UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017March 31, 2021

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________________ to ______________________

Commission File Number 000-51372

Omega Flex, Inc.

(Exact name of registrant as specified in its charter)

(610)524-7272

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes[X] ☒ No [  ]☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes[X] ☒ No [  ] ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of The Exchange Act). Yes ☐ No ☒

Yes [  ] No

[X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 12 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the courts.

The number of shares of the registrant’s common stock outstanding as of September 30, 2017March 31, 2021 was 10,091,822.10,094,322.

OMEGA FLEX, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021

INDEX

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Amounts)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)(Amounts in Thousands except Earnings per Common Share)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)(Amounts in Thousands)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)(Amounts in Thousands)

(unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)(Amounts in Thousands)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

OMEGA FLEX, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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 quarter ended September 30, 2017March 31, 2021 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, and is currently engaged in a number of different markets, including construction, manufacturing, petrochemical transfer, pharmaceutical and other industries.

The Company’s business is managedcontrolled as a single operating segment that consists of the manufacture and sale of flexible metal hose (also described as corrugated tubing), as well as the sale of the Company’s related proprietary fittings and a vast array of accessories.

The Company’s products are concentrated in residential and commercial construction, and general industrial markets, withCompany is a comprehensive portfolioleading manufacturer of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping,metal hose, which is used for gas pipingin a variety of ways to carry gases and liquids within residential and commercial buildings. Through its flexibility and easetheir particular applications. Some of use, the Company’s TracPipe^® and TracPipe^®CounterStrike^®more prominent uses include:

The Company manufactures flexible gas piping, along with its fittings distributed under the trademarks AutoSnap^® and AutoFlare^®, allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s products are manufactured primarilymetal hose at its facilities in Exton, Pennsylvania, facilitiesand Houston, Texas in the United States (U.S.), and in Banbury, Oxfordshire in the United Kingdom. A majority of the Company’s sales across all industries are generatedKingdom (U.K.), and primarily sells its products through independent outside sales organizations such as sales representatives,distributors, wholesalers and distributors, or a combination of both. The Company has a broad distribution network into original equipment manufacturers (“OEMs”) throughout North America and Europe, and to a lesser extent in other global markets.

2. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP)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 atas of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significantManagement develops, and changes periodically, these estimates and assumptions relatebased on historical experience and on various other factors that are believed to revenue recognition and related sales incentives, accounts receivable allowances, inventory valuations, goodwill valuation, product liability reserve, stock-based compensation valuations and accounting for income taxes.be reasonable under the circumstances. Actual amounts could differ significantly from these estimates.

Revenue Recognition

The Company’sWith regard to 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 doapplies the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The standard requires revenue to be entitledrecognized in a manner to depict the benefits represented bytransfer of goods or services to a customer at an amount that reflects the revenues. consideration expected to be received in exchange for those goods or services.

The principle of Topic 606 was achieved through applying the following criteria represent preconditions to the recognition of revenue:five-step approach:

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:

TheIf it was concluded that the above factors were in place for the Company, recognizesit 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 shipmentestimates 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 accordancenature, contract, terms, timing, and transfer of control of goods. As indicated within Note 2, Significant Accounting Policies, in these condensed consolidated financial statements, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically contained within North America, with the above principles.

Gross salesremainder scattered internationally. All performance assessments and resource allocations 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 projectedgenerally based upon the most reliable information available atreview of the reporting date. Commissions are accounted forresults of the Company as a sales expense.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 AccountsCredit Losses

Accounts receivableAll accounts receivables are reduced bystated at amortized cost, net of allowances for credit losses, and adjusted for any write-offs. The Company maintains allowances for credit losses, which represent an allowanceestimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for amounts that may become uncollectible in the future.supportable forecasts when appropriate. The estimated allowance for uncollectible amountsestimate 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 conditiona result 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 estimateongoing assessments and evaluations of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on any known collection issues,collectability, historical loss experience, and other currently available evidence. future expectations in estimating credit losses in its receivable portfolio. For accounts receivables, the Company uses historical loss experience rates and applies them to a related aging analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics.

The reserve for credit losses, which include future credits, discounts, and doubtful accounts, was $912,000$1,147,000 and $926,000$1,124,000 as of September 30, 2017March 31, 2021 and December 31, 2016,2020, 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.

Inventories

Inventories are valued at the lower of cost or market.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 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 carriedinitially recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are capitalized.

Goodwill

In accordance with Financial Accounting Standards Board (FASB)(“FASB”) ASC Topic 350, Intangibles – Goodwill and Other (ASU 2017-04), using the simplified method as adopted, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2016.2020. This analysis did not indicate any impairment of goodwill. There were no circumstances that indicate that Goodwill might be impaired at September 30, 2017.

However, the duration and severity of the COVID-19 pandemic could result in future goodwill impairment charges. While we have concluded that a triggering event did not occur during 2020 or as of March 31, 2021, a prolonged pandemic could impact the Company’s results of operations in a manner significant enough to trigger an impairment test.

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)(“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, Compensation - Stock Compensation(“Topic 718”), the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units.Units and are accordingly recorded as liabilities. Additionally, the liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. Further details of the Plan are provided in Note 6.

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 5, Commitments and Contingencies, 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$25,000 to $1,000,000$2,000,000 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 (“Topic 842”) which defines a lease as any contract that conveys the right to use a specific asset for a period of time in exchange for consideration. Leases are classified as a finance lease, formerly called a capital lease, if any of the following criteria are met:

For any leases that do not meet the criteria identified above for finance leases, the Company treats such leases as operating leases. As of March 31, 2021 and December 31, 2020, each of the Company’s leases are classified as operating leases.

Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities.

There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term.

The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components, such as common area maintenance, which are generally accounted for separately. In general, the Company will assess if non-lease components are fixed and determinable, or variable, when determining if the component should be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes its incremental borrowing rate at the time of the lease agreement.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.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 – aupon Level 1 input –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.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, most of which relate to ourthe Company’s United Kingdom subsidiary whose functional currency is British pound sterling, are translated into U.S. dollars at 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 the statements of income (other income (expense))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.Taxes. Under this method the Company recordsrecorded 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The Company electedchanges include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to recognize interestcarryback certain net operating losses, and penalties relatedincreasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. The tax law changes in the CARES Act did not have a material impact on the Company’s income tax matters as a component of the income tax provision in the consolidated statements of income. For additional information regarding ASC 740-10, see Note 8 of the Company’s December 31, 2016 Form 10-K.provision.

Other Comprehensive Income

For the threequarters ended March 31, 2021 and nine months ended September 30, 2017 and 2016,2020, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments.

Significant Concentration

The Company has one significant customer who representswhich represented more than 10%10% of the Company’s Accounts Receivable at March 31, 2021 and December 31, 2020. That same customer represented more than 10% of the Company’s total Net Sales for the three and nine months ended September 30, 2017March 31, 2021 and 2016, and more than 10% of the Company’s Accounts Receivable balance at September 30, 2017 and December 31, 2016.2020. Geographically, the Company has a significant amount of sales in the United States versus internationally. These concentrations are consistent with those discussed in detail in the Company’s December 31, 20162020 Form 10-K, and there has been no significant change as of this quarterly report.10-K.

Subsequent Events

The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its condensed consolidated financial statements. Refer to Note 910 of the condensed consolidated financial statements.

Recent Accounting Pronouncements

In May 2014,March 2020, the FASB issued ASU 2014-09,No. 2020-04, Revenue from Contracts with CustomersReference Rate Reform (Topic 606)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, requiring. The ASU applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity to recognizehas elected certain optional expedients for and that are retained through the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company in the first quarter of fiscal year 2018. The Company plans to adopt the revenue guidance effective January 1, 2018, using the modified retrospective approach. The Company has substantially completed its assessmentend of the potential impact on its financial statements and currently does not expect the adoption to have a material impact on its financial statements or related disclosures. Further, it does not expect to change the manner or timing of recognizing revenue as a majority of its revenue transactions are recognized when product is shipped.

In July 2015, the FASB issued ASU 2015-11,Simplifying the Measurement of Inventory (Topic 330). Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated.hedging relationship. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning afterall entities as of March 12, 2020 through December 15, 2016.31, 2022. The Company has evaluated the provisionsimpact of this statement, and concluded that the adoption of ASU 2015-112020-04 did not have a material impact on the Company’s condensed consolidated financial position or results of operations.statements.

In February 2016,December 2019, the FASB issued ASU 2016-02,2019-12, LeasesIncome Taxes (Topic 842)740): Simplifying the Accounting for Income Taxes.. Under this The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU lesseesalso adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are required to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and annual periodspublic business entities for fiscal years beginning after December 15, 2018.2020, including interim periods therein. Early adoption is permitted. The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard but currently believes the most significant impact relates to its accountingis permitted, including adoption in interim or annual periods for real estate operating leases.which financial statements have not yet been issued. The Company anticipates recognition of additional assetsadopted this new guidance, and corresponding liabilities related to leases upon adoption, but hasit did not quantified these amounts at this time. The Company plans to adopt the standard effective January 1, 2019.have a material impact on its condensed consolidated financial statements.

3. INVENTORIES

Inventories, net of reserves of $451,000 and $407,000 at March 31, 2021 and December 31, 2020, respectively, consisted of the following:

SCHEDULE OF INVENTORIES, NET OF RESERVES

4. LINE OF CREDIT AND OTHER BORROWINGS

As of October 2,On December 1, 2017, the Company agreed to a new proposed terms provided by Santander Bank, N.A. (“Santander”) which would allow the Company to potentially borrow up to $20,000,000 on an unsecured line of credit for a period of five years with interest rates slightly more favorable to the Company than provided in the December 29, 2014 agreement, which is detailed below. The revised formalAmended and Restated Revolving Line of Credit Note and Loan Agreement are currently being constructed, with finalization anticipated on or before December 31, 2017.

On December 29, 2014, the Company entered into an Amended and Restated Committed Revolving Line of Credit Note (“the Line”(the “Line”) and a SecondThird Amendment to the Loan Agreement with Santander. Santander Bank, N.A. (the “Bank”).The LineCompany established a line of credit facility in the maximum amount of $15,000,000, has a five year term$15,000,000, maturing on December 31, 2019,1, 2022, with funds available for working capital purposes and to fund dividends, andother cash needs. The loan is unsecured. The Lineloan agreement provides for the payment of any borrowings under the agreement at an interest rate range of either LIBOR plus 1.00%0.75% to plus 1.35%1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime from 0.00%Rate up to Prime Rate plus 0.10%0.50% (for borrowings with no fixed term other than the December 1, 2022 maturity date), depending upon the Company’s then existing financial ratios. At September 30, 2017,Currently, the Company’s financial ratiosratio would allow for the most favorable rate under the agreement’s range, which would be a rate of 2.3%0.86%. Under the terms of the agreement, theThe Company is also required to pay on a quarterly basis an unused facility fee equal toof 10 basis points of the average unused balance of the total Line commitment.note. The Company may terminate the line at any time during the five-year term, as long as there are no amounts outstanding.

During the quarter ended June 30, 2020, in an effort to ensure liquidity and secure all available resources during the COVID-19 pandemic, the Company borrowed the full amount of its capacity on the line of $15,000,000 at the prime rate of 3.25%. The Company repaid this amount in full prior to the end of such quarter, and as of December 31, 2020, had 0 borrowings on its line of credit. As of September 30, 2017 and DecemberMarch 31, 2016,2021, the Company had no0 outstanding borrowings on its line of credit, andcredit.

The Company was in compliance with all debt covenants.covenants as of March 31, 2021 and December 31, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S. On April 7, 2020, the Company received a loan from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the SBA’s Paycheck Protection Program (“PPP” and “PPP Loan”) created as part of the recently enacted CARES Act administered by the SBA. In connection with the PPP Loan, the Company entered into a promissory note filed as Exhibit 10.2 attached to Form 10-Q for the quarter ended March 31, 2020. Pursuant to the terms of the PPP Loan, the Company received total proceeds of $2,453,000 from the Bank at an interest rate of just below 1% per annum. After the issuance of the PPP Loan, the U.S. Treasury Department issued new guidance on the PPP program, and advised that publicly traded companies that had access to other sources of financing may not be appropriate candidates for the PPP Loans, and provided a grace period until May 7, 2020 for such companies to repay the previously issued PPP Loans. Accordingly, in light of this guidance, the Company repaid the PPP Loan by May 7, 2020.

Lastly, as stated above, borrowings under our line of credit facility bear interest at variable rates based on LIBOR. Currently, the Federal Reserve Bank is considering options and transitioning away from LIBOR, and as such, has formed the Alternative Rates Committee (ARRC). The ARRC selected the Secured Overnight Financing Rate (SOFR) as an appropriate replacement. SOFR is based on transactions in the overnight repurchase markets, which reflects a transaction-based rate on a large number of transactions, better reflecting current financing costs. Discussions are ongoing with the Bank with regards to transitioning the rate for the Line from LIBOR to another appropriate rate such as SOFR.

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 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.and/or past employees. These agreements provide for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death. The payment benefits range from $1,000$1,000 per month to $3,000$3,000 per month with the term of such payments limited to 15 years after the employee’s retirement at age 65.retirement. The agreements also provide for survivorship benefits if the employee dies before attaining age 65, and severance payments if the employee is terminated without cause; the amount of which is dependent on the length of company service at the date of termination. The net present value of the retirement payments associated with these agreements is $509,000$475,000 at September 30, 2017,March 31, 2021, of which $497,000$427,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000$48,000 is included in Other Liabilities, associated with the retired employee previously noted who is now receivingapplicable retirement benefit payments.payments over the next twelve months. The December 31, 20162020 liability of $515,000,$499,000 had $503,000$436,000 reported in Other Long Term Liabilities, and a current portion of $12,000$63,000 in Other Liabilities.

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.current and/or past employees. The cash surrender value of such policies (included in Other Long Term Assets) amounts to $1,257,000$1,562,000 at September 30, 2017March 31, 2021 and $1,169,000$1,556,000 at December 31, 2016.2020.

In addition to the above, the Company has other contractual employment and or change of control agreements in place with key employees, as previously disclosed and noted in the Exhibit Index to the Company’s December 31, 2020 Form 10-K. Obligations related to these arrangements are currently indeterminable due to the variable nature and timing of possible events required to incur such obligations.

As disclosed in detail in Note 9 of the Company’s December 31, 2016 Form 10-K,7, under the caption “Leases”, the Company has several lease obligations in place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves the manufacturing, warehousing and distribution functions. Additionally,

Lastly, as provided in Item 7 under the “Tabular Disclosure of Contractual Obligations and Off-Balance Sheet Arrangements”, of the Company’s December 31 2020 Form 10-K, the Company purchasedhas numerous purchase obligations in place for the operating facility at 427 Creamery Way in Exton, PA in February 2017, which was previously under lease through January 2018.forthcoming year, largely related to the Company’s core material inventory components.

Contingencies:

In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations and claims (collectively, the “Claims”). Most of theThe Claims including a putative class-action claim, relate to potential lightning damage to our flexible gas piping products, which impact legal and product liability related expenses. The Company does not believe the Claims have legal merit, and therefore has commenced a vigorous defense in response to the Claims. It is possible that the Company may incur increased litigation costs in the future due to a variety of factors, including a higher numbersnumber of Claims, higher legal costs, and higher insurance deductibles or retentions.

In 2010, the Company took its first Claim to trial in Pennsylvania, and the jury returned a verdict that the Company was not negligent in designing and selling the TracPipe^® product, but also returned a verdict for plaintiff on strict liability. The Company appealed that portion of the verdict, and in December 2014, the Supreme Court of Pennsylvania ruled in favor of the Company, and returned the case to the trial court for further hearings. The Company is currently appealing the trial court’s decision not to grant a new trial in this matter in spite of the Supreme Court decision. As a result of this new appeal, the Company was required during the second quarter of 2016 to post approximately $1,600,000 as security to proceed with the current appeal, and that collateral security is included in Other Long Term Assets as of September 30, 2017.

In February 2012, the Company was made aware of a fraud perpetrated by a third party broker involving insurance related premiums that the Company had prepaid for umbrella coverage. Upon discovery of the fraud, the Company replaced the aforementioned insurance coverage. The stolen assets were seized by a governmental agency investigating the case, and in the second quarter of 2016, the Company received restitution from the United States Department of Justice in the amount of $282,000. Of the amount received, $213,000 relieved the value of the assets on the books and the remaining $69,000 was recorded as a reduction of operating expenses. The Company also filed suit against a third party advisor arising from the transaction, alleging failure to exercise due diligence into the qualifications of the broker. In December 2016, the Company settled its suit with the advisor and its insurer for $132,500, which was included in Other Current Assets at December 31, 2016, and the case was dismissed, thus reducing insurance costs. These settlement proceeds were collected in January 2017.

In March 2017, a putative class action case was re-filedfiled against the Company and other parties in Missouri state court after the predecessor case was dismissed without prejudice by the federal court. The Company is vigorously defendingsuccessfully removed the case to federal court, and in August 2020, the court granted the defendants’ joint summary judgement motion, and dismissed the case. The parties have fully resolved the plaintiffs appeal of that decision, and the case has been dismissed by the plaintiffs, thus concluding the matter.

The Company was made aware of a potential legal liability regarding a legal dispute in the U.K., in which the Company’s subsidiary, Omega Flex Limited (“OFL”), was the claimant. After withdrawing the claim, the court determined that OFL was responsible for the defendant’s costs (including a portion of its attorneys’ fees). The Company reached an initial agreement during the fourth quarter of 2020 and made a payment of £320,000 accordingly. A nominal liability remains at March 31, 2021 and December 31, 2020 approximating any outstanding amounts that may potentially be due as part of the final arrangement.

The Company has in place commercial general liability insurance policies that cover themost Claims, which are subject to deductibles or retentions, ranging primarily from $25,000$25,000 to $1,000,000$2,000,000 per claim (depending on the terms of the policy and the applicable policy year), up to an aggregate amount. Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. The potential liability for a given claim could range from zero to a maximum of $1,000,000,$2,000,000, depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims as of March 31, 2021 is estimated to not exceed approximately $3,600,000,$4,300,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the condensed consolidated financial statements primarily represents an accrual for legal costs for services previously rendered, and outstanding or anticipated settlements for existing claims.Claims. The liabilities recorded on the Company’s books at September 30, 2017March 31, 2021 and December 31, 20162020 were $300,000$340,000 and $273,000,$642,000, respectively, and are included in Other Liabilities.

