UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period endedSeptember 30, 2019

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

(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, 2020

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

For the transition period from ________________________ to ______________________

Commission File Number000-51372

Omega Flex, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania23-1948942

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

  
451 Creamery Way,Exton,PA19341
(Address of principal executive offices)(Zip Code)

(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):

Large accelerated filer [  ]Accelerated filer [X]Non-accelerated filer [  ]Smaller reporting Company [  ]

Large accelerated filer ☐ Accelerated filer Non-accelerated filer ☐ Smaller reporting Company

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

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareOFLXNASDAQ Global Market

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, 20192020 was 10,094,322.10,094,322.

 

 

   
 

OMEGA FLEX, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20192020

INDEX

Page No.
PART I - FINANCIAL INFORMATION 
  
Item 1 – Financial Statements
  
Condensed consolidated balance sheets atas of September 30, 20192020 (unaudited) and December 31, 201820193
  
Condensed consolidated statements of income for the three-monthsthree and nine-monthsnine months ended September 30, 2020 and 2019 and 2018 (unaudited)4
  
Condensed consolidated statements of comprehensive income for the three-monthsthree and nine-monthsnine months ended September 30, 2020 and 2019 and 2018 (unaudited)5
  
Condensed consolidated statements of shareholders’shareholder’s equity for the three-monthsthree and nine-monthsnine months ended September 30, 2020 and 2019 and 2018 (unaudited)6
  
Condensed consolidated statements of cash flows for the nine-monthsnine months ended September 30, 2020 and 2019 and 2018 (unaudited)8
  
Notes to the condensed consolidated financial statements (unaudited)9
  
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations2627
  
Item 3 – Quantitative and Qualitative Information About Market Risks4042
  
Item 4 – Controls and Procedures4042
  
PART II - OTHER INFORMATION 
  
Item 1 – Legal Proceedings4143
  
Item 1A – Risk Factors4244
  
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds4245
  
Item 3 – Defaults Upon Senior Securities4246
  
Item 4 – Mine Safety Disclosures4246
  
Item 5 – Other Information4246
  
Item 6 – Exhibits4346
  
SIGNATURES4447

 -2- 
 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(InAmounts in Thousands, Except Share Amounts)

 September 30, December 31, 
 2019 2018  September 30, 2020 December 31, 2019 
 (unaudited)      (unaudited)     
ASSETS                
Current Assets:                
Cash and Cash Equivalents $25,158  $32,392  $18,577  $16,098 
Accounts Receivable - less allowances of $1,060 and $985, respectively  16,814   16,451 
Investments  22,865   14,944 
Inventories-Net  10,466   7,976 
Accounts Receivable - less allowances of $1,013 and $1,433, respectively  16,319   17,047 
Inventories - Net  11,429   11,078 
Other Current Assets  2,692   1,859   2,840   2,097 
                
Total Current Assets  77,995   73,622   49,165   46,320 
                
Right-Of-Use Assets  680    
Right-Of-Use Assets - Operating  524   771 
Property and Equipment - Net  8,899   8,378   8,647   8,909 
Goodwill - Net  3,526   3,526   3,526   3,526 
Deferred Taxes  3   3   4   4 
Other Long Term Assets  1,416   1,307   1,520   1,454 
                
Total Assets $92,519  $86,836  $63,386  $60,984 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities:                
Accounts Payable $2,859  $2,775  $2,147  $2,383 
Accrued Compensation  3,159   5,295   3,640   4,618 
Accrued Commissions and Sales Incentives  4,284   4,264   3,415   4,461 
Dividends Payable  2,826   2,422   2,826   2,826 
Taxes Payable     58      423 
Lease Liability  305    
Lease Liability - Operating  275   369 
Other Liabilities  6,590   3,591   5,787   5,404 
                
Total Current Liabilities  20,023   18,405   18,090   20,484 
                
Lease Liability, net of current portion  392    
Lease Liability – Operating, net of current portion  259   418 
Deferred Taxes  319   566   416   331 
Long Term Taxes Payable  559    
Other Long Term Liabilities  1,813   1,544   2,264   2,175 
                
Total Liabilities  22,547   20,515   21,588   23,408 
                
Commitments and Contingencies (Note 5)          -     
                
Shareholders’ Equity:                
Omega Flex, Inc. Shareholders’ Equity:                
Common Stock – par value $0.01 share: authorized 20,000,000 shares: 10,153,633 shares issued at September 30, 2019 and December 31, 2018, respectively, and 10,094,322 and 10,091,822 shares outstanding at September 30, 2019 and December 31, 2018, respectively  102   102 
Common Stock – par value $0.01 share: authorized 20,000,000 shares: 10,153,633 shares issued and 10,094,322 outstanding at both September 30, 2020 and December 31, 2019  102   102 
Treasury Stock  (1)  (1)  (1)  (1)
Paid-in Capital  11,025   10,808   11,025   11,025 
Retained Earnings  59,769   56,110   31,418   27,165 
Accumulated Other Comprehensive Loss  (1,141)  (950)  (968)  (909)
Total Omega Flex, Inc. Shareholders’ Equity  69,754   66,069   41,576   37,382 
Noncontrolling Interest  218   252   222   194 
                
Total Shareholders’ Equity  69,972   66,321   41,798   37,576 
                
Total Liabilities and Shareholders’ Equity $92,519  $86,836  $63,386  $60,984 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 -3- 
 

 

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(InAmounts in Thousands, Except perPer Share and Share Amounts)

  For the three-months ended  For the nine-months ended 
  September 30,  September 30, 
  2019  2018  2019  2018 
  (Unaudited) 
Net Sales $28,030  $27,199  $81,627  $79,443 
                 
Cost of Goods Sold  10,326   10,652   30,241   31,649 
                 
Gross Profit  17,704   16,547   51,386   47,794 
                 
Selling Expense  5,383   4,265   14,193   12,960 
General and Administrative Expense  6,786   4,385   18,430   12,939 
Engineering Expense  1,162   1,221   3,655   3,361 
                 
Operating Profit  4,373   6,676   15,108   18,534 
                 
Interest Income  229   130   685   275 
Other Income (Expense)  (55)  (40)  (50)  (80)
                 
Income Before Income Taxes  4,547   6,766   15,743   18,729 
                 
Income Tax Expense  1,153   1,556   3,896   4,504 
                 
Net Income  3,394   5,210   11,847   14,225 
Less: Net Income attributable to the Noncontrolling Interest  (26)  (34)  (114)  (110)
                 
Net Income attributable to Omega Flex, Inc. $3,368  $5,176  $11,733  $14,115 
                 
Basic and Diluted Earnings per Common Share $0.33  $0.51  $1.16  $1.40 
                 
Cash Dividends Declared per Common Share $0.28  $0.24  $0.80  $0.70 
                 
Basic and Diluted Weighted-Average Shares Outstanding  10,092,428   10,091,822   10,092,027   10,091,822 

  2020  2019  2020  2019 
  For the three months ended  For the nine months ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
  (Unaudited) 
             
Net Sales $27,087  $28,030  $74,171  $81,627 
                 
Cost of Goods Sold  9,821   10,326   27,874   30,241 
                 
Gross Profit  17,266   17,704   46,297   51,386 
                 
Selling Expense  3,991   5,383   12,045   14,193 
General and Administrative Expense  5,951   6,786   14,056   18,430 
Engineering Expense  945   1,162   3,086   3,655 
                 
Operating Profit  6,379   4,373   17,110   15,108 
                 
Interest Income (Expense)  6   229   (46)  685 
Other Income (Expense)  19   (55)  (112)  (50)
                 
Income Before Income Taxes  6,404   4,547   16,952   15,743 
                 
Income Tax Expense  1,576   1,153   4,188   3,896 
                 
Net Income  4,828   3,394   12,764   11,847 
Less: Net (Income) attributable to the Noncontrolling Interest  (11)  (26)  (32)  (114)
                 
Net Income attributable to Omega Flex, Inc. $4,817  $3,368  $12,732  $11,733 
                 
                 
Basic and Diluted Earnings per Common Share $0.48  $0.33  $1.26  $1.16 
                 
Cash Dividends Declared per Common Share $0.28  $0.28  $0.84  $0.80 
                 
Basic and Diluted Weighted Average Shares Outstanding  10,094,322   10,094,322   10,094,322   10,092,756 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 -4- 
 

 

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(InAmounts in Thousands)

 2020 2019 2020 2019 
 For the three months ended For the nine months ended 
 For the three-months ended For the nine-months ended  September 30, September 30, 
 September 30, September 30,  2020 2019 2020 2019 
 2019  2018  2019  2018  (Unaudited) 
 (Unaudited)          
Net Income $3,394  $5,210  $11,847  $14,225  $4,828  $3,394  $12,764  $11,847 
                                
Other Comprehensive Income (Loss):                                
Foreign Currency Translation Adjustment  (147)  (38)  (202)  29   134   (147)  (63)  (202)
Other Comprehensive Income (Loss)  (147)  (38)  (202)  29   134   (147)  (63)  (202)
                                
Comprehensive Income  3,247   5,172   11,645   14,254   4,962   3,247   12,701   11,645 
                                
Less: Comprehensive Income Attributable to the Noncontrolling Interest  (18)  (32)  (103)  (110)
Less: Comprehensive (Income) Loss Attributable to the Noncontrolling Interest  (22)  (18)  (28)  (103)
                                
