This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the three- and nine-month periods endedSeptember 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 endedDecember 31, 2021 .
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 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 throughoutNorth America . Our experienced team of sales and service professionals are strategically positioned acrossthe United States andCanada providing support and service for our products. 16 --------------------------------------------------------------------------------
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 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 throughoutthe United States andCanada . We initially developed our first burner-management controller in 2005. Since that time, our systems have become widely adopted throughoutthe United States andWestern Canada . Profire burner-management systems have been designed to comply with widely accepted safety and industrial codes and standards inNorth America , including those prescribed and certified by theCanadian 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 inSouth America ,Europe ,Africa , theMiddle East , andAsia . 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.
Environmental, Social and Governance Focus
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. 17 -------------------------------------------------------------------------------- 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.
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
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 Total Revenues$ 12,829,338 $ 9,633,148 $ 9,503,140 $ 8,286,345 $ 6,943,198 Gross Profit Percentage 47.7 % 45.7 % 47.9 % 41.6 % 44.9 % Operating Expenses$ 4,000,983 $ 4,308,337 $ 3,867,709 $ 3,747,420 $ 3,437,757 Income (loss) from Operations$ 2,117,893 $ 94,806 $ 688,995 $ (298,291) $ (318,289) Net Income (Loss)$ 1,210,748 $ 284,829 $ 627,160 $ (145,364) $ 92,246 Operating Cash Flow$ (1,818,322) $ 1,814,039 $ (1,192,349) $ (308,894) $ (598,001) Revenues for the quarter endedSeptember 30, 2022 increased by 85% or$5,886,140 compared to the quarter endedSeptember 30, 2021 , which was driven by improved customer demand associated with industry recoveries from the COVID-19 pandemic, a significant rise in oil prices, and an increase in rig counts and resulting completion activity. The average oil price during the three months endedSeptember 30, 2022 was$93.06 per barrel compared to$70.58 per barrel for the same period of last year, representing an increase of approximately 32%. The averageHenry Hub natural gas price increased by 84% during this same time period. Additionally, the third quarter of 2022 weekly average rig count forNorth America was 942 compared to 634 in the same period of last year, which represents an increase of 49%. Customer demand increased during the quarter endedSeptember 30, 2022 , in response to these industry trends. The quarter also benefited from strong, ongoing progress in our strategic growth initiatives that are targeted at expansion into new industries and new areas within the oil and gas industry. Revenues for the quarter endedSeptember 30, 2022 increased by 33% or$3,196,190 compared to the quarter endedJune 30, 2022 , which was driven by improved customer demand, a rise in natural gas prices, and an increase in drilling and completion activity. The averageHenry Hub natural gas price increased by 7% during the three months endedSeptember 30, 2022 . Additionally, the third quarter of 2022 weekly average rig count forNorth America increased by 16% compared to the prior quarter. Customer demand increased during the quarter endedSeptember 30, 2022 in response to these industry trends. 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 endedJune 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 endedSeptember 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 endedSeptember 30, 2022 decreased$307,354 from the prior quarter endedJune 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. 18 --------------------------------------------------------------------------------
Due to the factors discussed above, we reported income from operations of
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 endedSeptember 30, 2022 compared to net income of$92,246 for the same quarter in 2021 and net income of$284,829 in the quarter endedJune 30, 2022 . Operating cash flows decreased$1,818,322 during the quarter endedSeptember 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 endedJune 30, 2022 due primarily to changes in working capital balances, including increases in customer accounts receivable and inventory.
Comparison of the nine months ended
The table below presents certain financial data comparing the nine months ended
For the Nine Months Ended September 30, 2022 2021 $ Change % Change Total Revenues$ 31,965,625 $ 18,069,830 $ 13,895,795 76.9 % Gross Profit Percentage 47.2 % 44.0 % 3.2 % Operating Expenses$ 12,177,030 $ 9,668,838 $ 2,508,192 25.9 % Income (Loss) from Operations$ 2,901,695 $ (1,716,951) $ 4,618,646 269.0 % Net Income (Loss)$ 2,122,738 $ (906,420) $ 3,029,158 334.2 % Operating Cash Flow$ (1,196,632) $ 957,821 $ (2,154,453) (224.9) % Revenues during the nine-month period endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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.
Liquidity and Capital Resources
Working capital at
Our liquidity position is impacted by operating, investing and financing activities. During the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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 19 -------------------------------------------------------------------------------- ofSeptember 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.
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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