Good afternoon, everyone. Thank you for participating in today's conference call to discuss Profire Energy's Second Quarter 2019 Ended June 30, 2019. Joining us today is President and CEO of Profire Energy, Brenton Hatch; and CFO, Ryan Oviatt. Before we begin today's call, I would like to take a moment to read the company's safe harbor statement.

Statements made during this call that are not historical are forward-looking statements.

This call contains forward-looking statements, including, but not limited to, statements regarding the company's expected growth, increase in operating expenses, expansion into international markets, the planned launch of new products, the availability of company resources to make beneficial investments in 2019 and beyond, the hiring of additional employees, the company's exploration of M&A opportunities, the successful integration of acquired assets, potential of international markets and the company's future financial performance.

All such forward-looking statements are subject to uncertainty and changes in circumstances.

Forward-looking statements are not guarantees of future results or performance and involve risks, assumptions and uncertainties that could cause actual events or results to differ materially from the events or results described in or anticipated by the forward-looking statements.

Factors that could materially affect such forward-looking statements include certain economic, business, public market and regulatory risk factors identified in the company's periodic reports filed with the Securities and Exchange Commission.

All forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements were made only as of the date of this release and the company assumes no obligation to update forward-looking statements to reflect subsequent events or circumstances, except as required by law. Readers should not place undue reliance on these forward-looking statements.

I would like to remind everyone that this call is being recorded and will be available for replay through August 22, 2019, starting later this evening. It will be accessible via the link provided in yesterday's press release as well as the company's website at www.profireenergy.com. Following the remarks by Mr. Hatch and Mr.

Oviatt, we will open the call to your questions. As part of the question-and-answer session, Messrs. Hatch and Oviatt will be joined by Profire Energy's Chief Business Development Officer, Cameron Tidball; Vice President of Operations, Jay Fugal; and Vice President of Product Development, Patrick Fisher.

Now I would like to turn the call over to the President and Chief Executive Officer of Profire Energy, Mr. Brenton Hatch. Please go ahead..

Thank you very much. Welcome everyone to our second quarter earnings call and thank you for your interest in Profire. In the last two months, we were able to achieve two milestones for Profire as we closed on two separate acquisitions.

In June, we performed an asset purchase of a company called Millstream Energy Products which added to our robust product line. And this week, we closed on the acquisition of Midflow Services, LLC. Both these transactions were in line with our strategic goals and objectives.

Over the last several years, we have maintained a large cash balance to be able to react quickly to opportunities. It just so happened that both these opportunities became available in the same time frame and we had the resources to complete the purchases and continue to work on integrating the newly acquired assets.

Millstream Energy Products was a privately held Canadian company that developed a line of high-performance burners, economy burners, flame arrestor housing, secondary air control plates and other related combustion components. Many customers are currently buying these products when purchasing Profire burner management systems.

With these additional products, we are capturing more of the combustion market and sales that were not available to us previously at the margins we are now able to obtain. Our sales staff is able to leverage our existing customer base to sell these new products and there has already been tremendous positive feedback from our customers.

Midflow Services, LLC is an oilfield services company located in Ohio. They have steadily grown over the last few years and was one of the largest resellers of Profire burner management systems. We retained all the employees from Midflow, adding nearly 65 years of applicable industry experience. The Midflow team brings new direct customers to Profire.

This acquisition immediately increases Profire's footprint in the Northeastern United States, and we plan to leverage the Midflow knowledge and expertise throughout other markets, which are currently serviced by the Profire team.

When analyzing M&A opportunities, we are looking for companies that provide complementary products, improved product development, add additional industry expertise, expand market share and leverage our strong customer relationships and sales network.

We believe both these acquisitions fit within that strategy and will propel our growth in coming years. We were able to fund the Millstream acquisition primarily through cash flows from operation during the period.

Despite spending $2.5 million on the acquisition in the quarter, our cash and liquid investments were over $23 million at the end of the quarter. For the quarter, we achieved total revenues of $10.1 million and a net income of approximately $986,000. This represents an 11% decrease in total revenues from the same period last year.

