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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2020
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.
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 classTrading Symbol(s)Name of each exchange on which registered
Common, $0.001 Par ValuePFIENASDAQ




As of November 6, 2020, the registrant had 51,371,960 shares of common stock issued and 47,959,582 shares of common stock outstanding, par value $0.001.



PROFIRE ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Item 2.  Management's Discussion and Analysis of Financial Condition And Results of Operations
Item 3.  Quantitative and Qualitative Disclosure about Market Risk
Item 4.  Controls and Procedures
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A.  Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6.  Exhibits
Signatures




PART I. FINANCIAL INFORMATION
Item 1 Financial Information

PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of
September 30, 2020December 31, 2019
ASSETS(Unaudited)
CURRENT ASSETS
Cash and cash equivalents$7,919,545 $7,358,856 
Short-term investments2,239,256 1,222,053 
Short-term investments - other600,000 2,600,000 
Accounts receivable, net2,397,985 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 receivable465,828 77,385 
Total Current Assets24,581,867 28,100,224 
LONG-TERM ASSETS
Long-term investments6,450,891 7,399,963 
Financing right-of-use asset61,347 107,991 
Property and equipment, net11,595,366 12,071,019 
Intangible assets, net1,827,553 1,989,782 
Goodwill2,579,381 2,579,381 
Total Long-Term Assets22,514,538 24,148,136 
TOTAL ASSETS$47,096,405 $52,248,360 
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 403,092 
Total Current Liabilities2,085,140 5,185,379 
LONG-TERM LIABILITIES
Net deferred income tax liability484,115 439,275 
Long-term financing lease liability (note 6)20,927 52,120 
TOTAL LIABILITIES2,590,182 5,676,774 
STOCKHOLDERS' EQUITY (note 7)
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: 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 capital30,208,082 29,584,172 
Accumulated other comprehensive loss(2,873,765)(2,415,460)
Retained earnings22,473,554 24,705,069 
TOTAL STOCKHOLDERS' EQUITY44,506,223 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



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,
2020201920202019
REVENUES (note 9)
Sales of goods, net$3,517,280 $9,251,947 $14,377,377 $29,009,837 
Sales of services, net482,826 653,814 1,429,350 1,853,013 
Total Revenues4,000,106 9,905,761 15,806,727 30,862,850 
COST OF SALES
Cost of goods sold-product2,141,888 4,326,335 7,919,959 13,465,989 
Cost of goods sold-services337,795 410,130 1,114,804 1,275,655 
Total Cost of Goods Sold2,479,683 4,736,465 9,034,763 14,741,644 
GROSS PROFIT1,520,423 5,169,296 6,771,964 16,121,206 
OPERATING EXPENSES
General and administrative expenses2,247,614 3,256,023 8,273,925 9,984,251 
Research and development433,800 641,716 1,073,074 1,503,645 
Depreciation and amortization expense168,507 130,105 496,976 357,238 
Total Operating Expenses2,849,921 4,027,844 9,843,975 11,845,134 
INCOME (LOSS) FROM OPERATIONS(1,329,498)1,141,452 (3,072,011)4,276,072 
OTHER INCOME (EXPENSE)
Gain on sale of fixed assets36,483 34,826 193,938 73,166 
Other expense(48,349)(2,065)(49,667)(3,029)
Interest income103,364 38,478 255,289 216,068 
Total Other Income91,498 71,239 399,560 286,205 
INCOME (LOSS) BEFORE INCOME TAXES(1,238,000)1,212,691 (2,672,451)4,562,277 
INCOME TAX BENEFIT (EXPENSE)180,252 (290,943)440,936 (986,407)
NET INCOME (LOSS)$(1,057,748)$921,748 $(2,231,515)$3,575,870 
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)$3,842,184 
BASIC EARNINGS (LOSS) PER SHARE (note 10)$(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 OUTSTANDING47,933,318 47,739,192 47,717,114 47,509,357 
FULLY DILUTED WEIGHTED AVG NUMBER OF SHARES OUTSTANDING47,933,318 48,469,246 47,717,114 48,259,900 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5



PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance, December 31, 201947,411,977 $50,824 $29,584,172 $(2,415,460)$(5,353,019)$24,705,069 $46,571,586 
Stock based compensation66,34866,348
Stock issued in exercise of stock options2,000 2 2,018 2,020 
Stock issued in settlement of RSUs and accrued bonuses271,684 272 419,101 419,373 
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, 202047,685,661 $51,098 $29,922,760 $(3,518,237)$(5,353,019)$24,339,805 $45,442,407 
Stock based compensation$183,850 183,850 
Stock issued in settlement of RSUs227,454 227 (227) 
Foreign currency translation375,267 375,267 
Unrealized gains on investments72,875 72,875 
Net loss$(808,503)(808,503)
Balance, June 30, 202047,913,115 $51,325 $30,106,383 $(3,070,095)$(5,353,019)$23,531,302 $45,265,896 
Stock based compensation101,745 101,745 
Stock issued in settlement of RSUs46,467 46 (46) 
Foreign currency translation233,170 233,170 
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


Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders' Equity
SharesAmount
Balance, December 31, 201847,932,305 $49,708 $28,027,742 $(2,895,683)$(2,609,485)$22,683,577 $45,255,859 
Stock based compensation66,71466,714
Stock issued in exercise of stock options2,483 2 (2) 
Stock issued in settlement of RSUs and accrued bonuses148,723 149 379,712 379,861 
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 translation149,415 149,415 
Unrealized gains on investments68,752 68,752 
Net income1,668,618 1,668,618 
Balance, March 31, 201947,308,224 $49,859 $28,331,144 $(2,677,516)$(3,943,063)$24,352,195 $46,112,619 
Stock based compensation297,127 297,127 
Stock issued in exercise of stock options9,174 9 6,841 6,850 
Stock issued in settlement of RSUs148,794 149 (149) 
Tax withholdings paid related to stock based compensation(41,411)(41,411)
Foreign currency translation102,435 102,435 
Unrealized gains on investments49,495 49,495 
Net income985,504 985,504 
Balance, June 30, 201947,466,192 $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 options4,836 5 2,015 2,020 
Stock issued in settlement of RSUs546 1 (1) 
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 income921,748 921,748 
Balance, September 30, 2019$47,618,604 $50,762 $29,608,685 $(2,629,369)$(4,859,230)$26,259,447 $48,430,295 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7



PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30,
20202019
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 expense860,028 732,396 
Gain on sale of fixed assets(193,938)(73,166)
Bad debt expense182,179 255,943 
Stock awards issued for services351,943 358,270 
Changes in operating assets and liabilities:
Accounts receivable3,404,439 1,244,104 
Income taxes receivable/payable(404,304)(890,523)
Inventories714,245 1,711,446 
Prepaid expenses43,099 (586,576)
Deferred tax asset/liability44,840 219,138 
Accounts payable and accrued liabilities(2,648,339)855,207 
Net Cash Provided by Operating Activities122,677 7,402,109 
INVESTING ACTIVITIES
Proceeds from sale of equipment16,313 75,310 
Sale of investments1,814,070 2,476,227 
Purchase of fixed assets(1,146,400)(3,309,191)
Payments for acquisitions, net of cash acquired (4,322,722)
Net Cash Provided by (Used in) Investing Activities683,983 (5,080,376)
FINANCING ACTIVITIES
Value of equity awards surrendered by employees for tax liability(148,879)(185,004)
Cash received in exercise of stock options2,020 8,870 
Purchase of treasury stock (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 CASH560,689 (157,804)
CASH AT BEGINNING OF PERIOD7,358,856 10,101,932 
CASH AT END OF PERIOD$7,919,545 $9,944,128 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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 $379,861 
Issuance of common stock - Midflow acquisition$ $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, 2020 and 2019


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 subsidiaries, taken together.

The accompanying financial statements have been prepared by the Company without audit. In the opinion of 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, 2020 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, 2019 ("Form 10-K").  The results of operations for the three and nine month periods ended September 30, 2020 and 2019 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 "US GAAP."

The Company provides burner-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.

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.

NOTE 3 – INVENTORIES

Inventories consisted of the following at each balance sheet date:

As of
September 30, 2020December 31, 2019
Raw materials$328,945 $ 
Finished goods9,494,074 10,517,858 
Work in process  
Subtotal9,823,019 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:
 As of
 September 30, 2020December 31, 2019
Assets classified as held for sale791,180  
Prepaid Inventory659,084 1,291,577 
Prepaid insurance275,623 133,611 
Vehicle trade-in credits156,607  
Interest receivables64,600 80,609 
Other231,588 166,625 
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, 2020December 31, 2019
Employee-related payables$792,050 $1,657,826 
Warranty liabilities98,354 166,301 
Inventory-related payables80,641  
Acquisition liabilities 162,907 
Other90,470 102,357 
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 CostFor the Three Months Ended September 30, 2020For the Nine Months Ended September 30, 2020
Amortization of right-of-use assets$11,567 $45,064 
Interest on lease liabilities699 4,946 
Total financing lease cost$12,266 $50,010 

10

PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019
The following table reconciles future minimum lease payments to the discounted finance lease liability:

Years ending December 31,Amount
2020 - remaining$12,506 
202140,921 
202212,803 
2023 
2024 
Thereafter 
Total future minimum lease payments$66,230 
Less: Amount representing interest2,279 
Present value of future payments$63,951 
Current portion$43,024 
Long-term portion$20,927 

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 7 – STOCKHOLDERS' EQUITY

As of September 30, 2020 and December 31, 2019, the Company held 3,412,378 shares of its common stock in treasury at a total cost of $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 approved the 2019 Executive Incentive Plan (the “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. The 2019 EIP provided for the potential award of bonuses to the participants based on the Company’s financial performance in fiscal year 2019. On March 4, 2020, the Company'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 half of the bonus was settled by issuing 343,748 shares of common stock under the Company's 2014 Equity Incentive Plan, as amended (the "2014 Plan") which was fully vested on the date of grant.

