Omega Flex, Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Omega Flex, Inc. Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm – Financial Statements (PCAOB ID: 49 ) 28 Report of Independent Registered Public Accounting Firm – Internal Control over Financial Reporting (PCAOB ID: 49) 30 Financial Statements: Consolidated Balance Sheets as of December 31, 2023 and 2022 31 Consolidated Statements of Operations for the years ended December 31, 2023, 2022 and 2021 32 Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022 and 2021 33 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022 and 2021 34 Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021 35 Notes to the Consolidated Financial Statements 36 to 50 - 27 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Omega Flex, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Omega Flex, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2024, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Product liability claims As described in Notes 2 and 7 of the financial statements, the Company is subject to periodic lawsuits, investigations and claims, primarily relating to potential lightning damage to its flexible gas piping products (the “Claims”). The Company accrues an estimated product liability reserve related to the resolution cost of the Claims for which management believes a loss is probable of occurring, and the amount of the loss is reasonably estimable and also discloses the aggregate maximum exposure for all open Claims. As of December 31, 2023, the Company accrued a product liability reserve of $947,000 and disclosed that the aggregate maximum exposure for all current open Claims is estimated not to exceed $3,724,000. Due to the uncertainty of potential costs to be incurred related to the Claims, and the uncertainty of the ultimate outcome of each of the individual Claims, management applies significant judgments and estimates in determining the probability that a loss has been incurred and the amount to accrue for such loss. - 28 - We identified the accrual and disclosure of the Claims as a critical audit matter due to the significant judgments made by management when assessing the probability of a loss as well as the ultimate resolution costs of the Claims. Auditing management’s estimates and assumptions required a high degree of auditor judgment and increased audit effort due to the impact these assumptions have on the accrued product liability reserves and disclosures. Our audit procedures related to the Claims included the following, among others: ● We obtained an understanding of the relevant controls related to management’s evaluation of the Claims for accrual and disclosure and tested such controls for design and operating effectiveness, including controls around management’s evaluation of the probability that a loss has been incurred and management’s estimate of the amount of the loss. ● We tested the accuracy and completeness of the underlying data that served as the basis for management’s estimates of the probability that a loss has been incurred and the amount of the loss, including payment activity, relevant insurance coverage, lawsuit or claim status, and any settlement activity. ● We evaluated the methods and assumptions used by management to develop the estimate of the probability a loss has been incurred on individual product liability claims and the amount of such loss through consideration of historical claim and loss experience as well as current claim status. ● We performed confirmation procedures with the Company’s external legal counsel to corroborate management’s assertions regarding claim information, claim status, the probability the Company has incurred a loss, and the estimated amount of any potential loss. These confirmation procedures were also used to test the completeness and accuracy of the underlying source data that served as the basis of management’s estimates. ● We tested claim and settlement payment activity occurring subsequent to year-end to assess the reasonableness of management’s estimates and disclosures. /s/ RSM US LLP We have served as the Company’s auditor since 2010. Blue Bell, Pennsylvania March 11, 2024 - 29 - REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Omega Flex, Inc. Opinion on the Internal Control Over Financial Reporting We have audited Omega Flex, Inc.’s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2023 consolidated financial statements of the Company and our report dated March 11, 2024 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Blue Bell, Pennsylvania March 11, 2024 - 30 - OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (Dollars in Thousands, except Common Stock par value) 2023 2022 ASSETS Current Assets: Cash and Cash Equivalents $ 46,356 $ 37,703 Accounts Receivable - less allowances of $ 1,126 and $ 1,111 , respectively 15,361 17,503 Inventories - Net 15,597 17,764 Other Current Assets 2,874 2,785 Total Current Assets 80,188 75,755 Right-Of-Use Assets - Operating 2,940 3,205 Property and Equipment - Net 8,951 8,404 Goodwill - Net 3,526 3,526 Deferred Taxes 189 923 Other Long Term Assets 4,440 5,871 Total Assets $ 100,234 $ 97,684 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 2,090 $ 2,290 Accrued Compensation 3,198 3,782 Accrued Commissions and Sales Incentives 4,428 4,996 Dividends Payable 3,332 3,232 Taxes Payable 190 109 Lease Liability - Operating 454 447 Other Liabilities 4,390 7,530 Total Current Liabilities 18,082 22,386 Lease Liability - Operating, net of current portion 2,492 2,763 Deferred Taxes - 6 Tax Payable Long Term 205 370 Other Long Term Liabilities 603 986 Total Liabilities 21,382 26,511 Commitments and Contingencies (Note 7) - - Shareholders’ Equity: Omega Flex, Inc. Shareholders’ Equity: Common Stock – par value $ 0.01 share: authorized 20,000,000 shares: 10,153,633 shares issued and 10,094,322 shares outstanding as of December 31, 2023 and December 31, 2022, respectively 102 102 Treasury Stock ( 1 ) ( 1 ) Paid-in Capital 11,025 11,025 Retained Earnings 68,493 60,954 Accumulated Other Comprehensive Loss ( 930 ) ( 1,103 ) Total Omega Flex, Inc. Shareholders’ Equity 78,689 70,977 Noncontrolling Interest 163 196 Total Shareholders’ Equity 78,852 71,173 Total Liabilities and Shareholders’ Equity $ 100,234 $ 97,684 See accompanying Notes which are an integral part of the Consolidated Financial Statements. - 31 - OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, (Amounts in Thousands, except per Common Share Data) 2023 2022 2021 Net Sales $ 111,465 $ 125,487 $ 130,011 Cost of Goods Sold 43,100 47,182 48,480 Gross Profit 68,365 78,305 81,531 