This decrease was in part due to a 12% drop in the average oil price during the same period. As we indicated previously, we anticipated revenues remaining flat with Q4 2018 throughout the first half of 2019 due to ongoing market volatility within the oil and gas industry.

This has held true for the first half of the year as the macro industry continues to experience volatility with the price per barrel of oil fluctuating between the low to mid-$50s and $60 a barrel.

We were anticipating this volatility and believe our investment strategies, including acquisitions and product development, are enhancing our relevance as a technology leader in the industry. We also continue to evaluate international markets that could offer significant opportunities for Profire.

We are working to establish additional relationships with distributors globally. We have seen progress in our efforts in Asia, the Middle East and South America. We are dedicated to the success of our international sales as we see this as a major opportunity for growth.

Even though we have increased our strategic investments in 2019, our core belief about the company's capital structure has not changed. We believe these investments will enable us to achieve our five year growth plan. Our recent activities support our company's core values and we remain debt-free and continue to maintain a significant cash reserve.

With that said, I will now turn it down over to Ryan Oviatt, our CFO, to discuss the financial results for the second quarter of 2019.

Ryan?.

Thanks, Brent. Yesterday, after the market closed, we filed our 10-Q with the SEC and discussed the quarter's highlights in a press release. As always, both of those documents are available on the Investors section of our website. The transcript of this call will be posted in the coming days.

As Brent discussed, in the quarter, we purchased the assets of Millstream Energy Products. The total cost of this acquisition was CAD3.3 million or US$2.5 million. The purchase was funded primarily through our operating cash flows during the quarter. We ended the quarter with over $23 million in cash and liquid investments.

This acquisition should allow us to expand our reach in upstream and midstream customers by offering a broader product solution. It is anticipated that the additional products will result in an additional $1 million to $2 million of annual revenue in the coming years.

We purchased Midflow Services, LLC for approximately $2.4 million in cash and issued $1 million of restricted stock, subject to a 12 month lockup. We believe that the acquisition of Midflow will add between $2.5 million and $3.5 million in annual revenues.

Total cash spent for both acquisitions was just under US$5 million, with expected additional annual revenue of $3.5 million to $5.5 million in the coming years. Profire still means enough cash on hand to continue to react quickly to strategic opportunities.

We believe that Profire's share price has been negatively influenced by many pressures, including the macro environment. Given our cash balance and the current stock price, our Board of Directors approved an additional $2 million to purchase company stock pursuant to our existing stock repurchase program.

Let's continue by looking at the income statement. In the quarter, we recognized $10.1 million revenue, which is down 11% from the same period a year ago. As Brent mentioned, the average oil price in Q2 2019 was 12% lower than the average of Q2 2018.

E&P companies have continued to focus more on capital discipline, like debt reductions, dividends and share buybacks than they have on explorations and CapEx expansion. In Q2 2019 the weekly average rig count for North America was 989, compared to 1,039 in the same period of last year.

These decreases have followed the historic decline in oil prices in Q4 2018. As a result of these macro trends, we believe many E&P companies have pulled back on CapEx budgets or deferred planned spending to later in 2019 and even 2020.

Gross profit decreased to $5.2 million or 51.2% of total revenues, compared to $5.9 million or 52.1% of total revenues in the same year ago quarter. The fluctuation in gross profit margin was due to product mix changes, direct labor costs and adjustments in our inventory and warranty reserves.

Total operating expenses were approximately $4.1 million or a 10% increase from the same quarter last year. This increase is primarily due to an increase in wages, professional fees related to acquisition activity and certifications and development of the PF2200 product.

As a percent of total revenue, operating expenses increased to 41.4%, compared to 33.6% in the same quarter a year ago. This was an expected increase as we continue to execute strategic investments as part of our growth plan.

As mentioned in the beginning of 2019, we expect total operating expenses for the full year of 2019 to increase when compared to 2018, which may outpace revenue growth in the short-term due to the ongoing industry challenges. We originally announced that we expected a 20% increase in operating expenses from 2018 TO 2019.

