Omega Flex, Inc. 10-Q

Item 1 - Financial Statements OMEGA FLEX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, except Common Stock par value) September 30, 2022 December 31, 2021 (unaudited) ASSETS Current Assets: Cash and Cash Equivalents $ 30,569 $ 32,913 Accounts Receivable - less allowances of $ 1,229 and $ 1,410 , respectively 19,043 20,726 Inventories - Net 21,827 15,565 Other Current Assets 4,615 2,533 Total Current Assets 76,054 71,737 Right-Of-Use Assets - Operating 3,095 3,374 Property and Equipment - Net 8,558 8,569 Goodwill - Net 3,526 3,526 Deferred Taxes 206 7 Other Long Term Assets 1,584 1,702 Total Assets $ 93,023 $ 88,915 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable $ 2,576 $ 3,355 Accrued Compensation 2,897 7,008 Accrued Commissions and Sales Incentives 4,765 7,183 Dividends Payable 3,230 - Taxes Payable - 1 Lease Liability - Operating 431 383 Other Liabilities 7,079 4,864 Total Current Liabilities 20,978 22,794 Lease Liability - Operating, net of current portion 2,668 2,990 Deferred Taxes 13 427 Tax Payable Long Term 427 493 Other Long Term Liabilities 914 1,670 Total Liabilities 25,000 28,374 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 and 10,094,322 shares outstanding as of September 30, 2022 and December 31, 2021, respectively 102 102 Treasury Stock ( 1 ) ( 1 ) Paid-in Capital 11,025 11,025 Retained Earnings 58,005 50,053 Accumulated Other Comprehensive Loss ( 1,287 ) ( 827 ) Total Omega Flex, Inc. Shareholders’ Equity 67,844 60,352 Noncontrolling Interest 179 189 Total Shareholders’ Equity 68,023 60,541 Total Liabilities and Shareholders’ Equity $ 93,023 $ 88,915 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. - 3 - OMEGA FLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, except per Common Share data) For the three months ended For the nine months ended September 30, September 30, 2022 2021 2022 2021 (unaudited) Net Sales $ 31,629 $ 31,725 $ 94,670 $ 94,554 Cost of Goods Sold 11,872 11,686 35,005 35,258 Gross Profit 19,757 20,039 59,665 59,296 Selling Expense 5,261 4,876 16,545 14,625 General and Administrative Expense 4,754 5,724 16,257 16,281 Engineering Expense 1,101 1,113 3,514 3,326 Operating Profit 8,641 8,326 23,349 25,064 Interest Income 32 10 52 27 Other Income (Expense) ( 210 ) ( 19 ) ( 374 ) 6 Income Before Income Taxes 8,463 8,317 23,027 25,097 Income Tax Expense 1,924 2,160 5,558 6,441 Net Income 6,539 6,157 17,469 18,656 Less: Net (Income) Loss attributable to the Noncontrolling Interest 1 ( 9 ) ( 28 ) ( 57 ) Net Income attributable to Omega Flex, Inc. $ 6,540 $ 6,148 $ 17,441 $ 18,599 Basic and Diluted Earnings per Common Share $ 0.65 $ 0.61 $ 1.73 $ 1.84 Cash Dividends Declared per Common Share $ 0.32 $ 0.30 $ 0.94 $ 0.88 Basic and Diluted Weighted Average Shares Outstanding 10,094 10,094 10,094 10,094 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. - 4 - OMEGA FLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) For the three months ended For the nine months ended September 30, September 30, 2022 2021 2022 2021 (unaudited) Net Income $ 6,539 $ 6,157 $ 17,469 $ 18,656 Other Comprehensive (Loss): Foreign Currency Translation Adjustment ( 213 ) ( 96 ) ( 498 ) ( 60 ) Other Comprehensive (Loss) ( 213 ) ( 96 ) ( 498 ) ( 60 ) Comprehensive Income 6,326 6,061 16,971 18,596 Less: Comprehensive (Income) Loss Attributable to the Noncontrolling Interest 17 ( 3 ) 10 ( 54 ) Total Comprehensive Income $ 6,343 $ 6,058 $ 16,981 $ 18,542 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. - 5 - OMEGA FLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in Thousands, Except Share Amounts) For the three months ended September 30, 2022 Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity (unaudited) July 1, 2022 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 54,696 $ ( 1,090 ) $ 196 $ 64,928 Net Income - - - - 6,540 ( 1 ) 6,539 Cumulative Translation Adjustment ( 197 ) ( 16 ) ( 213 ) Dividends Declared ( 3,231 ) ( 3,231 ) September 30, 2022 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 58,005 $ ( 1,287 ) $ 179 $ 68,023 For the three months ended September 30, 2021 Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity (unaudited) July 1, 2021 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 42,366 $ ( 745 ) $ 311 $ 53,058 Net Income - - - - 6,148 9 6,157 Cumulative Translation Adjustment ( 90 ) ( 6 ) ( 96 ) Dividends Declared ( 3,028 ) ( 129 ) ( 3,157 ) September 30, 2021 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 45,486 $ ( 835 ) $ 185 $ 55,962 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. - 6 - OMEGA FLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in Thousands, Except