Selling Expense 20,993 21,931 20,429 General and Administrative Expense 17,705 20,625 21,430 Engineering Expense 3,868 4,733 4,610 Operating Profit 25,799 31,016 35,062 Interest Income 1,700 174 35 Other Income (Expense) 46 ( 211 ) 21 Income Before Income Taxes 27,545 30,979 35,118 Income Tax Expense 6,825 7,327 8,862 Net Income 20,720 23,652 26,256 Less: Net Loss (Income) – Noncontrolling Interest 43 ( 30 ) ( 61 ) Net Income attributable to Omega Flex, Inc. $ 20,763 $ 23,622 $ 26,195 Basic and Diluted Earnings per Common Share $ 2.06 $ 2.34 $ 2.60 Cash Dividends Declared per Common Share $ 1.31 $ 1.26 $ 1.18 Basic and Diluted Weighted Average Shares Outstanding 10,094 10,094 10,094 See accompanying Notes which are an integral part of the Consolidated Financial Statements. - 32 - OMEGA FLEX, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, (Dollars in Thousands) 2023 2022 2021 Net Income $ 20,720 $ 23,652 $ 26,256 Other Comprehensive Income (Loss): Foreign Currency Translation Adjustment 183 ( 299 ) ( 52 ) Other Comprehensive Income (Loss) 183 ( 299 ) ( 52 ) Comprehensive Income 20,903 23,353 26,204 Comprehensive Loss (Income) Attributable to the Noncontrolling Interest 33 ( 7 ) ( 58 ) Total Other Comprehensive Income $ 20,936 $ 23,346 $ 26,146 See accompanying Notes which are an integral part of the Consolidated Financial Statements. - 33 - OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the years ended December 31, 2023, 2022 and 2021 (Amounts in Thousands, Except Share Amounts) Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity December 31, 2020 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 35,769 $ ( 778 ) $ 260 $ 46,377 Net Income - - - - 26,195 - 61 26,256 Cumulative Translation Adjustment ( 49 ) ( 3 ) ( 52 ) Dividends Declared ( 11,911 ) ( 129 ) ( 12,040 ) December 31, 2021 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 50,053 $ ( 827 ) $ 189 $ 60,541 Net Income - - - - 23,622 - 30 23,652 Cumulative Translation Adjustment ( 276 ) ( 23 ) ( 299 ) Dividends Declared ( 12,721 ) ( 12,721 ) December 31, 2022 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 60,954 $ ( 1,103 ) $ 196 $ 71,173 Balance 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 60,954 $ ( 1,103 ) $ 196 $ 71,173 Net Income - - - - 20,763 - ( 43 ) 20,720 Cumulative Translation Adjustment 173 10 183 Dividends Declared ( 13,224 ) ( 13,224 ) December 31, 2023 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 68,493 $ ( 930 ) $ 163 $ 78,852 Balance 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 68,493 $ ( 930 ) $ 163 $ 78,852 See accompanying Notes which are an integral part of the Consolidated Financial Statements. - 34 - OMEGA FLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (Dollars in Thousands) 2023 2022 2021 Cash Flows from Operating Activities: Net Income $ 20,720 $ 23,652 $ 26,256 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Non-Cash Compensation Expense 292 156 506 Non-Cash Lease Expense 462 481 328 Depreciation and Amortization 1,099 1,096 1,020 Provision for Losses on Accounts Receivable, net of write-offs and recoveries 5 ( 301 ) 286 Deferred Taxes 728 ( 1,337 ) 305 Provision for Inventory Reserves 1,107 91 101 Changes in Assets and Liabilities: Accounts Receivable 2,182 3,396 ( 943 ) Inventories 1,227 ( 2,578 ) ( 4,185 ) Other Assets 1,344 ( 4,429 ) ( 509 ) Accounts Payable ( 205 ) ( 1,002 ) 894 Accrued Compensation ( 590 ) ( 3,194 ) 1,582 Accrued Commissions and Sales Incentives ( 572 ) ( 2,179 ) 2,835 Lease Liabilities ( 461 ) ( 475 ) ( 335 ) Other Liabilities ( 3,916 ) 1,869 ( 2,992 ) Net Cash Provided by Operating Activities 23,422 15,246 25,149 Cash Flows from Investing Activities: Capital Expenditures ( 1,642 ) ( 942 ) ( 971 ) Net Cash Used In Investing Activities ( 1,642 ) ( 942 ) ( 971 ) Cash Flows from Financing Activities: Dividends Paid ( 13,124 ) ( 9,489 ) ( 14,867 ) Net Cash Used In Financing Activities ( 13,124 ) ( 9,489 ) ( 14,867 ) Net Increase in Cash and Cash Equivalents 8,656 4,815 9,311 Translation effect on cash ( 3 ) ( 25 ) ( 31 ) Cash and Cash Equivalents - Beginning of Year 37,703 32,913 23,633 Cash and Cash Equivalents - End of Year $ 46,356 $ 37,703 $ 32,913 Supplemental Disclosure of Cash Flow Information Cash paid for Income Taxes $ 6,057 $ 8,678 $ 9,602 Cash paid for Interest $ - $ - $ - Declared Dividend $ 3,332 $ 3,232 $ - Additions to Right-Of-Use Assets obtained from new operating Lease Liabilities $ 65 $ 644 $ 3,261 See accompanying Notes which are an integral part of the Consolidated Financial Statements. - 35 - OMEGA FLEX, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND CONSOLIDATION Basis of Presentation The accompanying Consolidated Financial Statements include the accounts of Omega Flex, Inc. and its subsidiaries (collectively the “Company”). The Company’s audited Consolidated Financial Statements for the years ended December 31, 2023, 2022 and 2021 have been prepared in accordance with accounting standards set by the Financial Accounting Standards Board (FASB) and Article 5 of Regulation S-X. Certain amounts from prior years have been reclassified to conform to current year presentation. All material intercompany accounts and transactions have been eliminated in consolidation. Description of Business The Company is a leading manufacturer of flexible metal hose, which is used in a variety of applications to carry gases and liquids within their particular applications. The Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose and accessories. These applications include carrying fuel gases within residential and commercial buildings; gasoline and diesel gasoline products (both above and below the ground) in a double containment piping to contain any possible leaks, which is used in automotive and marina refueling, and fueling for back-up generation; and medical gases in health care facilities. The Company’s flexible metal piping is also used to carry other types of gases and fluids in a number of industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures. The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania and Houston, Texas, in the U.S., and in Banbury, Oxfordshire in the U.K., and sells its products through distributors, wholesalers and to OEMs throughout North America, and in certain European markets. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates. Revenue Recognition The Company applies the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). The standard requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. - 36 - The principle of Topic 606 was achieved through applying the following five-step approach: ● Identification of the contract, or contracts, with a customer — a contract with a customer exists when the Company enters into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods. ● Identification of the performance obligations in the contract — performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of product must exist. The Company ships products in accordance with the purchase order and standard terms as reflected within the Company’s order acknowledgments and sales invoices. ● Determination of the transaction price —the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with the Company’s internally approved pricing guidelines. ● Allocation of the transaction price to the performance obligations in the contract — if the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. This applies to the Company as there is only one performance obligation to ship the goods. ● Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company satisfies performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include: ■ The Company has a present right to payment ■ The customer has legal title to the goods ■ The Company has transferred physical possession of the goods ■ The customer has the significant risks and rewards of ownership of the goods ■ The customer has accepted the goods It is important to note that the indicators are not a set of conditions that must be met before the Company can conclude that control of the goods has transferred to the customer. The indicators are a list of factors that are often present if a customer has control of the goods. The Company has typical, unmodified FOB shipping point terms. As the seller, the Company can determine that the shipped goods meet the agreed-upon specifications in the contract or customer purchase order (e.g., items, quantities, and prices) with the buyer, so customer acceptance would be deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to payment upon shipment of the goods. Based upon the above, the Company has concluded that control substantively transfers to the customer upon shipment. Other considerations of Topic 606 include the following: ● Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions. Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt. ● Warranties - the Company does not offer a warranty as a separate component for customers to purchase. A warranty is generally included with each purchase, providing assurance that the goods comply with agreed-upon specifications, and the cost is therefore accrued accordingly, but contracts do not include any requirement for additional distinct services. Therefore, there is not a separate performance obligation, and there is no impact of warranties under Topic 606 upon the financial reporting of the Company. ● Returned Goods - from time to time, the Company provides authorization to customers to return goods. If deemed to be material, the Company would record a “right of return” asset for the cost of the returned goods which would reduce cost of sales. - 37 - ● Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also under Topic 606, to ensure that the related revenue recognized would not be probable of a significant reversal, the four following factors are considered: ■ The amount of consideration is highly susceptible to factors outside the Company’s influence. ■ The uncertainty about the amount of consideration is not expected to be resolved for a long period of time. ■ The Company’s experience with similar types of contracts is limited. ■ The contract has a large number and broad range of possible consideration amounts. If it was concluded that the above factors were in place for the Company, it would support the probability of a significant reversal of revenue. However, as none of the four factors apply to the Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the eligible products expected to be sold. Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated in this Note 2, Significant Accounting Policies, in these Consolidated Financial Statements, under the caption “Significant Concentrations”, the majority of the Company’s sales were geographically contained within North America, with the remainder scattered internationally. All performance assessments and resource allocations are generally based upon the review of the results of the Company as a whole. Cash Equivalents The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes, and bonds, and/or repurchase agreements, backed by such obligations, and in U.S. Treasury bills and certificates of deposit. Carrying value approximates fair value except for U.S. Treasury bills and certificates of deposit where amortized cost approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying their assets on a regular basis and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances and believes its credit risk to be minimal. Accounts Receivable and Provision for Credit Losses All accounts receivable is stated at amortized cost, net of allowances for credit losses, and adjusted for any write-offs. The Company maintains allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio. For accounts receivable, the Company uses historical loss experience rates and applies them to a related aging analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, operating profit. The allowances consider numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics. The reserve for credit losses, which include future credits, discounts, and doubtful accounts, was $ 1,126,000 and $ 1,111,000 as of December 31, 2023 and 2022, respectively. - 38 - Inventories Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly. Property and Equipment Property and equipment are initially recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are capitalized. Goodwill In accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other , using the simplified method as adopted, the Company performed an annual impairment test as of December 31, 2023. This analysis did not indicate any impairment of goodwill. Stock-Based Compensation Plans In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (“Units”) to certain key employees, officers, or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock and are accordingly recorded as liabilities. The Units follow a vesting schedule over three years from the grant date and are then paid upon maturity. In accordance with FASB ASC Topic 718, Compensation - Stock Compensation , the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. The liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. The Company recognizes the reversal of any previously recognized compensation expense on forfeited