Currently, we are below the 20% forecasted increase, but we plan to continue our investments in the second half of the year. Operating expenses for G&A increased 6%, R&D increased 62% and depreciation decreased 14% as compared to the same year ago quarter.

The increase in G&A expenses is primarily due to increased hiring and additional professional fees related to acquisition activities. The increase in R&D is largely related to labor and certification costs. We intend to keep investing in product development throughout 2019.

Total other income during the period was roughly $107,000, the majority of which was attributable to interest on investments and the sale of fixed assets. Our net income was $986,000 or $0.02 per diluted share, compared to net income of $1.7 million or $0.03 diluted share in the same quarter last year.

Net income is down 43% over the same quarter a year ago due to lower revenues and increased operating expenses. Now let's look at the balance sheet. Cash and liquid investments totaled just over $23 million as compared to $22.6 million at the end of 2018.

Despite purchasing nearly $1 million worth of inventory through the acquisition, inventory levels decreased to $9 million from $9.7 at the end of 2018. This decrease is a result of our operations team working closely with sales forecasts and vendors to carry the requisite inventory on hand.

Our accounts receivable collections remained strong, and the balance of accounts over 90 days was only 4.7% of total accounts receivable. We plan to continue our investment strategy in 2019 to take advantage of opportunities that will help increase Profire's market potential.

We plan to invest in additional sales staff for the 3100 product as well as product enhancements to our existing product lines. This includes support of the products that have recently been acquired through Midflow and Millstream.

We plan to be active in the investor community and attend several investor conferences over the coming months to discuss these developments and speak with investors about our growth strategies and core company values. With that, thanks, and I'll send it back to you, Brent..

Thanks, Ryan. Thus far in 2019, we've been focused on making investments that we believe will help drive growth well into the future for Profire. We've chosen to do so even though the oil and gas industry remains volatile. We expect oil prices to continue to fluctuate.

We are still receiving reports that E&Ps are performing layoffs in order to streamline functions and reduce shared services and expenses. The E&Ps continue to focus on improving balance sheet by reducing debt and participating in stock buyback programs. In the quarter, drilled but uncompleted wells, or DUCs, decreased slightly.

This is the first time in nearly two years that we have seen completion rates surpassing drilling rates. We continue to monitor the Colorado market closely as the legislation recently passed could adversely affect sales in the DJ Basin. However, the impact has not been as drastic as we initially thought and we are performing well in that region.

Throughout the quarter, the macro industry affected our stock price. We believe the current price is a reflection of investor apathy toward the energy sector rather than a response to Profire's performance. Profire is a stable company and we intend to continue with our growth plan and strategic objectives.

Throughout the quarter and in 2019, we were able to give back to the communities in which we live and work. Profire's products are designed to increase the safety of workers within the oilfield as we alleviate the risk of combustion-related injuries or even death.

Over the past five years, Profire has worked with the Burn Center at the University of Utah Health care center. Jointly with our employees, vendors and others, we have donated approximately $100,000 to this center which helps burn survivors to receive therapy and learn coping skills.

We believe it is important to give back to our community where we can. Charitable giving to this organization and others reflects some of our core values that helped establish Profire in the beginning. Profire continues to grow and develop its products in a way that is increasing customer safety, satisfaction and ease of use.

The PF2200 product, which is currently in field trials is receiving excellent reviews. We plan to continue our product enhancement for the PF3100 and other mechanical products, and to integrate the products we recently require – acquired.

Our new facility in Alberta, Canada is on track to open later this year, providing much needed upgrades to the workspace as our Canadian employee base has outgrown their current working conditions.

We intend to invest time and thoughtfully explore additional strategic opportunities as we focus on the integration of Midflow and Millstream to ensure the acquisitions are value accretive. Our outlook for 2019 is optimistic.

But consistent with market trends in the oil and gas industry, we are making strategic investments with the intent of increasing revenues in the coming years. These investments will help Profire remain a technology leader within the industry. Thank you, and we will now open up the call to questions.

Operator, would you please provide the appropriate instructions so we can get the Q&A started?.

Sure. Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rob Brown with Lake Street Capital. Please proceed with your questions..