Share Amounts) For the nine months ended September 30, 2022 Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity (unaudited) January 1, 2022 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 50,053 $ ( 827 ) $ 189 $ 60,541 Net Income - - - - 17,441 28 17,469 Cumulative Translation Adjustment ( 460 ) ( 38 ) ( 498 ) Dividends Declared ( 9,489 ) ( 9,489 ) September 30, 2022 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 58,005 $ ( 1,287 ) $ 179 $ 68,023 For the nine months ended September 30, 2021 Common Stock Outstanding Common Stock Treasury Stock Paid In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Noncontrolling Interest Shareholders’ Equity (unaudited) January 1, 2021 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 35,769 $ ( 778 ) $ 260 $ 46,377 Beginning balance, value 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 35,769 $ ( 778 ) $ 260 $ 46,377 Net Income - - - - 18,599 57 18,656 Cumulative Translation Adjustment ( 57 ) ( 3 ) ( 60 ) Dividends Declared ( 8,882 ) ( 129 ) ( 9,011 ) September 30, 2021 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 45,486 $ ( 835 ) $ 185 $ 55,962 Ending balance, value 10,094,322 $ 102 $ ( 1 ) $ 11,025 $ 45,486 $ ( 835 ) $ 185 $ 55,962 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. - 7 - OMEGA FLEX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) For the nine months ended September 30, 2022 2021 (unaudited) Cash Flows from Operating Activities: Net Income $ 17,469 $ 18,656 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 51 579 Depreciation and Amortization 812 697 Provision for Losses on Accounts Receivable, net of write-offs and recoveries ( 183 ) 105 Deferred Taxes ( 613 ) 303 Provision for Inventory Reserves ( 409 ) 303 Changes in Assets and Liabilities: Accounts Receivable 1,625 ( 2,165 ) Inventories ( 6,474 ) ( 1,671 ) Right-Of-Use Assets 380 201 Other Assets ( 1,975 ) ( 1,309 ) Accounts Payable ( 679 ) ( 605 ) Accrued Compensation ( 4,078 ) ( 235 ) Accrued Commissions and Sales Incentives ( 2,401 ) 1,148 Lease Liabilities ( 376 ) ( 209 ) Other Liabilities 1,420 ( 2,634 ) Net Cash Provided by Operating Activities 4,569 13,164 Cash Flows from Investing Activities: Capital Expenditures ( 817 ) ( 720 ) Net Cash Used in Investing Activities ( 817 ) ( 720 ) Cash Flows from Financing Activities: Dividends Paid ( 6,258 ) ( 8,809 ) Net Cash Used in Financing Activities ( 6,258 ) ( 8,809 ) Net (Decrease) Increase in Cash and Cash Equivalents ( 2,506 ) 3,635 Translation effect on cash 162 ( 23 ) Cash and Cash Equivalents – Beginning of Period 32,913 23,633 Cash and Cash Equivalents – End of Period $ 30,569 $ 27,245 Supplemental Disclosure of Cash Flow Information: Cash paid for Income Taxes $ 7,226 $ 7,455 Declared Dividends $ 9,489 $ 9,011 Supplemental Schedule of Non-Cash Investing and Financing Activities: Additions to Right-Of-Use Assets obtained from new operating Lease Liabilities $ 644 $ 3,261 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 Condensed Consolidated Financial Statements for the quarter ended September 30, 2022 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 ways to carry gases and liquids within their particular applications. Some of the more prominent uses include: ● carrying fuel gases within residential and commercial buildings; ● carrying 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, and fueling for back-up generation; ● using copper-alloy corrugated piping in medical or health care facilities to carry medical gases (oxygen, nitrogen, vacuum) or pure gases for pharmaceutical applications; and ● 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. - 9 - The Company manufactures flexible metal hose at its facilities in Exton, Pennsylvania, and Houston, Texas in the United States (U.S.), and in Banbury, Oxfordshire in the United Kingdom (U.K.), 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 global markets. 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. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual amounts could differ significantly from these estimates. Revenue Recognition The Company applies the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) . The standard 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 principle of Topic 606 was 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. - 10 - ● 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 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 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 a warranty as a separate component for customers to purchase. A warranty is generally included with each purchase, providing assurance that the goods comply with agreed-upon specifications, and