Total Comprehensive Income $3,229  $5,140  $11,542  $14,144  $4,940  $3,229  $12,673  $11,542 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 -5- 
 

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(InAmounts in Thousands, Except Share Amounts)

For the three-monthsthree months ended September 30, 20192020

 Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

  Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

 
          (unaudited)                  (unaudited)        
June 30, 2019  10,094,322  $102  $           (1) $11,025  $59,227  $        (1,002) $337  $69,688 
July 1, 2020  10,094,322  $102  $(1) $11,025  $29,427  $(1,091) $200  $39,662 
                                                                
Net Income                  3,368       26   3,394                   4,817       11   4,828 
Cumulative Translation Adjustment                      (139)  (8)  (147)                      123   11   134 
Shares Reissued From Treasury Pursuant  -   -   -   -   -   -   -   - 
To Restricted Stock Unit Awards  -   -   -   -   -   -   -   - 
Dividends Declared                  (2,826)      (137)  (2,963)                  (2,826)          (2,826)
September 30, 2019  10,094,322  $102  $(1) $11,025  $59,769  $(1,141) $        218  $69,972 
September 30, 2020  10,094,322  $102  $(1) $11,025  $31,418  $(968) $222  $41,798 

For the three-monthsthree months ended September 30, 20182019

 Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

  Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

 
          (unaudited)                  (unaudited)        
June 30, 2018  10,091,822  $102  $       (1) $10,808  $49,754  $(843) $198  $60,018 
July 1, 2019  10,094,322  $102  $(1) $11,025  $59,227  $(1,002) $337  $69,688 
                                                                
Net Income                  5,176       34   5,210                   3,368       26   3,394 
Cumulative Translation Adjustment                      (36)  (2)  (38)  -   -   -   -       (139)  (8)  (147)
Dividends Declared
                  (2,422)          (2,422)              (2,826)      (137)  (2,963)
September 30, 2018  10,091,822  $102  $(1) $10,808  $52,508  $(879) $230  $62,768 
September 30, 2019  10,094,322  $102  $(1) $11,025  $59,769  $(1,141) $218  $69,972 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 -6- 
 

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(InAmounts in Thousands, Except Share Amounts)

For the nine-monthsnine months ended September 30, 20192020

 Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

  Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

 
          (unaudited)                  (unaudited)        
December 31, 2018  10,091,822  $102  $(1) $10,808  $56,110  $(950) $       252  $66,321 
January 1, 2020  10,094,322  $102  $(1) $11,025  $27,165  $(909) $194  $37,576 
                                                                
Net Income                  11,733       114   11,847                   12,732       32   12,764 
Cumulative Translation Adjustment                      (191)  (11)  (202)  -   -   -   -       (59)  (4)  (63)
Shares Reissued From Treasury Pursuant To Restricted Stock Unit Awards  2,500           217               217 
Dividends Declared                  (8,074)      (137)  (8,211)              (8,479)          (8,479)
September 30, 2019  10,094,322  $102  $(1) $11,025  $59,769  $(1,141) $218  $69,972 
September 30, 2020  10,094,322  $102  $(1) $11,025  $31,418  $(968) $222  $41,798 

For the nine-monthsnine months ended September 30, 20182019

 Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

  Common Stock Outstanding  

Common

Stock

 

Treasury

Stock

  Paid In Capital  Retained Earnings  

Accumulated

Other

Comprehensive

Income (Loss)

 

Noncontrolling

Interest

 

Shareholders’

Equity

 
          (unaudited)                  (unaudited)        
December 31, 2017  10,091,822  $102  $(1) $10,808  $45,457  $(908) $611  $56,069 
January 1, 2019  10,091,822  $102  $(1) $10,808  $56,110  $(950) $252  $66,321 
                                                                
Net Income                  14,115       110   14,225                   11,733       114   11,847 
Cumulative Translation Adjustment                      29       29                       (191)  (11)  (202)
Shares Reissued From Treasury Pursuant                                
To Restricted Stock Unit Awards  2,500   -   -   217               217 
Dividends Declared
                  (7,064)      (491)  (7,555)                (8,074)      (137)  (8,211)
September 30, 2018  10,091,822  $102  $(1) $10,808  $52,508  $(879) $230  $62,768 
September 30, 2019  10,094,322  $102  $(1) $11,025  $59,769  $(1,141) $218  $69,972 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

 -7- 
 

OMEGA FLEX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(InAmounts in Thousands)

 2020  2019 
 For the nine-months ended  For the nine months ended 
 September 30,  September 30, 
 2019  2018  2020  2019 
 (unaudited)  (unaudited) 
Cash Flows from Operating Activities:                
Net Income $11,847  $14,225  $12,764  $11,847 
Adjustments to Reconcile Net Income to        
Net Cash Provided by Operating Activities:        
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:        
Non-Cash Compensation  1,962   445   1,406   1,962 
Depreciation and Amortization  493   361   637   493 
Provision for Losses on Accounts Receivable, net of write-offs and recoveries  75   129   (408)  75 
Deferred Taxes  (247)  139   85   (247)
Provision for Inventory Reserves  (5)  (134)  (100)  (5)
Changes in Assets and Liabilities:                
Accounts Receivable  (512)  (2,054)  1,091   (512)
Inventories  (2,534)  476   (294)  (2,534)
Right-Of-Use Assets  237   (680)
Other Assets  (944)  1,219   (811)  (944)
Accounts Payable  103   (28)  (230)  103 
Accrued Compensation  (2,115)  (1,069)  (962)  (2,115)
Accrued Commissions and Sales Incentives  28   (214)  (1,040)  28 
Lease Liability, Net  18    
Lease Liabilities  (242)  698 
Other Liabilities  1,504   (1,779)  (792)  1,504 
Net Cash Provided by Operating Activities  9,673   11,716   11,341   9,673 
                
Cash Flows from Investing Activities:                
Purchase of Investments  (45,921)  (34,897)     (45,921)
Net Proceeds from Sale of Investments  38,000         38,000 
Capital Expenditures  (1,022)  (1,046)  (381)  (1,022)
Net Cash Used in Investing Activities  (8,943)  (35,943)  (381)  (8,943)
                
Cash Flows from Financing Activities:                
Dividend Paid  (7,807)  (7,353)
Dividends Paid  (8,479)  (7,807)
Net Cash Used in Financing Activities  (7,807)  (7,353)  (8,479)  (7,807)
                
Net Decrease in Cash and Cash Equivalents  (7,077)  (31,580)
Net Increase (Decrease) in Cash and Cash Equivalents  2,481   (7,077)
Translation effect on cash  (157)  87   (2)  (157)
Cash and Cash Equivalents – Beginning of Period  32,392   37,938   16,098   32,392 
Cash and Cash Equivalents – End of Period $25,158  $6,445  $18,577  $25,158 
                
Supplemental Disclosure of Cash Flow Information:                
                
Cash paid for Income Taxes $4,342  $5,708  $4,939  $4,342 
                
Cash paid for Interest $  $  $112  $ 
                
Declared Dividends $8,211  $7,555  $8,479  $8,211 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 -8- 
 

 

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 quarter ended September 30, 20192020 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’s business is controlled 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 is a leading manufacturer of flexible metal hose, which is used in a variety of waysapplications to carry gases and liquids within their particular applications. Some of the more prominent usesThese applications include carrying liquefied gases in certain processing applications, fuel gases within residential and commercial buildings, carrying gasoline and diesel gasoline products (both above and below the ground)medical gases in a double containment piping to contain any possible leaks, which is used in automotive and marina refueling, and fueling for back-up generation, using copper-alloy corrugating piping in medical or health care facilities, and vibration absorbers in high vibration applications. The Company’s flexible metal piping is also used to carry medicalother types of gases (oxygen, nitrogen, vacuum) or pure gases for pharmaceutical applications, and fluids in a number of industrial applications where the customer requires the piping to have both a degree of flexibility and/or an ability to carry corrosive compounds or mixtures, or to carry at both very high and very low (cryogenic) temperatures.

The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania and Houston, Texas, in the United States, and in Banbury, Oxfordshire in the United Kingdom, and primarily sells its products through distributors, wholesalers and to original equipment manufacturers (“OEMs”) throughout North America, and Europe, and to a lesser extent other globalin certain European markets.

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COVID-19 Pandemic

The emergence of the coronavirus (COVID-19) pandemic in the United States (U.S.), United Kingdom (U.K.) and around the world, presents significant risks to the Company, not all of which the Company is able to fully evaluate or articulate at the current time. This has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the U.S. and abroad. The Company is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels. The COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, has created significant volatility, uncertainty and economic disruption which has begun to and is expected to continue to significantly affect the Company’s business. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the COVID-19 pandemic. Currently, the Company cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its overall impact on the Company’s business.

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 as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable allowances, investment valuations, inventory valuations, goodwill valuation, product liability reserve, stock-based compensation valuations and accounting for income taxes. Actual amounts could differ significantly from these estimates.

Revenue Recognition

Effective January 1, 2018, the Company adopted the requirements ofAccording to Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new, the Company recognizes revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective approach). The Company selected the modified retrospective approach however there was no material impact which required a cumulative effect adjustment.

 

The principle of Topic 606 wasis achieved through applying the following five-step approach:

 

Identification of the contract, or contracts, with a customer — a contract with a customer exists when the Company enters into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods.

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Identification of the performance obligations in the contract —performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of product must exist. The Company ships product in accordance with the purchase order and standard terms as reflected within the Company’s order acknowledgments and sales invoices.