Good morning, Rob..

Hi, Brenton. First question just on the demand environment. I know you've sort of talked it to be sort of choppy, but help me understand how that's been changing recently.

Is it – has it been stable kind of quarter-to-quarter? Are you seeing it maybe deteriorate or are you seeing it improve? Or how is the visibility at this point?.

We – I suppose that it's different as every E&P company out there, we are aware that some have drastically cut employee count and so on in an effort to try to improve their bottom lines. As Ryan's comments earlier, that CapEx budgets don't seem to be getting as much attention right now as working on balance sheet efforts by these companies.

But overall, we have found – even through these new acquisitions, that we've been able to find customers that we haven't previously had. We've shipped a lot of product to new customers since our sales team have gone out and really hustled this past quarter.

And so we're quite optimistic that we will be able to maintain well the standard of service that we offer out there and the standard of sales that we get. In terms of where the market is going to go, Rob, we have no idea. Yesterday, oil was at $50. Today, it's at $52 and changing. And so day by day, that changes.

And I think it's pretty hard for these E&P companies to establish a CapEx plan when it really is so random. But all of that being said, we have no idea what the market is going to do..

Okay, great. Thanks for the color for sure.

And then the – on the acquisitions you did, in particular the Millstream business, what are some of the product areas that you think you can grow there and maybe a sense of how that growth in that business can take place?.

Cameron, do you want to address that one?.

You bet. With the Millstream acquisition, obviously, it gives us product that we were selling before. However, we were not the manufacturer and you're really at the mercy of old antiquated supply distributors and products.

And so with this acquisition, you have in a burner management solution; you have the controller, which Profire does great at; you have fuel train, which Profire does pretty good at; and you have the burner and the flame arrestor housing, which we win but we don't win it very often because we're, again, buying from a supplier and we're really at no strategic advantage to any other reseller.

With bringing on a company that has those products, which are of great quality, which meet over – we believe over 95% of the need for – or the range of production equipment that is in the North American market, we feel that we have a great opportunity to increase the spend on each BMS that we sell.

So every solution we sell should have the ability to increase that average sales price to end users and resellers..

Okay, great. And then the last question.

The 3100, I know you're working on things this year to kind of seed the market, but how is that going and how is that growth kind of ramp looking into 2020?.

First, Mr. Fisher, do you want to just address for a second how that's going in terms of the development of the new modules and so on forward? And then perhaps, Cam, you can speak to the sales efforts in that regard..

Yes. Hi, not okay..

We can hear you..

Yes. So we’ve been putting a lot of effort towards expanding beyond the research development – product development team to a part where we can do multiple products – product lines at the same time and so we're now back to working – adding some key features to the 3100 product line to really open it up.

So we've had a few cases where there's just a specific feature here and there missing to address a certain market, and so we'll be working over the next six months here to continue to add in those features to really help the sales team be able to just go in and offer the product.

And the – when the customer says do you have this feature, they can just say yes and kind of the – they'd go over and want to get the pack..

Terrific. Thank you, Patrick.

Cam, sales?.

Yes. You bet. Similar to how the market has gone down, we've seen the number of projects in the 3100 realm or space slightly come down with the price of oil because projects are deferred.

However, with that being said, our average revenue per project is up, the amount of modules we sell for each product is up, the amount of customers that are taking the 3100 is up.

So we've had, so far in 2019, it's been a bright side that we – overall, our percentage of revenue is up year-over-year, which is showing that it's being adopted by the market. Our professionals who are selling and servicing and installing the product are becoming proficient.

And we're seeing a lot of interest being garnered from companies who are tired – or not tired so much as not wanting to deal with the status quo that's out there for alternative products. So very, very positive so far in 2019..

Thank you. I’ll turn over..

Thanks, Rob..

The next question is from the line of John White with Roth Capital. Please proceed with your question..

Missed your way..

Yes, good morning, team. So a couple of questions. Maybe, Cameron, in describing those two recently acquired companies, you described the – a couple of pieces of equipment that they manufacturer that you don't, and I didn't catch the name of those, what those equipment pieces are named..

Sure. The actual natural draft burner, Profire does not have its own manufactured burner. We have pilots and other components, but not the actual burner itself.

And the flame arrestor, which is the housing that goes on the outside of the fire tube which makes it safe for customers so that there isn't any explosion or fire being able to come outside of the vessel. Those are the two main products. There are other products that they have, but those are the two main ones..

And so the sellers in both cases feel integrating with Profire will benefit their business from a sales standpoint?.

Yes. The goal is to become more and more of that one-stop shop, complete and round out the solution that Profire can add, allow buyers, purchasers of the equipment, of the packages, to deal with that one place where that whole solution comes into play..

Thank you. And I wasn't clear on sales of the 3100.

Are those higher than you'd expect or higher than the last quarter or lower?.

So for the quarter, approximately flat. They're where we expect the – or they're where we predicted for the year, we're on budget for what we wanted to see in terms of growth. But the amount of customers showing interest, the quotes, the pipeline is strong for sure..

All right. And one more follow-up, if I may.

Can you give us some color on the progress of the PF2200?.

Yes.

Brent, do you want me to tackle that or?.

Yes. Would you? You bet, that'd be great..

So the 2200, it's close to schedule where we'd like to see it. We have our first trials out in the field. Of course, we've been testing it and trialing it in-house for many months, but we are now in the field, happy to report that customer feedback is strong.

Of course, with any new product, there's items that touch and tweak, but one of the things we've done with each installation is whoever commissions it, we've asked them to do it without any sort of manual or training and we like to see how they can do it, and rate reviews on the user experience.

So we are right on pace with our goals to get a bunch out this year, and then look to more of a formal mass launch or greater launch in the coming quarters..

Okay.

And there were no field trials for the 2200 in the first quarter, right?.

That’s correct, yes..

All right. Well, thank you very much, and Brent I hope to see you soon..

Thanks, John. You bet. Take care..

[Operator Instructions] The next question is from the line of the Samir Patel with Askeladden Capital. Please proceed with your question..

Samir, how are you?.

Doing well. So Ryan, I didn't fully understand your comments on OpEx.

Can you kind of – I don't know if there's a number or run rate or something, what should we be thinking about in terms of OpEx for the second half of 2019 and then 2020 on either a quarterly or an annual basis?.

Yes. So certainly, as I mentioned, we were talking at the start of the year about a 20% increase over the prior year, so obviously that number is fairly easy to come up with. And if you compare the run rate in Q1 and Q2, you would see that we're not quite at that same level of that 20% increase.

But in Q2 we have increased from where we were at in Q1 and even some of those costs, we expected to be back end-loaded into the year. Obviously, as you hire someone a few months into the year, you don't have the cost upfront, but then they carry through for the rest of the year.

So there is some hiring that we've gone through in the last six months that we didn't have full six months of costs associated with, but we will in the second half of the year. So overall, we still expect that the spend is going to increase a little bit more in Q3 and in Q4.

Operating costs, I think, we're at $4.1 million run rate in Q2, so we do expect that, that will come up a little bit. But as I mentioned, we may not hit that full 20% increase that we had forecasted at the start of the year.

So obviously, those investments are being evaluated and looked at as we go throughout the year and deal with some of the challenges that are facing us this year that are a bit different than what we thought we would be facing at this point when we started the year.

But nonetheless, we are still committed that we're investing in the right areas and continuing to grow the sales team, continuing to add investment in the international market exploration and the additional products that we've been talking about.

The acquisitions obviously that we've done, there's going to be some ongoing integration costs and a little bit more of additional consulting costs associated with those. But we believe we're being very strategic about these cost increases and we'll continue to do so in the second half of the year. Hopefully, that helps a little..

Yes. That’s perfect. That’s what I was looking for. And then more on the top line side, two part question.

So I don't know if this is for Cameron or who, but when you think about the various growth avenues that you have in terms of international, in terms of the 3100, in terms of maybe cross-selling some of these new acquired products and services that you've brought on in the last several months here, what kind of cadence would you expect – I know you can't control oil prices, but let's just sort of assume a flat demand environment, what sort of a cadence would you expect? Like when you expect each of those buckets to kick in? And then I guess a separate question is how do you think about – like with CMS, you've obviously invested over the long-term a little bit and it hasn't worked and you haven't invested more.

