Profire Energy, Inc.
Q3 2015 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Good afternoon, everyone and thank you for participating in today’s conference call to discuss Profire Energy’s Fiscal Third Quarter ended December 31, 2014. Joining us today is the President and CEO of Profire Energy, Brenton Hatch and CFO, Andrew Limpert. Before we begin today’s call, I would like to take a moment to read the company’s Safe Harbor statement. Cautionary note regarding forward-looking statements; 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 Profire Energy anticipating oil price oppression would continue for the foreseeable future; Profire Energy creating a growing awareness of burner and chemical management products throughout North America; the company is focusing on reducing expenses and making necessary investments; the company’s average tax rate; the company’s future margin returning to historical levels; current investments made by the company in people, products, and offices leading future revenues, income, or strategic advantage; Profire continuing to lead the industry in burner management products and services; the company’s primary focus on the North America oil and gas industry, including emphasizing sales in certain basins; the current market opportunity and having a strong retrofit market opportunity; the company’s Chemical Management Systems and it’s ability to give the company access to new markets; the ability of the company’s chemical management system to have improved margins as volume of sales increases; changes in industry regulations providing Profire with additional tailwind; company’s lack of reliance on regulation to grow the business; the R&D team continuing to develop innovative products for the industry; Profire service program offering a compelling value to oil and gas industry; or the company’s future performance including the guidance discussed on this call. 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 risks and 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 are 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 it will be available for replay through February 19, 2015, starting later this evening. It will be accessible via the link provided in today’s press release, as well as on the company’s website at www.profireenergy.com. Following Mr. Hatch’s and Mr. Limpert’s remarks, we will open the call to your questions. 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.

[Brenton Hatch:]

Thank you very much. Good afternoon, everyone. Thank you for joining us today. Our third fiscal quarter was quite an eventful one, which included our first ever acquisition, a newly opened office in Colorado, recognition by Deloitte as one of the fastest growing companies in North America for the second year in a row I might add; new industry regulations and of course a violent decline in oil prices. As you all know, the oil and gas industry is in the midst of a difficult transition period trying to figure out how the global oversupply of oil will play out both strategically and economically. In recent months, this steep drop in the price of oil along with the volatile natural gas prices has had a significant impact on our industry. During our third fiscal quarter, the price of WTI fell from over $94 per barrel to $54, a drop of more than 43%. That trend has continued since quarter end and recently hit below $45 a barrel, a 6-year low. On our last earnings call, we stated that we had historically seen little change in our growth patterns as commodity prices moved up and down, such has been our historical experience. There was not strong historical correlation between our growth and shifts in the price of oil and gas. However, the change we are currently witnessing is well beyond the magnitude of any drop we have ever seen since the one that took place in 2008. The year we first filed as a public company. This is new uncharted environment for Profire and is now teaching us that significant and violent drops in prices can indeed affect us, especially when our customers become highly uncertain as to what the coming months might bring for them. So while we do not feel that the decline in oil prices would impact us significantly, we also do not anticipate as I think much of the industry did not anticipate the magnitude of this drop. Prior to be drastic decrease in oil prices as you know Profire was in an aggressive growth investment phase realizing another record-breaking revenue quarter with the intent to expand quickly throughout North America in response to our massive market opportunity. We were expanding geographically into new sales and service territories investing heavily in multiple R&D projects and building out our sales and service teams to foster growth. We still feel that the market opportunity is very significant, but given the current condition of the industry we want to be particularly cautious in how we deploy resources. These two phenomena namely our significant growth investments made in the quarter, together with the significant contraction of industry investment combined for a lower revenue, higher expense quarter for us than we had anticipated earlier this year. Now that said when we think about the magnitude of what happened in this – in the industry during the quarter we feel that the quarter’s performance which included $0.04 in earnings per share was actually quite strong. Now, the oversupply of oil and its resulting price suppression has carried over to the current quarter and we anticipate such price suppression will continue for the foreseeable future until the industry structures structure again in sense long-term investments and purchasing. Until then we will continue to analyze and discuss the best way to balance two of our key interests. First, needing to stay lean during this time of reduced purchasing. And second, maintaining our agility to continue growth activity and expansion. We will strike this balance the very best that we can. So with that background let’s review just a few of the major developments from the quarter. First, as I mentioned Profire launched its chemical management division by completing our first ever acquisition in which we acquired a patent pending chemical injection management technology. This acquisition has opened the company up to new substantial market with the benefit of being able to leverage our existing sales force and customer relationships. Second, there have been new regulations put into place by a couple of states Utah and North Dakota specifically that could provide additional regulatory tailwind for the company. We have always said that we do not rely upon regulation to grow and have shown that historically we have grown in the U.S. without much regulatory pressure. However, regulation is not going away and it continues to become a more relevant issue in North America as many regulators look to improve safety and the emission control in the oilfield. Third, we opened up our seventh office in Greeley, Colorado this past quarter. This was done in a response to the market needs in that area as state regulatory pressures have become a stronger driver for growth in Colorado. But while there are certain – certainly significant industry challenges to work through we are still excited about the months and years ahead as we seek to build upon the foundation we have established and bring new solutions to the oilfield. But before I get too deep into that discussion, I want to turn the call over to Andrew Limpert, our CFO to discuss the financial results of the quarter. Andrew?