nonvested Units in the period the Units are forfeited. The Plan has been amended and restated, for all grants made starting January 1, 2023, to set the vesting method to three-year cliff vesting following the grant date, with payment upon maturity. Additionally, for grants made starting January 1, 2023, upon retirement at age 67 or greater, and with one year of continuous service prior to retirement, vesting of the issued grant(s) would accelerate on a pro-rata basis, 1/3 per year from the grant date. Further details of the Plan are provided in Note 8, Stock-Based Compensation Plans, to the Consolidated Financial Statements included in this report. Product Liability Reserves Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policy deductibles or self-insured retention limits, with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 7, Commitments and Contingencies, to the Consolidated Financial Statements included in this report for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $ 250,000 to $ 3,000,000 per claim, depending on the terms of the policy and the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. - 39 - Leases The Company applies the requirements of FASB ASC Topic 842, Leases which defines a lease as any contract that conveys the right to use a specific asset for a period of time in exchange for consideration. Leases are classified as a finance lease, formerly called a capital lease, if any of the following criteria are met: 1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. 3. The lease term is for the major part of the remaining economic life of the underlying asset. 4. The present value of the sum of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. For any leases that do not meet the criteria identified above for finance leases, the Company treats such leases as operating leases. As of December 31, 2023 and 2022, each of the Company’s leases is classified as an operating lease. Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities. There are some exceptions which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components, such as common area maintenance, which are generally accounted for separately. In general, the Company will assess if non-lease components are fixed and determinable, or variable, when determining if the component should be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes its incremental borrowing rate at the time of the lease agreement. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures . The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies upon Level 1 inputs in determining the fair value of the Company’s reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other . - 40 - Advertising Expense Advertising costs are charged to operations as incurred and are included in selling expenses in the accompanying consolidated statement of operations. Such charges aggregated $ 913,000 , $ 976,000 , and $ 877,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Research and Development Expense Research and development expenses are charged to operations as incurred. Such charges totaled $ 433,000 , $ 653,000 , and $ 627,000 for the years ended December 31, 2023, 2022 and 2021, respectively and are included in engineering expense in the accompanying consolidated statements of operations. Shipping Costs Shipping costs are included in selling expense on the consolidated statements of operations. The expense relating to shipping was $ 2,740,000 , $ 3,548,000 , and $ 3,814,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Earnings per Common Share Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and diluted earnings per share are the same. Currency Translation Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The assets and liabilities denominated in foreign currencies relate to the Company’s U.K. subsidiary whose functional currency is the British Pound and the U.K. subsidiary’s France subsidiary whose functional currency is the Euro. The Consolidated Statements of Operations are translated into U.S. dollars at average exchange rates for the period. Adjustments resulting from the translation of financial statements are excluded from the determination of income and are accumulated in a separate component of shareholders’ equity. Exchange gains and losses resulting from foreign currency transactions are included in the statements of operations in the period in which they occur. Income Taxes The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes . Under this method the Company records tax expenses, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The FASB ASC Topic 740, Income Taxes , clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. - 41 - The Company follows the provisions of FASB ASC Subtopic 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. Effective January 1, 2022, as a result of changes made by the Tax Cuts and Jobs Act of 2017, the Company is required to capitalize certain research and development expenses for tax purposes, and amortize those expenses over a five year period, resulting in a deferred tax asset for the capitalized amounts. Other Comprehensive Income For the years ended December 31, 2023, 2022 and 2021, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments. Significant Concentrations One customer represented 12% to 14% of sales during each of the fiscal years in the period from 2021 to 2023, and that same customer accounted for approximately 19% of the accounts receivable balance over the last two years. No other customer represented more than 10% of accounts receivable or sales. Geographically, North America accounted for approximately 93% to 96% of the Company’s sales during the last three years . The remaining portion of sales for each respective year was scattered among other countries, with the U.K. being the Company’s most dominant market outside North America. Subsequent Events The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its Consolidated Financial Statements. Refer to Note 14, Subsequent Events. Recent Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, updated in December 2022 by ASU No. 2022-06, Deferral of Sunset Date of Topic 848 . The ASUs apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASUs provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASUs do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, except for hedging relationships existing as of December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04, as updated by ASU 2022-06, is effective for all entities as of March 12, 2020, through December 31, 2024. The impact of the adoption did not have a material impact on the Company’s Consolidated Financial Statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The ASU expands public entities tax disclosures including improving disclosures surrounding the company’s rate reconciliation, cash taxes paid, and disaggregation of income tax expense (or benefit) from continuing operations. The amendment is effective for annual periods beginning after December 15, 2024. The Company is in the process of evaluating the impact of ASU No. 2023-09 on its Consolidated Financial Statements. - 42 - 3. INVENTORIES Inventories, net of reserves of $ 692,000 and $ 571,000 as of December 31, 2023 and 2022, respectively, consisted of the following: SCHEDULE OF INVENTORIES, NET OF RESERVES 2023 2022 December 31, 2023 2022 (in thousands) Finished Goods $ 6,161 $ 6,744 Raw Materials 9,436 11,020 Inventories - Net $ 15,597 $ 17,764 See Note 5, Other Long Term Assets, for details on inventories which are estimated to be used beyond the next twelve months. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following As of December 31: SCHEDULE OF PROPERTY AND EQUIPMENT 2023 2022 Depreciation and Amortization Est. Useful Lives (in thousands) Land $ 1,205 $ 1,205 Buildings 6,640 6,640 39 Years Leasehold Improvements 403 396 3 - 10 Years (Lesser of Life or Lease) Equipment 17,143 15,448 3 - 10 Years Property and Equipment - Gross 25,391 23,689 Accumulated Depreciation ( 16,440 ) ( 15,285 ) Property and Equipment - Net $ 8,951 $ 8,404 The above amounts include capital related items of $ 1,349,000 and $ 535,000 as of December 31, 2023 and 2022, respectively, which had not yet been placed in service by the Company, and therefore no depreciation was recorded in the related periods for those assets. Depreciation and amortization expense was approximately $ 1,099,000 , $ 1,096,000 , and $ 1,020,000 for the years ended December 31, 2023, 2022 and 2021, respectively. 5. OTHER LONG TERM ASSETS Other long term assets were as follows as of December 31: SCHEDULE OF OTHER LONG TERM ASSETS 2023 2022 (in thousands) Inventories $ 2,620 $ 4,261 Cash surrender value of life insurance policies 1,681 1,546 Other 139 64 Other Long Term Assets $ 4,440 $ 5,871 The Company maintains inventories, net of reserves of $ 1,000,000 and $ 0 as of December 31, 2023 and 2022, respectively, which are estimated to be used beyond the next twelve months, mainly for the corrugated medical tubing (“CMT”) products. Higher amounts of materials for the CMT products were initially purchased for cost considerations and because of longer required lead times. The Company has obtained and is the beneficiary of life insurance policies with respect to past employees. - 43 - 6. LINE OF CREDIT AND OTHER BORROWINGS On July 3, 2023, the Company agreed to an Amended and Restated Loan Agreement with Santander Bank, N.A. (the “Bank”), and a Second Amended and Restated Committed Revolving Line of Credit Note to the Bank (both documents together, the “Facility”). The Facility is an unsecured revolving credit facility in the maximum amount of $ 15,000,000 , with a $ 1,000,000 letter of credit sublimit, expiring June 1, 2028 , with funds available for working capital and other corporate purposes. The interest rate payable on any borrowings is either the Term SOFR Reference Rate or the Bank’s Prime Rate, as specified by the Company, plus the Applicable Margin. The Applicable Margin for the Term SOFR Reference Rate is plus 0.75% to plus 1.75%, and for Prime Rate, up to plus 0.50%, depending upon the Company’s then existing specified financial ratios. As of December 31, 2023, the Company’s ratio would allow for the most favorable rate under the Facility’s ranges or 6.09%. The Company is also required to pay on a quarterly basis an unused facility fee of 10 basis points of the average unused balance of the note and an annual commitment fee of $ 5,000 due and payable on each anniversary date of the Facility. The Company may terminate the Facility at any time as long as there are no amounts outstanding and may prepay any borrowings. Prior to this, the Company had been operating in adherence with the December 1, 2017 agreement, as discussed below. On December 1, 2017, the Company agreed to an Amended and Restated Revolving Line of Credit Note (the “Line”) and Third Amendment to the Loan Agreement with the Bank. The Company established a line of credit facility in the maximum amount of $ 15,000,000 , maturing on December 1, 2022 , with funds available for working capital purposes and other cash needs. The Line was unsecured and extended through the effective date of the Facility of July 3, 2023. The loan agreement provided for the payment of any borrowings under the agreement at an interest rate range of either LIBOR plus 0.75% to plus 1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime Rate up to Prime Rate plus 0.50% (for borrowings with no fixed term other than to the effective date of the Facility of July 3, 2023), depending upon the Company’s then existing financial ratios. The Company was also required to pay on a quarterly basis an unused facility fee of 10 basis points of the average unused balance of the note. As of December 31, 2023 and as of December 31, 2022, the Company had no outstanding borrowings on the Facility or the Line, as applicable, and was in compliance with all debt covenants. 7. COMMITMENTS AND CONTINGENCIES Commitments Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both. The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements. Under the terms of the agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors. The Company has obtained directors’ and officers’ insurance policies to fund certain obligations under the indemnity agreements. The Company has salary continuation agreements with past employees. These agreements provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death. The payment benefits range from $ 1,000 to $ 3,000 per month with the term of such payments limited to 15 years after the employee’s retirement. The agreements also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated without cause; the amount of which is dependent on the length of company service at the date of termination. The net present value of the retirement payments associated with these agreements is $ 326,000 as of December 31, 2023, of which $ 278,000 is included in Other Long Term Liabilities, and the remaining current portion of $ 48,000 is included in Other Liabilities, associated with the applicable retirement benefit payments over the next twelve months. The December 31, 2022 liability of $ 357,000 had $ 309,000 reported in Other Long Term Liabilities, and a current