How do you think as an organization about gauging the success of these various investments and when it might make sense to pull back in one area and spend more in another area, or decisions like that?.

Boy, Samir, I'm really glad that you called out on Cam on that one, because he can answer the hard questions like that.

Right, Cam?.

Yes. You bet. Samir, nice to meet you. So top line revenue, obviously, we have all the different buckets that we want to grow. We want to grow organically because we believe that burner management, there's a lot of room. We believe there's a lot of retrofits. We believe that new drilling will continue to occur.

Again, it will go up and down as we've seen over the past few years. And by adding these two acquisitions, immediately, we believe that we'll be able to increase our piece of the pie. So whatever that whole top market is, x, Profire should be able to increase that amount.

So we've looked and done some analysis on previous years of what we thought could have been, and that's what really led to these acquisitions because we believe there is a bigger piece of the pie to get. Now when does that take place? Well, we believe it's already starting to take place.

But again, that total pie for the year ebbs and flows, so we should see that – those increases shortly.

Now how do we gauge the success of that? Well, of course, we're – we have analytics in place to see how many – what's our average sales price for burner management, what are we going to be able to see in terms of how many of these different products can we sell. So very easily tracked. In terms of international space, very challenging, very fun.

We are working with partners actively to increase our footprint. Again, we haven't deployed a bricks-and-mortar strategy in every international occasion, that's just not a great strategy, we do not believe at this time.

So looking to find more reputable distributors that we feel can actually represent our product and not just be another notch on the line card. We've started to see gains there. We've had some success in Latin America. We've had some success in Asia and the MENA region.

When will it make a big impact to Profire's top line? We hope to see it in the coming quarters where it's a larger percentage. We already know we do have a nice percentage foothold internationally, however, a lot of it goes through U.S. OEMs and we're not necessarily able to track that. So we're looking forward to when we will see that.

And then, again, the overall picture is what can Profire add to our sales team that's current? What sales channels can we add to add more to that whole package of what our core customers, the ones we're good at working with, where we had good relationships and trust, and when will those kick in? Well, we're seeing that.

We work with suppliers to sell more of their product where it makes sense from a margin perspective. And I foresee that we'll start to see some of that fruit to being more noticeable coming in the 2020 year. Again, you put an asterisk beside everything.

Is oil going to be at $35 next year? Is it going to be at $85? Is it going to be at $70? Who knows? But I think we've got all these things in place and we're building out that whole big pie and the different slivers of it, they're all being pushed at the same time. So I think we're in a great place.

I don't know, Samir, if that answers your question completely, but that's how we're investing our time, that's how we're investing on our training and the people that we're working with in terms of third-party suppliers, et cetera/.

Sure. And maybe to touch on 3100 a little bit, the cadence of when you expect the SIL certification and all that to drive higher sales..

Yes. I believe we've seen that. We've got into doors that we wouldn't have gotten into without SIL. So we've seen that. And again, sometimes as much as our quarter-over-quarter is higher, so we know that's happening, but our Q2 versus Q1 is pretty flat. But still, in the same periods year-over-year, we're seeing an increase.

So that SIL certification has kicked in. When will we see more? As we get the word out more, as we get more suppliers trained or third-party installation groups, system integrators come onboard, we'll see that increase.

So fortune telling, again, this is going to – we expect a strong second half of the year with the 3100 and next year, we expect to see – again, depending on the spend and turnarounds, et cetera, we expect to see growth..

Cool. Thanks..

Thanks, Samir..

Thank you. As there are no additional questions at this time, I'll turn the floor back to management for closing remarks..

Thank you so much. Thank you everyone for joining us today on this call to discuss our second quarter of 2019. We'd like to thank each of you for your continued support of Profire. As always, we're available to answer questions if you'd like to reach out to us directly. Thank you. Have a great day, everybody..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..