NOTE 1 - CONDENSED FINANCIAL STATEMENTS
Except where the context otherwise requires, all references herein to the "Company," "Profire," "we," "us," "our," or similar words and phrases are to Profire Energy, Inc. and its wholly owned subsidiaries, taken together.
The accompanying consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments have been made (which include only normal recurring adjustments) which are necessary to present fairly the financial position, results of operations, stockholders' equity, and cash flows at September 30, 2022 and for all periods presented herein.
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, 2021 ("Form 10-K"). The results of operations for the three- and nine-month periods ended September 30, 2022 and 2021 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 primarily for the oil and gas industry within the US and Canadian markets. The Company has begun expanding outside of these markets to other international locations and into other industries with combustion and burner management requirements.
Significant Accounting Policies
There have been no changes to the significant accounting policies of the Company from the information provided in Note 1 of the notes to the consolidated financial statements in the Company's most recent Form 10-K.
Recent Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and determined that the adoption of pronouncements applicable to the Company has not had or is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 3 – INVENTORIES
Inventories consisted of the following at each balance sheet date:
| | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 245,049 | | | $ | 301,320 | |
Finished goods | 10,312,904 | | | 7,556,048 | |
| | | |
Subtotal | 10,557,953 | | | 7,857,368 | |
Reserve for obsolescence | (352,746) | | | (672,120) | |
Total | $ | 10,205,207 | | | $ | 7,185,248 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the nine months ended September 30, 2022 and 2021
NOTE 4 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at each balance sheet date: | | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 |
| | | |
Prepaid inventory | $ | 997,885 | | | $ | 530,725 | |
Accrued receivables | 767,110 | | | — | |
Prepaid insurance | 356,718 | | | 228,849 | |
Interest receivables | 60,248 | | | 63,841 | |
Tax credits | 161,385 | | | — | |
Other | 299,166 | | | 201,861 | |
Total | $ | 2,642,512 | | | $ | 1,025,276 | |
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following at each balance sheet date: | | | | | | | | | | | | |
| As of | |
| September 30, 2022 | | December 31, 2021 | |
Employee-related payables | $ | 1,785,874 | | | $ | 1,621,131 | | |
Deferred revenue | 328,744 | | | 817 | | |
Inventory-related payables | 483,382 | | | 67,027 | | |
Tax-related payables | 84,763 | | | 37,880 | | |
Warranty liabilities | 45,407 | | | 49,624 | | |
Other | 429,051 | | | 95,869 | | |
Total | $ | 3,157,221 | | | $ | 1,872,348 | | |
NOTE 6 – LEASES
We have leases for office equipment and office space. The leases for office equipment are classified as financing leases and the typical term is 36 months. We have the option to extend most office equipment leases, but we do not intend to do so. Accordingly, no extensions have been recognized in the right-of-use asset or lease liability. The office equipment lease payments are not variable, and the lease agreements do not include any non-lease components, residual value guarantees, or restrictions. There are no interest rates implicit in the office equipment lease agreements, so we have used our incremental borrowing rate to determine the discount rate to be applied to our financing leases for purposes of determining our lease liabilities. The weighted average discount rate applied to our financing leases is 4.50% and the weighted average remaining lease term is 3.6 years.
The following table shows the components of financing lease cost:
| | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | |
Financing Lease Cost | 2022 | 2021 | | 2022 | 2021 | | |
Amortization of right-of-use assets | $ | 7,240 | | $ | 9,811 | | | $ | 28,308 | | $ | 31,014 | | | |
Interest on lease liabilities | 1,078 | | 337 | | | 2,331 | | 2,690 | | | |
Total financing lease cost | $ | 8,318 | | $ | 10,148 | | | $ | 30,639 | | $ | 33,704 | | | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the nine months ended September 30, 2022 and 2021
The Company leases one warehouse space with a two-year lease, which is recorded as an operating lease. The remainder of our office space leases are considered to be short-term, and we have elected not to recognize those on our balance sheet under the short-term recognition exemption. Operating lease expense recognized during the three- and nine months ended September 30, 2022 and September 30, 2021 was $13,356 and $50,270, and $19,000 and $35,263, respectively.
Supplemental operating lease information as of September 30, 2022 is as follows:
| | | | | | | | |
Operating right of use assets | | $ | 42,473 | |
Current operating lease liabilities | | 25,101 | |
Long-term operating lease liabilities | | 17,372 | |
Weighted-average remaining lease term in years | | 1.8 |
Weighted-average discount rate | | 4.5 | % |
As of September 30, 2022, maturities of lease liabilities are as follows:
| | | | | | | | |
Years ending December 31, | | Amount |
2022 | | $ | 14,480 | |
2023 | | 57,919 | |
2024 | | 40,886 | |
2025 | | 11,927 | |
2026 | | 11,927 | |
Thereafter | | 5,963 | |
Total future minimum lease payments | | $ | 143,102 | |
Less: Amount representing interest | | 9,334 | |
Present value of future payments | | $ | 133,768 | |
Current portion | | $ | 53,084 | |
Long-term portion | | $ | 80,684 | |
NOTE 7 – STOCKHOLDERS' EQUITY
As of September 30, 2022 and December 31, 2021, the Company held 5,038,130 and 4,076,909 shares of its common stock in treasury at a total cost of $7,336,323 and $6,107,593, respectively.
