pfie-20200630

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 ended	June 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 class

Trading Symbol(s)

Name of each exchange on which registered

Common, $0.001 Par Value

PFIE

NASDAQ

As of August 3, 2020, the registrant had 51,325,493 shares of common stock issued and 47,913,115 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	4

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)	5

	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows (Unaudited)	8

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	9

Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations			19

Item 3. Quantitative and Qualitative Disclosure about Market Risk			23

Item 4. Controls and Procedures			23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			24

Item 1A. Risk Factors			24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			26

Item 3. Defaults Upon Senior Securities			26

Item 4. Mine Safety Disclosures			26

Item 5. Other Information			26

Item 6. Exhibits			27

Signatures			28

PART I. FINANCIAL INFORMATION

Item 1 Financial Information


PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
	As of
	June 30, 2020		December 31, 2019
ASSETS	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	8,022,237	$	7,358,856
Short-term investments	2,290,667		1,222,053
Short-term investments - other	1,600,000		2,600,000
Accounts receivable, net	2,439,296		5,597,701
Inventories, net (note 3)	8,996,223		9,571,807
Prepaid expenses and other current assets (note 4)	2,144,150		1,672,422
Income tax receivable	—		77,385
Total Current Assets	25,492,573		28,100,224
LONG-TERM ASSETS

Long-term investments	6,192,261		7,399,963

Financing right-of-use asset	72,914		107,991
Property and equipment, net	11,571,961		12,071,019
Intangible assets, net	1,883,236		1,989,782
Goodwill	2,579,381		2,579,381
Total Long-Term Assets	22,299,753		24,148,136
TOTAL ASSETS	$	47,792,326	$	52,248,360

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	685,617	$	2,633,520
Accrued liabilities (note 5)	1,122,242		2,089,391
Current financing lease liability (note 6)	45,411		59,376
Income taxes payable	99,481		403,092
Total Current Liabilities	1,952,751		5,185,379
LONG-TERM LIABILITIES
Net deferred income tax liability	543,441		439,275
Long-term financing lease liability (note 6)	30,238		52,120
TOTAL LIABILITIES	2,526,430		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: 51,325,493 issued and 47,913,115 outstanding at June 30, 2020, and 50,824,355 issued and 47,411,977 outstanding at December 31, 2019	51,325		50,824
Treasury stock, at cost	(5,353,019)		(5,353,019)
Additional paid-in capital	30,106,383		29,584,172
Accumulated other comprehensive loss	(3,070,095)		(2,415,460)
Retained earnings	23,531,302		24,705,069
TOTAL STOCKHOLDERS' EQUITY	45,265,896		46,571,586
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	47,792,326	$	52,248,360

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


PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
REVENUES (note 9)
Sales of goods, net	$	3,999,139	$	9,559,255	$	10,860,097	$	19,757,890
Sales of services, net	360,340		564,776		946,524		1,199,199
Total Revenues	4,359,479		10,124,031		11,806,621		20,957,089

COST OF SALES
Cost of goods sold-product	1,944,389		4,568,666		5,778,071		9,139,654
Cost of goods sold-services	328,225		368,327		777,009		865,525
Total Cost of Goods Sold	2,272,614		4,936,993		6,555,080		10,005,179

GROSS PROFIT	2,086,865		5,187,038		5,251,541		10,951,910

OPERATING EXPENSES
General and administrative expenses	2,753,773		3,566,698		6,026,311		6,728,228
Research and development	229,548		512,871		639,274		861,929
Depreciation and amortization expense	180,997		110,910		328,469		227,133
Total Operating Expenses	3,164,318		4,190,479		6,994,054		7,817,290

INCOME (LOSS) FROM OPERATIONS	(1,077,453)		996,559		(1,742,513)		3,134,620

OTHER INCOME (EXPENSE)
Gain on sale of fixed assets	157,455		21,410		157,455		38,340
Other expense	(1,665)		(413)		(1,318)		(964)
Interest income	77,532		85,887		151,925		177,590
Total Other Income	233,322		106,884		308,062		214,966