the cost is therefore accrued accordingly, but contracts do not include any requirement for additional distinct services. Therefore, there is not a separate performance obligation, and there is no impact of warranties under Topic 606 upon the financial reporting of the Company. - 11 - ● 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 the related 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’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, Significant Accounting Policies, in these Condensed Consolidated Financial Statements, under the caption “Significant Concentration”, the majority of the Company’s sales were geographically contained within North America, with the 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. - 12 - Accounts Receivable and Provision for Credit Losses All accounts receivables are stated 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 estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of collectability, historical loss experience, and 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 $ 1,229,000 and $ 1,410,000 as of September 30, 2022 and December 31, 2021, respectively. 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 (ASU 2017-04) , using the simplified method as adopted, the Company performed an annual impairment test as of December 31, 2021. This analysis did not indicate any impairment of goodwill. - 13 - 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 and are accordingly recorded as liabilities. The Units follow a vesting schedule over 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. The liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. The Company recognizes the reversal of any previously recognized compensation expense on forfeited nonvested Units in the period the Units are forfeited. The Plan has been amended and restated, for all grants made starting January 1, 2023, to set the vesting method to three-year cliff vesting following the grant date, with full value paid upon maturity. Additionally, for grants made starting January 1, 2023, upon retirement at age 67 or greater, and with one year of continuous service prior to retirement, vesting of the issued grant(s) would accelerate on a pro-rata basis, 1/3 per year from the grant date. Further details of the Plan are provided in Note 6, Stock-Based Compensation Plans, to the Condensed Consolidated Financial Statements included in this report. Product Liability Reserves Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 5, Commitments and Contingencies, to the Condensed Consolidated Financial Statements included in this report, 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 $ 3,000,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. Leases The Company applies 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. - 14 - 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, 2022 and December 31, 2021, each of the Company’s leases are classified as operating leases. Both finance and operating leases are reflected on the balance sheet as lease or “right-of-use” assets and lease liabilities. There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company’s general capitalization policy threshold, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components, such as common area maintenance, which are generally accounted for separately. In general, the Company will assess if non-lease components are fixed and determinable, or variable, when determining if the component should be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes its incremental borrowing rate at the time of the lease agreement. Fair Value of Financial and Nonfinancial Instruments The Company measures financial instruments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures . 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 the Company’s reporting unit in its annual impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other . - 15 - 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 diluted earnings per share are the same. Currency Translation Assets and liabilities denominated in foreign currencies, most of which relate to the Company’s U.K. subsidiary whose functional currency is the British Pound, are translated into U.S. dollars at exchange rates prevailing on the balance sheet dates. The Condensed Consolidated 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 Condensed Consolidated Statements of Income 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 records tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The FASB ASC Topic 740, Income Taxes , clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company follows the provisions of ASC 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions. - 16 - Other Comprehensive Income For the three and nine months ended September 30, 2022 and 2021, respectively, the components of other comprehensive income consisted solely of foreign currency translation adjustments. Significant Concentrations The Company has one significant customer which represented more than 10% of the Company’s Accounts Receivable on September 30, 2022. No customers represented more than 10% of the Company’s Accounts Receivable on December 31, 2021. That same customer represented more than 10% of the Company’s total Net Sales for the three and nine months ended September 30, 2022 and 2021. 