[Andrew Limpert:]

Thank you, Brent. Earlier today we filed our form 10-Q with the Securities and Exchange Commission and discussed the quarter’s highlights in the press release. Both of these are available on the Investors section of our website. Let’s get started by looking at the income statement. In our third fiscal quarter of 2015 ending December 31, 2014, our total revenues increased 31% over the same year ago quarter to $12.5 million. The increase was primarily due to increased activity from a larger sales force, improved sales execution and increased efficacy in a number of growing sales territories, including Texas, Colorado and Pennsylvania. Our gross profit increased to $6.5 million or 52% of total revenues as compared to $5.2 million or 55% of total revenues in the same year ago quarter. The biggest drivers leading to the decrease in our gross profit percentage year-over-year were

[Brenton Hatch:]

Thanks Andrew. As Andrew highlighted Profire’s revenues have grown significantly compared to the same period last year. This has been a result of building out the sales and service teams to capture the market. Further, we have expanded into several new sales and service territories and are continuing to develop relationships with new potential customers. As was mentioned earlier prior to the decrease in oil prices Profire’s focus was on growing and seizing our market opportunities throughout North America. The decline in oil prices and oilfield purchasing have elongated the timeframe in which we anticipate to see returns from prior investments. However, as we invest strategically, we still expect to realize returns in the coming months and years. With the current state of the industry, we have decided to curtail some of our aggressive growth initiatives relating to additional sales and service personnel. That being said, we will still at people in places that we anticipate will produce positive and early return on investment. While we have pulled back some expenses and may continue to do so, we are particularly cautious about cutting areas that are difficult to rebuild quickly or would otherwise compromise long-term growth capabilities such as entire teams training programs etcetera. With that said, in an effort to remain profitable and cash flowing in short-term and long-term, we have had to make some difficult decisions including reducing our workforce since quarter end. At the end of fiscal Q3, we had about 140 employees. Today that number has been reduced to about 125 employees and 11% decrease. These types of decisions are not taken lightly as they impact individuals and families. However, these measures were unfortunately necessary. Now, while we want to run a lean company where each employee strongly contributes to the mission of Profire, we need to maintain agility to grow again as the industry returns. To that end, we do not want to compromise our future growth capabilities because of the current industry turbulence and want to wise about every expense and investment we make. In addition to cutting some expenditures, we plan to maximize revenues in the near-term in a couple of ways. First, as you are probably aware there are still numerous basins where production is still economically feasible. Though many producers are obviously making budget cuts, estimates indicate that certain plays such as the Marcellus and Eagle Ford could still profitably produce oil at current prices. With this in mind, we are emphasizing sales in those basins where production is expected to remain relatively high if oil prices stay low for an extended period of time. Second, we are emphasizing sales in areas that have current or potential regulatory pressures such as Colorado, Utah, North Dakota. While some of these areas may be below there breakeven prices, regulation can help us make sales when economic conditions are weak as they are now. And as long as producers are not in a budget freeze, we can still sell on the premise that installing our products at the wellhead can improve efficiencies thereby increasing net margins. So, as producers look at ways to improve their operations, our products can assist in that process. As Andrew said of course, the industry is experiencing significant volatility right now, but we are still very optimistic about the opportunities that lie ahead of us in the long-term. Now, on that note, let me turn to one of the areas that we feel has expanded our potential market size. As I mentioned earlier, Profire completed its first ever acquisition this quarter. On