See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 OMEGA FLEX, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Omega Flex, Inc. (Omega) and its subsidiaries (collectively the “Company”).  The Company’s unaudited  condensed consolidated financial statements for the periodsquarter ended September 30, 2012March 31, 2013 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP), and with the instructions of Form 10-Q and Article 10 of Regulation S-X.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.  It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest shareholders’ annual report (Form 10-K).  All material inter-company accounts and transactions have been eliminated in consolidation.  It is Management’s opinion that all adjustments necessary for a fair statement of the results for the interim periods have been made, and that all adjustments are of a normal recurring nature or a description is provided for any adjustments that are not of a normal recurring nature.

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.  These applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings and vibration absorbers in high vibration applications.  In addition, our flexible metal piping is used to carry other types of gases or fluids in a number of industrial applications where the customer requires a degree of flexibility, an ability to carry corrosive compounds or mixtures, a double containment system, or piping to carry gases or fluids at very high or very low (cryogenic) temperatures.

The Company manufactures flexible metal hose at its facility in Exton, Pennsylvania, with a minor amount of manufacturing performed in the United Kingdom.  The Company sells its product through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and in certain European markets.

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2. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with 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 valuations, inventory valuations, goodwill valuation, product liability reserve and accounting for income taxes.  Actual amounts could differ significantly from these estimates.

Revenue Recognition

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.  The following criteria represent preconditions to the recognition of revenue:

·

Persuasive evidence of an arrangement for the sale of product or services must exist.

·

Delivery has occurred or services rendered.

·

The sales price to the customer is fixed or determinable.

·

Collection is reasonably assured.

The Company recognizes revenue upon shipment in accordance with the above principles.

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company.  This includes promotional incentives, which includes various programs including year-end rebates and discounts.  The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date.

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

Accounts Receivable

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

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Company’s customers were to deteriorate, resulting in their inability to make payments,

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additional allowances may be required.

Inventory

Inventories are valued at the lower of cost or market.  Cost of inventories is determined by the first-in, first-out (FIFO) method.  The Company generally considers inventory quantities beyond two-years usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly.

Goodwill and Intangible Assets

In accordance with FASBFinancial 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, 2011.2012.  This analysis did not indicate any impairment of goodwill.  There are no circumstances that indicate that Goodwill might be impaired at September 30, 2012.March 31, 2013.

Product Liability Reserves

Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims.claims that have been resolved.  The Company uses the most current available data to estimate claims.  As explained more fully under Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 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.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with Financial Accounting Standards Board (FASB)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 on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles -

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FASB ASC Topic 350 Goodwill and Intangibles.Other.

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 statementsStatements of incomeIncome 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 operations (other income (expense))(income) expense) in the period in which they occur.

Income Taxes

The Company accounts for taxes in accordance with the FASB ASC Topic 740, Income Taxes.  Under this method the Company records income tax expense and the related deferred taxes and tax benefits.

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 in which the rate is enacted.  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.  No valuation allowancereserve was deemed necessary at September 30, 2012March 31, 2013 or at December 31, 2011.2012.  Also, in accordance with FASB ASC Topic 740 (formerly FIN 48);, the Company had reserves on the books for uncertainties in tax positions of $118,000$121,000 at September 30, 2012,March 31, 2013, and $135,000$119,000 at December 31, 2011.2012.  These reserves are reviewed each quarter.

Other Comprehensive Income (Loss)

For the threequarter ended March 31, 2013 and nine-months ended September 30, 2012, and 2011, respectively, the sole component of Other Comprehensive Income (Loss) was a foreign currency translation adjustment.