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Determination of the transaction price —the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with the Company’s internally approved pricing guidelines.
Allocation of the transaction price to the performance obligations in the contract— if the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. This applies to the Company as there is only one performance obligation to ship the goods.
   
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company satisfies performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include:

The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods

It is important to note that the indicators are not a set of conditions that must be met before the Company can conclude that control of the goods has transferred to the customer. The indicators are a list of factors that are often present if a customer has control of the goods.

The Company has typical, unmodified FOB shipping point terms. As the seller, the Company can determine that the shipped goods meet the agreed-upon specifications in the contract or customer purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be deemed a formality, as noted in Accounting Standards Codification (“ASC”)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.

 

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Other considerations of Topic 606 include the following:

Contract Costs -costs to obtain a contract (e.g. customer purchase order) include sales commissions. Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt.
Warranties- the Company does not offer customers to purchase a warranty separately.separately purchased warranties. Therefore, there is not a separate performance obligation. The Company does account for warranties as a cost accrual and the warranties do not include any additional distinct services other than the assurance that the goods comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the financial reporting of the Company.

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Returned Goods - from time to time, the Company provides authorization to customers to return goods. If deemed to be material, the Company would record a “right of return” asset for the cost of the returned goods which would reduce cost of sales.
Volume Rebates (Promotional Incentives)- volume rebates are variable (dependent upon the volume of goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also, under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the four following factors are considered:

The amount of consideration is highly susceptible to factors outside the company’sCompany’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.

If it was concluded that the above factors were in place for the Company, it would support the probability of a significant reversal of revenue. However, as none of the four factors apply to the Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the eligible products expected to be sold.

Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically contained within North America, with the remainder scattered internationally. All performance assessments and resource allocations are generally based upon the review of the results of the Company as a whole.

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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.

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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 the Company’s 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 $1,060,000$1,013,000 and $985,000$1,433,000 as of September 30, 20192020 and December 31, 2018,2019, respectively. In regards to identifying uncollectible accounts, the Company reviews an aging report on a consistent basis to determine past due accounts, and utilizes a well-established credit rating agency. The Company charges off those accounts that are deemed uncollectible once all collection efforts have been exhausted.

Investments

The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and bank time deposits.deposits, with maturities typically of one year or less. These investments are stated at fair value, which approximates amortized cost, and are classified as available-for-sale in accordance with ASC 320,Investments – Debt and Equity Securities. Investments were $22,865,000 and $14,944,000The Company did not have any investments as of September 30, 20192020 and December 31, 2018,2019, respectively. Maturities, from the date of purchase, were more than three months and less than one year.

Inventories

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

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Property and Equipment

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

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Goodwill

In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350,Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2018.2019. This analysis did not indicate any impairment of goodwill. There were no circumstances

However, the duration and severity of the COVID-19 pandemic could result in future goodwill impairment charges. While we have concluded that indicate that goodwill might be impaired as ofa triggering event did not occur during the nine months ended September 30, 2019.2020, a prolonged pandemic could impact the Company’s results of operations in a manner significant enough to trigger an interim 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”) 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 mostly 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.

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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:

1.The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2.The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3.The lease term is for the major part of the remaining economic life of the underlying asset.
4.The present value of the sum of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
5.The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

For any leases that do not meet the criteria identified above for finance leases, the Company treats such leases as operating leases. As of September 30, 2019,2020, each of the Company’s leases are classified as operating leases.

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Under the new guidance, bothBoth finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities. It should be noted that under previous guidance operating leases (non-capital leases) were not required to be recorded as an asset on the balance sheet.

There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company electshas 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.

As permitted under ASU 2018-11, the Company elected the optional transition method to adopt the new leases standard. Under this new transition method, the Company initially applied the new leases standard at the adoption date of January 1, 2019 and would have recognized a cumulative-effect adjustment, if appropriate, to the opening balance of retained earnings in the period of adoption. No cumulative-effect adjustment was recognized. The Company’s reporting for the comparative periods prior to 2019 in the financial statements are presented in accordance with existing GAAP in effect for 2018 and earlier (ASC Topic 840,Leases).

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The impact of the adoption of this new standard resulted in an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of approximately $800,000.$800,000. The implementation did not have a material impact on the Company’sour consolidated statements of income and statements of cash flows.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with FASB ASC Topic 820,Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies upon Level 1 inputs in determining the fair value of investments and the fair value of the Company’s reporting unit in its annual impairment test as described in the FASB ASC Topic 350,Intangibles - Goodwill and Other.

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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 diluteddilutive earnings per share are the same.

Currency Translation

Assets and liabilities denominated in foreign currencies, most of which relate to the 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 expense) in the period in which they occur.

Income Taxes

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

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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.

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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 reflectedchanges include, but are not limited to: increasing the effectslimitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the Tax Cuts and Jobs Act (the “Act”) in its financial statements during the 2017 enactment period. This included the effectsamount of the changenet operating loss carryforwards that corporations can use to offset taxable income. The tax law changes in the US Corporate tax rate from 35% to 21%Act have not had an effect on deferred tax assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign subsidiary. The Company’sincome tax expenseprovision for the periodsthree and nine months ended September 30, 2019 and 2018 included the continuing effect of the reduction in the U.S. federal tax rate from 35% to 21%, effective for those respective tax years. The Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global Intangible Low Taxed Income (“GILTI”) provisions, and changes effecting the deductibility of certain executive compensation.2020.

Other Comprehensive Income

For the three and nine months ended September 30, 20192020 and 2018,2019, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments.

Significant Concentration

The Company has one significant customer which represented more than 10%10% of the Company’s Accounts Receivable at September 30, 20192020 and December 31, 2018.2019. That same customer represented more than 10%10% of the Company’s total Net Sales for the three and nine months ended September 30, 20192020 and 2018.2019. 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, 20182019 Form 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 10 of the condensed consolidated financial statements.

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Recent Accounting Pronouncements

In January 2017, the FASB amended ASC Topic 350,Intangibles – Goodwill and Other(issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizerecognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requiresrequired adoption on January 1, 2020. TheIn compliance, the Company does not expect that the adoption ofadopted ASU 2017-04 will have aas required during the first quarter of 2020 and determined that there was no material impact on its condensed consolidated financial statements.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-11 requires entities that did not adopt the amendments in ASU 2016-13 as of November 2019 to adopt ASU 2019-11. This ASU contains the same effective dates and transition requirements as ASU 2016-13. We adopted ASU 2016-13 and ASU 2019-11 effective January 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.

3. INVENTORIES

Inventories, net of reserves of $251,000 and $355,000 at September 30, 2020 and December 31, 2019, respectively, consisted of the following:

SCHEDULE OF INVENTORIES, NET OF RESERVES

  September 30, 2020  December 31, 2019 
  (dollars in thousands) 
       
Finished Goods $5,292  $5,409 
Raw Materials  6,137   5,669 
         
Inventories - Net $11,429  $11,078 

 

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3. INVENTORIES

Inventories, net of reserves of $351,000 and $363,000 at September 30, 2019 and December 31, 2018, respectively, consisted of the following:

  September 30,  December 31, 
  2019  2018 
  (dollars in thousands) 
Finished Goods $5,094  $4,756 
Raw Materials  5,372   3,220 
         
Inventories - Net $10,466  $7,976 

4. LINE OF CREDIT AND OTHER BORROWINGS

On December 1, 2017, the Company agreed to a new Amended and Restated Revolving Line of Credit Note and Third Amendment to the Loan Agreement with Santander Bank, N.A. (the “Bank”). The Company established a line of credit facility in the maximum amount of $15,000,000,$15,000,000, maturing on December 1, 2022, with funds available for working capital purposes and other cash needs. The loan is unsecured. The loan agreement provides for the payment of any borrowings under the agreement at an interest rate range of either LIBOR plus 0.75%0.75% to plus 1.75%1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or, Prime Rate up to Prime Rate plus 0.50%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. Currently, the Company’s ratio would allow for the most favorable rate under the agreement’s range, which would be a rate of 2.77%0.90%. The Company is also required to pay on a quarterly basis an unused facility fee of 10 basis points of the average unused balance of the note. The Company may terminate the line at any time during the five yearfive-year term, as long as there are no amounts outstanding.

During the quarter ending June 30, 2020, in an effort to ensure liquidity and secure all available resources during the COVID-19 crisis, the Company borrowed the full amount of its capacity on the line of $15,000,000 at the prime rate of 3.50% and repaid it in full prior to the end of the quarter. As of September 30, 2019 and December 31, 2018,2019, the Company had no0 outstanding borrowings on its line of credit, andcredit.

The Company was in compliance with all debt covenants.covenants as of September 30, 2020 and December 31, 2019.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. 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 ending March 31, 2020. Pursuant to the terms of the PPP Loan, the Company received total proceeds of $2,453,000 from the Bank. 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.

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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.

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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. 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 $495,000$505,000 at September 30, 2019,2020, of which $483,000$451,000 is included in Other Long Term Liabilities, and the remaining current portion of $12,000$54,000 is included in Other Liabilities, associated with the applicable retired employee previously noted who is now receiving benefit payments.payments over the next twelve months. The December 31, 20182019 liability of $462,000$492,000 had $450,000$480,000 reported in Other Long Term Liabilities, and a current portion of $12,000$12,000 in Other Liabilities.

