-month period of 2022 has also benefited from significant progress in our diversification efforts with many projects completed in other industries such as RNG, Biogas and industrial applications. Our gross profit percentage increased slightly by 3.2% during the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to changes in product mix, inventory adjustments and the fixed cost coverage from a higher revenue base. Operating expenses increased 25.9% due to increases in headcount and general cost inflation in the current year. Due to the increase in revenue and gross margin, which exceeded the increase in operating expenses, we recognized net income of $2,122,738 for the nine months ended September 30, 2022 compared to a net loss of $906,420 for the same period in 2021. The Company used operating cash flows of $1,196,632 during the nine-month period ended September 30, 2022 primarily due to increases in inventory and accounts receivable. During the same period in 2021, the Company generated operating cash flows of $957,821 due to decreases in inventory and an increase in accounts payable.

Our liquidity position is impacted by operating, investing and financing activities. During the nine months ended September 30, 2022, we used $1,196,632 of cash from operating activities, primarily due to inventory purchases and an increase in accounts receivable as sales grew substantially. These increases were partially offset by increases in accounts payable and income taxes payable. Operating activity trends consist of cash inflows and outflows related to changes in operating assets and liabilities. During the nine months ended September 30, 2022, we generated $45,412 of cash from investing activities, primarily due to the sale of property, equipment, and intangibles. 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, 2022, we used $1,320,594 of cash in financing activities, primarily related to purchases of treasury stock during the year. Financing activity trends consist of transactions related to equity awards and purchases of treasury stock pursuant to our now completed share repurchase program. The extent to which our liquidity position will be impacted in the future depends on industry trends and developments, which are highly uncertain and cannot be predicted with confidence. As

of September 30, 2022, we held $14,451,704 of cash and investments that form our core excess liquidity which could be utilized, if required, due to the issues described above.

We have not engaged in any off-balance sheet arrangements, nor do we plan to engage in any in the foreseeable future.

This section is not required.

Our management, with the participation of the Principal Executive Officers 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 quarterly report on Form 10-Q. 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, including our Principal Executive Officers 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, including the Principal Executive Officers and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of September 30, 2022.

Our management, with the participation of our Principal Executive Officers and Principal 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, management 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, 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

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