PROFIRE ENERGY, INC. This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the three-month periods endedMarch 31, 2020 and 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 endedDecember 31, 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's beliefs and assumptions and on information currently available to Management. For this purpose, any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to, statements relating to our future actions, intentions, plans, strategies, objectives, results of operations, cash flows and the adequacy of or need to seek additional capital resources and liquidity. 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 theUnited 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 creation of burner-management systems used on a variety of oilfield forced-air and natural-draft fire-tube applications. We sell our products and services primarily throughoutNorth America . Our experienced team of industry service professionals also provides supporting services for our products. 16 --------------------------------------------------------------------------------Profire Energy, Inc. was established onOctober 9, 2008 , upon the closing of transactions contemplated by an Acquisition Agreement betweenThe Flooring Zone, Inc. andProfire Combustion, Inc. and the shareholders ofProfire Combustion, Inc. (the "Subsidiary"). Following the closing of the transactions,The Flooring Zone, Inc. was renamedProfire Energy, Inc. (the "Parent"). As a result of the transaction, the Subsidiary became a wholly-owned subsidiary of the Parent and the shareholders of the Subsidiary became the controlling shareholders of the Company. The Parent was incorporated onMay 5, 2003 in theState of Nevada . The Subsidiary was incorporated onMarch 6, 2002 in the Province ofAlberta, Canada .
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 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, and transporting oil and gas. Factors such as petroleum's specific gravity, the presence of hydrates, temperature and hydrogen sulfide content contribute to the need 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 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 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 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 of 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 throughoutthe United States andCanada . 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, includingCanadian Standards Association (CSA),Underwriters Laboratories (UL), and Safety Integrity Level (SIL) standards. Our burner-management systems have become widely used inWestern Canada and throughout many regions inthe United States . We have sold our burner-management systems to many large energy companies, includingAnadarko , Chesapeake, 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 inEurope ,South America ,Africa , theMiddle East andAsia . We are established in the North American oil and gas markets, which is our 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. While 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. 17 -------------------------------------------------------------------------------- We recognized the area of burner management most in need of innovation was the user experience. The PF2200 is designed to optimize installation, commissioning, troubleshooting and daily operation. This focus on the user will optimized the time required on-site for both installation and operator training. With the user 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 and gas 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.
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
March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019
Total Revenues $ 7,447,142 $ 8,118,463 $ 9,905,761 $ 10,124,031 $ 10,833,058
Gross Profit Percentage 42.5 % 42.0 % 52.2 % 51.2 % 53.2 %
Operating Expenses $ 3,829,736 $ 4,518,825 $ 4,027,844 $ 4,190,479 $ 3,626,811
Net Income (Loss) $ (365,264) $ (1,554,378) $ 921,748 $ 985,504 $ 1,668,618
Operating Cash Flow $ 271,078 $ 311,093 $ 2,094,454 $ 2,699,154 $ 2,608,501
Revenues for the quarter ended March 31, 2020 decreased by 31% or $3,385,916
compared to the quarter ended March 31, 2019 , which was mostly driven by macro
industry changes over that same period. The average oil price in the first three
months of 2020 was only $45.34 per barrel compared to $54.70 per barrel in the
first three months of 2019 representing a decrease of 17.1%. Further the price
dropped to a historic low of $14.10 per barrel on March 30, 2020 due to global
economic pressures related to the COVID-19 pandemic. The first quarter of 2020
weekly average rig count for North America was 958 compared to 1,204 in the same
period of last year. The historic fall in oil prices accelerated toward the end
of March 2020 and has continued into April 2020 due to a flood of supply from
Russia and Saudi Arabia and a dramatic drop in 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 are
expected to recover in the months ahead as supply is reduced and demand
increases as the economy recovers from the COVID-19 pandemic, it is uncertain
when oil prices will return to levels consistent with the first quarter of 2019.
As a result of these extraordinary macro pressures and uncertainties,
exploration and production companies have begun to pull back even further on
capital expenditure budgets or cancelled planned spending all together. Until
our customers return to more normal capital expenditure levels, our business is
likely to continue to be adversely affected.
Our gross profit margin was down from the same quarter of last year and is below
our normally expected range for a completed quarter. The gross margin percentage
normally fluctuates each quarter due to changes in product mix and product
related reserves which have contributed to the change in the current period.
However the significant decrease in revenue has also caused the fixed cost
portion of cost of goods and services to push the product margin even lower in
the current period. In the current economic environment, we are reviewing the
Company's cost structure and making changes that we believe will improve profit
margins in future periods.
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Operating expenses increased $202,925 from the same quarter of last year, which
was consistent with our announced strategic investment plan for 2019. Strategic
investments were made throughout 2019 including two small business acquisitions
that increased the operating cost structure of the Company during the first
quarter of 2020.
Due to the lower revenues and higher operating cost to support strategic
initiatives discussed above, net income decreased 122% during the quarter ended
Operating cash flows decreased significantly during the first quarter of 2020 compared to the first quarter of 2019, due to lower revenue and increased costs, but still remained positive for the quarter. This decrease is primarily due to extraordinary industry and global economic crisis conditions that have begun during the first quarter of 2020.
Liquidity and Capital Resources
Working capital at
We acquired land for a new office building and research and development facility inCanada inJune 2018 and completed construction of the facility as ofMarch 31, 2020 . Excluding the cost of the land, the total cost of the building is expected to be approximately$4,600,000 USD . As ofMarch 31, 2020 , we had spent approximately$3,986,137 USD towards construction of the building. Remaining costs for the building are related to final landscaping, an ancillary storage shed and contractor hold back payments.
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.
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