Item 1 Financial Information
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PROFIRE ENERGY, INC. AND SUBSIDIARIES
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Condensed Consolidated Balance Sheets
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As of
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September 30,
2017
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December 31,
2016
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(Unaudited)
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CURRENT ASSETS
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Cash and cash equivalents
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$
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9,784,793
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$
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9,316,036
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Short term investments
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854,323
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2,965,536
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Investments - other
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3,010,000
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2,250,000
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Accounts receivable, net
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7,644,918
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5,633,802
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Inventories, net
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6,934,821
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7,839,503
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Income tax receivable
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55,682
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180,981
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Prepaid expenses & other current assets
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505,082
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410,558
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Total Current Assets
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28,789,619
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28,596,416
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LONG-TERM ASSETS
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Net deferred tax asset
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200,239
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60,940
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Long-term investments
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7,798,848
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5,504,997
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Property and equipment, net
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7,016,570
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7,458,723
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Goodwill
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997,701
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997,701
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Intangible assets, net
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505,875
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490,082
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Total Long-Term Assets
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16,519,233
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14,512,443
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TOTAL ASSETS
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$
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45,308,852
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$
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43,108,859
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CURRENT LIABILITIES
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Accounts payable
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794,464
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1,220,478
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Accrued vacation
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192,579
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154,307
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Accrued liabilities
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814,404
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284,214
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Income taxes payable
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774,361
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61,543
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Total Current Liabilities
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2,575,808
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1,720,542
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TOTAL LIABILITIES
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2,575,808
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1,720,542
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STOCKHOLDERS' EQUITY
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Preferred shares: $0.001 par value, 10,000,000 shares authorized: no shares issued or outstanding
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—
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—
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Common shares: $0.001 par value, 100,000,000 shares authorized: 53,692,460 issued and 48,471,890 outstanding at September 30, 2017 and 53,582,250 issued and 50,705,933 outstanding at December 31, 2016
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53,692
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53,582
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Treasury stock, at cost
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(6,703,521
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)
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(3,582,805
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)
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Additional paid-in capital
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27,249,628
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26,800,298
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Accumulated other comprehensive loss
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(2,096,731
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)
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(2,810,743
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)
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Retained earnings
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24,229,976
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20,927,985
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Total Stockholders' Equity
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42,733,044
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41,388,317
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$
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45,308,852
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$
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43,108,859
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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PROFIRE ENERGY, INC. AND SUBSIDIARIES
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Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)
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(Unaudited)
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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2017
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2016
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2017
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2016
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REVENUES
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Sales of goods, net
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$
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9,387,232
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$
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4,507,044
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$
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25,514,149
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$
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11,942,860
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Sales of services, net
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662,960
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483,769
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1,825,528
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1,565,649
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Total Revenues
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10,050,192
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4,990,813
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27,339,677
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13,508,509
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COST OF SALES
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Cost of goods sold-product
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4,509,191
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1,977,658
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11,600,019
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5,470,866
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Cost of goods sold-services
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479,206
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388,496
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1,333,819
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1,198,838
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Total Cost of Goods Sold
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4,988,397
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2,366,154
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12,933,838
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6,669,704
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GROSS PROFIT
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5,061,795
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2,624,659
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14,405,839
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6,838,805
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OPERATING EXPENSES
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General and administrative expenses
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2,771,869
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2,328,100
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8,454,235
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7,383,766
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Research and development
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318,621
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263,712
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798,142
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667,957
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Depreciation and amortization expense
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125,898
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160,216
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405,811
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461,993
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Total Operating Expenses
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3,216,388
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2,752,028
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9,658,188
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8,513,716
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INCOME (LOSS) FROM OPERATIONS
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1,845,407
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(127,369
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4,747,651
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(1,674,911
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OTHER INCOME (EXPENSE)
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Gain (loss) on sale of fixed assets
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14,017
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—
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62,492
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(1,705
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Other (expense) income
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25,991
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82,452
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39,377
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(189,106
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Interest income
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41,672
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19,668
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127,790
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53,030
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Total Other Income (Expense)
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81,680
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102,120
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229,659
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(137,781
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)
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NET INCOME (LOSS) BEFORE INCOME TAXES
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1,927,087