The Company has obtained and is the beneficiary of three 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 $1,376,000$1,479,000 at September 30, 20192020 and $1,296,000$1,417,000 at December 31, 2018.2019.

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, 2019 Form 10-K. There are no current payment obligations related to these arrangements, and any future obligations are currently indeterminable due to the variable nature and timing of possible events required to incur such obligations.

As disclosed in detail in Note 7, and in the Company’s December 31, 2018 Form 10-K, Note 8, under the caption “Leases”,Leases, the Company has several lease obligations in place that will be paid out over time. Most notably,

Lastly, as provided in Item 7 of the Company’s December 31, 2019 Form 10-K, under the “Tabular Disclosure of Contractual Obligations and Off-Balance Sheet Arrangements”, the Company leases a facilityhas numerous purchase obligations in Banbury, England that servesplace for the manufacturing, warehousing and distribution functions.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 the Claims, including a putative class-action claim, relate to potential lightning damage to the Company’sour 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 number of Claims, higher legal costs, and higher insurance deductibles or retentions.

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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 cash bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August 7, 2018.

In MarchSeptember 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 successfully removed the case to federal court, and is currently vigorously defendingthe court recently granted the defendants’ joint summary judgement motion, and dismissed the case. The plaintiffs have filed a notice of appeal to the adverse summary judgment decision. The Company is continuing to vigorously defend the case.

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The Company was made aware of a potential legal liability regarding a legal dispute in the United Kingdom, 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 potential amount of loss for defendant’s legal costs is estimated to be between £200,000 and £500,000. We have recorded a reserve of £350,000, or approximately $452,000, as of September 30, 2020.

The Company has in place commercial general liability insurance policies that cover most 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, excluding the putativeMissouri class action case, as of September 30, 20192020 is estimated to not exceed approximately $3,200,000,$7,100,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered, and outstanding or anticipated settlements for Claims. The liabilities recorded on the Company’s books at September 30, 20192020 and December 31, 20182019 were $150,000$214,000 and $215,000, respectively, and are included in Other Liabilities.

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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 million1000000 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:

ownership interest in the Company
shareholder voting rights
other incidents of ownership to the Company’s common stock

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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 theirhis 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, 2018,2019, the Company had 17,80515,493 unvested units outstanding, all of which were granted atFull Value. On February 15, 2019,28, 2020, the Company granted an additional 6,0504,875Full ValueUnits with a fair value of $65.40$74.52 per unit on grant date, using historical volatility. In February 2019,2020, the Company paid $746,000$968,000 for the 10,460 fully vested and matured units that were granted during 2015,February 2016, including their respective earned dividend values. In August 2020, the Company paid $356,000 for the 2,750 fully vested and matured units that were granted during August 2016, including their respective earned dividend values. On August 27, 2019,24, 2020, the Company granted an additional 1,508870Full ValueUnits with a fair value of $76.79$134.19 per unit on grant date, using historical volatility. As of September 30, 2019,2020, the Company had 15,49313,252 unvested units outstanding.

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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 718Compensation - 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.

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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% forfeiture rate to Plan Units outstanding in determining its Plan Unit compensation expense as of September 30, 2019.2020.

The total Phantom Stock related liability as of September 30, 20192020 was $2,719,000 $3,283,000 of which $1,389,000$1,470,000 is included in Other Liabilities, as it is expected to be paid in February and August of 2020,within the next twelve months, and the balance of $1,330,000$1,813,000 is included in Other Long Term Liabilities. At December 31, 2018,2019, the total Phantom Stock liability was $1,692,000,$3,201,000, with $599,000$1,508,000 in Other Liabilities, and $1,093,000$1,693,000 included in Other Long Term Liabilities.

Related to the Phantom Stock Plan, in accordance with FASB ASC Topic 718,Compensation - Stock Compensation, the Company recorded compensation expense of approximately $1,745,000$1,406,000 and $445,000$1,745,000 for the nine months ended September 30, 20192020 and 2018,2019, respectively. Compensation 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, 2019:2020:

  Units  Weighted Average Grant Date Fair Value 
Number of Phantom Stock Unit Awards:       
Nonvested at December 31, 2018  17,805  $46.08 
Granted  7,558  $67.67 
Vested  (9,870) $41.31 
Forfeited      
Canceled      
Nonvested at September 30, 2019  15,493  $59.65 
Phantom Stock Unit Awards Expected to Vest  15,493  $59.65 

SUMMARY OF NONVESTED PHANTOM STOCK UNITS

  Units  Weighted Average Grant Date Fair Value 
Number of Phantom Stock Unit Awards:        
Nonvested at December 31, 2019  15,493  $59.65 
Granted  5,745  $83.56 
Vested  (7,986) $55.35 
Forfeited      
Canceled      
Nonvested at September 30, 2020  13,252  $72.61 
Phantom Stock Unit Awards Expected to Vest  13,252  $72.61 

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The total unrecognized compensation costs calculated at September 30, 20192020 are $1,118,000$1,474,000 which will be recognized through August of 2022.2023. The Company will recognize the related expense over the weighted average period of 1.361.4 years.

7. LEASES

In the United States, the Company owns its two main operating facilities located in Exton, PA.PA, which provide manufacturing, warehousing and distribution space. 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

With regards to the below.

Facility leasesleased facilities within the United States, includethe Company leases its corporate office space in Middletown, CT, with the lease term expiring in 2022. Additionally, the Company leases a warehousing and distribution center in Houston, Texas, which currently provides manufacturing, stocking and sales operations, with the original a 5-year lease term running through October 2019. In April 2019, the Company entered into a new operating lease agreement extending the lease term through October 2024. Additionally, the Company leases its corporate office space in Middletown, CT, with the lease term expiring in 2022.

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In the United Kingdom, the Company leases a facility in Banbury, England, which serves sales, warehousing and operational functions with thefunctions. The lease in Banbury has a 15-year term ending in MarchSeptember 2021.

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

In the September 30, 20192020 condensed consolidated balance sheet, the Company has recorded right-of-use assets of $680,000,$524,000, and a lease liability of $697,000,$534,000, of which $305,000$275,000 is reported as a current liability. The respective weighted average remaining lease term and discount rate are approximately 2.962.42 years and 3.70%3.16%.

AsFuture minimum lease payments under non-cancellable leases as of September 30, 2019, payment of the lease liability over the next five years, which includes the related interest, is2020, are as follows:

Twelve Months Ending September 30, Lease Liability
Payments
 
  (in thousands) 
2020 $       305 
2021  210 
2022  90 
2023  43 
2024  45 
Thereafter  4 
     
Total Lease Payments $697 

SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES

Twelve Months Ending September 30, Operating Leases 
   (in thousands) 
     
2021 $275 
2022  149 
2023  56 
2024  47 
2025  7 
Thereafter   
     
Total Minimum Lease Payments $534 

A similar description of the lease obligations for the previous year is disclosed in the Company’s December 31, 20182019 Form 10-K.

 

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Lease expense for the operating leases was approximately $73,000$76,000 and $223,000$225,000 for the three and nine months ended September 30, 2019, respectively.2020 and $73,000 and $223,000 for the three and nine months ended September 30, 2019. Lease expense is allocated to each portion of the business generally based upon use, with the majority absorbed by manufacturing (cost of goods sold), and the remainder apportioned to selling, administrative and engineering.

8. SHAREHOLDERS’SHAREHOLDERS' EQUITY

As of September 30, 20192020 and December 31, 2018,2019, the Company had authorized 20,000,000 common stock shares with par value of $0.01$0.01 per share. At these same dates,For both periods, the total number of outstanding shares was 10,094,322 and 10,091,822,, shares held in Treasury was 59,311 and 61,811,, and total shares issued was 10,153,633 for both periods..

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During 20192020 and 2018,2019, upon approval of the Board of Directors (the “Board”"Board") the Company has madedeclared and paid regular quarterly dividend payments,dividends, as well as special dividends, as set forth in the following table:

Dividend Declared Dividend Paid on or Before
Date Price Per Share  Date Amount 
September 6, 2019 $0.28  October 2, 2019* $2,826,000 
June 13, 2019 $0.28  July 2, 2019* $2,826,000 
April 9, 2019 $0.24  April 29, 2019** $2,422,000 
December 13, 2018 $0.24  January 3, 2019** $2,422,000 
September 11, 2018 $0.24  October 2, 2018** $2,422,000 
September 6, 2018 $0.24  July 3, 2018** $2,422,000 
April 10, 2018 $0.22  April 30, 2018** $2,220,000 
December 13, 2017 $0.22  January 3, 2018** $2,220,000 

SCHEDULE OF REGULAR QUARTER DIVIDEND PAYMENTS

Dividend Declared  Dividend Paid 
Date Price Per Share  Date Amount 
September 23, 2020 $0.28  October 13, 2020*$2,826,000 
June 24, 2020 $0.28  July 13, 2020*$2,826,000 
March 31, 2020 $0.28  April 17, 2020*$2,826,000 
December 16, 2019 (S)$3.50  December 30, 2019*$35,330,000 
December 14, 2019 $0.28  January 3, 2020*$2,826,000 
September 6, 2019 $0.28  October 2, 2019*$2,826,000 
June 13, 2019 $0.28  July 2, 2019*$2,826,000 
April 9, 2019 $0.24  April 29, 2019**$2,422,000 
December 13, 2018 $0.24  January 3, 2019**$2,422,000 

(*)The number of shares outstanding on the dividend payment date was 10,094,322.
(**)The number of shares outstanding on the dividend payment date was *10,094,322 and **10,091,822.
(S)indicates special dividend

In addition to the above dividend amounts, there were dividends approved by the Company’s foreign subsidiary during April 2018, which amounted to an outlayJuly and December of cash of $491,000 to the foreign subsidiary’s noncontrolling interest, and again in July 2019, with the cash distribution to the noncontrolling interest of $137,000$137,000 and $65,000, respectively, paid during July 2019.those respective months.

It should be noted that from time to time, the Board may elect to pay special dividends, in addition to or in lieu of the regular quarterly dividends, depending upon the financial condition of the Company. Special dividends are indicated in the above schedule as (S).

The Board approved and granted a total of 2,500 restricted stock unit awards (the “Awards”) to be allocated to the existing non-employee directors of the Company. The Awards were approved by the shareholders’shareholders of the Company at the annual meeting on June 11, 2019, and distributed on June 20, 2019. A Form S-8 registration statement, and the restricted stock unit award agreements, were filed with the SEC on December 13, 2018 (2,000(2,000 units) and May 24, 2019 (500(500 units). The related director compensation cost of approximately $217,000$217,000 was recognized during June 2019.

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On April 4, 2014, the Company’s Board of Directors authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $1,000,000.$1,000,000. The original program established in December 2007 authorized the purchase of up to $5,000,000$5,000,000 of its common stock. The purchases may be made from time-to-time in the open market or in privately negotiated transactions, depending on market and business conditions. The Board retained the right to cancel, extend, or expand the share buyback program, at any time and from time-to-time. Since inception, the Company has purchased a total of 61,811 shares for approximately $932,000,$932,000, or approximately $15$15 per share, which were held as treasury shares. The Company has not made any stock repurchases since 2014; however, as stated above, there were 2,500 shares distributed from treasury to non-employee directors during June 2019.

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9. RELATED PARTY TRANSACTIONS

From time to time the Company may have related party transactions (“RPTs”). In short, RPTs represent any transaction between the Company and any Company employee, director or officer, or any related entity, or relative, etc. The Company performs a review of transactions each year to determine if any RPTs exist.exist, and if so, determines if the related parties act independently of each other in a fair transaction. Through this investigation the Company noted a limited number of RPTs which are disclosed hereto. Legal services were performed by a firm which formerly employed one member of the board. On occasion the Company shares a small amount of services with its former parent Mestek, Inc., mostly related to board meeting expenses. The Company is aware of transactions between a few service providers which employ individuals indirectly associated to Omega Flex employees. In all cases, these transactions have been determined to be independent transactions with no indication that they are influenced by the related relationships. During the first nine months of 2020, the Company had both provided and subsequently collected $5,000 of note agreement assets with related parties. Other than as disclosed above, the Company is currently not aware of any RPTs between the Company and any of its current directors or officers outside the scope of their normal business functions or expected contractual duties. The Company does on occasion share a small amount of services with its former parent Mestek, Inc., mostly related to board meeting expenses. Additionally, the Company is aware of transactions between a few service providers which employ individuals indirectly associated to Omega Flex employees, but these have been determined to be independent transactions with no indication that they are influenced by the related relationships. The Company had note agreement assets with related parties amounting to approximately $5,000 at December 31, 2018, which were contractually secured by the Company. In February 2019, the amounts due from related parties were collected.

10. SUBSEQUENT EVENTS

The Company evaluated all events or transactions that occurred through the date of this filing. During this period, no events other than as discussed above came to the Company did not have any material subsequent eventsCompany’s attention that impacted itswould impact the condensed consolidated financial statements.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control.

 

Certain statements in this Quarterly Report on Form 10-Q that are not historical facts, but rather reflect the Company’s current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believes”, “expects”, “intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Form 10-Q. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

OVERVIEW

The Company is a leading manufacturer of flexible metal hose (also described as corrugated tubing), and is currently engaged in a number of different markets, including construction, medical, healthcare and pharmaceutical industries, manufacturing, transportation, petrochemical, pharmaceutical, healthcare and other industries.

The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose, 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, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe® and TracPipe®CounterStrike® 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 DoubleTrac® product is used to carry gasoline and diesel gasoline products (both above and below the ground) in a double containment piping to contain any possible leaks, which is used in automotive and marina refueling applications, and fueling for back-up generation. Developed for healthcare, medical and pure gas applications, the Company’s newest corrugated tubing product MediTrac®, has received robust interest during its launch. Similar to TracPipe® and CounterStrike®, with a flexible design and availability in long continuous lengths, MediTrac® can be installed in any facility that uses medical or pure gas in a safer and more cost and time efficient manner than traditional medical grade rigid copper pipe. The Company’s products are manufactured at its facilities in Exton, Pennsylvania facilitiesand Houston, Texas in the United States, and in Banbury, Oxfordshire in the United Kingdom. Through the use of its broad network of independent outside sales organizations, such as sales representatives, the Company primarily sells its products to distributors, wholesalers and OEM’s, mostly throughout North America, and to a lesser extent in other global markets.

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CHANGES IN FINANCIAL CONDITION

For the period ended September 30, 2019 vs. December 31, 2018

The Company’s cash balance of $25,158,000 at September 30, 2019, decreased $7,234,000 or 22.3% from the $32,392,000 balance at December 31, 2018. During 2019, the Company made a net purchase of investments of $7,921,000 and paid regular quarterly dividends during the year totaling $7,807,000. Additionally, consistent with prior years, the Company paid a significant amount of cash during the first quarter for obligations that were accrued as of the end of the preceding year, such as sales promotional incentive programs and various incentive related compensation. Those cash outflows were partially offset by income generated from operations during 2019. The condensed consolidated statement of cash flows is provided on page eight which provides further details regarding changes in cash.

Investments were $22,865,000 and $14,944,000 as of September 30, 2019 and December 31, 2018, respectively, increasing $7,921,000 or 53.0%. During 2019, the Company invested excess funds in various liquid interest earning instruments including U.S. Treasury bills. These investments are stated at fair value, which approximates amortized cost, and are classified as available-for-sale in accordance with Accounting Standards Codification 320,Investments – Debt and Equity Securities(or “ASC 320”). Maturities, from the date of purchase, were more than three months and less than one year.

Inventories were $10,466,000 and $7,976,000 as of September 30, 2019 and December 31, 2018, respectively, increasing $2,490,000 or 31.2%. A majority of the increase is related to the build-up of inventory for the Company’s newest product, MediTrac®flexible medical gas piping, in anticipation of customer orders.

Accrued Compensation was $3,159,000 at September 30, 2019, compared to $5,295,000 at December 31, 2018, decreasing $2,136,000 or 40.3%. A significant portion of the liability that existed at year end related to incentive compensation earned in 2018. As is customary, the liability was then paid during the first quarter of the following year, or 2019, thus diminishing the balance. The liability now represents amounts earned during the current year.

Other Liabilities were $6,590,000 and $3,591,000 at September 30, 2019 and December 31, 2018, respectively. The primary contributors to the $2,999,000 or 83.5% increase, relates to accruals for legal expenses associated with one class action case, and executive compensation for prior equity awards impacted by the surging stock price.

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RESULTS OF OPERATIONSCOVID-19 PANDEMIC

Three-monthsThe emergence and escalation of the coronavirus (COVID-19) in the United States (U.S.), United Kingdom (U.K.), and around the world presents significant risks to the Company, not all of which the Company is able to fully evaluate or quantify at the present time. While the effects of the COVID-19 pandemic did slightly affect the Company’s financial results and business operations during the second quarter of 2020, most of those negative effects were in the early period of the quarter, with sales progressively growing thereafter through September 30, 2020. The Company has therefore managed to maintain a reasonable level of sales and profitability despite the obstacles presented by these turbulent times.

The Company has responded to the challenges of the COVID-19 pandemic by taking measures to protect its workforce and supply chain. The Company currently maintains the full use of its $15,000,000 line of credit facility with Santander Bank N.A., and has other banking resources as well to assure liquidity.

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year, or hereafter. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s operations. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time.

CHANGES IN FINANCIAL CONDITION

For the period ended September 30, 2020 vs. December 31, 2019

The Company’s cash balance of $18,577,000 at September 30, 2020, increased $2,479,000 (15.4%) from the $16,098,000 balance at December 31, 2019 mainly the result of income generated from operations during 2020, less dividends of $8,479,000 paid during the first nine months of 2020. The condensed consolidated statement of cash flows is provided on page 8 which provides further details regarding changes in cash.

Accrued Commissions and Sales Incentives were $3,415,000 at September 30, 2020, compared to $4,461,000 at December 31, 2019, decreasing $1,046,000 (23.4%). A portion of the decrease relates to the lower level of sales during the third quarter of 2020, in comparison to the fourth quarter of 2019, and the resulting commissions and sales incentives that are earned. Additionally, a portion of the sales incentives have an annual component which accumulates during the year and are then paid during the first quarter of the following year.

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RESULTS OF OPERATIONS

Three months ended September 30, 2020 vs. September 30, 20182019

The Company reported comparative results from continuing operations for the three-month periodsthree months ended September 30, 20192020 and 20182019 as follows:

 

Three months ended September 30,

(in thousands)

 
 Three-months ended September 30,          
 (in thousands)   2020   2020   2019   2019 
 2019 2019 2018 2018  ($000)  %  ($000)  % 
Net Sales $28,030   100.0% $27,199   100.0% $27,087   100.0% $28,030   100.0%
Gross Profit $17,704   63.2% $16,547   60.8% $17,266   63.7% $17,704   63.2%
Operating Profit $4,373   15.6% $6,676   24.6% $6,379   23.6% $4,373   15.6%

Net Sales. The Company’s 20192020 third quarter net sales (sales) of $28,030,000 increased $831,000$27,087,000 decreased $943,000 or 3.1% over3.4% compared to the third quarter of 2018,2019, which generated sales of $27,199,000.$28,030,000. The decrease in sales resulted mostly from a decrease in unit volume, slightly offset by pricing actions which the Company continuestook to see sustained demand for our productsoffset material cost pressure and maintain a dominant position in our core market.to protect margins.

Gross Profit. The Company’s gross profit margins were 63.2%63.7% and 60.8%63.2% for the three-monthsthree months ended September 30, 2020 and 2019, and 2018, respectively, reflecting an improvement in the Company’s core operations.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 expensesexpense was $3,991,000 and $5,383,000 for the three-monthsthree months ended September 30, 2020 and 2019, respectively, representing a decrease of $5,383,000 were $1,118,000 (26.2%) higher than selling expenses experienced during the third quarter of 2018, which were $4,265,000.$1,392,000 or 25.9%. A majority of the additionalreduction in expense relates to atypical consulting costs of $654,000 recognized during the third quarter of 2019 primarily attributable to the Company’s new product, MediTrac® flexible medical gas piping. The Company hasCommissions were also expanded its staffing resources,down, largely in unison with the reduction in sales. Lastly, travel and recognized an increasetrade show expenses were lower mostly due to the restrictions in commissions during the year, largely driven by the increase in sales.place related to COVID-19. Selling expenses as a percent of net sales were 19.2%lower, being 14.7% and 15.7%19.2% for the third quarterthree months ended September 30, 2020 and 2019, and 2018, respectively.

General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $6,786,000$5,951,000 and $4,385,000$6,786,000 for the three-months ended September 30, 20192020 and 2018,2019, respectively, thus increasingdecreasing by $2,401,000$835,000 or 54.8%12.3%. LegalThe Company experienced a reduction in legal and product liability related defense costs increased $1,886,000, associated primarily with one pendingof $1,730,000 in 2020 mostly related to a slow-down in the ongoing class action case which was dismissed in favor of the Company continues to vigorously defend itself against. Thereduring the third quarter of 2020, as discussed in Note 5, Commitments and Contingencies. The decrease in legal costs was alsopartially offset by an $819,000 increase in incentive compensation, primarily relatedattributable to prior equity awards impacted byhigher profits and the surgephantom stock component of incentive compensation, associated with the increase in the Company’s stock price during the third quarter of 2019.recent quarter. As a percentage of sales, general and administrative expenses increaseddecreased to 22.0% for the three months ended September 30, 2020 from 24.2% for the three-monthsthree months ended September 30, 2019 from 16.1% for the three-months ended September 30, 2018.2019.

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Engineering Expense. Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were $1,162,000$945,000 and $1,221,000$1,162,000 for the three-monthsthree months ended September 30, 20192020 and 2018,2019, respectively, decreasing by $59,000$217,000 or 4.8%18.7%. There was a reduction in travel, and less experimental materials previously required for the progression of various promising applications. Engineering expenses decreased as a percentage of sales, being 4.2%3.5% for the three-monthsthree months ended September 30, 2019,2020, and 4.5%4.2% for the same period in 2018.2019.

Operating Profits. Reflecting all of the factors mentioned above, operating profits were $4,373,000$6,379,000 and $6,676,000$4,373,000 for the quarters ending September 30, 2020 and 2019, respectively, increasing by $2,006,000 or 45.9%. As a percentage of sales, operating profits increased, being 23.6% and 15.6% for the three-months ended September 30, 2020 and 2019, and 2018, respectively, decreasing by $2,303,000 or 34.5%.respectively.

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 Company recorded $229,000$6,000 and $130,000$229,000 of interest income during the third quarters of 2020 and 2019, respectively. The reduction in interest income was largely due to the lower cash balance and 2018, respectively.thus lack of investment mostly resulting from the $35,330,000 special dividend paid in December 2019. Additionally, earning potential on short-term liquid investments has diminished in comparison to this time last year.

Other Income (Expense)-Net. Other Income (Expense)-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, oursettled in currencies other than the Company’s local currency, typically related to the Company’s foreign UK subsidiary.subsidiaries. There was expenseincome of $19,000 earned during the third quarter 2020 versus $55,000 and $40,000of expense recorded during the third quarter 2019 and 2018, respectively.of 2019.

Income Tax Expense. Income Tax Expense was $1,153,000$1,576,000 for the third quarter of 2019,2020, compared to $1,556,000$1,153,000 for the same period in 2018. The $403,0002019, increasing $423,000 or 25.9% decrease in tax expense was largely36.7%, mostly the result of the decreaseincrease in income before taxes. A lower rate was in effect during the third quarter of both 2019 and 2018 attributable to the Tax Cuts and Jobs Act enacted at the end of 2017. The Act reduced the U.S. federal tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global Intangible Low Taxed Income provisions, and changes effecting the deductibility of certain executive compensation.

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Nine-monthsNine months ended September 30, 20192020 vs. September 30, 20182019

The Company reported comparative results from continuing operations for the nine-month periodsnine months ended September 30, 20192020 and 20182019 as follows:

 Nine-months ended September 30,  

Nine months ended September 30,

(in thousands)

 
 (in thousands)          
 2019 2019 2018 2018   2020   2020   2019   2019 
 ($000) % ($000) %  ($000)  %  ($000)  % 
Net Sales $81,627   100.0% $79,443   100.0% $74,171   100.0% $81,627   100.0%
Gross Profit $51,386   63.0% $47,794   60.2% $46,297   62.4% $51,386   63.0%
Operating Profit $15,108   18.5% $18,534   23.3% $17,110   23.1% $15,108   18.5%

Net Sales. The Company’s sales for the first nine months 2019 of $81,627,000 increased $2,184,0002020 of $74,171,000 decreased $7,456,000 or 2.8%9.1% over the first nine months of 2018,2019, which generated sales of $79,443,000.$81,627,000. The decrease in sales resulted mostly from a decrease in unit volume, slightly offset by pricing actions which the Company took to offset material cost pressure and to protect margins.

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Gross Profit. The Company’s gross profit margins were 63.0%62.4% and 60.2%63.0% for the nine-monthsnine months ended September 30, 20192020 and 2018,2019, respectively. The Company has experienced strong expansiona decrease in production during the first nine months of 2020, most notably during the second quarter as a result of COVID-19, which diminished labor and overhead absorption, and resulted in slightly lower gross profit due to robust pricing actions, and a focus on costs and operating leverage.profit.

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. A majoritySelling expense was $12,045,000 and $14,193,000 for the nine months ended September 30, 2020 and 2019, respectively, representing a decrease of $2,148,000 or 15.1%. The most significant contributor to the additional expensedecrease relates to atypical consulting costs of $654,000 during the third quarter of 2019, attributable to the Company’s new product, MediTrac® flexible medical gas piping. The Company hasdecrease was also expanded its staffing resources,related to lower commissions and recognized an increasefreight expenses, which move in commissions during the year, largely driven by the increase inrelation to sales. Selling expense was $14,193,000Travel and $12,960,000 for the nine-months ended September 30, 2019 and 2018, respectively, representing an increase of $1,233,000 or 9.5%.advertising costs were also lower. Selling expenses have decreased as a percent of net sales compared to last year, wereat 16.2% for the nine months ended September 30, 2020, and 17.4% for the nine-monthsnine months ended September 30, 2019, and 16.3% for the nine-months ended September 30, 2018, increasing slightly.2019.

General and Administrative Expenses. General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, and corporate general and administrative services. General and administrative expenses were $18,430,000$14,056,000 and $12,939,000$18,430,000 for the nine-monthsnine months ended September 30, 20192020 and 2018,2019, respectively, thus increasingdecreasing by $5,491,000$4,374,000 or 42.4%23.7%. LegalThe Company experienced a reduction in legal and product liability related defense costs increased $4,376,000, associated primarily with one pendingof $4,420,000 in 2020 mostly related to a slow-down in the ongoing class action case which was dismissed in favor of the Company continues to vigorously defend itself against. The Company also experienced an increase in incentive compensation primarily related to prior equity awards impacted byduring the Company’s surging stock price during 2019, and an increasethird quarter of 2020. A decrease in director compensation due to thealso occurred, as there was a distribution of shares awarded to the non-employee directors upon approval by the shareholders in September 2019.2019, but no such grant occurred during 2020. These decreases were offset slightly by an increase in various less notable items. As a percentage of sales, general and administrative expenses increaseddecreased to 19.0% for the nine months ended September 30, 2020 from 22.6% for the nine-monthsnine months ended September 30, 2019 from 16.3% for the nine-months ended September 30, 2018.2019.

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Engineering Expense. Engineering expenses consist of development expenses associated with the development of new products and enhancements to existing products, and manufacturing engineering costs. Engineering expenses were $3,655,000$3,086,000 and $3,361,000$3,655,000 for the nine-monthsnine months ended September 30, 2020 and 2019, respectively, decreasing by $569,000 or 15.6%. The decrease was primarily attributable to a reduction in experimental materials that diminished after the completion of work on various promising applications during 2019, and 2018, respectively, increasing by $294,000 or 8.8%, with staffing and consulting costs representing the majority of the change.to a lesser extent travel. Engineering expenses increaseddecreased as a percentage of sales, being 4.5%4.2% for the nine-monthsnine months ended September 30, 2019,2020, and 4.2%4.5% for the same period in 2018.2019.

Operating Profits. Reflecting all of the factors mentioned above, operating profits were $15,108,000$17,110,000 and $18,534,000$15,108,000 for the quartersnine months ended September 30, 2020 and 2019, respectively, increasing by $2,002 or 13.3%. As a percentage of sales, operating profits increased, being 23.1% and 2018, respectively, decreasing by $3,426,000 or 18.5%. for the nine-months ended September 30, 2020 and 2019, respectively.

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 Company recorded $685,000 and $275,000interest expense of $46,000 for the nine months ended September 2020, compared to interest income of $685,000 through September 30, 2019. The reduction in interest income was largely due to the lower cash balance and thus lack of investment, mostly resulting from the $35,330,000 special dividend paid in December 2019. Additionally, the Company had borrowed $15,000,000 on its line of credit for a portion of the second quarter of 2020 to ensure liquidity during the first nine months of 2019 and 2018, respectively, reflecting a greater return during 2019.COVID-19 crisis. Earning potential on short-term liquid investments has also diminished in comparison to this time last year.

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Other Income (Expense)-Net. Other Income (Expense)-net primarily consists of foreign currency exchange gains (losses) on transactions with Omega Flex Limited, our UK subsidiary. There was expense of $112,000 and $50,000 recorded during the first nine months of 2020 and 2019, and expense of $80,000 for the same period in 2018.respectively.

Income Tax Expense. Income Tax Expense was $3,896,000$4,188,000 for the first nine months of 2019,2020, compared to $4,504,000$3,896,000 for the same period in 2018.2019. The $608,000$292,000 or 13.5% decrease7.5% increase in the tax expense was largely the result of the decreaseincrease in income before taxes. A lower rate was in effect during the first nine months of both 2019 and 2018 attributable to the Tax Cuts and Jobs Act enacted at the end of 2017. The Act reduced the U.S. federal tax rate from 35% to 21%, effective for the Company’s 2018 tax year. The Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global Intangible Low Taxed Income provisions, and changes effecting the deductibility of certain executive compensation.

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 include a summary of the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. The following is a discussion of the Company’s 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 as of 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, investment valuations, inventory valuations, goodwill valuation, product liability reserve, stock-based compensation valuations 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:

Revenue Recognition

Effective January 1, 2018, the Company adopted the requirements ofAccording to Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new, the Company recognizes revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective approach). The Company selected the modified retrospective approach however there was no material impact which required a cumulative effect adjustment.

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The principle of Topic 606 wasis achieved through applying the following five-step approach:

 

Identification of the contract, or contracts, with a customer — a contract with a customer exists when the Company enters into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party’s rights regarding the goods to be transferred and identifies the payment terms related to these goods.
Identification of the performance obligations in the contract —performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of product must exist. The Company ships product in accordance with the purchase order and standard terms as reflected within the Company’s order acknowledgments and sales invoices.
Determination of the transaction price —the transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with the Company’s internally approved pricing guidelines.

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Allocation of the transaction price to the performance obligations in the contract— if the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. This applies to the Company as there is only one performance obligation to ship the goods.
Recognition of revenue when, or as, the Company satisfies a performance obligation — the Company satisfies performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include:

The Company has a present right to payment
The customer has legal title to the goods
The Company has transferred physical possession of the goods
The customer has the significant risks and rewards of ownership of the goods
The customer has accepted the goods

It is important to note that the indicators are not a set of conditions that must be met before the Company can conclude that control of the goods has transferred to the customer. The indicators are a list of factors that are often present if a customer has control of the goods.

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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 Accounting Standards Codification (“ASC”)ASC 606-10-55-86. As a result, the Company has a legal right to payment upon shipment of the goods.

Based upon the above, the Company has concluded that transfer of control substantively transfers to the customer upon shipment.

Other considerations of Topic 606 include the following:

Contract Costs -costs to obtain a contract (e.g. customer purchase order) include sales commissions. Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or less. The majority of the Company’s customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt.
Warranties- the Company does not offer customers to purchase a warranty separately.separately purchased warranties. Therefore, there is not a separate performance obligation. The Company does account for warranties as a cost accrual and the warranties do not include any additional distinct services other than the assurance that the goods comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the financial reporting of the Company.
Returned Goods - from time to time, the Company provides authorization to customers to return goods. If deemed to be material, the Company would record a “right of return” asset for the cost of the returned goods which would reduce cost of sales.

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Volume Rebates (Promotional Incentives)- volume rebates are variable (dependent upon the volume of goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the four following factors are considered:

The amount of consideration is highly susceptible to factors outside the company’sCompany’s influence.
The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
The Company’s experience with similar types of contracts is limited.
The contract has a large number and broad range of possible consideration amounts.

If it was concluded that the above factors were in place for the Company, it would support the probability of a significant reversal of revenue. However, as none of the four factors apply to the Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the eligible products expected to be sold.

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Regarding disaggregated revenue disclosures, as previously noted, the Company’s business is controlled as a single operating segment that consists of the manufacture and sale of flexible metal hose. Most of the Company’s transactions are very similar in nature, contract, terms, timing, and transfer of control of goods. As indicated within Note 2, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically contained within North America, with the remainder scattered internationally. All performance assessments and resource allocations are generally based upon the review of the results of the Company as a whole.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements, backed by such obligations. Carrying value approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis, and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances, and believes its credit risk to be minimal.

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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 the Company’s 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 $1,060,000$1,013,000 and $985,000$1,433,000 as of September 30, 20192020 and December 31, 2018,2019, respectively. In regards to identifying uncollectible accounts, the Company reviews an aging report on a consistent basis to determine past due accounts, and utilizes a well-established credit rating agency. The Company charges off those accounts that are deemed uncollectible once all collection efforts have been exhausted.

Investments

The Company invests excess funds in liquid interest earning instruments including U.S. Treasury bills and bank time deposits.deposits, with maturities typically of one year or less. These investments are stated at fair value, which approximates amortized cost, and are classified as available-for-sale in accordance with ASC 320,Investments – Debt and Equity Securities. Investments were $22,865,000 and $14,944,000The Company did not have any investments as of September 30, 20192020 and December 31, 2018,2019, respectively. Maturities, from the date of purchase, were more than three months and less than one year.

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Inventories

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

Property and Equipment

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

Goodwill

In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350,Intangibles – Goodwill and Other, the Company performed an annual impairment test in accordance with this guidance as of December 31, 2018.2019. This analysis did not indicate any impairment of goodwill. There were no circumstances

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However, the duration and severity of the COVID-19 pandemic could result in future goodwill impairment charges. While we have concluded that indicate that goodwill might be impaired as ofa triggering event did not occur during the nine months ended September 30, 2019.2020, a prolonged pandemic could impact the Company’s results of operations in a manner significant enough to trigger an interim 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”) 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, 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 mostly 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 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.

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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:

1.The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2.
2.The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
3.
3.The lease term is for the major part of the remaining economic life of the underlying asset.
4.
4.The present value of the sum of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset.
5.
5.The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

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For any leases that do not meet the criteria identified above for finance leases, the Company treats such leases as operating leases. As of September 30, 2019,2020, each of the Company’s leases are classified as operating leases.

Under the new guidance, bothBoth finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities. It should be noted that under previous guidance operating leases (non-capital leases) were not required to be recorded as an asset on the balance sheet.

There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company electshas 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.

As permitted under ASU 2018-11, the Company elected the optional transition method to adopt the new leases standard. Under this new transition method, the Company initially applied the new leases standard at the adoption date of January 1, 2019 and would have recognized a cumulative-effect adjustment, if appropriate, to the opening balance of retained earnings in the period of adoption. No cumulative-effect adjustment was recognized. The Company’s reporting for the comparative periods prior to 2019 in the financial statements are presented in accordance with existing GAAP in effect for 2018 and earlier (ASC Topic 840,Leases).

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The impact of the adoption of this new standard resulted in an increase to the Company’s operating lease assets and liabilities on January 1, 2019 of approximately $800,000. The implementation did not have a material impact on the Company’sour consolidated statements of income and statements of cash flows.

Fair Value of Financial and Nonfinancial Instruments

The Company measures financial instruments in accordance with FASB ASC Topic 820,Fair Value Measurements and Disclosures. The accounting standard defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard creates a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. The Company relies upon Level 1 inputs in determining the fair value of investments and the fair value of the Company’s reporting unit in its annual impairment test as described in the FASB ASC Topic 350,Intangibles - Goodwill and Other.

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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 diluteddilutive earnings per share are the same.

Currency Translation

Assets and liabilities denominated in foreign currencies, most of which relate to the 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 expense) in the period in which they occur.

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Income Taxes

The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740,Income 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.

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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 reflectedchanges include, but are not limited to: increasing the effectslimitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the Tax Cuts and Jobs Act (the “Act”) in its financial statements during the 2017 enactment period. This included the effectsamount of the changenet operating loss carryforwards that corporations can use to offset taxable income. The tax law changes in the US Corporate tax rate from 35% to 21%Act have not had an effect on deferred tax assets and liabilities, and a provision related to previously deferred taxes on earnings of the Company’s foreign subsidiary. The Company’sincome tax expenseprovision for the periodsthree and nine months ended September 30, 2019 and 2018 included the continuing effect of the reduction in the U.S. federal tax rate from 35% to 21%, effective for those respective tax years. The Company’s tax provision also reflects other changes as a result of the Act, including the impact of the Global Intangible Low Taxed Income (“GILTI”) provisions, and changes effecting the deductibility of certain executive compensation.2020.