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, 2021 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. Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The impact of the adoption of ASU 2020-04 did not have a material impact on the Company’s Condensed Consolidated Financial Statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. The Company adopted this new guidance in 2021, and it did not have a material impact on its Condensed Consolidated Financial Statements. - 17 - 3. INVENTORIES Inventories, net of reserves of $ 78,000 and $ 505,000 on September 30, 2022 and December 31, 2021, respectively, consisted of the following: SCHEDULE OF INVENTORIES, NET OF RESERVES September 30, December 31, 2022 2021 (in thousands) Finished Goods $ 8,538 $ 5,903 Raw Materials 13,289 9,662 Inventories - Net $ 21,827 $ 15,565 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 (the “Line”) 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 , 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% to plus 1.75% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime Rate up to Prime Rate plus 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 3.89%. 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-year term, as long as there are no amounts outstanding. As of September 30, 2022 and December 31, 2021, the Company had no outstanding borrowings on its line of credit and was in compliance with all debt covenants. As stated above, borrowings under our line of credit facility bear interest at variable rates based on LIBOR. Currently, the Federal Reserve Bank is considering options and transitioning away from LIBOR, and as such, has formed the Alternative Rates Committee (ARRC). The ARRC selected the Secured Overnight Financing Rate (SOFR) as an appropriate replacement. SOFR is based on transactions in the overnight repurchase markets, which reflects a transaction-based rate on a large number of transactions, better reflecting current financing costs. Discussions are ongoing with the Bank with regards to transitioning the rate for the Line from LIBOR to another appropriate rate such as SOFR. - 18 - 5. COMMITMENTS AND CONTINGENCIES Commitments Under a number of indemnity agreements between the Company and each of its officers and directors, the Company has agreed to indemnify each of its officers and directors against any liability asserted against them in their capacity as an officer or director, or both. The Company’s indemnity obligations under the indemnity agreements are subject to certain conditions and limitations set forth in each of the agreements. Under the terms of the Agreement, the Company is contingently liable for costs which may be incurred by the officers and directors in connection with claims arising by reason of these individuals’ roles as officers and directors. The Company has obtained directors’ and officers’ insurance policies to fund certain obligations under the indemnity agreements. The Company has salary continuation agreements with current 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 per month to $ 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 $ 382,000 on September 30, 2022, of which $ 334,000 is included in Other Long Term Liabilities, and the remaining current portion of $ 48,000 is included in Other Liabilities, associated with the applicable retirement benefit payments over the next twelve months. The December 31, 2021 liability of $ 447,000 had $ 399,000 reported in Other Long Term Liabilities, and a current portion of $ 48,000 in Other Liabilities. The Company has obtained and is the beneficiary of life insurance policies with respect to current and/or past employees. The cash surrender value of such policies (included in Other Long Term Assets) amounts to $ 1,509,000 at September 30, 2022 and $ 1,651,000 at December 31, 2021. 