November 18, 2014, we announced the acquisition of VIM Injection Management Inc., an oilfield chemical injection management company based in Canada. This strategic acquisition gives us access to additional markets and complements our flagship product line. Chemical injection is used for a wide variety of purposes, including down-hole inhibition of wax, hydrates and corrosion agents, so that products 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. We feel there is significant market opportunity for our chemical management system with an estimated 80% of the 1.3 million wells in North America qualifying as potential installations. We have a very experienced chemical division manager and the support of our entire distribution team dedicated to developing this chemical market. And we look forward to BMS becoming an increasingly important part of our overall product sales. We believe the acquisition of this chemical controller will strengthen our role as an oilfield technology leader, though it will take time to develop that market. Just recently, we announced our first installations of our new chemical management systems and are excited about the market opportunities for this product. These BMS products are starting to generate revenue for the company and [Technical Difficulty] products. Just as with any product, we would expect to see slight margin improvement over time as sales volumes increase. Our primary focus will still remain on capturing the burner management market throughout North America. Profire’s products will continue to provide solutions to producers looking to gain efficiencies at the wellhead. Even if new drills declined significantly throughout 2015, we feel there is ample opportunity for us to continue selling. New drills have historically been receptive to innovative technology, but as drilling activities decline, we will look to deploy increased resources towards the retrofit market, which is estimated at close to 1.3 million wells. To-date, we have sold slightly less than 40,000 systems and we estimate that current market penetration is still well below 5%. As we have stated before, there are three main drivers for a producer to purchase our products

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Rob Brown of Lake Street Capital Markets. Please go ahead.

[Rob Brown:]

Good afternoon. Hello, could you sort of give us kind of the latest order cadence and the trend how the order flow is happening after downturn in oil prices things kind of slowed down, but things [indiscernible]?

[Brenton Hatch:]

This is Brent, Rob I would suggest that we are caught in that same situation where the oil companies themselves are waiting to see where this thing is going to level out. We have found that they are still indicating at the operator level that they do not have the budgets to do what they would do it and they would like to do until their companies decide that there is some to the bottom and that they are ready to establish a budget at that level. So it is still a little bit up in the air. I think it’s getting a little firmer. We are seeing a little more interest in making some decisions than we have in the past few weeks. But we are still waiting for firmness in budgets to come down from the top.

[Rob Brown:]

Okay. Regarding the normal seasonality I think the March quarter has the normal slower seasonality, but what’s for the seasonality throughout the year kind of at normal times?

[Brenton Hatch:]

Traditionally when we were in Canada, Rob, we found that there was what’s called spring breakup up there and usually towards the end of March, April, early May it was kind of time to go and retrofit fields, take vacations whatever in the oilfield, but as we have broadened our horizons as we have started to work in this entire geographic location of North America, we found that’s not the case anymore. The one season that is really kind of an unpredictable one is the one towards the end of the calendar year, December in particular where not only are we dealing with various holidays, but often budgets are closing at the end of that month. And sometimes there is a rush to spend the budget before the end of that for us the third quarter. And sometimes they hold off till the beginning of the fourth quarter January 1, until the new budgets come in. And that’s traditionally been the case. So that was really traditionally the unpredictable month. But we found a kind of a leveling off in terms of seasonality from what we used to find particularly in the Canadian market.