INCOME (LOSS) BEFORE INCOME TAXES	(844,131)		1,103,443		(1,434,451)		3,349,586

INCOME TAX BENEFIT (EXPENSE)	35,628		(117,939)		260,684		(695,464)

NET INCOME (LOSS)	$	(808,503)	$	985,504	$	(1,173,767)	$	2,654,122

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation gain (loss)	$	375,267	$	102,435	$	(570,156)	$	251,850
Unrealized gains (losses) on investments	72,875		49,495		(84,479)		118,247
Total Other Comprehensive Income (Loss)	448,142		151,930		(654,635)		370,097

COMPREHENSIVE INCOME (LOSS)	$	(360,361)	$	1,137,434	$	(1,828,402)	$	3,024,219

BASIC EARNINGS (LOSS) PER SHARE (note 10)	$	(0.02)	$	0.02	$	(0.02)	$	0.06
FULLY DILUTED EARNINGS (LOSS) PER SHARE (note 10)	$	(0.02)	$	0.02	$	(0.02)	$	0.06

BASIC WEIGHTED AVG NUMBER OF SHARES OUTSTANDING	47,723,208		47,348,137		47,607,825		47,392,534
FULLY DILUTED WEIGHTED AVG NUMBER OF SHARES OUTSTANDING	47,723,208		48,124,208		47,607,825		48,192,849

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


PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Retained Earnings		Total Stockholders' Equity
	Shares	Amount
Balance, December 31, 2019	47,411,977	$	50,824	$	29,584,172	$	(2,415,460)	$	(5,353,019)	$	24,705,069	$	46,571,586
Stock based compensation				66,348								66,348
Stock issued in exercise of stock options	2,000	2		2,018								2,020
Stock issued in settlement of RSUs and accrued bonuses	271,684	272		419,101								419,373
Tax withholdings paid related to stock based compensation				(148,879)								(148,879)

Foreign currency translation						(945,423)						(945,423)
Unrealized losses on investments						(157,354)						(157,354)
Net loss										(365,264)		(365,264)
Balance, March 31, 2020	47,685,661	$	51,098	$	29,922,760	$	(3,518,237)	$	(5,353,019)	$	24,339,805	$	45,442,407
Stock based compensation				$	183,850							$	183,850

Stock issued in settlement of RSUs	227,454	$	227	$	(227)							$	—


Foreign currency translation						$	375,267					$	375,267
Unrealized gains on investments						$	72,875					$	72,875
Net loss										$	(808,503)	$	(808,503)
Balance, June 30, 2020	47,913,115	$	51,325	$	30,106,383	$	(3,070,095)	$	(5,353,019)	$	23,531,302	$	45,265,896

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





	Common Stock					Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Retained Earnings		Total Stockholders' Equity
	Shares	Amount
Balance, December 31, 2018	47,932,305	$	49,708	$	28,027,742	$	(2,895,683)	$	(2,609,485)	$	22,683,577	$	45,255,859
Stock based compensation				66,714								66,714
Stock issued in exercise of stock options	2,483	2		(2)								—
Stock issued in settlement of RSUs and accrued bonuses	148,723	149		379,712								379,861
Tax withholdings paid related to stock based compensation				(143,022)								(143,022)
Treasury stock repurchased	(775,287)							(1,333,578)				(1,333,578)
Foreign currency translation						149,415						149,415
Unrealized gains on investments						68,752						68,752
Net income										1,668,618		1,668,618
Balance, March 31, 2019	47,308,224	$	49,859	$	28,331,144	$	(2,677,516)	$	(3,943,063)	$	24,352,195	$	46,112,619
Stock based compensation				$	297,127							$	297,127
Stock issued in exercise of stock options	9,174	$	9	$	6,841							$	6,850
Stock issued in settlement of RSUs	148,794	$	149	$	(149)							$	—
Tax withholdings paid related to stock based compensation				$	(41,411)							$	(41,411)