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(25,249
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4,977,310
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(1,812,692
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)
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Income tax expense (benefit)
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709,169
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(99,701
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1,846,634
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(517,232
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NET INCOME (LOSS)
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$
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1,217,918
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$
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74,452
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$
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3,130,676
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$
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(1,295,460
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)
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OTHER COMPREHENSIVE INCOME (LOSS)
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Foreign currency translation gain (loss)
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$
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327,271
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$
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(202,520
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$
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640,927
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$
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(1,041,937
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)
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Unrealized gains (losses) on investments, net of tax
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10,138
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(20,621
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73,085
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(20,621
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)
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Total Other Comprehensive Income (Loss)
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337,409
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(223,141
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)
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714,012
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(1,062,558
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TOTAL COMPREHENSIVE INCOME (LOSS)
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$
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1,555,327
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$
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(148,689
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$
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3,844,688
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$
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(2,358,018
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)
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BASIC EARNINGS (LOSS) PER SHARE
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$
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0.03
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$
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—
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$
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0.06
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$
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(0.02
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)
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FULLY DILUTED EARNINGS (LOSS) PER SHARE
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$
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0.02
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$
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—
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$
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0.06
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$
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(0.02
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)
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BASIC WEIGHTED AVG NUMBER OF SHARES OUTSTANDING
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48,552,770
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53,215,385
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49,613,704
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53,274,855
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FULLY DILUTED WEIGHTED AVG NUMBER OF SHARES OUTSTANDING
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49,369,835
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54,091,419
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50,346,333
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53,274,855
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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PROFIRE ENERGY, INC. AND SUBSIDIARIES
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Condensed Consolidated Statements of Cash Flows
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(Unaudited)
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For the Nine Months Ended September 30,
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2017
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|
2016
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OPERATING ACTIVITIES
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Net Income (Loss)
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$
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3,130,676
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$
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(1,295,460
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)
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization expense
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675,223
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764,906
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Loss (Gain) on sale of fixed assets
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(62,310
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)
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1,705
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Bad debt expense
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147,470
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247,568
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Stock options issued for services
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648,244
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460,212
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Changes in operating assets and liabilities:
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Changes in accounts receivable
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(2,024,858
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)
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2,594,557
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Changes in income taxes receivable/payable
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840,343
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(785,089
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)
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Changes in inventories
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634,646
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2,098,574
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Changes in prepaid expenses
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(93,669
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)
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(119,238
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)
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Changes in deferred tax asset/liability
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(139,298
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)
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140,488
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Changes in accounts payable and accrued liabilities
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588,868
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(710,012
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)
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Net Cash Provided by Operating Activities
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4,345,335
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3,398,211
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INVESTING ACTIVITIES
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Proceeds from sale of equipment
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140,198
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59,013
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Purchase of investments
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(869,554
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)
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(11,143,504
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)
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Purchase of fixed assets
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(214,632
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)
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(7,140
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)
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|
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|
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—
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Net Cash Used in Investing Activities
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(943,988
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)
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(11,091,631
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)
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FINANCING ACTIVITIES
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Value of equity awards surrendered by employees for tax liability
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(25,667
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)
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(99
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)
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Purchase of Treasury stock
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(3,120,716
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)
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(261,544
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)
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Net Cash Used in Financing Activities
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(3,146,383
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)
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(261,643
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)
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Effect of exchange rate changes on cash
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213,793
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|
348,348
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NET INCREASE IN CASH
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468,757
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(7,606,715
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)
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CASH AT BEGINNING OF PERIOD
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9,316,036
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19,281,501
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CASH AT END OF PERIOD
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$
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9,784,793
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$
|
11,674,786
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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CASH PAID FOR:
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|
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Interest
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$
|
—
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|
|
$
|
—
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|
Income taxes
|
|
$
|
1,282,157
|
|
|
$
|
—
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|
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
As of
September 30, 2017
, and
December 31, 2016
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
Except where the context otherwise requires, references herein to the "Company" 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, except for the adoption of ASU 2016-09 discussed below) necessary to present fairly the financial position, results of operations and cash flows at
September 30, 2017
and for all periods presented 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 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 transition report on Form 10-K for the transition period ended
December 31, 2016
. The results of operations for the period ended
September 30, 2017
and
2016
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 consolidated financial statements. The Company's accounting policies conform to accounting principles generally accepted in the United States of America ("US GAAP").