[Andrew Limpert:]

Rob this is Andrew, just to add a little more color to that. With the diversification of our revenue streams, we are seeing less climate related seasonality. And so as we see more revenue coming from Texas and Oklahoma as opposed to, we were very Canadian centric 3 years or 4 years ago. And even there is a little bit of climate seasonality in regards to the Marcellus, but it has really been minimized. And just to reiterate what Brent said it seems like this past holiday season clients found more of a reason to pause because of the commodity state of affairs with oil is dropping that it was easier to take those weeks off at the end of the year and put these type of choices off than in past years where we have seen as Brent mentioned either a spike in buying to exhaust or extinguish year-end budgets or if they would run out previously. So again seasonality is more normalized. It is not as visible as it was in years passed. And so I think there is a bit of a random walk from time to time. But that tends to be exaggerated more when the commodity prices has mothballed.

[Brenton Hatch:]

If I might add one more thing Rob, just the types of products that we are dealing with, traditionally again in the Canadian market where it was so cold there was often a need for more burners on tanks and so on. So you would find a little more aggressive market in the cold Canadian months. But as we started adding for example chemical management systems, which require chemicals to be injected year-round every day of the year, we feel like that will again help level that out and minimize that change from month to month.

[Rob Brown:]

Okay, good. Thank you. On the cost reduction side how should we think about I guess the location of that or the parts of that cost reduction is it mostly operating expense and what’s sort of the magnitude with dollar or percentages are with the current run rate? Thank you.

[Andrew Limpert:]

We have got a couple of issues. One is any course corrections that we would have made in the reporting quarter and then things that are happening real time. So it is very difficult to break those two out. But I think, one way to think about that Rob is to say if we were to take the CapEx budget and we run a fairly fast trajectory for the last year and turn that speaker off for a period of time while we wait to see what the industry does, that’s the first place to start. So as far as expansion, of vehicles, of locations and the costs associated with that, the CapEx sort of goes to nothing for a while. And then we are going to look at certain positions within the company administrative or operational that are more easily replaced when the velocity of transactions in the oil patch picks up. For example a salesperson we know has a 6 months or 9 months lead time to become productive. But someone who works in our shop work or does other types of administrative things here in the corporate offices perhaps that rebound could happen much faster. And so we are trying to be very judicious on how we make these cuts, but also look for things that have a soon or a quick ROI that are much more nimble and dynamic. And we feel that giving the support and maybe in some regions even increasing support in our sales team to our end users and our clients will pay us dividends in the future.

[Rob Brown:]

Okay, great. Thank you. I will turn it over.

[Brenton Hatch:]

Thanks Rob.

[Operator:]

Our next question is from William Bremer of Maxim Group. Please go ahead.

[William Bremer:]

Good evening Brent. Good evening Andrew.

[Andrew Limpert:]

Hi Bill.

[Brenton Hatch:]

Hi Bill.

[William Bremer:]

Let’s start off with the products, you mentioned burner management systems, you definitely mentioned the BMI, we had a nice release yesterday on that, how is the Flare Stack proceeding in the marketplace at this time?

[Brenton Hatch:]

The Flare Stack is starting off with some good acceleration when we introduced it at the end of summer and we moved a couple hundred units fairly quickly. What we found though is again as we got into the commodity spiral downward in starting in October, November, that many of our clients although there is a lot of validity as far as the effectiveness of that particular product. They weren’t in a mindset or a budget position to get to exploratory on trying new technologies at that particular time. We still sell a fair amount into the Wyoming and Colorado markets. But we are not seeing the type of acceptance that we were hoping for at that time. Now when we think it’s a solid product, we think there is a tremendous need for it. Especially if you look in the Bakken area where flaring is somewhat of a controversial topic, we know there is a lot of legislation pushing around to determine what that will look like in future years. But we think that that product is a bright future. But the acceptance rate has seemed to stall somewhat with the commodity pressure.

