GENCOR INDUSTRIES INC 10-Q

Item 1. Financial Statements GENCOR INDUSTRIES, INC. Condensed Consolidated Balance Sheets March 31, 2022 (Unaudited) September 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 22,571,000 $ 23,232,000 Marketable securities at fair value (cost of $ 94,746,000 at March 31, 2022 and $ 93,690,000 at September 30, 2021) 94,501,000 94,976,000 Accounts receivable, less allowance for doubtful accounts of $ 349,000 at March 31, 2022 and $ 321,000 at September 30, 2021 3,924,000 2,622,000 Costs and estimated earnings in excess of billings 1,629,000 1,903,000 Inventories, net 47,222,000 41,888,000 Prepaid expenses and other current assets 3,756,000 2,202,000 Total current assets 173,603,000 166,823,000 Property and equipment, net 12,205,000 11,801,000 Other long-term assets 711,000 838,000 Total Assets $ 186,519,000 $ 179,462,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 5,741,000 $ 3,105,000 Customer deposits 10,286,000 5,244,000 Accrued expenses 2,442,000 2,645,000 Current operating lease liabilities 407,000 393,000 Total current liabilities 18,876,000 11,387,000 Deferred and other income taxes — 394,000 Non-current operating lease liabilities 189,000 392,000 Total liabilities 19,065,000 12,173,000 Commitments and contingencies Shareholders’ equity: Preferred stock, par value $ .10 per share; 300,000 shares authorized; no ne issued — — Common stock, par value $ .10 per share; 15,000,000 shares authorized; 12,338,845 shares issued and outstanding at March 31, 2022 and September 30, 2021 1,234,000 1,234,000 Class B Stock, par value $ .10 per share; 6,000,000 shares authorized; 2,318,857 shares issued and outstanding at March 31, 2022 and September 30, 2021 232,000 232,000 Capital in excess of par value 12,590,000 12,590,000 Retained earnings 153,398,000 153,233,000 Total shareholders’ equity 167,454,000 167,289,000 Total Liabilities and Shareholders’ Equity $ 186,519,000 $ 179,462,000 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of Contents GENCOR INDUSTRIES, INC. Condensed Consolidated Income Statements (Unaudited) For the Quarters Ended March 31, For the Six Months Ended March 31, 2022 2021 2022 2021 Net revenue $ 30,654,000 $ 21,352,000 $ 50,760,000 $ 40,316,000 Cost of goods sold 24,462,000 15,206,000 40,863,000 31,189,000 Gross profit 6,192,000 6,146,000 9,897,000 9,127,000 Operating expenses: Product engineering and development 920,000 1,069,000 2,269,000 1,914,000 Selling, general and administrative 3,364,000 3,838,000 6,763,000 7,032,000 Total operating expenses 4,284,000 4,907,000 9,032,000 8,946,000 Operating income 1,908,000 1,239,000 865,000 181,000 Other income (expense), net: Interest and dividend income, net of fees 296,000 327,000 573,000 1,130,000 Net realized and unrealized gains (losses) on marketable securities, net ( 1,488,000 ) 1,294,000 ( 1,065,000 ) 3,488,000 Other ( 137,000 ) — ( 137,000 ) — ( 1,329,000 ) 1,621,000 ( 629,000 ) 4,618,000 Income before income tax expense 579,000 2,860,000 236,000 4,799,000 Income tax expense 140,000 572,000 71,000 960,000 Net income $ 439,000 $ 2,288,000 $ 165,000 $ 3,839,000 Basic income per common share $ 0.03 $ 0.16 $ 0.01 $ 0.26 Diluted income per common share $ 0.03 $ 0.16 $ 0.01 $ 0.26 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of Contents GENCOR INDUSTRIES, INC. Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Six Months Ended March 31, 2022 Common Stock Class B Stock Capital in Excess of Retained Total Shareholders’ Shares Amount Shares Amount Par Value Earnings Equity September 30, 2021 12,338,845 $ 1,234,000 2,318,857 $ 232,000 $ 12,590,000 $ 153,233,000 $ 167,289,000 Net loss — — — — — ( 274,000 ) ( 274,000 ) December 31, 2021 12,338,845 $ 1,234,000 2,318,857 $ 232,000 $ 12,590,000 $ 152,959,000 $ 167,015,000 Net income — — — — — 439,000 439,000 March 31, 2022 12,338,845 $ 1,234,000 2,318,857 $ 232,000 $ 12,590,000 $ 153,398,000 $ 167,454,000 For the Six Months Ended March 31, 2021 Common Stock Class B Stock Capital in Excess of Retained Total Shareholders’ Shares Amount Shares Amount Par Value Earnings Equity September 30, 2020 12,287,337 $ 1,229,000 2,318,857 $ 232,000 $ 12,331,000 $ 147,428,000 $ 161,220,000 Net income — — — — — 1,551,000 1,551,000 December 31, 2020 12,287,337 $ 1,229,000 2,318,857 $ 232,000 $ 12,331,000 $ 148,979,000 $ 162,771,000 Net income — — — — — 2,288,000 2,288,000 Stock options exercised 11,000 1,000 — — 55,000 — 56,000 March 31, 2021 12,298,337 $ 1,230,000 2,318,857 $ 232,000 $ 12,386,000 $ 151,267,000 $ 165,115,000 See accompanying Notes to Condensed Consolidated Financial Statements 6 Table of Contents GENCOR INDUSTRIES, INC. Condensed Consolidated