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New Accounting Pronouncements

Accounting Standards Update (ASU) 2011-08,ASU 2011-11,Intangibles—GoodwillBalance Sheet (Topic 210): Disclosures about Offsetting Assets and Other (Topic 350):  Testing GoodwillLiabilities.This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for Impairment.  In September 2011,offset in the FASB issued guidancebalance sheet, and instruments and transactions subject to amend and simplify the rules relatedan agreement similar to testing goodwill for impairment.a master netting arrangement. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test.  The amendmentsrequirements are effective for annual and interim goodwill impairment tests performed for fiscal yearsperiods beginning on or after December 15, 2011.  Management is currently evaluating the impact on the consolidated financial statements as a result of potentially adopting this guidance, but does believe it will have any material impact.

ASU 2011-05,Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.  In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders' equity.  The amendments require that all non-owner changes in shareholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This guidance is effective for fiscal years,January 1, 2013, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted.  The Company adopted this guidance in the quarter ended March 31, 2012.  The adoption of this guidance did not have anyannual periods.  ASU 2011-11 currently has no impact on the Company'sCompany’s financial position,conditions, results of operations or cash flows andflows.

ASU 2011-12, “Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” issued in December 2011 amends ASU 2011-05 to reflect only impactedthose changes in Update 2011-05 that relate to the presentation of reclassification adjustments.  The amendments are being made to allow FASB time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  While FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments; entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05.  Public entities should begin applying these requirements for fiscal years ending after December 15, 2011.  Adoption of ASU 2011-12 had no material impact on the financial statements.

3. INVENTORIES

Inventories, net of reserves consisted of the following:

4. LINE OF CREDIT

On December 30, 2010, the Company agreed to a new Revolving Line of Credit Note and Loan Agreement with Sovereign Bank, NA (“Sovereign”).  The Company established a line of credit facility in the maximum amount of $10,000,000, maturing on December 31, 2014, with funds available for working capital purposes and other cash needs.  The loan is collateralized by all of the Company’s tangible and intangible assets.  The loan agreement provides for the

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payment of any borrowings under the agreement at an interest rate range of either LIBOR plus

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1.75% to plus 2.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime less 0.50% to plus 0.50% (for borrowings with no fixed term other than the December 31, 2014 maturity date), depending upon the Company’s then existing financial ratios.  At September 30, 2012,March 31, 2013, the Company’s ratio would allow for the most favorable rate under the agreement’s range, which would be a rate of 2.07%2.03% (LIBOR plus 1.75%).  The Company is required to pay an annual commitment fee for the access to the funds, and is also obligated to pay a “Line Fee” ranging from 17.5 to 35.0 basis points of the average unused balance on a quarterly basis, depending again upon the Company’s then existing financial ratios.  The Company may terminate the line at any time during the four year term, as long as there are no amounts outstanding.

As of September 30, 2012, andAt December 31, 2011,2012, the line of credit balance was $324,000. During the first quarter of 2013 the Company paid off the line of credit balance, and therefore had no outstanding borrowings on its line of credit.credit as of March 31, 2013.

As of September 30, 2012March 31, 2013 and December 31, 2011,2012, the Company was in compliance with all debt covenants.

5. 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 of the Company’s obligations under the indemnity agreements.

The Company has salary continuation agreements with one current employee, and one former employee who retired at the end of 2010.  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 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65.  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 $486,000$483,000 at September 30, 2012,March 31, 2013, of which $474,000$471,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000 is included in Other Liabilities, associated with the retired employee previously noted who is now receiving benefit payments.  The December 31, 20112012 liability of $468,000,$481,000, had $456,000$469,000 reported in Other Long Term Liabilities, and a current portion of $12,000 in Other Liabilities. The increase in the liability was largely related to the time value of money, and the

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related decrease in the discount rate used to compute the liability.

The Company has obtained and is the beneficiary of three whole life insurance policies with respect to the two employees discussed above, and one other employee policy.  The cash surrender value of such policies (included in Other Long Term Assets) amounts to $828,000$891,000 at September 30, 2012March 31, 2013 and $756,000$838,000 at December 31, 2011.2012.