[William Bremer:]

And can you give us a sense of the visibility that you have not just for this fourth quarter in which you provided with the underlying guidance, but now as we enter into your fiscal ‘16 maybe what are you seeing in the first half of ‘16 and give us a sense of what your talks are with some of the more dominant of your customer base?

[Andrew Limpert:]

As you can imagine and appreciate a lot of our clients are in a holding pattern to see what their financial situations are, what their profitability happens to be depending on which basins they are in. You see a fair amount of strength again in Eagle Ford, in the Niobrara and Marcellus, but not so much, obviously, in the Bakken and some of the Wyoming fields. And so it’s a bit of a mix bag depending on which region you look at. And so we are trying make sense of that the visibility is hard to really pen down right now. We go into sales meetings and folks are saying we know that this product has validity as far as the economics. We know that certain states are driving the safety legislation requiring and it, so we know at some point in the next year, or 18 months we are going to be required to have this if we have combustion device. And then we know that they are the environmental drivers. But we are still seeing a bit of pause and so it’s very difficult for us to look out into the second half of the year. Now with the variables as Brent mentioned chemical management is being introduced, being accepted in a way that we are fairly pleased with in the spirit of this particular time with the commodity price, the diversification of the revenue stream, the possibilities of the preventative maintenance model coming on sooner versus later and some of those things that can to help offset. You have mentioned earlier in your question about Flare Stack Ignition system. So that’s a great example of a peripheral technology that complements what we are already doing. And at the same time we are making a very focused effort from our sales and marketing team to get out with our value proposition in front of new clients. And so right now we work with about 200 clients. But we have recognized in North America there are about 4,000 independent producers and so we are making a very concerted effort to get out in front of those folks and so we won’t not release any type of fiscal forecasts for the upcoming year until late-April, maybe mid-March, somewhere in that timeframe. Once we have had a better – mid-May, sorry Bill not March but. Until we have had a time to reassess what that environment looks like. Now, if oil has a V-shape recovery even if it’s not back to where it was, we think that many of these drillers can get those rigs back in place very fast. They just typically lay them down now and they can be back in operations in 2 weeks or 3 weeks where it used to be 2 months or 3 months before they can get their assets moving again. So I know that’s a long answer Bill, it’s hard to tell but we are dealing with multiple variables here in trying to make sense of it.

[William Bremer:]

I appreciated it. And it’s not easy – it’s not easy for anyone in this space for sure. And it’s one in which it’s a moving target and we understand that. We truly do. You mentioned looking at your margins across the Board and of course I see that they are slightly affected really which is a leverage of the underlying model. But can you just give us a sense of what you are selling right now? Are you able to get pretty much comparable margins or have you had to possibly adjust pricing given the underlying environment?

[Brenton Hatch:]

I might address that, Bill. We are finding the margins are actually about the same and could potentially be better. We aren’t having to adjust price overall. In fact, we hope that as we become a little more cognizant of cutting some of our costs that maybe have become a little excess in the past as we were anticipating significant growth in the company. But as we cut back there that we will see margins actually improved.

[Andrew Limpert:]

Bill, it’s Andrew. In the one isolated case, we had a fee rebate that once it is not our practice and that impact our overall cost of goods sold, but that’s one-off and it’s an outlier really from what our strategy is. But as far as pricing power, we think especially in states like Utah, Colorado and what will be looming in North Dakota that we are going to have a fair amount of strength there. And especially when you look at the components that go together with our control systems, i.e., a flare stack ignition system, in line ignition whatever happens to be, but also in the case of the chemical management, we think that where – but not in the case of the chemical management for mandates, but those areas we think will have quite a bit of pricing power ongoingly as those – the mandate deadlines approach. And we are sitting about 18 months away from Colorado and about 2 years away from Utah. And so you are talking about up to 30,000 wells potentially that are our aggregate market in Colorado that have combustors on them. Now, people have other ways to solve that problem and perhaps be compliant with the rule, but we think that there is a possibility of some acceleration as we get into that 18-month period. In Utah, you are talking about 10,000 potential wells plus or minus over the next couple of years that provide a good baseline for us that is driven simply by the regulatory piece. Now, if oil goes up and we have the economic drivers as well in other places, then I think our ability to be dynamic and respond to that demand would be pretty quick and nimble.