Profire Energy, Inc. was established on October 9, 2008 upon the closing of transactions contemplated by an Acquisition Agreement among The Flooring Zone, Inc., Profire Combustion, Inc. (the "Subsidiary") and the shareholders of the Subsidiary. Following the closing of the transactions, The Flooring Zone, Inc. was renamed Profire Energy, Inc. (the "Parent").
Pursuant to the terms and conditions of the Acquisition Agreement,
35,000,000
shares of restricted common stock of the Parent were issued to the three shareholders of the Subsidiary in exchange for all of the issued and outstanding shares of the Subsidiary. As a result of the transaction, the Subsidiary became a wholly-owned subsidiary of the Parent and the shareholders of the Subsidiary became the controlling shareholders of the Parent.
The Parent was incorporated on
May 5, 2003
in the State of
Nevada
. The Subsidiary was incorporated on March 6, 2002 in the province of Alberta, Canada.
The Company provides burner and chemical management products and services for the oil and gas industry primarily in the Canadian and US 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 10-K, except as discussed below.
Stock-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. Several aspects of the accounting for share-based payment awards are simplified under ASU No. 2016-09, including accounting for and classification of various taxes, classification of awards as equity or liabilities, classification of various amounts on the statement of cash flows, and accounting for forfeitures. This standard became effective for the Company on January 1, 2017.
As part of this standard, companies can choose whether to recognize forfeitures as they occur or continue to estimate forfeitures with periodic true-ups. The Company has elected to recognize forfeitures as they occur. This election was made on a modified
NOTE 2 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
retrospective basis with the cumulative effect recognized in beginning retained earnings of the current period; therefore, amounts in prior periods have not been restated. The total adjustment was $
171,315
as a reduction of APIC and increase in retained earnings.
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. The reclassification had no impact on financial position, net income, or stockholders' equity.
NOTE 3 – INVENTORY
Inventories consisted of the following at each balance sheet date:
|
|
|
|
|
|
|
|
|
|
As of
|
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
69,149
|
|
|
$
|
940,527
|
|
Finished goods
|
7,120,645
|
|
|
7,112,098
|
|
Work in process
|
—
|
|
|
—
|
|
Subtotal
|
7,189,794
|
|
|
8,052,625
|
|
Reserve for Obsolescence
|
(254,973
|
)
|
|
(213,122
|
)
|
Total
|
$
|
6,934,821
|
|
|
$
|
7,839,503
|
|
NOTE 4 – STOCKHOLDERS' EQUITY
As of
September 30, 2017
and
December 31, 2016
, the Company held
5,220,570
and
2,876,317
shares of its common stock in treasury at a total cost of $
6,703,521
and $
3,582,805
, respectively. All purchases of treasury stock have been made at market rates.
On May 25, 2017, the Company repurchased
1,300,000
shares of its common stock from the Company's CEO for a total price of $
1,703,000
. This repurchase is included in the treasury stock described in the preceding paragraph. For further details, refer to the Stock Redemption Agreement filed as exhibit 10.2 to the Company's quarterly report for the quarterly period ended June 30, 2017.
NOTE 5 - FINANCIAL INSTRUMENTS AND INVESTMENTS
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.
A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is divided into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair value.
The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments. Investments are presented at fair value as of the balance sheet date and accumulated gains or losses on those investments are reported in other comprehensive income. Management is of the opinion that the Company is not exposed to significant interest or credit risks arising from financial instruments and any declines in the value of investments are temporary in nature.