Statements of Cash Flows For the Six Months Ended March 31, 2022 and 2021 (Unaudited) 2022 2021 Cash flows from operating activities: Net income $ 165,000 $ 3,839,000 Adjustments to reconcile net income to cash provided by operating activities: Purchase of marketable securities ( 68,803,000 ) ( 54,048,000 ) Proceeds from sale and maturity of marketable securities 68,043,000 53,067,000 Change in value of marketable securities 1,235,000 ( 3,167,000 ) Deferred and other income taxes ( 456,000 ) 501,000 Depreciation and amortization 1,299,000 1,210,000 Provision for doubtful accounts 75,000 25,000 Changes in assets and liabilities, excluding the initial effects of business acquisitions: Accounts receivable ( 1,377,000 ) ( 1,576,000 ) Costs and estimated earnings in excess of billings 274,000 6,405,000 Inventories ( 5,334,000 ) ( 629,000 ) Prepaid expenses and other current assets ( 1,554,000 ) ( 15,000 ) Accounts payable 2,636,000 969,000 Customer deposits 5,042,000 2,173,000 Accrued expenses ( 200,000 ) 529,000 Total adjustments 880,000 5,444,000 Cash flows provided by operating activities 1,045,000 9,283,000 Cash flows from investing activities: Acquisition of Blaw-Knox assets — ( 13,777,000 ) Capital expenditures ( 1,706,000 ) ( 1,729,000 ) Cash flows used in investing activities ( 1,706,000 ) ( 15,506,000 ) Cash flows from financing activities: Proceeds from stock option exercises — 56,000 Cash flows provided by financing activities — 56,000 Net decrease in cash and cash equivalents ( 661,000 ) ( 6,167,000 ) Cash and cash equivalents at: Beginning of period 23,232,000 35,584,000 End of period $ 22,571,000 $ 29,417,000 Non-cash investing and financing activities: Operating lease right-of-use assets $ — $ 254,000 Operating lease liabilities $ — $ 254,000 See accompanying Notes to Condensed Consolidated Financial Statements 7 Table of Contents GENCOR INDUSTRIES, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022. The accompanying Condensed Consolidated Balance Sheet at September 30, 2021 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. On October 1, 2020, the Company acquired the Blaw-Knox paver line and associated assets, including inventory, fixed assets and related intellectual property, from Volvo CE. The acquisition provided the Company entry into the asphalt paver sector of the asphalt industry. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The initial purchase price of approximately $ 14.4 million, which was subject to post-closing adjustments, was funded by cash on hand. After post-closing adjustments transacted during the quarter ended March 31, 2021, the final purchase price was $ 13.8 million, including $ 10.4 million in inventory and $ 3.4 million in fixed assets. There were no liabilities assumed. The accompanying condensed consolidated financial statements as of March 31, 2022 and September 30, 2021, and for the quarters and six months ended March 31, 2022 and 2021, include the assets, liabilities and operating results of the paver line as of and for the periods then ended. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended September 30, 2021 filed with the Securities and Exchange Commission on December 17, 2021. Recent Accounting Pronouncements There were no accounting pronouncements recently issued or newly effective that had, or are expected to have, a material impact on the Company’s consolidated financial statements. COVID-19 Pandemic The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the COVID-19 pandemic, including impacts on its employees, customers, suppliers and financial results. As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted. However, the full impact of the COVID-19 pandemic continues to evolve subsequent to the quarter ended March 31, 2022 and as of the date this Quarterly Report is issued. As such, the full magnitude that the COVID-19 pandemic will have on the Company’s financial condition and future results of operations is uncertain. Management continues to monitor the situation on the Company’s financial condition, operations, suppliers, 8 Table of Contents industry, customers, and workforce. As the spread of COVID-19 and its variants continues, the Company’s ability to meet customer demands for products may be impacted or its customers may experience adverse business consequences due to COVID-19 and its variants. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance. Global, market and economic conditions may negatively impact our business, financial condition and share price. Concerns over inflation, geopolitical issues, global financial markets and the COVID-19 pandemic have led to increased economic instability and expectations of slower global economic growth. Our business may be adversely affected by any such economic instability or unpredictability. Russia’s invasion of Ukraine and related sanctions has led to increased oil and natural gas prices. Such sanctions and disruptions to the global economy may lead to additional inflation and may disrupt the global supply chain and could have a material adverse effect on our ability to secure supplies. The increased cost of oil, along with increased or prolonged periods of inflation, would likely increase our costs in the form of higher wages, further inflation on supplies and equipment necessary to operate our business. There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals. Note 2 - Marketable Securities and Fair Value Measurements Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated income statements. Net changes in unrealized gains and losses are reported in the condensed consolidated income statements in the current period. Fair Value Measurements The fair value of financial instruments is presented based upon a hierarchy of levels that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value of marketable equity securities (stocks), mutual funds, exchange-traded funds, government securities, and cash and money funds, are substantially based on quoted market prices (Level 1). Corporate bonds are valued using market standard valuation methodologies, including: discounted cash flow methodologies, and matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future cash flows. In addition to bond characteristics, the valuation methodologies incorporate market data, such as actual trades completed, bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market information and judgments about financial instruments (Level 2). Fair values of the Level 2 investments are provided by the Company’s professional investment management firms. From time to time the Company may transfer cash between its marketable securities portfolio and operating cash and cash equivalents. 9 Table of Contents The following table sets forth, by level, within the fair value hierarchy, the Company’s marketable securities measured at fair value as of March 31, 2022: Fair Value Measurements Level 1 Level 2 Level 3 Total Equities $ 19,998,000 $ — $ — $ 19,998,000 Mutual Funds 10,130,000 — — 10,130,000 Exchange-Traded Funds 9,849,000 — — 9,849,000 Corporate Bonds — 24,022,000 — 24,022,000 Government Securities 27,960,000 — — 27,960,000 Cash and Money Funds 2,542,000 — — 2,542,000 Total $ 70,479,000 $ 24,022,000 $ — $ 94,501,000 Net unrealized gains and (losses) included in the Condensed Consolidated Income Statements for the quarter and six months ended March 31, 2022, were $( 1,598,000 ) and $( 1,531,000 ), respectively. The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2021: Fair Value Measurements Level 1 Level 2 Level 3 Total Equities $ 14,734,000 $ — $ — $ 14,734,000 Mutual Funds 10,357,000 — — 10,357,000 Exchange-Traded Funds 9,458,000 — — 9,458,000 Corporate Bonds — 24,853,000 — 24,853,000 Government Securities 30,999,000 — — 30,999,000 Cash and Money Funds 4,575,000 — — 4,575,000 Total $ 70,123,000 $ 24,853,000 $ — $ 94,976,000 Net unrealized gains and (losses) included in the Condensed Consolidated Income Statements for the quarter and six months ended March 31, 2021, were $ 596,000 and $ 2,503,000 , respectively. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, customer deposits and accrued expenses approximate fair value because of the short-term nature of these items. Note 3 – Inventories Inventories are valued at the lower of cost or net realizable value with cost being determined under the first in, first out method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery. Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company on trade-in from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, an allowance is established to reduce the cost basis of inventories three to four years old by 50 %, the cost basis of inventories four to five years old by 75 %, and the cost basis of inventories greater than five years old to zero . Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time. 10 Table of Contents Net inventories at March 31, 2022 and September 30, 2021 consist of the following: March 31, 2022 September 30, 2021 Raw materials $ 29,847,000 $ 25,858,000 Work in process 7,858,000 6,280,000 Finished goods 9,517,000 9,730,000 Used equipment — 20,000 $ 47,222,000 $ 41,888,000 Slow-moving and obsolete inventory allowances were $ 6,828,000 and $ 5,397,000 at March 31, 2022 and September 30, 2021, respectively. Note 4 – Costs and Estimated Earnings in Excess of Billings Costs and estimated earnings in excess of billings on uncompleted contracts as of March 31, 2022 and September 30, 2021 consist of the following: March 31, 2022 September 30, 2021 Costs incurred on uncompleted contracts $ 19,501,000 $ 11,483,000 Estimated earnings 5,875,000 4,395,000 25,376,000 15,878,000 Billings to date 23,747,000 13,975,000 Costs and estimated earnings in excess of billings $ 1,629,000 $ 1,903,000 Note 5 – Earnings per Share Data The Condensed Consolidated Financial Statements include basic and diluted earnings per share information. The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended March 31, 2022 and 2021: Quarter Ended March 31, Six Months Ended March 31, 2022 2021 2022 2021 Net Income $ 439,000 $ 2,288,000 $ 165,000 $ 3,839,000 Common Shares: Weighted average common shares outstanding 14,658,000 14,614,000 14,658,000 14,611,000 Effect of dilutive stock options — 133,000 — 129,000 Diluted shares outstanding 14,658,000 14,747,000 14,658,000 14,740,000 Basic: Net income per share $ 0.03 $ 0.16 $ 0.01 $ 0.26 Diluted: Net income per share $ 0.03 $ 0.16 $ 0.01 $ 0.26 Basic earnings per share are based on the weighted-average number of shares outstanding. Diluted earnings per share are based on the sum of the weighted-average number of shares outstanding plus common stock equivalents. As of September 30, 2021, no options were available for granting of awards under the 2009 Incentive Compensation Plan (the “2009 Plan”) and as of November 1, 2021, there were no outstanding stock options under the 2009 Plan. 11 Table of Contents For the quarter and six months ended M arch 31, 2022, there were no common stock equivalents included in the diluted earnings per share calculation. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter ended March 31, 2021 were 252,000 , which equates to 133,000 dilutive common stock equivalents. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the six months ended March 31, 2021 were 252,000 , which equates to 129,000 dilutive common stock equivalents. There were no anti-dilutive shares for the quarter and six months ended March 31, 2022 and March 31, 2021. Note 6 – Customers with 10% (or greater) of Net Revenues During the quarter ended March 31, 2022, one customer accounted for 13.6 % of net revenues. During the quarter ended March 31, 2021, one other customer accounted for 12.0 % of net revenues. During the six months ended March 31, 2022 and March 31, 2021, no customer accounted for 10 % or greater of net revenues. Note 7 – Income Taxes Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, the Company is more likely than not to realize the benefit of a deferred tax asset and whether a valuation allowance is needed for some portion or all of a deferred tax asset. No such valuation allowances were recorded as of March 31, 2022 and September 30, 2021. The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its tax expense divided by pre-tax book income) from period to period. The Company’s effective tax rates for the quarters and six months ended March 31, 2022 and March 31, 2021 reflect the impact of the reduced rates under the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act) which was signed into law on December 22, 2017. Note 8 – Revenue Recognition and Related Costs The Company recognizes revenue under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The following table disaggregates the Company’s net revenue by major source for the quarters and six months ended March 31, 2022 and 2021: Quarter Ended March 31, Six Months Ended March 31, 2022 2021 2022 2021 Equipment sales recognized over time $ 10,998,000 $ 3,870,000 $ 20,772,000 $ 8,002,000 Equipment sales recognized at a point in time 10,475,000 9,565,000 14,673,000 19,701,000 Parts and component sales 7,381,000 6,830,000 12,824,000 10,761,000 Freight revenue 1,495,000 1,147,000 2,079,000 1,892,000 Other 305,000 ( 60,000 ) 412,000 ( 40,000 ) Net revenue $ 30,654,000 $ 21,352,000 $ 50,760,000 $ 40,316,000 Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time, as the equipment is unique to the specific contract and thus does not create an asset 12 Table of Contents with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred, as the amortization period is less than one year . Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $ 1,629,000 at March 31, 2022 and $ 1,903,000 at September 30, 2021, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets. The Company anticipates that all of the contract assets at March 31, 2022, will be billed and collected within one year . Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service. Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as services are completed. Accounts receivable related to contracts with customers for equipment sales were $ 130,000 and $ 210,000 at March 31, 2022 and September 30, 2021, respectively. Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized. Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at March 31, 2022 and September 30, 2021. Customer deposits related to contracts with customers were $ 10,286,000 and $ 5,244,000 at March 31, 2022 and September 30, 2021, respectively, and are included in current liabilities on the Company’s condensed consolidated balance sheets. The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as cost of goods sold concurrently with the revenue recognition. All product engineering and development costs, and selling, general and administrative expenses are charged to operations as incurred. Provision is made for any anticipated contract losses in the period that the loss becomes evident. The allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability, and also adjusting for any known customer payment issues with account balances in the less-than-90-day past due aging category. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts. The allowance for doubtful accounts also includes an estimate for returns and allowances. Provisions for estimated returns and allowances and other adjustments, are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using known issues and historical experience. 13 Table of Contents Note 9 – Leases The Company leases certain equipment under non-cancelable operating leases. Future minimum rental payments under these leases at March 31, 2022 were immaterial. On August 28, 2020, the Company entered into a three-year operating lease for property related to the manufacturing and warehousing of the Blaw-Knox paver product line which was acquired on October 1, 2020. The lease term is for the period beginning on September 1, 2020 through August 31, 2023. In accordance with ASU 2016-02, the Company recorded a ROU asset totaling $ 970,000 and related lease liabilities at inception. On October 9, 2020, the Company entered into an operating lease for additional warehousing space for Blaw-Knox inventory. The original lease term was for one year beginning November 2020 with automatic one-year renewals. In accordance with ASU 2016-02, the Company recorded a ROU asset totaling $ 254,000 and related lease liabilities at inception. An additional $ 39,000 was recorded as a ROU asset and related lease liability in October 2021 to reflect the impact of the lease renewal. In March 2022, the ROU asset and related liability was reduced by $ 39,000 to reflect the impact of a reduction in the square footage being leased. For the quarter and six months ended March 31, 2022, operating lease costs were $ 101,000 and $ 202,000 , respectively, and cash payments related to these operating leases were $ 107,000 and $ 216,000 , respectively. For the quarter and six months ended March 31, 2021, operating lease costs were $ 105,000 and $ 194,000 , respectively, and cash payments related to these operating leases were $ 116,000 and $ 232,000 , respectively. Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of March 31, 2022 and September 30, 2021, is as follows: March 31, 2022 September 30, 2021 Operating lease ROU asset included in other long-term assets $ 596,000 $ 785,000 Current operating lease liability 407,000 393,000 Non-current operating lease liability 189,000 392,000 Weighted average remaining lease term (in years) 1.50 2.00 Weighted average discount rate used in calculating ROU asset 4.0 % 4.0 % Future annual minimum lease payments as of March 31, 2022 are as follows: Fiscal Year Annual Lease Payments 2022 (remaining 6 months) $ 210,000 2023 398,000 2024 6,000 Total 614,000 Less interest ( 18,000 ) Present value of lease liabilities $ 596,000 Note 10 – Segment Information The Company has one reporting segment, equipment for the highway construction industry. Based on evaluation of the criteria of ASC 280 – Segment Reporting, including the nature of products and services, the nature of the production processes, the type of customers and the methods used to distribute products and services, the Company determined that its operating segments meet the requirements for aggregation. The Company designs, manufactures and sells asphalt plants and pavers, combustion systems and fluid heat transfer systems for the highway construction industry and environmental and petrochemical markets. The Company’s products are manufactured at three facilities in the United States. The Company also services and sells parts for its equipment. 14 Table of Contents