[William Bremer:]

Okay, gentlemen. Thank you for your time.

[Brenton Hatch:]

Thanks.

[Operator:]

The next question is from Jim McIlree of Chardan Capital. Please go ahead.

[Jim McIlree:]

Thank you and good evening.

[Brenton Hatch:]

Hi, Jim.

[Jim McIlree:]

Can you describe, I am sorry, for the first nine months of your fiscal year, what were the basins that generated the most revenue, where – what basins were you strongest?

[Brenton Hatch:]

Dallas, Eagle Ford and DJ Basin in Niobrara, Colorado.

[Jim McIlree:]

Right. Okay. And getting into the Bakken, it seems like you have got a couple of cost currents there, the regulatory aspect could help you, but that was an area that’s been hit hard by the oil prices. Is there an expectation of opening an office there or getting bigger in the Bakken anytime soon or do you need an improvement in oil prices for that to happen?

[Brenton Hatch:]

We have people there that work that field specifically. And give up to the point where this – the oil price really came down, they were making phenomenal momentum and had any number of companies that were ready to pull the trigger. Since that time, they are maintaining an interest these companies are, but again because they are restricted in their budgets are not making those decisions. We have had a few that have had to back away from their plans, but many of them are just on hold. So, there seems to be developing a really good interest there, but until we have a firming up of the budgets, it’s going to be very hard to tell what’s going to happen there.

[Jim McIlree:]

Okay. And Andrew you have mentioned this rebate a couple of times, can you tell us how large that rebate was and why it was given. And I think the first time you said it was a service rebate, was it a service rebate or a product rebate?

[Andrew Limpert:]

Well, it’s really kind of a hybrid between the two. We had – the amount was about $120,000 that was in the Marcellus region. And it’s a group that had some what I would call outdated technology and we gave them a small credit for that. We have got an ongoing relationship with them as far as the preventive maintenance testing fees and those things working together. So, how it was categorized, it could really be a hybrid as far as the accounting piece, we put it into the service.

[Jim McIlree:]

Okay, alright. And you guys – you answered I think a little bit about how the chemical management business is the best, is that something that can generate $5 million in revenue over the next 12 months or is that too high, too low, about right?

[Andrew Limpert:]

Well, I guess we will see, but ASP on that particular technology ranges between $3,700 and $10,000. So, we model right around $5,000 ASP with that technology. Again, it’s a very challenging time to launch a product like that. So, I guess the possibility is there if we can sell 1,000 units, then we will get north of $5 million as far as revenue goes. But it’s just hard to know exactly when the acceptance picks up for new technology. For example, with our 2,100, we were in the states for a couple years and we had the same value proposition we had today without any regulatory pressure, but then all of a sudden it seemed whether there were some occurrences as far as hazards in the field, where safety became an issue or we could demonstrate the return of the economics from the statements that are experienced there. All of a sudden it started to take off. And so there is a bit of a gestation period from when we introduce something to actually starting to see the ramp of the revenue. In this case though, Jim, it’s slightly different, because we now have an expanded distribution force. And so at that point we had one or two people that were also vacuuming the floors at night, but also now we have a dedicated staff, but we hope that the introduction of this technology will be much quicker as far as reception in the oil patch. But again, the variable is the oil down, our people going to be just cautious in general for trying or accepting a new technology.