Participants were 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 were based on the Company’s total revenue, net income, free cash flow, and product development milestones. Each of these performance goals were weighted 25% in calculating bonus amounts.
11

PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the three and nine months ended September 30, 2020 and 2019

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 (“RSUs”) to Mr. Oviatt, up to 51,646 RSUs to Mr. Tidball, up to 35,313 RSUs to Mr. Fugal, and up to 24,862 RSUs to Mr. Fisher pursuant to two separate Restricted Stock Unit Award Agreements that were entered into between the Company and each participant under the 2014 Plan. One agreement covers 33% of each award recipient’s RSU's that are subject to time-based vesting, and the other agreement covers the remaining 67% of such award recipient’s RSU'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 RSU. The vesting period of the 2019 LTIP began on January 1, 2019 and terminates on December 31, 2021.

2017 LTIP

On March 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 270,966 RSUs to Independent Directors. Half of the RSUs vested 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.

On 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.

2019 RSUs

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.

12

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 
Liabilities140,257 
$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 
Inventory1,119,143 
Intangible assets990,000
Goodwill17,681 
Accounts payable(114,187)
$2,219,782 

13

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 
Stock1,020,000 
$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 receivable324,989 
Inventory269,746 
Prepaid expenses13,180 
Property and equipment126,000 
Intangible assets1,110,000 
Goodwill1,564,000 
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
14

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.

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,
2020201920202019
Electronics$1,406,681 $3,880,542 $5,708,436 $12,632,170 
Manufactured139,057 519,990 682,149 1,456,789 
Re-Sell1,971,542 4,851,415 7,986,792 14,920,878 
Service482,826 653,814 1,429,350 1,853,013 
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,
20202019
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 $0.02 
Effect of Dilutive Securities
Stock options & RSUs   730,054 
Diluted EPS
Net income (loss) available to common stockholders + assumed conversions$(1,057,748)47,933,318 $(0.02)$921,748 48,469,246 $0.02 
15

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,
20202019
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 $0.08 
Effect of Dilutive Securities
Stock options & RSUs   750,543 
Diluted EPS
Net income (loss) available to common stockholders + assumed conversions$(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.


16

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 11 – SEGMENT INFORMATION

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

For the Three Months Ended September 30,For the Nine Months Ended September 30,
Sales2020201920202019
Canada$755,701 $1,890,592 $2,365,118 $3,883,010 
United States3,244,4058,015,16913,441,60926,979,840
Total Consolidated$4,000,106 $9,905,761 $15,806,727 $30,862,850 
For the Three Months Ended September 30,For the Nine Months Ended September 30,
Profit (Loss)2020201920202019
Canada$(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 AssetsSeptember 30, 2020December 31, 2019
Canada$5,733,180 $6,068,061 
United States16,781,358 18,080,075 
Total Consolidated$22,514,538 $24,148,136 
 
NOTE 12 – 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.


17


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, 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 ended December 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 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 solutions used on a variety of oilfield natural-draft fire-tube and 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.



18


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, increased 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 throughout the United States and Western Canada. We have sold our burner-management systems to many large energy companies, including 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 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.

Our latest BMS solution, the PF2200, was built to address what we recognized as the area of burner management most in need of innovation: the user experience. The PF2200 is designed to optimize installation, commissioning, troubleshooting and daily operation. This focus on the user will optimize 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.

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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
September 30, 2020June 30, 2020March 31, 2020December 31, 2019September 30, 2019
Total Revenues$4,000,106 $4,359,479 $7,447,142 $8,118,463 $9,905,761 
Gross Profit Percentage38.0 %47.9 %42.5 %42.0 %52.2 %
Operating Expenses$2,849,921 $3,164,318 $3,829,736 $4,518,825 $4,027,844 
Net Income (Loss)$(1,057,748)$(808,503)$(365,264)$(1,554,378)$921,748 
Operating Cash Flow$(724,342)$575,941 $271,078 $311,093 $2,094,454 

Revenues for the quarter ended September 30, 2020 decreased by 60% or $5,905,655 compared to the quarter ended September 30, 2019, which was mostly driven by macro industry changes over that same period. The average oil price during the three months ended September 30, 2020 was only $40.89 per barrel compared to $56.34 per barrel for the same period of last year, representing a decrease of 27.4%. The third quarter of 2020 weekly average rig count for North America was 287 compared to 1,024 in the same period of last year, which represents a decrease of 62%. The 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 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 pressures and uncertainties, exploration and production companies have pulled 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 for the thir