Foreign currency translation						$	102,435					$	102,435
Unrealized gains on investments						$	49,495					$	49,495
Net income										$	985,504	$	985,504
Balance, June 30, 2019	47,466,192	$	50,017	$	28,593,552	$	(2,525,586)	$	(3,943,063)	$	25,337,699	$	47,512,619

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


PROFIRE ENERGY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	For the Six Months Ended June 30,
	2020		2019
OPERATING ACTIVITIES
Net income (loss)	$	(1,173,767)	$	2,654,122
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense	566,791		483,063
Gain on sale of fixed assets	(153,973)		(38,340)
Bad debt expense	236,005		229,792
Stock awards issued for services	250,198		363,841
Changes in operating assets and liabilities:
Accounts receivable	3,248,693		983,865
Income taxes receivable/payable	(1,761)		(1,261,267)
Inventories	445,634		1,831,865
Prepaid expenses	168,718		(35,637)
Deferred tax asset/liability	104,166		205,314
Accounts payable and accrued liabilities	(2,843,685)		(115,813)
Net Cash Provided by Operating Activities	847,019		5,300,805

INVESTING ACTIVITIES
Proceeds from sale of equipment	—		39,810
Sale of investments	1,057,404		1,109,297
Purchase of fixed assets	(994,410)		(1,429,735)
Payments for acquisitions, net of cash acquired	—		(2,088,814)
Net Cash Provided by (Used in) Investing Activities	62,994		(2,369,442)

FINANCING ACTIVITIES
Value of equity awards surrendered by employees for tax liability	(148,879)		(184,433)
Cash received in exercise of stock options	2,020		6,850
Purchase of treasury stock	—		(1,333,578)
Principal paid towards lease liability	(34,267)		(32,185)
Net Cash Used in Financing Activities	(181,126)		(1,543,346)

Effect of exchange rate changes on cash	(65,506)		(2,171)

NET INCREASE IN CASH	663,381		1,385,846
CASH AT BEGINNING OF PERIOD	7,358,856		10,101,932
CASH AT END OF PERIOD	$	8,022,237	$	11,487,778

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

CASH PAID FOR:
Interest	$	4,247	$	2,832
Income taxes	$	—	$	1,793,281
NON-CASH FINANCING AND INVESTING ACTIVITIES
Common stock issued in settlement of accrued bonuses	$	419,373	$	379,861

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

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the three and six months ended June 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 subsidiary, 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 June 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 six month periods ended June 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.

Reclassification

Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation within the Condensed Consolidated Statements of Cash Flows. The reclassification had no impact on financial position, net income (loss), or stockholders' equity.

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

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019

NOTE 3 – INVENTORIES

Inventories consisted of the following at each balance sheet date:


	As of
	June 30, 2020		December 31, 2019
Raw materials	$	209,393	$	—
Finished goods	9,786,297		10,517,858
Work in process	—		—
Subtotal	9,995,690		10,517,858
Reserve for obsolescence	(999,467)		(946,051)
Total	$	8,996,223	$	9,571,807

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
	June 30, 2020		December 31, 2019
Prepaid Inventory	784,373		1,291,577
Assets classified as held for sale	774,832		—
Vehicle trade-in credits	174,630		—
Prepaid insurance	107,367		133,611
Interest receivables	93,027		80,609
Other	209,921		166,625
Total	$	2,144,150	$	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 June 30, 2020, consist of this old office building which we intend to sell within a one year period. 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
	June 30, 2020		December 31, 2019
Employee-related payables	$	657,501	$	1,657,826
Inventory-related payables	208,128		—
Warranty liabilities	115,731		166,301
Acquisition liabilities	20,225		162,907
Other	120,657		102,357
Total	$	1,122,242	$	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

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019

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 20.5 months.

The following table shows the components of financing lease cost:


Financing Lease Cost	For the Three Months Ended June 30, 2020		For the Six Months Ended June 30, 2020
Amortization of right-of-use assets	$	15,121	$	33,497
Interest on lease liabilities	3,375		4,247
Total financing lease cost	$	18,496	$	37,744

The following table reconciles future minimum lease payments to the discounted finance lease liability:


Years ending December 31,	Amount
2020 - remaining	$	25,013
2021	40,921
2022	12,803
2023	—
2024	—
Thereafter	—
Total future minimum lease payments	$	78,737
Less: Amount representing interest	3,088
Present value of future payments	$	75,649
Current portion	$	45,411
Long-term portion	$	30,238

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 six months ended June 30, 2020, we recognized $19,059 and $38,531, respectively, in short-term lease costs associated with office space leases.

NOTE 7 – STOCKHOLDERS' EQUITY

As of June 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 June 30, 2020 , the Company had 279,447 restricted stock units, 252,701 performance based restricted stock units, and 115,200 stock options outstanding with $365,717 in remaining compensation expense to be recognized over the next 2.01 years.

2020 EIP and LTIP

Due to market uncertainties including those caused by the COVID-19 pandemic, the Board of Directors of the Company (the "Board") and the Company's executives have 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 market conditions.

2019 EIP

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019

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.

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.

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 to be recognized over the vesting period.

2020 Stock Options

On March 17, 2020 (the "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 "Options"). The Options terminate four years from the Grant Date and the Options shall become exercisable as to 1/3 of the shares of common stock covered thereby on each anniversary of the Grant Date for the next three years. The Options will result in a total compensation expense of $40,280 to be recognized over the vesting period.

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019

NOTE 8 – ACQUISITIONS

Millstream Energy Products

On June 18, 2019, our wholly-owned subsidiary, Profire Combustion, Inc., acquired substantially all the assets from Millstream Energy Products, LTD., a Canadian corporation ("MEP"). MEP is a privately-held Canadian company that 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 should enable us to supply a larger portion of the total BMS package sale to our customers.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase price of $2,219,782 was funded through existing cash. Of this cash purchase amount $140,257 was held back for 6 months pending satisfaction of seller obligations under the purchase agreement and was settled with the seller on February 20, 2020. The seller is also entitled to receive a 4.5% royalty on proprietary MEP product revenue generated during the next five years.

Profire hired a valuation firm to perform the purchase price allocation based on net assets received and the price paid. Based on the fair value of net assets at the time of purchase, the Company recorded intangible assets in the amount of $990,000 and goodwill of $17,681. Intangible assets include customer relationships, the trade name and developed technology.


The purchase price calculation is a follows:
Cash	$	2,079,525
Liabilities	140,257
	$	2,219,782

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of purchase:
Accounts receivable	$	207,145
Inventory	1,119,143
Intangible assets	990,000
Goodwill	17,681
Accounts payable	(114,187)
	$	2,219,782

Transaction and related 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 is based in Millersburg, Ohio. Midflow provides packaged combustion solutions and services to the upstream and midstream oil and gas industry.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase 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.

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.

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019


The purchase price calculation is as follows:
Cash	$	2,419,371
Stock	1,020,000
	$	3,439,371

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of purchase:
Cash	$	172,850
Accounts receivable	324,989
Inventory	269,746
Prepaid expenses	13,180
Property and equipment	126,000
Intangible assets	1,110,000
Goodwill	1,564,000
Accounts payable	(134,956)
Accrual liabilities	(6,438)
	$	3,439,371

Transaction costs directly related to the acquisition of Midflow, consisting primarily of professional fees and integration expenses, amounted to approximately $44,087. All of these costs were expensed as incurred and are included in general and administrative expenses.

NOTE 9 – REVENUE

Performance Obligations

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 an appropriate 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 June 30, 2020.

Contract Balances

We have elected to use the practical expedient in ASC 340-40-25-4 (regarding recognition of the incremental costs of obtaining a contract) for costs related to contracts that are estimated to be completed within one year. All of our current sales contracts and service contracts are expected to be completed within one year, and as a result, we have not recognized a contract asset account. If we had chosen not to use this practical expedient, we would not expect a material difference in the contract balances. We also did not have any material contract liabilities because we typically do not receive payments in advance of recognizing revenue.

PROFIRE ENERGY, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

For the three and six months ended June 30, 2020 and 2019

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 June 30,		For the Six Months Ended June 30,
2020	2019