As disclosed in detail in the December 31, 2012 Form 10-K, the Company has several lease obligations in place that will be paid out over time.  Most notably, the Company has a lease for the manufacturing facility in Banbury, England, and also the new building lease in Exton, Pennsylvania near the current main operating facility, which provides additional manufacturing, warehousing and distribution space.

Contingencies:

The Company’s general liability insurance policies are subject to deductibles or retentions, ranging primarily from $25,000 to $250,000 per claim, (depending on the terms of the policy and the applicable policy year) up to an aggregate amount.  The Company is insured on a ‘first dollar’ basis for workers’ compensation subject to statutory limits.  

In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”).  There has been an increase in the frequency of those Claims over the past twofew years relating to product liability.  The Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims.  The Company has in place commercial general liability insurance policies that cover the Claims, as noted above, including those alleging damages as a result of product defects.  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 $250,000, depending upon the insurance deductible in place for the respective claim year, and theyear.  The aggregate maximum exposure for all current open claims is estimated not to not exceed $3,700,000.approximately $2,400,000, which represents the defense costs and any settlements or adverse verdicts incurred over time within the insurance policy deductibles or retentions.  It is possible that the results of operations or liquidity and capital resources of the Company could be adversely affected by the ultimate outcome of the pending litigation as a result of the costs of contesting such lawsuits, potentially materially. Again, theThe Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation and, accordingly, the liability in the consolidated financial statements represents an accrual for legal costs for services previously rendered and outstanding settlements for existing claims. The liabilities recorded on the Company’s books at September 30, 2012March 31, 2013 and December 31, 20112012 were $598,000$663,000 and $414,000,$537,000, respectively, and are included in Other Liabilities.  

In 2010, the Company took one of the Claims to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe product, but that under the unique law in Pennsylvania for strict liability, the product lacked “any element” necessary to make it safe for its intended use.  The Company has appealed that portion of the verdict, and the Supreme Court of Pennsylvania has agreed to hear the case with the focus on whether the product liability law in Pennsylvania should be revised.  

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In 2007, the Company instituted a legal complaint against a former insurer, seeking reimbursement of amounts paid in defense of a class action litigation, as well as supplementary payments made in connection with the class action.  In March of 2012, the Company and the insurer settled the litigation for $4,700,000, with receipt of the cash occurring during that same month.  For clarity regarding this item, it is defined as the “Insurance Legal Recovery”Recovery or ILR” on the accompanying condensed consolidated statement of income for the nine-monthsthree-months ended September 30,March 31, 2012.

In February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency who is investigating the case, and being held in a custodial account.  The value of the assets amount to $333,000$291,000 at September 30, 2012,March 31, 2013, and are included in Other Long Term Assets.  It is possible that not all of

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those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection, but the outcome is currently not known or able to be estimated.  The Company is currently pursing all avenues in an effort to bring closure to the event, reclaim the assets, and has since replaced the aforementioned insurance coverage.

Warranty Commitments:

Gas transmission products such as those made by the Company carry potentially serious personal injury risksAs disclosed in Note 13, Subsequent Events, in the eventCompany’s December 31, 2012 Form 10-K, our subsidiary, Omega Flex Limited (“OFL”), had been sued regarding the installation of failuresTracPipe product in an apartment complex in England.  In March of 2013, OFL settled that case by entering into a settlement agreement and making a one-time payment of £800,000 to resolve all claims associated with the field.  As a result,project.  The Company subsequently recorded approximately $1,300,000 in Other Liabilities at December 31, 2012 to reflect the Company performs extensive internal testingevent.  The amount was paid in full in March 2013, and other quality control procedures.  Historically, duetherefore there is no liability relating to the extensive nature of these quality controls the Company has not had a meaningful warranty claim rate, and the warranty expense isde minimis. Accordingly, the Company does not maintain a warranty reserve beyond a nominal amount.this at March 31, 2013.

6. STOCK BASED 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 and of any of its subsidiaries.  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 Unitsdoes not receive any of the following:

§

ownership interest in the Company

§

shareholder voting rights

§

other incidents of ownership to the Company’s common stock

The Units are granted to participants upon the recommendation of the Company’s CEO, 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, and at an amounta minimum, the Unit’s value will be 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.  date.  

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The Units follow a vesting schedule, with a maximum vesting of 3 years after the grant date.  Upon vesting, the Units represent a contractual right of payment for the value of the Unit.  The Units will be paid on their maturity date, one year after all of the Units granted in a particular award have fully vested, unless an acceptable event occurs under the terms of the Plan prior to one year, which would allow for earlier payment.  The amount to be paid to the participant on the maturity date is dependent on the type of Unit granted to the participant.

The Units may beFull Value, in which the value of each Unit at the maturity date, will equal the closing price of the Company’s common stock as of the maturity date; orAppreciation Only, in which the value of each Unit at the maturity date will be equal to the closing price of the Company’s common stock at the maturity dateminus the closing price of the Company’s

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common stock at the grant date.

On December 9, 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 phantom stock units outstanding as of the record date of the common stock dividend.  The dividend equivalent will be paid at the same time the underlying phantom stock units are paid to the participant.

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 his 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 Phantom Stock Units.  As of December 31, 2011,2012, the Company had 16,38116,790 unvested units outstanding, all of which were granted atFull Value.  On February 16, 2012,The Company did not make any new grants during the Company granted an additional 8,690Full Value Units with a fair valuefirst quarter of $14.44 per unit on grant date, using historical volatility. In all cases, the grant price was equal to the closing price of the Company’s common stock at the grant date.2013. In March 2012,2013, the Company paid $77,000$154,000 for the 5,0768,645 fully vested and matured units that were granted on March 6, 2008.February 20, 2009.  As of September 30, 2012,March 31, 2013, the Company had 16,7908,493 unvested 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 period of each grant or award.

The FASB ASC Topic 718, Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately to vest.

Forfeitures represent only the unvested portion of a surrendered Unit and are typically estimated based on historical experience.  Based on an analysis of the Company’s historical data, which has limited experience related to any stock-based plan forfeitures, the Company applied a

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0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of September 30, 2012.March 31, 2013.

The total Phantom Stock related liability as of September 30, 2012March 31, 2013 was $230,000$299,000 of which $107,000$143,000 is included in other liabilities, as it is expected to be paid in March 2013,2014, and the balance of $123,000$156,000 is included in other long term liabilities.

In accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation expense of approximately $9,000$126,000 and $28,000$2,000 related to the Phantom Stock Plan

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for each of the nine month periodsthree months ended September 30,March 31, 2013 and 2012, and 2011 respectively.

The following table summarizes information about the Company’s nonvested phantom stock Units at September 30, 2012:March 31, 2013:

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Net Sales.  The Company’s sales for the first nine months of 2012 increased $7,015,000 (18.2%) over the same period in 2011, ending at $45,590,000 and $38,575,000 in 2012 and 2011, respectively.  Volume, or units sold, increased approximately 15% compared to the prior year quarter, and price increases were also recognized largely related to the sales of the Company’s highly advanced  TracPipe^® CounterStrike^®, which sells at a premium compared to its predecessor product.

The success over the prior year is primarily driven by the appeal in the gas market of the Company’s flagship product, TracPipe^® CounterStrike^®, along with a surge in the sales of its emerging products, such as DoubleTrac^®and DEF-Trac^® double-containment flexible piping systems.  The increase in sales has been most notable in the domestic operations, as the construction environment in the United States has shown signs of economic recovery duringMarch 31, 2012.

Gross Margins.  The Company’s gross profit margins are very similar for the two periods, being 51.0% and 51.1% for the nine-months ended September 30, 2012 and 2011, respectively.

Selling Expenses.  Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight.  Selling expense was $9,049,000 and $7,825,000 for the nine-months ended September 30, 2012 and 2011, respectively, representing an increase of $1,224,000.  Commissions and Freight increased largely in unison with the increase in sales volume, accounting for $840,000, or close to 70% of the variance from last year.  The Company also had more costs in advertising relating to various initiatives, and additional sales staff and travel related expenses compared to last year.  Sales expense was however lower than the prior year when compared as a percent of net sales, being 19.8% for the nine-months ended September 30, 2012, and 20.3% for the nine-months ended September 30, 2011.

General and Administrative Expenses.  General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services.  General and administrative expenses were $7,667,000 and $5,618,000 for the nine-months ended September 30, 2012 and 2011, respectively, increasing $2,049,000 between periods.  Compared to last year, the Company incurred $1,195,000 of additional legal and insurance related expenses primarily associated with product liability claims and coverage.  Furthermore, the Company absorbed $942,000 additional administrative staffing expenses in 2012, which includes an increase in incentive compensation related to increased profits from this year’s general business activities, as well as the additional earnings derived from the Insurance Legal Recovery discussed below.  Those increases were slightly offset by efficiencies found in various other items.  As a percentage of sales, general and administrative expenses increased to 16.8% for the nine-months ended September 30, 2012 from 14.6% for the nine months ended September 30, 2011.

Insurance Legal Recovery –.  As previously disclosed in thea Form 8-K/A filed with the Securities and Exchange Commission on March 15, 2012, the Company agreed to settle a legal dispute relating to insurance coverage and received $4,700,000 as part of the settlement during

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the that same month.  This receipt was all recorded as income during the first quarter of 2012.  There was no comparable event during the previous year,first quarter of 2013, and thus the change between periods is $4,700,000.  This event also impacted incentive compensation, which is included in the General and Administrative Expenses, and Income Tax Expense,Expenses, increasing both significantly compared to lastthis year.

Engineering Expense.  Engineering expenses consist of development expenses associated with the development of new products and costs relatedenhancements to enhancements of existing products, and manufacturing processes.engineering costs.  Engineering expenses increased $76,000 between periods, due to various insignificant items, as ended at $1,930,000$83,000.  They were

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$718,000 and $1,854,000$635,000 for the ninethree months ended September 30,March 31, 2013 and 2012, and 2011, respectively.  Engineering expenses as a percentage of sales improved, being 4.2%were consistent at 4.4% for the ninethree months ended September 30, 2012, compared to 4.8% for the nine months ended September 30, 2011.March 31, 2013, and 2012.

Operating Profits.  Reflecting all of the factors mentioned above, Operating Profits were up 109.6%, increasing by $4,856,000 to a profit of $9,286,000 in the nine-months ended September 30, 2012, from a profit of $4,430,000 in the nine-months ended September 30, 2011.$3,535,000 or 58.9% less than last year, being $2,463,000 at March 31, 2013 and $5,998,000 at March 31, 2012.  It should be noted however that Excluding the Insurance Legal Recovery lessand its applicable auxiliary costs noted above, operating profits were still up $917,000 or approximately 21% compared toincreased by nearly 14% over the prior year.

Interest Income (Expense)-Net.  Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit.  The interest income (expense) was nominal for the first quarter of 20122013 and 2011, and both periods had similar amounts of income.2012.  

Other Income (Expense)-Net.  Other Income (Expense)-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our U.K. subsidiary.  The British Pound has weakened compared to last year, and was therefore largely responsible for a decline in other income (expense) between quarters of $143,000.  There was an expense recorded during the first quarter of 2013, versus income during the same quarter last year.

Income Tax Expense.  Income Tax Expense was $3,292,000$794,000 for the first ninethree months of 2012,2013, compared to $1,552,000$2,137,000 for the same period in 2011.  Of2012.  The $1,343,000 change in the $1,740,000 increase in tax expense approximately $1,400,000 was largely the result of the receipt of the Insurance Legal Recovery with the remaining increased associated with higher profits from general operations.in 2012.  The Company’s effective tax rate in 20122013 does however approximate the 20112012 rate and does not differ materially from expected statutory rates.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Financial Reporting Release No. 60, released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements.  Note 2 of the Notes to the Condensed Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our condensed Consolidated Financial Statements. The following is a brief discussion of the Company’s more significant accounting policies.

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 valuations, inventory valuations, goodwill valuation, product liability reserve and accounting for income taxes.  Actual amounts could differ significantly from these estimates.

Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:

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Revenue Recognition

The Company’s revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe.  Under GAAP, revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.  The following criteria represent preconditions to the recognition of revenue:

·

Persuasive evidence of an arrangement for the sale of product or services must exist.

·

Delivery has occurred or services rendered.

·

The sales price to the customer is fixed or determinable.

·

Collection is reasonably assured.

The Company recognizes revenue upon shipment in accordance with the above principles.

Gross sales are reduced for all consideration paid to customers for which no identifiable benefit is received by the Company.  This includes promotional incentives, which includes various programs including year-end rebates and discounts.  The amounts of certain incentives are known with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at the reporting date.

Commissions, for which the Company receives an identifiable benefit, are accounted for as a sales expense.

Accounts Receivable

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,

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additional allowances may be required.

Inventory

Inventories are valued at the lower of cost or market.  Cost of inventories is determined by the first-in, first-out (FIFO) method.  The Company generally considers inventory quantities beyond two-years usage, measured on a historical usage basis, to be excess inventory and reduces the gross carrying value of inventory accordingly.

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Goodwill and Intangible Assets

In accordance with FASB ASC Topic 350, Intangibles – Goodwill and Other, the Company performsperformed an annual impairment test in accordance with this guidance at the endas of each year, or when a triggering event is noted that may create impairment.  This was last tested at December 31, 2011, and the2012.  This analysis did not indicate any impairment of goodwill.  There are no circumstances that indicate that Goodwill might be impaired at September 30, 2012.March 31, 2013.

Product Liability Reserves

Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims.claims that have been resolved.  The Company uses the most current available data to estimate claims.  As explained more fully under Contingencies, for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $250,000 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.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with Financial Accounting Standards Board (FASB)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 on its actively traded share value – a level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the

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FASB ASC Topic 350 Goodwill and Intangibles.350.

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

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exchange rates prevailing on the balance sheet dates.  The Statements of Income 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 operations (other income (expense))(income) expense) in the period in which they occur.

Accounting for Income Taxes

The Company accounts for federal tax liabilitiestaxes in accordance with the FASB ASC Topic 740, Income Taxes.  Under this method the Company recordedrecords income tax expense and the related deferred taxes and tax benefits.

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 includesin which the enactment date.rate is enacted.  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.  No valuation allowancereserve was deemed necessary at September 30, 2012March 31, 2013 or at December 31, 2011.2012.  Also, in accordance with FASB ASC Topic 740 (formerly FIN 48), the Company had reserves on the books for uncertainties in tax positions of $118,000$121,000 at September 30, 2012,March 31, 2013, and $135,000$119,000 at December 31, 2011.2012.  These reserves are reviewed each quarter.

Other Comprehensive Income (Loss)

For the quarter ended September 30,March 31, 2013 and 2012, and 2011, respectively, the sole component of Other Comprehensive Income (Loss) was a foreign currency translation adjustment.

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LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company’s primary cash needs have been related to working capital (including capital used for inventory purchases),items, which the Company has largely funded through cash generated from operations.  

As of September 30, 2012,March 31, 2013, the Company had a cash balance of $9,206,000.$658,000.  Additionally, the Company has a $10,000,000 line of credit available with Sovereign Bank, as discussed in detail in Note 4, which currently hashad no borrowings outstanding upon it.it at March 31, 2013.  At December 31, 2011, The2012, the Company had cash of $3,476,000,$939,000, and therefore has experienced an increase in cashborrowings against the line of $5,730,000 during 2012.credit of $324,000.

Operating Activities

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital.  

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For the first ninethree months of 2012,2013, the company’sCompany’s cash from operating activities increased $6,557,000 over the comparable periodwas $186,000.  The first quarter of 2012 experienced cash from operating activities of $5,018,000.  The significant increase in the prior year.  A significant factor contributing to the increase2012 was largely related to the Insurance Legal Recovery received during the first quarter of 2012,ILR discussed in Note 5, Commitments and Contingencies, which enhanced cash from operations by approximately $3,300,000$3,900,000 after considering the deduction for taxes.  Additionally, in 2011auxiliary costs.  Inversely, the Company paid approximately $900,000 more for insurance costs than in 2012, mostly$1,300,000 during the first quarter of 2013 related to long-term coverage.the settlement in England, also discussed in Note 5.  Those two isolated events, along with various other less significant items account for the $4,832,000 decrease in cash from operating activities between periods.

As a general trend, the Company tends to deplete cash during the first four months ofearly in the year, as significant payments are typically made for accrued promotional incentives, incentive compensation, and taxes.  Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year.  If excess cash is available at the end of the year, and no sensible investment opportunity exists, the Company may, and has shown a willingness in the past, to declare and pay a dividend to the shareholders.  

Investing Activities

Cash used in investing activities for the first ninethree months of 2013 and 2012 was $92,000 and 2011 was $109,000 and $85,000,$38,000, respectively, all related to capital expenditures for both years.periods.  

We believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, and the potential for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for additional capacity.  There are currently noRegarding any known material commitments for capital expenditures.  expenditures, the Company does anticipate an increase in capital spending in 2013 related to the expansion of our current manufacturing capabilities, as well as space, as the Company has opened another manufacturing facility located largely adjacent to the existing main manufacturing facility in Exton, PA.  Total capital spending for the coming year could approach $1,800,000.

Financing Activities

There were no financing activities relative toAt December 31, 2012, the line of credit balance was $324,000. During the first nine monthsquarter of 2012 or 2011.2013 the Company paid off the line of credit balance, and therefore had no outstanding borrowings on its line of credit as of March 31, 2013.

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CONTINGENT LIABILITIES AND GUARANTEES

See Note 5 to the Company’s financial statements.

 OFF-BALANCE SHEET ARRANGEMENTS

Refer to Item 7 of the Company’s 20112012 year-end Form 10-K under the caption “Tabular Disclosure of Contractual“Off-Balance Sheet Obligations and Off-Balance Sheetor Arrangements”.

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Item 3. Quantitative And Qualitative Information About Market Risks

The Company does not engage in the purchase or trading of market risk sensitive instruments.  The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations.  No market risk sensitive instruments are held for speculative or trading purposes.  

Item 4 – Controls And Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

At the end of the fiscal thirdfirst quarter of 2012,2013, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures.  The Company’s disclosure controls and procedures are designed to ensure that the Company records, processes, summarizes and reports in a timely manner the information required to be disclosed in the periodic reports filed by the Company with the Securities and Exchange Commission.  The Company’s management, including the chief executive officer and chief financial officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s Disclosure Controls and Procedures as defined in the Rule 13a-15(e) of Securities Exchange Act of 1934.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that, as of the date of this report, the Company’s disclosure controls and procedures are effective to provide reasonable assurance of achieving the purposes described in Rule 13a-15(e), and no changes are required at this time.

(b)

Changes in Internal Controls.

There was no change in the Company’s “internal control over financial reporting” (as defined in rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the three-month period covered by this Report on Form 10-Q that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting subsequent to the date the chief executive officer and chief financial officer completed their evaluation.