NOTE 5 - FINANCIAL INSTRUMENTS AND INVESTMENTS
(CONTINUED)
The following tables show the adjusted cost, unrealized losses and fair value of the Company's money market funds and investments held as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Adjusted Cost
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Short Term Investments
|
|
Long Term Investments
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
336,372
|
|
|
$
|
—
|
|
|
$
|
336,372
|
|
|
$
|
336,372
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual Funds
|
|
1,626,236
|
|
|
(35,246
|
)
|
|
1,590,990
|
|
|
—
|
|
|
—
|
|
|
1,590,990
|
|
Subtotal
|
|
1,962,608
|
|
|
(35,246
|
)
|
|
1,927,362
|
|
|
336,372
|
|
|
—
|
|
|
1,590,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
3,010,000
|
|
|
$
|
—
|
|
|
$
|
3,010,000
|
|
|
$
|
—
|
|
|
$
|
3,010,000
|
|
|
$
|
—
|
|
Corporate Bonds
|
|
2,384,269
|
|
|
(18,896
|
)
|
|
2,365,373
|
|
|
—
|
|
|
454,252
|
|
|
1,911,121
|
|
Municipal Bonds
|
|
4,705,311
|
|
|
(8,503
|
)
|
|
4,696,808
|
|
|
—
|
|
|
400,071
|
|
|
4,296,737
|
|
Subtotal
|
|
10,099,580
|
|
|
(27,399
|
)
|
|
10,072,181
|
|
|
—
|
|
|
3,864,323
|
|
|
6,207,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,062,188
|
|
|
$
|
(62,645
|
)
|
|
$
|
11,999,543
|
|
|
$
|
336,372
|
|
|
$
|
3,864,323
|
|
|
$
|
7,798,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Adjusted Cost
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Cash and Cash Equivalents
|
|
Short Term Investments
|
|
Long Term Investments
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
1,053,844
|
|
|
$
|
—
|
|
|
$
|
1,053,844
|
|
|
$
|
1,053,844
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual Funds
|
|
1,473,536
|
|
|
(90,495
|
)
|
|
1,383,041
|
|
|
—
|
|
|
—
|
|
|
1,383,041
|
|
Subtotal
|
|
2,527,380
|
|
|
(90,495
|
)
|
|
2,436,885
|
|
|
1,053,844
|
|
|
—
|
|
|
1,383,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
$
|
2,250,000
|
|
|
$
|
—
|
|
|
$
|
2,250,000
|
|
|
$
|
—
|
|
|
$
|
2,250,000
|
|
|
$
|
—
|
|
Corporate Bonds
|
|
2,246,956
|
|
|
(29,419
|
)
|
|
2,217,537
|
|
|
—
|
|
|
400,053
|
|
|
1,817,484
|
|
Municipal Bonds
|
|
4,929,249
|
|
|
(59,294
|
)
|
|
4,869,955
|
|
|
—
|
|
|
2,565,483
|
|
|
2,304,472
|
|
Subtotal
|
|
9,426,205
|
|
|
(88,713
|
)
|
|
9,337,492
|
|
|
—
|
|
|
5,215,536
|
|
|
4,121,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,953,585
|
|
|
$
|
(179,208
|
)
|
|
$
|
11,774,377
|
|
|
$
|
1,053,844
|
|
|
$
|
5,215,536
|
|
|
$
|
5,504,997
|
|
NOTE 6 – 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,
|
Sales
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Canada
|
1,982,739
|
|
|
1,273,863
|
|
|
5,024,957
|
|
3,461,708
|
United States
|
8,067,453
|
|
|
3,716,950
|
|
|
22,314,720
|
|
10,046,801
|
Total Consolidated
|
10,050,192
|
|
|
4,990,813
|
|
|
27,339,677
|
|
13,508,509
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
Profit (Loss)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Canada
|
193,636
|
|
|
(114,114)
|
|
|
(141,874)
|
|
(572,136)
|
United States
|
1,024,282
|
|
|
188,566
|
|
|
3,272,550
|
|
(723,324)
|
Total Consolidated
|
1,217,918
|
|
|
74,452
|
|
|
3,130,676
|
|
(1,295,460)
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
Long-lived assets
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Canada
|
$
|
1,547,689
|
|
|
$
|
1,472,207
|
|
|
|
|
|
United States
|
14,971,544
|
|
|
13,040,236
|
|
|
|
|
|
Total Consolidated
|
$
|
16,519,233
|
|
|
$
|
14,512,443
|
|
|
|
|
|
NOTE 7 – STOCK BASED COMPENSATION
On February 27, 2017, the Company issued
74,711
shares of common stock to one of its directors in settlement of previously vested restricted stock units ("RSUs"). During the nine-month period, the Company issued
29,999
shares of common stock to an employee in settlement of previously vested RSUs and the Company issued
5,500
shares of common stock to employees in exercise of previously vested stock options. The compensation cost for all of these issuances was already recognized in prior periods as the awards vested.
On September 20, 2017, the Company issued a total of
96,081
RSUs to the directors of the Company. Half of the RSUs vested immediately and the remaining half will vest on June 15, 2018. The Company estimates the fair value of the RSUs at their intrinsic value at the time of grant, which was
$1.85
per share for a total of $
177,750
.