On September 15, 2021, the Board of Directors of the Company (the "Board") authorized a share repurchase program allowing the Company to repurchase up to $2,000,000 worth of the Company’s common stock from time to time through September 30, 2022. All purchases under this program were made at the discretion of management. The size and timing of purchases were dependent on price, market and business conditions and other factors. As of June 2022, the Company had spent the full allotment under the program.
As of September 30, 2022, the Company had 536,361 restricted stock units ("RSUs"), 735,512 performance-based RSUs, and 827,500 stock options outstanding with $746,570 in remaining compensation expense to be recognized over the next 1.4 years. See further details below about certain subsets of these outstanding equity-based awards.
On June 15, 2022, pursuant to the annual renewal of director compensation, the Board approved a grant of 178,623 RSUs to the Company's 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 approximately $234,000 to be recognized over the vesting period.
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the nine months ended September 30, 2022 and 2021
On April 6, 2022, the Compensation Committee of the Board (The "Compensation Committee") approved the 2022 Executive Incentive Plan (the “2022 EIP”) for Ryan W. Oviatt, the Company's Co-CEO, Co-President, and CFO, Cameron M. Tidball, the Company's Co-CEO and Co-President, and Patrick D. Fisher, the Company's Vice President of Product Development. The 2022 EIP provides for the potential award of incentive compensation to the participants based on the Company’s financial performance in fiscal 2022. If earned, the incentive compensation will be payable in cash and stock, and the stock portion of the incentive compensation is intended to constitute an award under the Company's 2014 Equity Incentive Plan, as amended (the " Plan"). In addition to the 2022 EIP, the Board also approved as a long-term incentive plan the grants of restricted stock unit awards to Messrs. Oviatt, Tidball, and Fisher pursuant to the Plan (the “2022 LTIP”).
2022 EIP
Under the terms of the 2022 EIP, each participating executive officer has been assigned a target incentive compensation amount for fiscal 2022. The target incentive compensation amount for Mr. Oviatt is $198,000, the target incentive compensation amount for Mr. Tidball is $198,000, and the target incentive compensation for Mr. Fisher is $64,750 CAD.
Participants will be eligible to receive incentive compensation based upon reaching or exceeding performance goals established by the Compensation Committee for fiscal 2022. The performance goals in the 2022 EIP are based on the Company’s total revenue, EBITDA, and a non-financial milestone relating to revenue source diversification to be determined by the Compensation Committee. Each of these performance goals will be weighted one third in calculating incentive compensation amounts.
The incentive compensation amounts earned under the 2022 EIP, if any, will be paid 50% in cash and 50% in shares of restricted stock under the Plan. In no event shall the total award exceed 200% of the target incentive compensation amount for each participant, or exceed any limitations otherwise set forth in the Plan. The actual incentive compensation amounts, if any, will be determined by the Compensation Committee upon the completion of fiscal 2022 and paid by March 15, 2023, subject to all applicable tax withholding.
2022 LTIP
The 2022 LTIP consists of total awards of up to 230,232 RSUs to Mr. Oviatt, up to 230,232 RSUs to Mr. Tidball, and up to 43,023 RSUs to Mr. Fisher, pursuant to two separate restricted stock unit award agreements (collectively, the “2022 LTIP Restricted Stock Unit Award Agreements”) entered into between the Company and each participant. One such agreement covers the 33% of each award recipient’s RSUs that are subject to time-based vesting, and the other such agreement covers the remaining 67% of such award recipient’s RSUs 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 unit. The vesting period of the 2022 LTIP began on January 1, 2022 and terminates on December 31, 2024 (the “2022 LTIP Performance Vesting Date”).
The RSUs subject to time-based vesting, including 76,744 RSUs to Mr. Oviatt, 76,744 RSUs for Mr. Tidball, and 14,341 RSUs to Mr. Fisher, will vest in three equal and annual installments beginning December 31, 2022 and ending on December 31, 2024 if the award recipients’ employment continues with the Company through such dates.