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, 2021 Form 10-K. Obligations related to these arrangements are currently indeterminable due to the variable nature and timing of possible events required to incur such obligations. As disclosed in detail in Note 7, Leases, to the Condensed Consolidated Financial Statements included in this report, the Company has several lease obligations in place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves the manufacturing, warehousing, and distribution functions. Lastly, as provided in Item 7 under “Liquidity and Capital Resources”, of the Company’s December 31, 2021 Form 10-K, the Company has numerous purchase obligations in place for the forthcoming year, largely related to the Company’s core material inventory components. - 19 - Contingencies In the ordinary and normal conduct of the Company’s business, it is subject to periodic lawsuits, investigations, and claims (collectively, the “Claims”). The Claims generally 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. The Company was made aware of a potential legal liability regarding a legal dispute in the U.K., in which the Company’s subsidiary, Omega Flex Limited (“OFL”), was the claimant. After withdrawing the claim, the court determined that OFL was responsible for the defendant’s costs (including a portion of its attorneys’ fees). The Company reached an initial agreement during the fourth quarter of 2020 and made a payment of £ 320,000 accordingly. An additional payment of £ 110,000 was made on January 5, 2022, which was recorded as an accrued liability as of December 31, 2021 and represented the remaining amount of the liability as part of the final arrangement. This matter is now closed. 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 $ 3,000,000 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 $ 3,000,000 , depending upon the circumstances, and insurance deductible or retention in place for the respective claim year. The aggregate maximum exposure for all current open Claims as of September 30, 2022 is estimated to not exceed approximately $ 7,840,000 , which represents the potential costs that may be incurred over time for the Claims within the applicable insurance policy deductibles or retentions. From time to time, depending upon the nature of a particular case, the Company may decide to spend in excess of a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the Condensed Consolidated Financial Statements primarily represents an accrual for legal costs for services previously rendered, outstanding settlements for Claims not yet paid, and anticipated settlements for Claims within the Company’s remaining retention under its insurance policies. The liabilities recorded on the Company’s books as of September 30, 2022 and December 31, 2021 were $ 3,513,000 and $ 262,000 , respectively, and are included in Other Liabilities. - 20 - 6. STOCK-BASED COMPENSATION PLANS Phantom Stock Plan Plan Description. On April 1, 2006, the Company adopted the Omega Flex, Inc. 2006 Phantom Stock Plan (the “Plan”). The Plan authorizes the grant of up to one million units of phantom stock to employees, officers, or directors of the Company. The phantom stock units (“Units”) each represent a contractual right to payment of compensation in the future based on the market value of the Company’s common stock . The Units are not shares of the Company’s common stock, and a recipient of the Units does not receive any of the following: ■ ownership interest in the Company ■ shareholder voting rights ■ other incidents of ownership to the Company’s common stock The Units are granted to participants upon the recommendation of the Company’s President, 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. Grants made on or after January 1, 2023, will fully vest three-years from the grant date. Upon vesting, the Units represent a contractual right of payment for the value of the 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 the Units granted in a particular award have fully vested, unless a specified event occurs under the terms of the Plan, which would allow for earlier payment. 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 ( Full Value ). In 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 addition, the Plan has been amended and restated, for all grants made starting January 1, 2023, to set the vesting method to three-year cliff vesting following the grant date, with full value paid upon maturity. Additionally, for grants made starting January 1, 2023, upon retirement at age 67 or greater, and with one year of continuous service prior to retirement, vesting of the issued grant(s) would accelerate on a pro-rata basis, 1/3 per year from the grant date. 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 their 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. - 21 - Grants of Phantom Stock Units. As of December 31, 2021, the Company had 8,358 unvested units outstanding, all of which were granted at Full Value . On February 22, 2022, the Company granted an additional 2,471 Full Value Units with a fair value of $ 148.03 per unit on grant date, using historical volatility. In February 2022, the Company paid $ 838,000 for 5,450 fully vested and matured units that were granted during 2018, including their respective earned dividend values. In March 2022, the Company paid $ 295,000 for 1,870 fully vested units that were granted during 2018, 2019 and 2020, including their respective earned dividend values. On August 19, 2022, the Company granted an additional 1,022 Full Value Units with a fair value of $ 113.63 per unit on grant date, using historical volatility. In August 2022, the Company paid $ 107,000 for the 950 fully vested and matured units that were granted during August 2018, including their respective earned dividend values. As of September 30, 2022, the Company had 6,653 unvested units outstanding. The Company uses the Black-Scholes option pricing model as its method for determining fair value of the Units. The Company uses the straight-line method of attributing the value of the stock-based compensation expense relating to the Units. The compensation expense (including adjustment of the liability to its fair value) from the Units is recognized over the vesting period of each grant or award. The FASB ASC Topic 718, Compensation - Stock Compensation , requires forfeitures either to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates to derive an estimate of awards ultimately to vest or to recognize the effect of any forfeited awards for which the requisite vesting period is not completed in the period that the award is forfeited. The Company recognizes the reversal of any previously recognized compensation expense on forfeited awards in the period that the award is forfeited. During the three and nine months ended September 30, 2022, no awards were forfeited. However, for the three and nine months ended September 30, 2021, a reversal of $ 56,000 of previously recognized compensation expense was recognized on 1,212 nonvested forfeited Units. The total Phantom Stock related liability as of September 30, 2022 was $ 1,238,000 of which $ 656,000 is included in Other Liabilities, as it is expected to be paid within the next twelve months, and the balance of $ 582,000 is included in Other Long Term Liabilities. The total Phantom Stock related liability as of December 31, 2021 was $ 2,427,000 of which $ 1,156,000 was included in Other Liabilities, and the balance of $ 1,271,000 was 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 $ 51,000 and $ 579,000 for the nine months ended September 30, 2022 and 2021, respectively. The company recorded compensation income of approximately $ 81,000 for the three months ended September 30, 2022 and compensation expense of $ 102,000 for the three months ended September 30, 2021, respectively. Compensation income or expense for a given period largely depends upon fluctuations in the Company’s stock price. - 22 - The following table summarizes information about the Company’s nonvested phantom stock Units as of and for the nine months ended September 30, 2022: SUMMARY OF NONVESTED PHANTOM STOCK UNITS Units Weighted Average Grant Date Fair Value Number of Phantom Stock Unit Awards: Nonvested on December 31, 2021 8,358 $ 100.93 Granted 3,493 $ 137.97 Vested ( 5,198 ) $ 89.78 Forfeited — — Canceled — — Nonvested on September 30, 2022 6,653 $ 129.09 Phantom Stock Unit Awards Expected to Vest 6,653 $ 129.09 The total unrecognized compensation costs calculated on September 30, 2022 are $ 469,000 which will be recognized through August of 2025. The Company will recognize the related expense over the weighted average period of 1.4 years. 7. LEASES In the U.S., the Company owns its two main operating facilities located in Exton, Pennsylvania. In addition to the owned facilities, the Company also has operations in other locations that are leased, as well as other leased assets. In conjunction with the guidance for leases, as defined by the FASB with ASU 2016-02, Leases (Topic 842), the Company has described the existing leases, which are all classified as operating leases, pursuant to the below. In the U.S., the Company leases a facility in Houston, Texas, which currently provides manufacturing, stocking, and sales operations, with the lease term running through October 2024 and a facility in Malvern, Pennsylvania, which was consummated, effective January 1, 2022, with a 3-year term ending in December 2024 , that provides warehousing. Additionally, the Company extended its operating lease agreement for its corporate office space in Middletown, Connecticut, with the lease term ending in June 2027 . In the U.K., the Company leases a facility in Banbury, England, which serves manufacturing, warehousing, and other operational functions. The lease in Banbury has a 15-year term ending in March 2036 . In addition to property rentals, the Company also has lease agreements in place for various fleet vehicles and equipment with various lease terms. On September 30, 2022, the Company has recorded right-of-use assets of $ 3,095,000 , and a lease liability of $ 3,099,000 , of which $ 431,000 is reported as a current liability. On December 31, 2021, the Company had recorded right-of-use assets of $ 3,374,000 , and a lease liability of $ 3,373,000 , of which $ 383,000 was reported as a current liability. The respective weighted average remaining lease term and discount rate are approximately 11.01 years and 1.05 % as of September 30, 2022. - 23 - Rent expense for the operating leases was approximately $ 119,000 and $ 384,000 for the three and nine months ended September 30, 2022 and $ 108,000 and $ 312,000 for the three and nine months ended September 30, 2021. Future minimum lease payments, inclusive of interest, under non-cancelable leases as of September 30, 2022 are as follows: SCHEDULE OF FUTURE MINIMUM RENTAL PAYMENTS FOR OPERATING LEASES Twelve Months Ending September 30, Operating Leases (in thousands) 2023 $ 431 2024 411 2025 270 2026 240 2027 226 Thereafter 1,521 Total Minimum Lease Payments $ 3,099 8. SHAREHOLDERS’ EQUITY As of September 30, 2022 and December 31, 2021, the Company had authorized 20,000,000 common stock shares with par value of $ 0.01 per share. For both periods, the total number of outstanding shares was 10,094,322 , shares held in Treasury was 59,311 , and total shares issued was 10,153,633 . During 2022 and 2021, upon approval of the Board of Directors (the “Board”) the Company has declared and paid dividends, as set forth in the following table: SCHEDULE OF DIVIDEND PAYMENTS Dividend Declared Dividend Paid Date Price Per Share Date Amount September 30, 2022 $ 0.32 October 24, 2022 $ 3,231,000 June 24, 2022 $ 0.32 July 5, 2022 $ 3,230,000 March 29, 2022 $ 0.30 April 25, 2022 $ 3,028,000 December 9, 2021 $ 0.30 December 30, 2021 $ 3,029,000 September 15, 2021 $ 0.30 October 4, 2021 $ 3,028,000 June 9, 2021 $ 0.30 July 6, 2021 $ 3,028,000 March 24, 2021 $ 0.28 April 14, 2021 $ 2,827,000 December 11, 2020 $ 0.28 January 5, 2021 $ 2,826,000 - 24 - In addition to the above dividend amounts, there were dividends approved by the Company’s foreign subsidiary during September 2021, which amounted to an outlay of cash of $ 129,000 to the foreign subsidiary’s noncontrolling interest. 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. On April 4, 2014, the Board authorized an extension of its stock repurchase program without expiration, up to a maximum amount of $ 1,000,000 . The original program established in December 2007 authorized the purchase of up to $ 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 , or approximately $ 15 per share, which were held as treasury shares. The Company has not made any stock repurchases since 2014. 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, 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. First, legal and accounting fees of $ 117,000 were paid on behalf of three affiliated shareholders during the first two quarters of 2021 for the filing of a registration statement with the SEC (Form S-3) which allowed for the resale of up to 300,000 shares of common stock owned by the affiliated shareholders. The legal and accounting fees are to be repaid to the Company by the three affiliated shareholders, and the remaining amount is reported in Other Current Assets. Legal services for the Form S-3 and for other legal services were performed by a firm which formerly employed one member of the board. Second, on occasion the Company shares a small amount of services with its former parent Mestek, Inc., mostly related to board meeting expenses. Finally, the Company is aware of transactions between a few service providers which employ individuals with associations 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. 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. 10. SUBSEQUENT EVENTS The Company evaluated all events or transactions that occurred through the date of this filing. During this period, no events came to the Company’s attention that would impact the Condensed Consolidated Financial Statements for the period ended September 30, 2022. - 25 -