NOTE 8 – BASIC AND DILUTED EARNINGS PER SHARE
The following table is a reconciliation of the numerator and denominators used in the earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Nine Months Ended September 30, 2017
|
|
|
Income
(Numerator)
|
|
Weighted Average Shares (Denominator)
|
|
Per-Share
Amount
|
|
Income
(Numerator)
|
|
Weighted Average Shares (Denominator)
|
|
Per-Share
Amount
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
1,217,918
|
|
|
48,552,770
|
|
|
$
|
0.03
|
|
|
3,130,676
|
|
|
49,613,704
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options & RSUs
|
|
—
|
|
|
817,065
|
|
|
|
|
|
—
|
|
|
732,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders + assumed conversions
|
|
1,217,918
|
|
|
49,369,835
|
|
|
$
|
0.02
|
|
|
3,130,676
|
|
|
50,346,333
|
|
|
$
|
0.06
|
|
Options to purchase
1,569,730
shares of common stock at a weighted average price of
$3.17
per share were outstanding during the
three and nine
months ended
September 30, 2017
, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price per share of common stock. These options, which expire between March 2018 and October 2025, were still outstanding at
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
Income
(Numerator)
|
|
Weighted Average Shares (Denominator)
|
|
Per-Share
Amount
|
|
Income
(Numerator)
|
|
Weighted Average Shares (Denominator)
|
|
Per-Share
Amount
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
74,452
|
|
|
53,215,385
|
|
|
$
|
—
|
|
|
(1,295,460
|
)
|
|
53,274,855
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options & RSUs
|
|
—
|
|
|
876,034
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders + assumed conversions
|
|
74,452
|
|
|
54,091,419
|
|
|
$
|
—
|
|
|
(1,295,460
|
)
|
|
53,274,855
|
|
|
$
|
(0.02
|
)
|
Options to purchase
1,343,500
and
2,343,579
shares of common stock at a weighted average price of $
2.17
and $
2.83
per share were outstanding during the
three and nine
months ended
September 30, 2016
, respectively, but were not included in the computation of diluted EPS because the Company reported a net loss during the periods and the impact of these shares would be antidilutive. These options, which expire between February 2017 and October 2025, were still outstanding at
September 30, 2016
.
NOTE 9 – SUBSEQUENT EVENTS
In accordance with ASC 855 "Subsequent Events," Company Management reviewed all material events through
November 3, 2017
, the date this report was available to be issued, and the following subsequent events occurred:
During the period beginning October 1, 2017 and ended
November 3, 2017
, the Company repurchased
51,670
shares of common stock for a total repurchase price of $
92,758
pursuant to its previously authorized repurchase program. All repurchases were made at market rates.
On October 12, 2017, the Compensation Committee of the Board of Directors approved a long term inventive plan for the Company's Chief Financial Officer. For further details, refer to the Restricted Stock Unit Award Agreement filed as exhibit 10.1 to the Company's current report on Form 8-K filed on October 17, 2017.
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, 2017
and
2016
. For a complete understanding, 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 transition report on Form 10-K for the nine-month transition period ended
December 31, 2016
.
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. Without limiting the foregoing, 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. These 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 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.
Forward-looking statements are predictions and not guarantees of future performance or events. 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. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements and we hereby qualify all our forward-looking statements by these cautionary statements.
These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to amend this report or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) 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 of Products & Services
We design, assemble, install, service, and sell oilfield-management technologies. Our flagship products are burner-management systems that monitor and manage burners found throughout the industry. We believe our products provide major benefits to our customers including improved efficiency, increased safety, and enhanced compliance with evolving industry regulation. We also sell related products such as flare ignition systems, fuel-train components, secondary airplates, valve actuators, solar packages, and chemical-management systems. Our products and services aid oil and natural gas producers in the safe and efficient production and transportation of oil and natural gas.
Principal Products and Services
In the oil and natural gas industry, there are numerous demands for heat generation and control. Oilfield vessels of all kinds, including line-heaters, dehydrators, separators, treaters, amine reboilers, and free-water knockout systems require heat to satisfy their various functions, which is provided by a burner flame inside the vessel. This burner flame is integral to the operation of the vessel because these vessels use the flame's heat to facilitate the proper function of the vessel. Such functions include separating, storing, transporting and purifying oil and gas (or even water). For example, the viscosity of oil and moisture content (and temperature) of gas are critical to a number of oilfield processes, and are directly affected by the heat provided by the burner flame inside the vessel. Our burner-management systems help ignite, monitor, and manage this burner flame, reducing the need for employee interaction with the burner, such as for the purposes of re-ignition or temperature monitoring.