[Brenton Hatch:]

What Andrew said is absolutely accurate, but Jim what we found, I just got a report this very afternoon that they anticipate an install of up to 10 units in this next week here in the U.S. And so that’s a great way to start as its spread across a number of different companies. We are quite excited about the possibilities there.

[Jim McIlree:]

Right, okay. And Andrew, inventory was up substantially quarter-to-quarter from $8 million last quarter to $11 million this quarter and I am presuming that’s because you were building on the expectation of pretty strong demand and then demand just went away. First of all, is that correct? And then is it reasonable to expect that you will have lower inventories as you start unwinding that process?

[Brenton Hatch:]

That’s exactly correct, Jim that we were ramping in anticipation and not expecting what happened with the commodity that seems paused a bit. The only color I would add to that is we have several components in our technology that have long lead time. And so some of those are 10 plus weeks, may be 12 weeks out. And we are working on getting those shorten with a new buyer as far as the components go. But you are right, you will see a dry down on inventory to where it will turn that and hope to get it down to where it’s say a quarter’s worth of revenue plus or minus depending at a wholesale rate.

[Jim McIlree:]

Okay, well it’s tough times and good luck with it.

[Andrew Limpert:]

Thanks, Jim.

[Brenton Hatch:]

Thanks, Jim.

[Operator:]

Our next question is from Steve McManus of Sidoti & Company. Please go ahead.

[Brenton Hatch:]

Hi, Steve.

[Steve McManus:]

Thanks for taking my questions. So, my first question [Technical Difficulty].

[Brenton Hatch:]

Well, it’s hard to tell. I mean it’s a moving target as we if you will right size based on the environment that’s presented to us. But I think you can look to book for us over the course of the year. Here again ex-any capital to look to drawdown SG&A by $2 million to $3 million and that will be somewhat dynamic or nimble. It’s hard to say exactly what that will be or we are going to look at – it relates to just have with contractors, we are going to look at travel. And travel budgets to see if those things are necessary or not, if they are revenue producing or revenue supporting. In that regard we will look at headcount and see if those are long-term type of investments or more short-term to mid-term. And we will see how that plays out. We are looking to take that fixed cost down to where it’s going to give a significant leverage when this turns.

[Steve McManus:]

Okay, great. [Technical Difficulty]

[Brenton Hatch:]

Actually we have been quite surprised Steve how well this has gone and no we haven’t found a lot of additional costs related to it. These sales teams seem to be embracing this. As I said earlier the oil companies seem quite positive about especially now as they are having to look at their operating budgets. They are quite positive about the potential savings that this offers. So generally speaking it’s been fairly fluid, it’s moved forward well. The training we have taken advantage of some of the slower – like the slower month of December to be out having our specialists training the sales team. And it really seems to be fitting in very well without what we might have anticipated being some of the upheavals that you normally experience with this.

[Steve McManus:]

Alright, great. And then my last question I know you kind of touched on it before, but is there any guidance with respect [Technical Difficulty]?

[Brenton Hatch:]

There is no guidance really. I think the spirit of what we have said is that it will be on hold. We will see how the first couple of quarters go in the next fiscal year and then we will adjust accordingly. But that’s just the difficult thing for us to forecast and to provide guidance on.

[Steve McManus:]

Great. It sounds good. Thanks a lot guys. I appreciate it.

[Operator:]

Our next question is from Walter Ramsley with Walrus Partners. Please go ahead.

[Brenton Hatch:]

Hi Walter.

[Walter Ramsley:]

Hey Brent, Andrew. Actually I would say you guys are doing quite well given the circumstance. So I am going to say…

[Brenton Hatch:]

Thanks.

[Walter Ramsley:]

In any event [Technical Difficulty].

[Brenton Hatch:]

What we have – there are a couple of issues there. We had some expenses around the acquisitions some – a bit of spike in professional fees that the total professional fees for the quarter were $400,000 plus or minus if will $430,000. And some of those will get to the acquisition expense. And then we talked earlier about a small rebate of $120,000, it’s non-recurring that was isolated to one client. Again that was a bit of a hybrid between a rebate on some old technologies that we were replacing. And just to maintain our relationship there. So those are really the only two issues.