portion of $ 48,000 in Other Liabilities. In addition to the above, the Company has other contractual employment and or change of control agreements in place with key employees, as previously disclosed and noted in the Exhibit Index to this Form 10-K. Obligations related to these arrangements are currently indeterminable due to the variable nature and timing of possible events required to incur such obligations. - 44 - As disclosed in detail in Note 10, Leases, to the Consolidated Financial Statements included in this report, the Company has several lease obligations in place that will be paid over time. Most notably, the Company leases a facility in Banbury, England that serves the manufacturing, warehousing, and distribution functions. Lastly, the Company has numerous contractual obligations in place for the forthcoming year, mainly related to purchase obligations for the Company’s raw material inventories, totaling $ 12,895,000 . Contingencies In the ordinary and normal conduct of the Company’s business, it is subject to lawsuits, investigations, and claims (collectively, the “Claims”). The Claims generally relate to potential lightning or other electrical damage to our flexible gas piping products and may result in legal and product liability related expenses. The Company does not believe the Claims have legal merit and vigorously defends them. It is possible that the Company may incur increased litigation costs in the future due to a variety of factors, including a higher number of Claims, higher legal and expert costs, and higher insurance deductibles or self-insured retention limits (or “retentions”). The Company has in place commercial general liability insurance policies that cover most Claims, which are subject to deductibles or retentions, ranging primarily from $ 250,000 to $ 3,000,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $ 3,000,000 , depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims as of December 31, 2023 is estimated to not exceed approximately $ 3,724,000 , which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the Consolidated Financial Statements primarily represents an accrual for legal costs for services previously rendered, outstanding settlements for Claims not yet paid, and anticipated, probable, settlements for Claims within the Company’s remaining retention under its insurance policies. The liabilities recorded in the Company’s books as of December 31, 2023 and December 31, 2022 were $ 947,000 and $ 3,848,000 , respectively, and are included in Other Liabilities. 8. STOCK BASED COMPENSATION PLANS Phantom Stock Plan Plan Description. On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”). The Plan authorizes the grant of up to one million units of phantom stock to employees, officers, or directors of the Company. The phantom stock units (“Units”) each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock. The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following: ■ ownership interest in the Company; ■ shareholder voting rights; and ■ other incidents of ownership to the Company’s common stock - 45 - The Units are granted to participants upon the recommendation of the Company’s President, and the approval of the Compensation Committee. Each of the Units that are granted to a participant will be initially valued by the Compensation Committee at an amount equal to the closing price of the Company’s common stock on the grant date but are recorded at fair value using the Black-Sholes method as described below. The Units follow a vesting schedule, with a maximum vesting of three years after the grant date. Grants made on or after January 1, 2023, will fully vest three-years from the grant date. Upon vesting, the Units represent a contractual right of payment for the value of the Unit and therefore are stated as liabilities in accordance with FASB ASC Topic 718, Compensation - Stock Compensation . The Units will be paid on their maturity date, one year after all the Units granted in a particular award have fully vested, unless a specified event occurs under the terms of the Plan, which would allow for earlier payment. Units granted with value at the maturity date equal to the closing price of the Company’s common stock as of the maturity date are defined as Full Value Units. Unless stated otherwise, all Units described herein are Full Value Units. In 2009, the Board of Directors authorized an amendment to the Plan to pay an amount equal to the value of any cash or stock dividend declared by the Company on its common stock to be accrued to the Units outstanding as of the record date of the common stock dividend. The dividend equivalent will be paid at the same time the underlying Units are paid to the participant. In addition, the Plan has been amended and restated, for all grants made starting January 1, 2023, to set the vesting method to three-year cliff vesting following the grant date, with payment upon maturity. Additionally, for grants made starting January 1, 2023, upon retirement at age 67 or greater, and with one year of continuous service prior to retirement, vesting of the issued grant(s) would accelerate on a pro-rata basis, 1/3 per year from the grant date. In certain circumstances, the Units may be immediately vested upon the participant’s death or disability. All Units granted to a participant are forfeited if the participant is terminated from their relationship with the Company or its subsidiary for “cause,” which is defined under the Plan. If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,” then any vested Units will be paid to the participant upon termination. However, Units granted to certain “specified employees” as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination. Grants of Units. As of December 31, 2022, the Company had 6,653 nonvested and unmatured Units outstanding. In February 2023, the Company paid $ 673,000 for 5,120 fully vested and matured Units that were granted during 2019, including their respective earned dividend values. On March 8, 2023, the Company granted an additional 2,536 Units with a fair value of $ 108.47 per Unit on grant date, using historical volatility. In March 2023, 597 unvested Units were forfeited. On August 25, 2023, the Company granted an additional 1,500 Units with a fair value of $ 76.04 per Unit on grant date, using historical volatility. In September 2023, the Company paid $ 133,000 for 1,508 fully vested and matured Units that were granted during 2019, and $ 72,000 for the 575 fully vested and matured Units that were granted during 2020, 2021, and 2022, including their respective earned dividend values. In October 2023, the Company paid $ 132,000 for 1,149 fully vested and matured Units that were granted during 2020 and 2021, including their respective earned dividend values. In December 2023, the Company paid $ 96,000 for 1,125 fully vested and matured Units that were granted during 2020, including their respective earned dividend values. As of December 31, 2023, the Company had 6,440 nonvested and unmatured Units outstanding. The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units. The Company uses the straight-line method of attributing the value of the stock based compensation expense relating to the Units. The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting and maturity periods of each grant. The FASB ASC Topic 718, Compensation - Stock Compensation , requires forfeitures either to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates to derive an estimate of awards ultimately to vest or to recognize the effect of any forfeited awards for which the requisite vesting period is not completed in the period that the award is forfeited. The Company recognizes the reversal of any previously recognized compensation expense on forfeited awards in the period that the award is forfeited. For the year ended December 31, 2023, a reversal of $ 22,000 of previously recognized compensation expense was recognized on 597 nonvested forfeited Units. However, for the year ended December 31, 2022, no awards were forfeited. - 46 - The total liability related to the Units as of December 31, 2023 was $ 530,000 of which $ 206,000 is included in Other Liabilities, as it is expected to be paid within the next twelve months, and the balance of $ 324,000 is included in Other Long Term Liabilities. The total liability related to the Units as of December 31, 2022 was $ 1,343,000 of which $ 665,000 was included in Other Liabilities, and the balance of $ 678,000 was included in Other Long Term Liabilities. Related to the Plan, in accordance with FASB ASC Topic 718, Compensation - Stock Compensation , the Company recorded compensation expense of approximately $ 292,000 , $ 156,000 , and $ 506,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Compensation expense or income for a given period largely depends upon fluctuations in the Company’s stock price. The following table summarizes information about the Company’s nonvested and unmatured Units as of and for the year ended December 31, 2023: SUMMARY OF NONVESTED PHANTOM STOCK UNITS Units Weighted Average Grant Date Fair Value Number of Units: Nonvested and Unmatured as of December 31, 2022 6,653 $ 129.09 Granted 4,036 $ 96.42 Vested ( 3,652 ) $ 120.40 Forfeited ( 597 ) $ 147.37 Canceled — — Nonvested and Unmatured as of December 31, 2023 6,440 $ 111.85 Units Expected to Vest and Mature 6,440 $ 111.85 The total unrecognized compensation costs calculated as of December 31, 2023 were $ 316,000 which will be recognized through August of 2026. The Company will recognize the related expense over the weighted average period of 1.5 years. 9. INCOME TAXES Income tax expense consisted of the following: SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT) December 31, 2023 2022 2021 (in thousands) Federal Income Tax: Current $ 5,279 $ 7,453 $ 7,197 Deferred 745 ( 1,156 ) 264 State Income Tax: Current 821 1,126 1,062 Deferred 113 ( 173 ) 43 Foreign Income Tax: Current ( 3 ) 84 298 Deferred ( 130 ) ( 7 ) ( 2 ) Income Tax Expense $ 6,825 $ 7,327 $ 8,862 Pre-tax income included foreign income of $ 458,000 , $ 437,000 , and $ 1,500,000 in 2023, 2022 and 2021, respectively. - 47 - Total income tax expense differed from statutory income tax expense, computed by applying the U.S. federal income tax rate of 21 % to earnings before income tax, as follows: SCHEDULE OF EFFECTIVE INCOME TAX RATE RECONCILIATION December 31, 2023 2022 2021 (in thousands) Computed Statutory Income Tax Expense $ 5,785 $ 6,505 $ 7,362 State Income Tax, Net of Federal Tax Benefit 738 753 902 Foreign Tax Rate Differential ( 37 ) ( 9 ) ( 29 ) Valuation Allowance 81 - - Executive Compensation Limitation 258 296 773 Foreign Derived Intangible Income Deduction ( 93 ) ( 98 ) ( 107 ) Research Credit - ( 171 ) ( 59 ) Other - Net 93 51 20 Income Tax Expense $ 6,825 $ 7,327 $ 8,862 A deferred income tax (expense) benefit results from temporary timing differences in the recognition of income and expense for income tax and financial reporting purposes. The components of and changes in the net deferred tax assets (liabilities) which give rise to this deferred income tax (expense) benefit for the years ended December 31, 2023 and 2022 are as follows: SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES December 31, 2023 2022 (in thousands) Deferred Tax Assets: Compensation Assets $ 191 $ 201 Inventory Valuation 656 529 Accounts Receivable Valuation 200 259 Deferred Litigation Costs 11 12 Capitalized Research Costs 485 590 Accrued Product Liability 217 900 Foreign Net Operating Losses 312 78 Valuation Allowance for Loss Carryover ( 176 ) ( 78 ) Other 24 17 Compensation Liabilities 196 360 Total Deferred Assets $ 2,116 $ 2,868 Deferred Tax Liabilities: Prepaid Expenses ( 612 ) ( 592 ) Depreciation and Amortization ( 1,315 ) ( 1,359 ) Total Deferred Liabilities $ ( 1,927 ) $ ( 1,951 ) Total Deferred Tax Asset $ 189 $ 917 Management believes it is more likely than not that the Company will have sufficient taxable income when these timing differences reverse and that the deferred tax assets will be realized except for a carryover of foreign operating losses incurred by one of its foreign subsidiaries. Due to the uncertainty of future income in the foreign subsidiary, the Company has recognized a valuation allowance related to the foreign operating losses carrying forward. The Company is currently subject to audit by the Internal Revenue Service for the calendar years ended 2020 through 2022. The Company and its Subsidiaries’ state income tax returns are subject to audit for the calendar years ended 2019 through 2022. As of December 31, 2023, the Company had no liability for unrecognized tax benefits related to various federal and state income tax matters. - 48 - 10. LEASES In the U.S., the Company owns its two main operating facilities located in Exton, Pennsylvania. In addition to the owned facilities, the Company also has operations in other locations that are leased, as well as other leased assets. In conjunction with the guidance for leases, as defined by FASB ASC Topic 842, Leases , the Company has described the existing leases, which are all classified as operating leases, pursuant to the below. In the U.S., the Company leases a facility in Houston, Texas, which currently provides manufacturing, stocking, and sales operations, with the lease term running through October 2024, and a facility in Malvern, Pennsylvania, with a three year term ending in December 2024, that provides warehousing. Additionally, the Company has an operating lease agreement for its corporate office space in Middletown, Connecticut, with the lease term ending in June 2027. In the U.K., the Company leases a facility in Banbury, England, which serves manufacturing, warehousing, and other operational functions. The lease in Banbury has a 15-year term ending in March 2036. With a lease commencement date of January 1, 2024, the Company leased a facility in West Chester, Pennsylvania providing approximately 28,000 square feet of warehousing and storage, quality control, distribution, and corporate office space. See Note 14. Subsequent Events to the Consolidated Financial Statements included in this report. In addition to property rentals, the Company also has lease agreements in place for various fleet vehicles and equipment with various lease terms. As of December 31, 2023, the Company has right-of-use assets of $ 2,940,000 , and a lease liability of $ 2,946,000 , of which $ 454,000 is reported as a current liability. As of December 31, 2022, the Company recorded right-of-use assets of $ 3,205,000 , and a lease liability of $ 3,210,000 , of which $ 447,000 was reported as a current liability. The respective weighted average remaining lease term and discount rate are approximately 10.57 years and 1.07 % as of December 31, 2023. Rent expense for operating leases was $ 467,000 , $ 504,000 , and $ 421,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Future minimum lease payments under non-cancelable leases as of December 31, 2023 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES Twelve Months Ending December 31, Operating Leases (in thousands) 2024 $ 482 2025 316 2026 296 2027 250 2028 215 Thereafter 1,541 Total Future Minimum Lease Payments 3,100 Less: Interest 154 Lease Liability 2,946 Less: Current Portion of Lease Liability 454 Lease Liability – Net of Current Portion $ 2,492 - 49 - 11. EMPLOYEE BENEFIT PLANS Defined Contribution and 401(K) Plans The Company maintains a qualified non-contributory profit-sharing plan (the “Plan”) covering all eligible employees. There were $ 484,000 , $ 474,000 , and $ 441,000 of contributions accrued for the Plan in 2023, 2022 and 2021 respectively, which were charged to expense in those respective years. Contributions to the Plan are defined as three percent ( 3 %) of gross wages up to the current Old Age, Survivors, and Disability (OASDI) limit and six percent ( 6 %) of the excess over the OASDI limit, subject to the maximum allowed under the Employee Retirement Income Security Act (ERISA). Participant balances vest over six years. The Company also maintains a savings and retirement plan qualified under Internal Revenue Code Section 401(k) for all employees. Employees are eligible to participate in the Plan the first day of the month following date of hire. Participants may elect to have up to fifty percent ( 50 %) of their compensation withheld, up to the maximum allowed by the Internal Revenue Code. After completing one year of service, the Company contributed an additional amount equal to 50 % of all employee contributions, up to a maximum of 6 % of an employee’s gross wages. Contributions are funded on a current basis. Contributions to the Plan charged to expense for the years ended December 31, 2023, 2022 and 2021 were $ 330,000 , $ 319,000 , and $ 315,000 , respectively. The participant’s Company contribution vests ratably over six years. 12. SHAREHOLDERS’ EQUITY As of December 31, 2023 and December 31, 2022, the Company had 20,000,000 shares of common stock, with par value of $ 0.01 per share, authorized. For both periods, the total number of outstanding shares was 10,094,322 , shares held in Treasury was 59,311 , and total shares issued was 10,153,633 . During 2023, 2022, and 2021, upon approval of the Board of Directors (the “Board”) the Company has declared and paid regular quarterly dividends, as set forth in the following table: SCHEDULE OF REGULAR QUARTER DIVIDEND PAYMENTS Dividend Declared Dividend Paid Date Price Per Share Date Amount December 6, 2023 $ 0.33 January 4, 2024 $ 3,332,000 September 11, 2023 $ 0.33 October 6, 2023 $ 3,331,000 June 13, 2023 $ 0.33 July 7, 2023 $ 3,332,000 March 28, 2023 $ 0.32 April 24, 2023 $ 3,229,000 December 7, 2022 $ 0.32 January 4, 2023 $ 3,232,000 September 30, 2022 $ 0.32 October 24, 2022 $ 3,231,000 June 10, 2022 $ 0.32 July 5, 2022 $ 3,230,000 March 29, 2022 $ 0.30 April 25, 2022 $ 3,028,000 December 9, 2021 $ 0.30 December 30, 2021 $ 3,029,000 September 15, 2021 $ 0.30 October 4, 2021 $ 3,028,000 June 9, 2021 $ 0.30 July 6, 2021 $ 3,028,000 March 24, 2021 $ 0.28 April 14, 2021 $ 2,827,000 In addition to the above dividend amounts, there were dividends approved by the Company’s foreign subsidiary during September 2021 which amounted to an outlay of cash of $ 129,000 to the foreign subsidiary’s noncontrolling interest. It should be noted that from time to time, the Board may elect to pay special dividends, in addition to or in lieu of the regular quarterly dividends, depending upon the financial condition of the Company. The most recent special dividend was declared and paid in December 2019. 13. RELATED PARTY TRANSACTIONS From time to time, the Company may have related party transactions (“RPTs”). RPTs represent any transaction between the Company and any Company employee, director or officer, or any related entity, or relative, etc. The Company performs a review of transactions each year to determine if any RPTs exist, and if so, determines if the related parties act independently of each other in a fair transaction. Through this investigation the Company noted a limited number of RPTs. In all cases, these RPTs have been determined to be arms length transactions with no indication that they are influenced by the related relationships. 14. SUBSEQUENT EVENTS The Company evaluated all events or transactions that occurred through the date of this filing. During this period, one event came to the Company’s attention that would impact the Consolidated Financial Statements as of and for the period ended December 31, 2023. With a lease commencement date of January 1, 2024, the Company leased a facility in West Chester, Pennsylvania providing approximately 28,000 square feet of warehousing and storage, quality control, distribution, and corporate office space. - 50 - Item 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.