Oil and gas producers can use our burner-management systems to achieve increased safety, greater operational efficiencies, and improved compliance with changing industry regulations. We believe, despite the recent industry down-turn, there is a growing trend in the oil and gas industry toward enhanced control, process automation, and data logging, partly for potential regulatory-satisfaction purposes. We continue to assess compliance-interest in the industry, especially given the budgetary constraints we have observed over the last two years. 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 in Canada and throughout the United States.
We initially developed our first burner-management system in 2005. Since 2005, we have released several iterations of our initial burner-management system, increasing features and capabilities, while maintaining compliance with Canadian Standards Association (CSA) and Underwriters Laboratories (UL) ratings.
Our burner-management systems have become widely used in Western Canada, and throughout many regions in the United States. We have sold our burner-management systems to many large energy companies, including Anadarko, Chesapeake, ConocoPhillips, Devon, Encana, Exxon-Mobil, Petro-Canada, Shell and others. Our systems have also been sold or installed in other parts of the world, including France, Italy, Ukraine, India, Nigeria, the Middle East, Australia, and Brazil. While we have an interest in expanding our long-term international distribution capabilities, our current principal focus is on the North American oil and gas market.
Product Extension: PF3100
In September 2015, the Company unveiled its next generation burner-management system which is designed to operate, monitor, and control more complex, multi-faceted oilfield applications. The PF3100, is an advanced management system designed to work with other Profire-engineered modules, specific to different applications, thus allowing the system to expertly manage a wide variety of applications.
Throughout the industry, Programmable Logic Controllers (PLC) are used to operate and manage custom-built oilfield applications. Though capable, PLC's can be expensive, tedious, and difficult to use. Our unique solution, the PF3100, can help manage and synchronize custom applications helping oilfield producers meet deadlines and improve profitability through an off-the-shelf solution with dynamic customization. The Company is selling the PF3100 for initial use in the oil and gas industry's natural-draft and forced-air markets.
The Company frequently assesses market needs by participating in industry conferences and soliciting feedback from existing and potential customers, and looks for opportunities to provide quality solutions to the oil and gas producing companies it serves. Upon identifying a potential market need, the Company begins researching the market and developing products that might have feasibility for future sale.
Additional Complementary Products
In addition to our burner-management systems, we also sell complementary oilfield products to help facilitate improved oilfield safety and efficiency. Such products help manage fuel flow (e.g., valves and fuel-trains), meter air flow (e.g., airplates), generate power on-site (e.g., solar packages), ignite and direct flame (e.g., flare stack igniter and nozzles), and other necessary functions. We have invested heavily to develop innovative complementary products which we anticipate will help bolster continued long-term growth. Some of these products are resold from third parties (e.g., solar packages), while some are proprietary (e.g., flare stack igniter) or patent-pending (e.g., inline pilot and valve technologies).
Chemical-Management Systems
In addition to the burner-management systems and complementary technologies we have sold historically, we acquired the assets of VIM Injection Management ("VIM") in November 2014, which extended our product offering to include chemical-management systems.
Chemical injection is used for a wide variety of purposes in the oil and gas industry including down-hole inhibition of wax, hydrates, and corrosion agents, so that product can flow more efficiently to the wellhead. Once at the wellhead, chemical injection can also be used to further process the oil or gas before it is sent into a pipeline, and with other applications.
Currently, a variety of pumps are used to meter the chemicals injected, but are often inaccurate in injecting the proper amount of chemical, as they may not account for all of the variables that affect how much chemical should be injected (e.g., pressure, hydrogen sulfide concentration, etc.) nor the optimal efficiency rates of varying pump systems.
Inaccurate injection levels are problematic because the chemicals injected are expensive, and over-injection causes unnecessary expense for producers. Under-injection can also be problematic because it often results in the creation of poor product (i.e., with wax, hydrate, or corrosion agents) and causes problems with pipeline audits.
Our chemical-management systems monitor and manage the chemical-injection process to ensure that optimal levels of chemicals are injected. This improves the efficiency of the pump and production quality of the well, improves safety for workers that would otherwise be exposed to these chemicals, and improves compliance with pipeline operators. Like our burner-management systems, our chemical-management systems can be monitored and managed remotely via SCADA or other remote-communication systems. We hold a U.S. patent related to our chemical management system and its process for supplying a chemical agent to a process fluid.