Other Comprehensive Income

For the three and nine months ended September 30, 20192020 and 2018,2019, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments.

Significant Concentration

The Company has one significant customer which represented more than 10% of the Company’s Accounts Receivable at September 30, 20192020 and December 31, 2018.2019. That same customer represented more than 10% of the Company’s total Net Sales for the three and nine months ended September 30, 2020 and 2019, and 2018.respectively. 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, 20182019 Form 10-K.

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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 10 of the condensed consolidated financial statements.

Recent Accounting Pronouncements

In January 2017, the FASB amended ASC Topic 350,Intangibles – Goodwill and Other(issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizerecognizes an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requiresrequired adoption on January 1, 2020. TheIn compliance, the Company does not expect that the adoption ofadopted ASU 2017-04 will have aas required during the first quarter of 2020 and determined that there was no material impact on its condensed consolidated financial statements.

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In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaced the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Adoption of the standard requires using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align existing credit loss methodology with the new standard. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-11 requires entities that did not adopt the amendments in ASU 2016-13 as of November 2019 to adopt ASU 2019-11. This ASU contains the same effective dates and transition requirements as ASU 2016-13. We adopted ASU 2016-13 and ASU 2019-11 effective January 1, 2020. The impact of adoption of these standards on our condensed consolidated financial statements was not material.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations.

As of September 30, 2019,2020, the Company had a cash balance of $25,158,000.$18,577,000. Additionally, the Company has a $15,000,000 line of credit available, as discussed in detail in Note 4, which had no borrowings outstanding upon it at as of September 30, 2019.2020. At December 31, 2018,2019, the Company had a cash balance of $32,392,000,$16,098,000, with no borrowings against the line of credit.

We believe our existing cash and cash equivalents, along with our borrowing capacity, will be sufficient to meet our anticipated cash needs for at least the next twelve 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.capacity, and the COVID-19 pandemic. The details of our operating, investing and financing activities are provided below.

Operating Activities

Cash used inprovided 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.

For the first nine months of 2019,2020, the Company’s operating activities provided cash of $9,673,000,$11,341,000, compared to the first nine months of 20182019 which provided cash of $11,716,000, a difference of $2,043,000.$9,673,000, increasing by $1,668,000. For details of the operating cash flows refer to the condensed consolidated statements of cash flows in Part I – Financial Information on page eight.

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Investing Activities

Cash used in investing activities during the first nine months of 2020 and 2019 was $381,000 and 2018$8,943,000, respectively. For these same periods, cash used for capital expenditures was $8,943,000$381,000 and $35,943,000, respectively. Cash$1,022,000, respectively, decreasing by $641,000. For 2019, cash was used to purchase short-term investments of $45,921,000, and $34,897,000, which was partially offset by cash received from net proceeds from the sale of short-term investments of $38,000,000 and $0 during the first nine months of 2019 and 2018, respectively. There were also capital expenditures during 2019 and 2018 amounting to $1,022,000 and $1,046,000, respectively. The capital spending during both 2019 and 2018 related to various projects, with prominent spending designated for the new MediTrac products.$38,000,000.

Financing Activities

All financing activities relate to dividend payments, which are detailed in Note 8, Shareholders’ Equity. Dividend payments through the first nine months of 20192020 and 2018,2019, amounted to $8,479,000 and $7,807,000 respectively. See Note 4, Line of Credit and $7,353,000 respectively.Other Borrowings, for a description of borrowings and repayments during the second quarter of 2020.

CONTINGENT LIABILITIES AND GUARANTEES

See Note 5 to the Company’s condensed consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

None

Item 3.3 – 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 third quarter of 2019,2020, 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.

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(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 nine-monthnine 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”). Most of the 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 number 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 cash bond of $1,600,000, which was previously included in Other Long Term Assets and posted as security for a subsequent appeal, was returned to the Company in May 2018. This case was finally settled and closed on August 7, 2018.

In MarchSeptember 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 successfully removed the case to federal court, and is currently vigorously defendingthe court recently granted the defendants’ joint summary judgement motion, and dismissed the case. The plaintiffs have filed a notice of appeal to the adverse summary judgment decision. The Company is continuing to vigorously defend the case.

The Company was made aware of a potential legal liability regarding a legal dispute in the United Kingdom, 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 potential amount of loss for defendant’s legal costs is estimated to be between £200,000 and £500,000. We have recorded a reserve of £350,000, or approximately $452,000, as of September 30, 2020.

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The Company has in place commercial general liability insurance policies that cover most Claims, which are subject to deductibles or retentions, ranging primarily from $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, excluding the putativeMissouri class action case, as of September 30, 20192020 is estimated to not exceed approximately $3,200,000,$7,100,000, which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the consolidated financial statements primarily represents an accrual for legal costs for services previously rendered, and outstanding or anticipated settlements for Claims. The liabilities recorded on the Company’s books at September 30, 20192020 and December 31, 20182019 were $150,000$214,000 and $215,000, respectively, and are included in Other Liabilities.

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Item 1A – Risk Factors

RiskIn addition to the risk factors are discusseddescribed under Item 1A of the Company’s Form 10-K for the year ended December 31, 2019, readers should also carefully consider the risks, uncertainties and other factors described below, in detailaddition to the other information set forth in this report, because they could materially and adversely affect the Company’s business, operating results, financial condition, cash flows, prospects, and the value of an investment in the Company’s common stock.

Risks Related to Our Business

The COVID-19 pandemic has begun to affect and may continue to affect the business.

The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020, has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the United States and abroad. The Company is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels. The COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions that have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, has created significant volatility, uncertainty and economic disruption which has begun to affect and may continue to affect the Company’s business. For example, governmental authorities in several jurisdictions have ordered the cessation of all business activity that is deemed non-essential and, although the Company’s business has to date been deemed essential in many affected markets, there is a risk that these shutdown orders will be extended or expanded or that similar shutdown orders will be implemented in other regions.

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While the Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations, the Company is currently navigating through this unprecedented crisis without any government support from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”), and the nature and magnitude of the COVID-19 pandemic’s ultimate impact on the Company will depend on numerous evolving factors, future developments and cascading effects of the coronavirus pandemic that the Company is not able to predict, including: the duration and severity of the COVID-19 pandemic and the international actions and business restrictions that are being undertaken and implemented as a result of it; governmental, business and other responses to the COVID-19 pandemic, including the promotion of “social distancing,” the issuance of shelter in place orders and restrictions on the Company’s operations, and the possibility that government officials may mandate that the Company provide products or services; potential disruptions in the Company’s supply chain; the impact of the COVID-19 pandemic on the Company’s ability to execute its short-term and long-term business strategies and initiatives; the extent to which forced remote working arrangements reduce the Company’s ability to manage its business effectively; the extent to which staffing shortages due to members of the Company’s workforce being quarantined or exposed to the coronavirus may be detrimental to the Company’s operations; and the Company’s ability to maintain current levels of skilled headcount without the proceeds of the loan under the PPP (the “PPP Loan”) as a source of additional liquidity. Furthermore, while the Company timely returned the proceeds of its PPP Loan out of an abundance of caution in reliance on U.S. Treasury Department and Small Business Administration guidance that companies were able to do so without penalty, as the COVID-19 pandemic unfolds, federal or state governments (including government agencies such as the Treasury Department, the Small Business Administration or the SEC) could promulgate new statutes, regulations, guidance or relief measures, or rescind or modify existing statutes, regulations, guidance or relief measures, in a way that is detrimental to the Company or its business, including as a result of the Company’s prior application for a loan under the PPP.

In addition, while the Company cannot predict the magnitude of the impact that the COVID-19 pandemic will have on its customers and suppliers or their financial conditions, any material effect on the Company’s customers or suppliers could adversely impact the Company. For example, the Company’s customers or suppliers may themselves assert, or attempt to terminate various agreements and arrangements with us on the basis of, contractual force majeure provisions, and any termination of a significant commercial agreement may adversely harm our operations. Additionally, the COVID-19 pandemic and related travel restrictions and other containment efforts have had a significant impact on the travel industry, which may result in reduced demand for products. The impact of the COVID-19 pandemic may also exacerbate other risk factors described under Item 1A of the Company’s Form 10-K for the year ended December 31, 2018 Form 10-K. There are no additional2019, any of which could have a material effect on the Company. For example, the risks attributableassociated with potential cybersecurity threats may be magnified given the increase in the number of Company employees working remotely using personal electronic devices and home internet connections.

The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the quarter.duration and severity of the COVID-19 pandemic. At this point, the Company cannot reasonably estimate the duration and severity of the COVID-19 pandemic or its overall impact on the Company’s business.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 – Other Information

None.

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Item 6 - Exhibits

Exhibit

No.

Description
31.1Certification of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2Certification of Chief Financial Officer of Omega Flex, Inc. pursuant to 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1Certification 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.

OMEGA FLEX, INC.
(Registrant)
Date: November 4, 2019October 30, 2020By:/s/S/ Paul J. Kane
Paul J. Kane
Vice President – Finance
and Chief Financial Officer

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