Item 1A. Risk Factors
Item
1A – RISK FACTORS
You
should carefully consider the following risk factors and all the other information contained in this annual report in evaluating our
business and investment in our common stock. If any of these risks occur, our business, financial condition, results of operations and
prospects could be materially and adversely affected. In that case, the market price of our common stock could decline and you could
lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial
may also materially harm our business, operating results and financial condition and could result in a complete loss of your investment.
Risk
Relating to Our Business – Sales and Competition
We
are primarily dependent on one product line for most of our sales.
Most
of our sales are derived from the sale of TracPipe ® and CounterStrike ® CSST systems, including Autoflare ®
fittings and a variety of accessories. Sales of our flexible metal hose for other applications represent a small portion of our
overall sales and income. Any event or circumstance that adversely affects our TracPipe ® or CounterStrike ®
CSST could have a greater impact on our business and financial results than if our business were more evenly distributed across several
different product lines. The effects of such an adverse event or circumstance would be magnified in terms of our company as a whole as
compared to one or more competitors whose product lines may be more diversified, or who are not as reliant on the sales generated by
their respective flexible gas piping products. Therefore, risks relating to our TracPipe ® and CounterStrike ®
CSST business – in particular, loss of distributors or sales channels, technological changes, loss of our key personnel involved
in the flexible gas piping product line, increases in commodity prices, particularly in stainless steel, copper, and polyethylene –
could damage our business, competitive position, results of operations or financial condition.
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We
face intense competition in all our markets.
The
markets for flexible metal hose are intensely competitive. There are a number of competitors in all markets in which we operate, and
generally none of these markets have one dominant competitor. One or more of our competitors may develop technologies and products that
are more effective, or which may cost less than our current or future products or could potentially render our products noncompetitive
or obsolete. Volumes of competing low price imports has increased, and may continue to increase, negatively affecting our earnings. Our
prior success has been due to our ability to develop new products and product improvements and establish and maintain an effective distribution
network, which to some extent came at the expense of several competing manufacturers. Our business, competitive position, results of
operations or financial condition could be negatively impacted if we are unable to maintain and develop our competitive products.
We
may not retain our independent sales organizations.
Almost
all our products and product lines are sold by outside sales organizations. These independent sales organizations or sales representatives
are geographically dispersed in certain territorial markets across the U.S., Canada and elsewhere. These outside sales organizations
are independent of us and are typically owned by the individual principals of such firms. We enter into agreements with such outside
sales organizations for the exclusive representation or distribution of our products, but such agreements are generally terminable on
short notice. At the expiration of the agreement, the agent or distributor may elect to represent a different manufacturer. As a result,
we have no ability to control which flexible metal hose manufacturer any such sales organization may represent or carry. The competition
to retain quality outside sales organizations is also intense between manufacturers of flexible metal hose since it is these sales organizations
that generally can direct the sales volume to distributors and, ultimately, contractors and installers in important markets across the
country, and in other countries in which we operate. The failure to obtain the best outside sales organization within a particular geographic
market can limit our ability to generate sales of our products. While we currently have a fully developed sales and distribution network
of superior outside sales organizations, there can be no assurance that any one or more of the outside sales organizations will elect
to remain with us, or that our competitors will not be able to disrupt our distribution network by causing one or more of our sales representatives
to drop our product lines. Our business, competitive position, results of operations or financial condition could be negatively impacted
if we cannot maintain adequate sales and distribution networks.
We
are dependent on wholesale distribution channels for a significant portion of our business.
Of
the various sales channels that we use to sell our products, a significant portion of such sales are made through our wholesale stocking
distributors. These and other distributors purchase our products, and stock the goods in warehouses for resale, either to their own local
branches or to end users. Because of the breadth and penetration of the distribution networks, and the range of complementary products
they offer for sale, these wholesale distributors can sell large amounts of our products to end users across the U.S. and Canada. The
decision by a major wholesaler distributor to stop distributing our products such as TracPipe ® and CounterStrike ®
CSST, and to distribute a competitive flexible gas piping product, could significantly affect our business, competitive position,
results of operations or financial condition.
Certain
of our competitors may have greater resources, or they may acquire greater resources.
Some
of our competitors have substantially more resources than are available to us as a stand-alone company. For example, in the CSST market,
two of our competitors are divisions of large corporations with revenues measured in the billions of dollars. These competitors may be
able to devote substantially greater resources to the development, manufacture, distribution, and sale of their products than would be
available to us as a stand-alone company. One or more competitors may acquire several other competitors, or may be acquired by a larger
entity, and through a combination of resources be able to devote additional resources to their businesses. These additional resources
could be devoted to product development, reduced costs in an effort to obtain market share, greater flexibility in terms of profit margin
as part of a larger business organization, increased investment in plant, machinery, distribution and sales concessions. As a stand-alone
company, the resources that may be devoted by us to meet any potential developments by larger, well-financed competitors may be limited.
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Our
business may be subject to macroeconomic effects caused by increased trade tariffs, changes to existing trade agreements and changes
in international trade relations.
Changes
in U.S. and foreign government trade policies, including tariffs and potential modifications to existing trade agreements, and further
restrictions on free trade, are introducing uncertainty. These increased tariffs may cause the cost of materials to rise and may add
additional expenses to exported goods. However, we do not believe that increased tariffs will materially affect our sales or gross profits,
as most of the raw materials and supplies used to manufacture our products are sourced domestically in the U.S. and most of our sales
of product manufactured in the U.S. are domestic. Further, exports of our flexible gas piping products from our Exton, Pennsylvania facility
are primarily to Canada. Sales to Europe, Asia and Africa are primarily handled from our U.K and France facilities, which are not affected
by U.S. trade tariffs and retaliatory tariffs but may be subject to other border and customs controls which could increase costs and
delay incoming and outgoing shipments.
Our
international sales subject us to additional risks that can adversely affect our business, operating results, and financial condition.
During
2024 and 2023, we derived 3% to 4% of our revenue from sales to customers located outside the U.S. Our ability to convince customers
to expand their use of our products or renew their agreements with us is directly correlated to our direct engagement with such customers.
To the extent that we are unable to engage with non-U.S. customers effectively, we may be unable to grow sales to international customers
to the same degree we have experienced in the past.
Our
international operations are subject to a variety of risks and challenges, including:
●
general
economic or geopolitical conditions in each country or region;
●
the
effects of a widespread outbreak of an illness or disease, or any other public health crisis, including the COVID-19 pandemic, in
each country or region;
●
economic
uncertainty around the world; and
●
compliance
with laws and regulations imposed on foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act,
import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our
ability to sell our products in certain foreign markets, and the risks and costs of non-compliance.
For
example, in response to the continuing conflict between Russia and Ukraine, the U.S. has imposed and may further impose, and other countries
may additionally impose, broad sanctions or other restrictive actions against governmental and other entities in Russia, and such sanctions
or actions could cut off or impede the flow of raw materials for our products, including minerals, such as nickel, that are used in our
stainless steel and copper alloys. Additionally, further escalation of geopolitical tensions could have a broader impact that extends
into other markets where we do business. Any of these risks could adversely affect our international sales, reduce our international
revenues, or increase our operating costs, adversely affecting our business, financial condition, or operating results.
Risk
Relating to Our Business – Manufacturing and Operations
Our
manufacturing plants may be damaged, destroyed or disrupted.
The
majority of our manufacturing capacity is currently located in Exton, Pennsylvania, where we own two manufacturing facilities which are
in close proximity to each other, and in Banbury, England in the U.K. where we lease a manufacturing facility. On a smaller scale we
also have manufacturing operations in Houston, Texas. We do not have any operational manufacturing capacity for flexible metal hose outside
of these locations. We cannot replicate our manufacturing methods at a supplier’s facility due to the confidential and proprietary
nature of our manufacturing process. If one of the manufacturing facilities were destroyed or damaged in a significant manner or otherwise
disrupted for more than a short time, we would likely experience a delay or some interruption of our flexible metal hose operations.
This could lead to a reduction in sales volume if customers were to purchase their requirements from our competitors, claims for breach
of contract by certain customers with contracts for delivery of flexible metal hose by a certain date, and costs to replace our destroyed
or damaged manufacturing capacity. The fittings and accessories for the flexible metal hose are manufactured for us by suppliers not
located at our manufacturing facilities, and we also have outside warehouses which contain finished goods inventory. Disruption of or
damage to our supply of these items could damage our business, competitive position, results of operations or financial condition.
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We
are dependent on certain raw materials and supplies that could be subject to volatile price escalation .
As
a manufacturer of flexible metal hose, we must use certain raw materials in the manufacture of the hose. The primary raw material is
stainless steel that is used in the forming of the hose, and various other steel products used in the wire braid overlay over some flexible
metal hoses for additional strength and durability, as well as copper alloy for MediTrac ® CMT. We also use polyethylene
in pellet form for the forming and extrusion of a polyethylene jacket over CSST for use in fuel gas applications, underground installations,
and other installations that require that the metal hose be isolated from the environment. Finally, we also purchase brass and stainless
steel for our proprietary fittings used with the flexible metal hose that provides a mechanical means of attaching the hose to an assembly
or junction. We attempt to limit the effects of volatile raw material prices, and to ensure adequate and timely supply of material, by
committing to annual purchase contracts for the bulk of our steel and polyethylene requirements, and for our fitting requirements. The
contracts typically represent a significant portion of our annual planned usage and are set at a designated fixed price or a range of
prices. These agreements sometimes require us to accept delivery of the commodity in the quantities committed, at the agreed upon prices.
Transactions in excess of the pre-arranged commitments are conducted at current market prices at our discretion. We have identified multiple
qualified vendors to produce or manufacture our critical purchase requirements. Although we tend to rely on more than one source for
each or our primary components to leverage the relationship and pricing, there is no assurance that we would be able to eliminate all
or most of the adverse effects of a sudden increase in the cost of materials or key components, or that the loss of one or more of our
key sources would not lead to higher costs or a disruption in our business, which could damage our business, competitive position, results
of operations or financial condition.
If
we were to lose the services of one or more members of our senior management team, we may not be able to execute our business strategy.
Our
future success depends in large part upon the continued service of key members of our senior management team. The senior executives are
critical to the development of our products and our strategic direction and have a keen knowledge of business operations and processes.
Their unique abilities, experience and expertise cannot be easily duplicated or replaced. Although, as much as possible, senior executives
strive to educate and develop other layers of staff for succession planning purposes, the loss of any members of our current senior management
could seriously harm our business.
Risk
Relating to Our Business – Legal
Susceptibility
to litigation and significant legal costs or settlements.
In
the ordinary and normal conduct of our business, we are subject to periodic lawsuits, investigations, and claims (collectively, the “Claims”).
We have continued to receive repeat pattern Claims relating to our flexible gas piping products, although the pace of new Claims has
generally declined. While we do not believe the Claims have legal merit, and have successfully defended against such Claims, we cannot
predict whether the pace of Claims will increase or subside. Any significant increase in the number of Claims, the financial magnitude
of Claims brought against us, the costs of defending the Claims, particularly under higher retentions of our current product liability
insurance policies, could have a detrimental and material impact on our business, competitive position, results of operations or financial
condition.
If
we are not able to protect our intellectual property rights, we may not be able to compete as effectively.
We
possess a wide array of intellectual property rights, including patents, trademarks, copyrights, and applications for the above, as well
as trade secrets, manufacturing know-how, and other proprietary information. Certain of these intellectual property rights form the basis
of our competitive advantage in the marketplace through a superior product design, a superior business process, superior manufacturing
methods or other features that we believe provide an advantage over our competitors. Intellectual property rights are sometimes subject
to infringement or misappropriation by other organizations, and failing an amiable resolution, we may be forced to resort to legal proceedings
to protect our rights in such intellectual property.
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In
the past, we needed to protect our company and resort to legal action, in one instance regarding a trade secret, and other instances
where we sued flexible gas pipe competitors for infringement of one or more of our U.S. patents covering our various piping and/or fitting
products. In each instance, we received favorable rulings, thus solidifying the validity of our intellectual property. Although we had
past success, the results we may obtain from resorting to any such legal proceedings are never assured, and it is possible that an adverse
decision may be delivered in any particular proceeding. As a result, we may not be able to retain the exclusive rights to utilize and
practice such intellectual property rights, and one or more of our competitors could utilize and practice such intellectual property
rights. This development may lessen our competitive advantage vis-à-vis one or more competitors, and lead to a reduction in sales
volume in one or more product lines, a reduction in profit margin in such product lines, or both, which would damage our business, competitive
position, results of operations or financial condition.
Risk
Relating to Our Business – General and Macroeconomic
Our
business may be subject to the supply and availability of fuel gas supplies and infrastructure.
With
increasing awareness of the effect of human activities on climate change, there has been a focus on transitioning energy and heating
in buildings away from fossil fuels, such as natural gas and liquid propane, mainly to electric. Some states and several municipalities
in the U.S. have announced policy decisions to move away from fossil fuel applications in the future, including prohibiting the new installation
of appliances fueled by natural gas or liquid propane. Although there are significant technical and economic hurdles, it is possible
that a large scale movement, in individual cities and states or on a federal level, away from fossil fuels may increase in the future.
Such moves could reduce the demand for our flexible gas piping products that carry natural gas or liquid propane from the building’s
meter to the gas-fired appliance, which represent a major part of our sales and net profits. As a result, it is possible in the future
that proposals to limit or eliminate the use of fossil fuels could adversely impact our financial results, perhaps materially.
Our
TracPipe ® and CounterStrike ® CSST products are used to convey fuel gas, primarily natural gas, but also
propane within a building from the exterior wall of the building to any gas-fired appliances within the building. Because those products
are used in the transmission of fuel gas, the applications are limited to geographic areas where such fuel gas is available. Certain
geographic areas of the U.S. and other countries do not have the infrastructure to make natural gas available. Other types of fuel gas
may be used in areas where there are no natural gas pipelines, but these alternate fuel gas sources have other distribution issues that
may constrict their availability. Our prospects for future growth of the TracPipe ® and CounterStrike ® CSST
products are largely limited to those areas that have natural gas transmission lines available for use in residences and commercial buildings.
We
may substantially increase our debt in the future or be restricted from accessing funds.
We
are currently not carrying any long-term debt, although we have a line of credit facility available for use as described in Note 6, Line
of Credit and Other Borrowings, to the Consolidated Financial Statements included in this report. We may consider borrowing funds for
purposes of working capital, capital purchases, research and development, potential acquisitions, and business development. If we do
use credit facilities, interest costs associated with any such borrowings and the terms of the loan could potentially adversely affect
our profitability. Additionally, the current line of credit has debt covenants associated with it which may restrict the level of borrowing
we may incur. Lack of access to financing or to reasonable terms could damage our business, competitive position, results of operations
or financial condition.
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Our
credit facility bears a variable rate of interest that is based on the Secured Overnight Financing Rate (“SOFR”), which may
have consequences for us that cannot be reasonably predicted and may adversely affect our liquidity, financial condition, and earnings.
Borrowings
under our credit facility bear interest at a rate per annum of either, at our election, (i) Term SOFR plus a margin or (ii) the Prime
Rate plus a margin, with the applicable margin depending on specified financial ratios. Since the initial publication of SOFR, daily
changes in the rate have, on occasion, been more volatile than daily changes in comparable benchmark or market rates, and SOFR over time
may bear little or no relation to the historical actual or historical indicative data. As of December 31, 2024, we had no outstanding
borrowings under this credit facility. If we were to borrow under this credit facility, it is possible that the volatility of SOFR could
result in higher borrowing costs for us and could adversely affect our liquidity, financial condition, or earnings.
Our
business may be subject to varying demands based on market interest rates.
Our
TracPipe ® and CounterStrike ® CSST products are used in the construction industry, both in residential,
commercial, and industrial segments, for the piping of fuel gas within a building. The demand for new or remodeled construction in the
construction industry – and in particular the residential construction industry – is susceptible to fluctuations in interest
rates charged by banks and other financial institutions as well as consumer demand. The purchasers of new or remodeled construction generally
finance the construction or acquisition of the residential, commercial, or industrial buildings, and increases in the interest rates
on such financing raise the acquisition cost of the potential purchaser. Interest rates have been increasing and there is no guarantee
that they will not continue to increase in the future. If costs continue to increase, a higher number of potential buyers may not be
able to support the level of financing under a higher interest rate environment. Increased acquisition costs may lead to a continued
decline in the demand for new or remodeled construction, and as a result may also lead to a continued, reduced demand for our products
used in the construction industry, which could damage our business, competitive position, results of operations or financial condition.
Our
business may be subject to cyclical demands.
The
demand for our products may be subject to cyclical demand in the markets in which we operate. Our customers who use our products in industrial
and commercial applications are generally manufacturing capital equipment for their customers. Similarly, our TracPipe ® and
CounterStrike ® CSST products are used primarily in residential construction, both in single-family buildings, and in larger
multi-unit buildings. Should there be any change in factors that affect the rate of new residential construction, our growth rate would
likely be impacted. To the extent that interest rates increase, in conjunction with an economic cycle or as part of the general economic
conditions in the U.S. or abroad, the demand for our products in such applications may decrease as well, which could damage our business,
competitive position, results of operations or financial condition.
Our
business may be subject to seasonal or weather related factors.
The
demand for our products may be affected by factors relating to seasonal demand for the product, or a decline in demand due to inclement
weather. Our TracPipe ® and CounterStrike ® CSST products are installed in new or remodeled buildings, including
homes, apartment buildings, office buildings, warehouses, and other commercial or industrial buildings. Generally, the rate of new or
remodeled buildings in the U.S. and in the other geographic markets in which we are present decline in the winter months due to the inability
to dig foundations, challenges at the job site relating to snow, or generally due to low temperatures and stormy weather. As the rate
of construction activity declines during the winter, the demand for our corrugated stainless steel tubing may also decrease or remain
static.
Our
business may be subject to the impact of currency volatility.
We
have operations in the U.K. and France, and execute business transactions elsewhere in the world outside of the U.S. While the magnitude
of these transactions outside of the U.S. have thus far not been significant, and typically not in currencies of high volatility, it
is possible that they could be material. Events such as Brexit, or other instances of political and economic turmoil or uncertainty,
could create a weakened British Pound (“BP”), Euro and Canadian Dollar (“CAD”) in comparison to other currencies.
A weakened BP, Euro or CAD would in turn have a direct negative impact, as we would experience losses when settling transactions in other
currencies, and experience unfavorable results due to the translation of financial statements with a lower exchange rate. During the
fourth quarter of 2024, the U.S. Dollar strengthened relative to the value of the BP, Euro and CAD partly due to the results of the U.S.
elections. This in turn had a direct negative impact on the Company’s financial statements and results. Going forward, it is possible
that the BP, Euro, CAD, and other currencies that we engage in may materially impact on our financial position, operations, or liquidity.
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A
cybersecurity incident or other technology disruption could harm us.
We
face certain cybersecurity threats and technology disruptions, including threats to our information technology (“IT”) infrastructure,
attempts to gain access to our or our customers’ proprietary or confidential information, and failures of our technology tools
and systems. Our IT networks and related systems are critical to the operation of our business and essential to our ability to successfully
perform day-to-day operations. Cybersecurity threats, which include, but are not limited to, computer viruses, spyware, and malware,
attempts to access information, denial of service attacks and other electronic security breaches, are persistent and evolve quickly.
In general, such threats have increased in frequency, scope, and potential impact in recent years. Further, a variety of technological
tools and systems, including both company-owned IT and technological services provided by outside parties, support our critical functions.
These technologies are subject to failure and the user’s inability to have such technologies properly supported, updated, expanded,
or integrated into other technologies and, in certain cases, may contain open source and third-party software which may unbeknownst to
us contain defects or viruses that pose unintended risks. These risks, if not effectively mitigated or controlled, could materially harm
our business or reputation. While we believe that we have implemented appropriate measures and controls, there can be no assurance that
such actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption
of data.
The
security measures we have implemented may become subject to third-party security breaches, employee error, malfeasance, faulty password
management or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing
usernames, passwords, or other sensitive information, which may in turn be used to access our IT systems. These security systems cannot
provide absolute security. To the extent we were to experience a breach of our systems and were unable to protect sensitive data, such
a breach could materially damage business partner and customer relationships and curtail or otherwise impact the use of our IT systems.
Moreover, if a security breach of our IT systems affects our computer systems or results in the release of personally identifiable or
other sensitive information of customers, business partners, employees and other third parties, our reputation and brand could be materially
damaged, use of our products and services could decrease, and we could be exposed to a risk of loss, litigation, and potential liability.
Such an event could require significant management attention and resources, negatively impact our reputation among our customers and
the public, which could have a material adverse effect on our business, financial condition, or results of operations.
A
pandemic, like COVID-19 pandemic, may adversely affect our business.
The
COVID-19 pandemic created significant uncertainty and adversely impacted many industries throughout the global economy. Although we have
not seen a material impact from the COVID-19 pandemic on our business, financial position, liquidity, or ability to service customers
or maintain critical operations, the extent to which a future pandemic may impact our business is difficult to predict, and it is dependent
on many factors over which we have no control. Such factors include, but are not limited to, the duration and severity of the pandemic;
government restrictions on businesses and individuals; potential significant adverse impacts on our employees, customers, suppliers,
or service providers; the impact on U.S. and global economies, and the timing and rate of economic recovery.
In
case of a future pandemic, we could face liquidity shortages, weaker product demand from our customers, disruptions in our supply chain,
and/or staffing shortages in our workforce due to the direct and indirect effects of a pandemic.
Various
other general and macroeconomic issues may impact the business.
Conflicts,
wars, natural disasters, infectious disease outbreaks (such as COVID-19 pandemic), active shooter or other workplace violence, or terrorist
acts could also cause significant damage or disruption to our operations, employees, facilities, systems, suppliers, supply chain, distributors,
resellers, or customers in the U.S. and internationally for extended periods of time and could also affect demand for our products.
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Risks
Associated with Our Common Stock
The
concentration of ownership of our common stock could impact on its market price.
As
of December 31, 2024, approximately 65% of our issued and outstanding common stock was owned or controlled by certain of our directors
and officers and their respective affiliates, with the largest holders being: The John E. Reed Trust and other Reed family trusts, Stewart
B. Reed, and Kevin R. Hoben. Stewart B. Reed currently serves as Vice Chairman of the Board of Directors, and Mr. Hoben serves as the
Executive Chairman of the Board. This concentration of ownership may have the effect of reducing the volume of trading of the common
stock on the NASDAQ. A decrease in trading volume could result in lower prices for the common stock because there is not a sufficient
supply of shares to create a vibrant market for our shares on the NASDAQ, or inversely could drive the common stock price higher when
demand exceeds supply.
This
concentration of ownership of common stock could exert significant influence over matters requiring approval by our shareholders, including
the election of directors and the approval of mergers or other business combinations. This concentration also could have the effect of
delaying, preventing, or deterring a change in control of our company.