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PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”).  There has been an increase in the frequency of those Claims over the past few years relating to product liability.  The Company does not believe that the Claims have legal merit, and is therefore vigorously defending against those Claims.  The Company has in place commercial general liability insurance policies that cover the Claims, as noted above, including those alleging damages as a result of product defects.  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

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from zero to a maximum of $250,000, depending upon the insurance deductible in place for the respective claim year.  The aggregate maximum exposure for all current open claims is estimated not to exceed approximately $2,400,000, which represents the defense costs and any settlements or adverse verdicts incurred over time within the insurance policy deductibles or retentions.  It is possible that the results of operations or liquidity and capital resources of the Company could be adversely affected by the ultimate outcome of the pending litigation as a result of the costs of contesting such lawsuits, potentially materially. The Company is not presently involvedcurrently unable to estimate the ultimate liability, if any, that may result from the pending litigation and, accordingly, the liability in any single litigation that it believes could materiallythe consolidated financial statements represents an accrual for legal costs for services previously rendered and adversely affect its financial condition or results of operations.outstanding settlements for existing claims. The results could however be materially impacted ifliabilities recorded on the cumulative open cases resultedCompany’s books at March 31, 2013 and December 31, 2012 were $663,000 and $537,000, respectively, and are included in unfavorable determinations.Other Liabilities.  

In October 2010, the Company took one of the first case relatingClaims to CSSTtrial in Pennsylvania, and lightning to trial.  At trialthe jury returned a verdict that the Company proved that it was not negligent in designing and selling the TracPipe product, but that under the unique law in Pennsylvania for strict liability, the product design, but the jury did find the Company liable under strict product liability.  However, the company has appealed the jury verdict.  The final outcome of the case is not yet determined.lacked “any element” necessary to make it safe for its intended use.  The Company has insurance protectionappealed that portion of the verdict, and the Supreme Court of Pennsylvania has agreed to hear the case with regards to this case and therefore nothe focus on whether the product liability is reflectedlaw in the financials associated with this item.Pennsylvania should be revised.  

In 2007, the Company instituted a legal complaint against a former insurer, seeking reimbursement of amounts paid in defense of a class action litigation, as well as supplementary payments made in connection with the class action.  In March of 2012, the Company and the insurer settled the litigation for $4,700,000, with receipt of the cash occurring during that same month.  For clarity regarding this item, it is defined as the “Insurance Legal Recovery or ILR” on the accompanying condensed consolidated statement of income for the three-months ended March 31, 2013.

In February of 2012, the Company was made aware of a fraud perpetrated by an outside party involving insurance related premiums that the Company had prepaid for umbrella coverage. The assets are currently secured by a governmental agency who is investigating the case, and being held in a custodial account.  The value of the assets amount to $291,000 at March 31, 2013, and are included in Other Long Term Assets.  It is possible that not all of those funds will be returned to the Company, or the Company may need to incur additional costs to procure collection, but the outcome is currently not known or able to be estimated.  The Company is currently pursing all avenues in an effort to bring closure to the event, reclaim the assets, and has since replaced the aforementioned insurance coverage.

As disclosed in Note 13, Subsequent Events, in the Company’s December 31, 2012 Form 10-K, our subsidiary, Omega Flex Limited (“OFL”), had been sued regarding the installation of TracPipe product in an apartment complex in England.  In March of 2013, OFL settled that case by entering into a settlement agreement and making a one-time payment of £800,000 to resolve all claims associated with the project.  The Company had subsequently recorded approximately $1,300,000 in Other Liabilities at December 31, 2012 to reflect the event.  The amount was paid in full during the same month, and therefore there is no liability relating to this at March 31, 2013.

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Item 4 – Submission of Matter to a Vote of the Security Holders

No matters were submitted to the security holders of the Company for a vote during the thirdfirst quarter of 2012.2013.

Item 6 - Exhibits

Exhibit

No.

Description

31.1

Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

31.2

Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1

Certification of Chief Executive Officer and Chief Financial Officer of Omega Flex, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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