The performance-vesting RSUs, including up to 153,488 RSUs for Mr. Oviatt, 153,488 RSUs for Mr. Tidball, and 28,682 RSUs to Mr. Fisher, may vest at the end of the three-year performance period beginning January 1, 2022 based upon the following Company performance metrics:
| | | | | | | | | | | | | | |
Performance Metric | Weight | Target | Above Target | Outstanding |
Total Shareholder Return (based on the Company’s closing price of its common stock at the end of the Performance Period relative to its closing price as of the last trading day in 2021) | 1/3 | 89% | 136% | 183% |
Relative Total Shareholder Return (based on the Company’s ranked performance in closing stock price growth relative to a peer group of companies during the Performance Period) | 1/3 | Third Quartile | Second Quartile | First Quartile |
EBITDA as a Percentage of Total Revenue | 1/3 | 10% | 15% | 20% |
| | | | |
PROFIRE ENERGY, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
For the nine months ended September 30, 2022 and 2021
One-third of such performance-vesting RSUs, consisting of 51,163 RSUs for Mr. Oviatt, 51,163 RSUs for Mr. Tidball, and 9,561 RSUs for Mr. Fisher, may vest for each of the three performance metrics identified in the table above. The number of RSUs that will vest for each performance metric on the 2022 LTIP Performance Vesting Date shall be determined as follows:
a.if the “Target” level for such performance metric is not achieved, none of the RSUs relating to such performance metric will vest;
b.if the “Target” level (but no higher level) for such performance metric is achieved, 50% of the RSUs relating to such performance metric will vest;
c.if the “Above Target” level (but no higher level) for such performance metric is achieved, 75% of the RSUs relating to such performance metric will vest; and
d.if the “Outstanding” level for such performance metric is achieved, 100% of the RSUs relating to such performance metric will vest.
The foregoing summary of the 2022 EIP and the 2022 LTIP Restricted Stock Unit Award Agreements is qualified in its entirety by the text of the 2022 EIP and each of the 2022 LTIP Restricted Stock Unit Award Agreements, which are filed as exhibits to Form 10-Q for the quarter ending March 31, 2022.
2021 EIP and LTIP
On May 28, 2021, the Compensation Committee approved the 2021 Executive Incentive Plan (the “2021 EIP”) for Brenton W. Hatch, the Company’s former Executive Chairman, Ryan W. Oviatt, Cameron M. Tidball, Jay G. Fugal, the Company’s former Vice President of Operations, and Patrick D. Fisher. The 2021 EIP provided for the potential award of incentive compensation to the participants based on the Company’s financial performance in fiscal 2021. The incentive compensation was payable in cash and stock, and the stock portion of the incentive compensation was intended to constitute an award under the Plan.
Participants were eligible to receive incentive compensation based upon reaching or exceeding performance goals established by the Compensation Committee for fiscal 2021. The performance goals in the 2021 EIP were based on the Company’s total revenue, EBITDA, and a non-financial milestone relating to revenue source diversification. Each of these performance goals were weighted one third in calculating incentive compensation amounts.
On March 2, 2022, the Compensation Committee approved the incentive compensation amounts based on achieving certain targets pursuant to the 2021 EIP. The incentive compensation amounts earned under the 2021 EIP were paid 50% in cash and 50% in shares of restricted stock under the Plan. The incentive compensation amounts resulted in the Compensation Committee approving a one-time bonus for Company executives that was settled by issuing a total of 182,626 shares of common stock, or 120,097 shares net of tax withholding. These shares were fully vested as of March 2, 2022.
In addition to the 2021 EIP, the Board also approved as a long-term incentive plan, the grants of restricted stock unit awards to Messrs. Oviatt, Tidball, Fugal, and Fisher pursuant to the Plan (the “2021 LTIP”). The 2021 LTIP consists of total awards of up to 204,543 RSUs to Mr. Oviatt, up to 204,543 RSUs to Mr. Tidball, up to 85,908 RSUs to Mr. Fugal, and up to 47,973 RSUs to Mr. Fisher, pursuant to two separate restricted stock unit award agreements (collectively, the “2021 LTIP Restricted Stock Unit Award Agreements”) between the Company and each participant. One agreement covers the 33% of each award recipient’s RSUs that are subject to time-based vesting, and the other agreement covers the remaining 67% of such award recipient’s RSUs 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 2021 LTIP began on January 1, 2021 and terminates on December 31, 2023 (the “2021 LTIP Performance Vesting Date”).
The RSUs subject to time-based vesting, including 68,181 RSUs to Mr. Oviatt, 68,181 RSUs for Mr. Tidball, 28,636 RSUs to Mr. Fugal, and 15,991 RSUs to Mr. Fisher, vest in three equal annual installments that began on December 31, 2021 and will end on December 31, 2023 if the award recipients’ employment continues with the Company through such dates.
The performance-vesting RSUs, including up to 136,362 RSUs for Mr. Oviatt, 136,362 RSUs for Mr. Tidball, 57,272 RSUs for Mr. Fugal, and 31,982 RSUs to Mr. Fisher, are eligible to vest over a three-year performance period beginning January 1, 2021 based upon the following Company performance metrics: