| Significant Accounting Policies | 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 at the dates
of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant
estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable allowances, investment
valuations, inventory valuations, goodwill valuation, product liability reserves, phantom stock and accounting for income taxes.
Actual amounts could differ significantly from these estimates. Revenue Recognition Effective January 1, 2018,
the Company adopted the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) The guidance permits two
methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with
the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective
approach). The Company selected the modified retrospective approach however there was no material impact which required a cumulative
effect adjustment. The principle of Topic 606 was achieved through
applying the following five-step approach:
● Identification of the contract, or contracts, with a customer —
● Identification of the performance obligations in the contract —
● Determination of the transaction price
● Allocation of the transaction price to the performance obligations in the contract
● Recognition of revenue when, or as, the Company satisfies a performance obligation
● 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 transfer of control substantively transfers to the customer upon shipment. Other considerations of
Topic 606 include the following:
● Contract Costs -
● Warranties
● Returned Goods
● Volume Rebates (Promotional Incentives)
● 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 within Note 2, under the caption “Significant Concentration”,
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. Carrying value 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 its 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
Doubtful Accounts Accounts receivable are
reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management
believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting
in their inability to make payments, additional allowances may be required. The allowance for doubtful
accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the
allowance based on any known collection issues, historical experience, and other currently available evidence. The reserve for
future credits, discounts, and doubtful accounts was $1,433,000 and $985,000 as of December 31, 2019 and 2018, respectively. In
regards to identifying uncollectible accounts, the Company reviews an aging report on a consistent basis to determine past due
accounts, and utilizes a well-established credit rating agency. The Company charges off those accounts that are deemed uncollectible
once all collection efforts have been exhausted. Investments The Company invests excess
funds in liquid interest earning instruments including U.S. Treasury bills and bank time deposits. These investments are stated
at fair value, which approximates amortized cost, and are classified as available-for-sale in accordance with Accounting Standards
Codification 320, Investments – Debt and Equity Securities 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 non-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 carried 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 Financial
Accounting Standards Board (FASB) ASC Topic 350, Intangibles – Goodwill and Other, the Company performed an annual impairment
test in accordance with this guidance as of December 31, 2019 and also at December 31, 2018. These analyses did not indicate any
impairment of goodwill at the end of either period. 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. The Units follow a vesting schedule of three years from the grant date, and are then
paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes option pricing
model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note 11. Product Liability Reserves Product liability reserves
represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company
uses the most current available data to estimate claims. As explained more fully under Note 10, 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 $25,000 to $1,000,000 per claim, depending on the
terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known
claims. Leases Effective January 1, 2019,
the Company adopted the requirements of FASB ASU 2016-02, Leases
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,
2019, each of the Company’s leases are classified as operating leases. Under the new guidance,
both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities.
It should be noted that under previous guidance operating leases (non-capital leases) were not required to be recorded as an asset
on the balance sheet. 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 elects 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. As permitted under ASU
2018-11, the Company elected the optional transition method to adopt the new leases standard. Under this new transition method,
the Company initially applied the new leases standard at the adoption date of January 1, 2019 and would have recognized a cumulative-effect
adjustment, if appropriate, to the opening balance of retained earnings in the period of adoption. No cumulative-effect adjustment
was recognized. The Company’s reporting for the comparative periods prior to 2019 in the financial statements are presented
in accordance with existing GAAP in effect for 2018 and earlier (ASC Topic 840, Leases The impact of the adoption
of this new standard resulted in an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of
approximately $800,000. The implementation did not have a material impact on the Company’s consolidated statements of income
and statements of cash flows. 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 investments and 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. 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 $1,056,000, $1,037,000 and $1,075,000 for the years ended December 31, 2019, 2018, and 2017, respectively. Research and Development Expense Research and development
expenses are charged to operations as incurred. Such charges totaled $1,191,000, $1,531,000 and $923,000 for the years ended December
31, 2019, 2018 and 2017, 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 $2,862,000, $2,973,000 and
$2,562,000 for the years ended December 31, 2019, 2018 and 2017, 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 dilutive 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
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 (other income (expense)) 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 recorded tax expense, 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. The Company follows the
provisions of ASC 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. The Company reflected the
effects of the Tax Cuts and Jobs Act (the “Act”), in its 2017 financial statements. This included the effects of the
change in the US corporate tax rate from 35% to 21% on deferred tax assets and liabilities, and a provision related to previously
deferred taxes on earnings of the Company’s foreign subsidiary. The Company’s tax expense for the periods ended December
31, 2018 and 2019 includes the effect of the reduction in the US corporate tax rate from 35% to 21%, effective for the Company’s
2018 and 2019 tax years. The Company’s tax provision also reflects other changes as a result of the Act, including the impact
of the Global Intangible Low Taxed Income (“GILTI”) provisions, and changes affecting the deductibility of certain
executive compensation. Other Comprehensive Income For the years ended December
31, 2019, 2018 and 2017, respectively, the components of other comprehensive income consisted solely of foreign currency translation
adjustments. Significant Concentrations One customer represented
14% to 15% of sales during the period from 2017 to 2019, and that same customer accounted for approximately 22% to 24% of the Accounts
Receivable balance over the last two years. No other customer represented more that 10% of Accounts Receivable or Sales. Geographically,
North America accounted for approximately 90% 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 United Kingdom 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 13. Recent Accounting Pronouncements In January 2017, the FASB
amended ASC Topic 350, Intangibles – Goodwill and Other In June 2016, the FASB
issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