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. 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:

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, at an amount equal to the closing price of the Company’s common stock on the grant date, but are recorded at fair value using the Black-Sholes method as described below. The Units follow a vesting schedule, with a maximum vesting of three years after the grant date. Upon vesting, the Units represent a contractual right of payment for the value of the Unit.Unit and therefore are stated as liabilities in accordance with Topic 718. 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 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, 2016,2020, the Company had 23,67113,252 unvested units outstanding, all of which were granted atFull Value. On February 14, 2017,18, 2021, the Company granted an additional 7,7502,412Full ValueUnits with a fair value of $41.68$146.06 per unit on grant date, using historical volatility. In February 2021, the Company paid $1,214,000 for the 7,750 fully vested and matured units that were granted during 2017, including their respective earned dividend values. As of September 30, 2017,March 31, 2021, the Company had 20,0469,872 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 0%0% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of September 30, 2017.March 31, 2021.

The total Phantom Stock related liability as of September 30, 2017March 31, 2021 was $2,051,000$2,557,000 of which $776,000$1,264,000 is included in Other Liabilities, as it is expected to be paid in February 2018,within the next twelve months, and the balance of $1,275,000$1,293,000 is included in Other Long Term Liabilities. At December 31, 2016,2020, the total Phantom Stock liability was $1,624,000,$3,331,000, with $506,000$1,378,000 in Other Liabilities, and $1,118,000$1,953,000 included in Other Long Term Liabilities.

Related to the Phantom Stock Plan, in accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation expense of approximately $855,000 and $409,000$441,000 for the ninethree months ended September 30, 2017March 31, 2021, and 2016, respectively.compensation income of $467,000 for the three months ended March 31, 2020. Compensation income or expense for a given period largely depends upon fluctuations in the Company’s stock price.

The following table summarizes information about the Company’s nonvested phantom stock Units at September 30, 2017:March 31, 2021:

SUMMARY OF NONVESTED PHANTOM STOCK UNITS

The total unrecognized compensation costs calculated at September 30, 2017March 31, 2021 are $977,000$1,354,000 which will be recognized through February of 2020.2024. The Company will recognize the related expense over the weighted average period of 1.3 years.1.6 years.

7. SHAREHOLDERS’ EQUITYLEASES

In the U.S., the Company owns its two main operating facilities located in Exton, Pennsylvania. In addition to the owned facilities, the Company also has operations in other locations that are leased, as well as other leased assets. In conjunction with the new guidance for leases, as defined by the FASB with ASU 2016-02, Leases (Topic 842), the Company has described the existing leases, which are all classified as operating leases, pursuant to the below.

In the U.S., the Company leases a facility in Houston, Texas, which currently provides manufacturing, stocking and sales operations, with the lease term running through October 2024. Additionally, the Company leases its corporate office space in Middletown, Connecticut, with the lease term expiring in June 2022.

In the U.K., the Company leases a facility in Banbury, England, which serves manufacturing, warehousing, and other operational functions. The lease in Banbury was effective April 1, 2006 and had a 15-year term ending in March 2021.As of September 30, 2017March 31, 2021, this lease is month to month and currently being negotiated for renewal.

In addition to property rentals, the Company also has lease agreements in place for various fleet vehicles and equipment with various lease terms.

At March 31, 2021, the Company has recorded right-of-use assets of $395,000, and a lease liability of $399,000, of which $193,000 is reported as a current liability. At December 31, 2020, the Company had recorded right-of-use assets of $493,000, and a lease liability of $499,000, of which $247,000 is reported as a current liability. The respective weighted average remaining lease term and discount rate are approximately 2.47 years and 2.56% as of March 31, 2021.

Rent expense for operating leases was approximately $96,000 and $75,000 for the three months ended March 31, 2021 and 2020, respectively.

Future minimum lease payments, inclusive of interest, under non-cancelable leases as of March 31, 2021 is as follows:

SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES

8. SHAREHOLDERS’ EQUITY

As of March 31, 2021 and December 31, 2016,2020, the Company had authorized 20,000,000 common stock shares with par value of $0.01$0.01 per share. AtFor both dates, the number of shares issued was 10,153,633, andperiods, the total number of outstanding shares was 10,091,822, with the 61,811 variance representing10,094,322, shares held in Treasury.Treasury was 59,311, and total shares issued was 10,153,633.