Results of Operations
Comparison quarter over quarter
The table below presents certain financial data comparing the current quarter to prior quarters:
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For the three months ended
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September 30, 2017
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June 30, 2017
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March 31,2017
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December 31, 2016
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September 30, 2016
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Total Revenues
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$10,050,192
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$9,464,951
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|
$7,824,495
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|
$7,022,330
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|
$4,990,813
|
Gross Profit Percentage
|
50.4
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%
|
|
52.6
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%
|
|
55.8
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%
|
|
50.7
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%
|
|
52.6
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%
|
Operating Expenses
|
$3,216,388
|
|
$3,145,669
|
|
$3,296,131
|
|
$2,890,716
|
|
$2,752,028
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Net Income (Loss)
|
$1,217,918
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|
$1,312,647
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$600,071
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|
$608,896
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|
$74,452
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Operating Cash Flow
|
$1,579,809
|
|
$800,580
|
|
$1,964,946
|
|
$538,358
|
|
$1,108,674
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As oil prices have increased over the past twelve-months, we have seen increased capital budgets from our customers and an increased willingness to invest in new equipment. Revenues have steadily increased each quarter for the past year primarily due to increased sales volumes. If oil prices remain at or above current levels and our customers' capital budgets increase, we expect that sales volumes will continue to increase at a moderate pace. From the quarter ended
September 30, 2016
to the quarter ended
September 30, 2017
, revenues increased
101%
with only a
17%
increase in operating expenses, which enabled us to significantly increase net income
1536%
between the two periods.
Our gross profit percentage fluctuates each quarter due to changes in product mix. Over the past year it has stayed fairly consistent and we expect it to remain so, with normal product mix fluctuations, in future periods. We believe that our gross profit percentage could improve as the PF3100 becomes a larger contributor to revenue in future periods.
For over a year we have been focusing on optimizing and right-sizing our operations to be able to facilitate growth without increasing costs more than necessary. Our operating expenses for the quarter ended
September 30, 2016
have increased $
464,360
compared to the same quarter in the prior year, primarily due to additional staffing and labor costs required to support the revenue growth we have experienced.
Due to the reasons discussed above, net income increased
1536%
compared to the same quarter last year. We have also increased operating cash flows
42%
in that same time frame. We believe we are positioned well for continued growth in future periods.
Comparison of the
nine
months ended
September 30, 2017
and
2016
The table below presents certain financial data comparing the
nine
months ended
September 30, 2017
to the same period ended
September 30, 2016
:
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For the nine months ended
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September 30, 2017
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September 30, 2016
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$ Change
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% Change
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Total Revenues
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$27,339,677
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|
$13,508,509
|
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$13,831,168
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|
102%
|
Gross Profit Percentage
|
53%
|
|
51%
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N/A
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|
2%
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Operating Expenses
|
$9,658,188
|
|
$8,513,716
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$1,144,472
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13%
|
Net Income (Loss)
|
$3,130,676
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$(1,295,460)
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$4,426,136
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342%
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Operating Cash Flow
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$4,345,335
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|
$3,398,211
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$947,124
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|
28%
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We have made changes to right-size our operations to enable us to increase revenues while keeping costs low and we are seeing the results of those changes. Revenues during the
nine
month period ended
September 30, 2017
compared to the same
nine
month period last year have increased
102%
while operating expenses have only increased
13%
. As a result of our right-sizing efforts, those changes have flowed through to our bottom line, resulting in a
342%
increase in net income. Our gross profit percentage has remained fairly consistent, with a slight change due to product mix.
During the past
nine
months, we were able to finance our treasury stock repurchases of $
3,120,716
entirely from our cash flow from operations. We continue to believe that repurchasing our stock is an appropriate use of our excess cash at this time.
Liquidity and Capital Resources
Working capital at
September 30, 2017
was $
26,213,811
compared to $
26,875,874
at
December 31, 2016
. This change was due to an increase in revenues and related collections offset by increased accruals for income taxes and payroll-related costs and the repurchase of $
3,120,716
worth of common stock (including
1,300,000
shares of common stock from our CEO for an aggregate purchase price of $
1,703,000
). We currently do not have any material commitments for capital expenditures, although we are committed to maintaining the assets we have already acquired. We believe our available cash resources are sufficient to cover expected capital expenditures for the foreseeable future, and we have no current plans to incur debt financing.
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.