[Walter Ramsley:]

And in the current period fourth quarter is there going to be a one-time expense related to the reduction in force…?

[Andrew Limpert:]

Yes. I think some of that’s factored into the guidance. As you know there is a cost of both time and then a real cost economically when you are moving folks along and it’s a very painful process and as Brent mentioned it, you are talking about a real person and real families involved there. But there is also sometimes severance it’s involved and other economics. And so we built it into the guidance and it isn’t necessarily broken out as a line item. So, it’s just difficult to comment on what the actual number will be.

[Walter Ramsley:]

Okay. And you were talking about the tax rate, but I got a little mixed up on that one too, so what is the ongoing tax rate is going to be?

[Andrew Limpert:]

We think it makes sense to model around 30%, a blended tax rate and we have got a few factors there, you have got the Canadian tax rate you have the U.S. tax rate. And then we are being a little more judicious on the R&D credits and things that are available to us now that we are investing more in product development. So, we traditionally modeled around 35%, but we feel it’s time based on where we are positioned right now to bring that down to 30%.

[Walter Ramsley:]

Okay. And I mean, your customers are well-financed anyway, are you having any trouble collecting the accounts receivable or what the trend look like with those?

[Andrew Limpert:]

We haven’t had any specific instances. Credit quality is still strong with this group. And so we are knocking on wood here to see how they weathered the next quarter or two. And we will be very judicious there. Just to that point though we have hired a AR clerk, who has deepening our relationships with the folks that are making the payments and increasing communication. And so we think that’s actually going quite nicely relative to the volatility with the commodity.

[Walter Ramsley:]

Okay, that’s encouraging. Good. And before all this happened, the company [Technical Difficulty] whatever the number was 65% to 75% market share. I don’t know if you have kept up with what your competitors are doing, but if you have, can you tell us anything?

[Andrew Limpert:]

I don’t think that’s moved against us at all on a market share. In fact, we are probably gaining a little bit, especially with the peripherals we spoke of earlier flare stack ignition, in line ignition. And then now with the chemical management system, we are getting a lot of doors open to us. It is perhaps new about Profire and our burner management technology, but now because we are getting in the door with capital management it’s sort of getting a new group of folks interested in us.

[Walter Ramsley:]

And just one last thing I guess maybe for some of your bigger customers, the return on investments for either the burner management or the chemical, perspective announcement you can start up a leasing program or if they [Technical Difficulty] money down and just make money [Technical Difficulty] same time?

[Andrew Limpert:]

Yes. I mean, I think it’s compelling, it’s really a strategic question from us, but we – to that point we have had a fair amount of interest in looking at a subscription-based model for the technology and either discounting it heavily or as you say even giving the technology away and then with including a maintenance program and any upgrades and looking at it more as a subscription base ongoingly. So, that’s something that’s a significant possibility for us in the near future.

[Walter Ramsley:]

Okay. Well, anyway good luck this weekend too, Andrew and sorry I can’t make it.

[Andrew Limpert:]

Thanks a lot. We appreciate it.

[Operator:]

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hatch. Mr. Hatch, please proceed.

[Brenton Hatch:]

Thanks so much. Thanks everyone for joining us today on our third quarter conference call. We like to thank of course our customers, those that have been with us for some time, many of them our employees, our shareholders for their continued support and encouragement. Please note that we are of course available anytime for shareholders to contact us with questions or concerns they might have. Feel free to do that. Thank you very much. Have a great day everybody. Thank you.

[Operator:]

Again, I would like to remind everyone that this call will be available for replay through February 19 starting later this evening via the link provided in today’s press release and in the Investors section of the company’s website. Thank you, ladies and gentlemen for joining us today for our presentation. You may now disconnect.