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<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>1. BASIS OF PRESENTATION AND DESCRIPTION
OF BUSINESS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><u>Basis of Presentation</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 March
31, 2018 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.25in"><b><u>Description of Business</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, the transfer of liquefied
gases in certain processing applications, vibration absorbers in high vibration applications, 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, and the Company’s corrugated tubing can also be used in
the healthcare industry to carry various medical related gases.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company manufactures
flexible metal hose at its facilities in Exton, Pennsylvania, 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 global markets.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>2. SIGNIFICANT ACCOUNTING POLICIES</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Use of Estimates</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, inventory valuations, goodwill valuation, product liability
reserve, stock-based compensation valuations and accounting for income taxes. Actual amounts could differ significantly from these
estimates.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Revenue Recognition</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Effective January 1, 2018,
the Company adopted the requirements of Accounting Standards Update 2014-09, <i>Revenue from Contracts with Customers (Topic 606)</i>.
The standard is a comprehensive new 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The principle of Topic
606 was achieved through applying the following five-step approach:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><i> </i></p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Identification of the contract, or contracts, with a customer —</i> 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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Identification of the performance obligations in the contract — </i>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.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Determination of the transaction price</i> —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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Allocation of the transaction price to the performance obligations in the contract </i>— 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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Recognition of revenue when, or as, the Company satisfies a performance obligation</i> — 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:</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 72px"> </td>
<td style="width: 24px; text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company has a present right to payment</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has legal title to the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company has transferred physical possession of the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has the significant risks and rewards of ownership of the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has accepted the goods</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">Based upon
the above, the Company has concluded that transfer of control substantively transfers to the customer upon shipment.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Other considerations of
Topic 606 include the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Contract Costs - </i>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 customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Warranties </i>- the Company does not offer customers to purchase a warranty separately. 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.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: -0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px; text-align: justify"> </td>
<td style="width: 24px; text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Returned Goods</i> - 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. Upon implementation of Topic 606, the Company will monitor pending authorized returns of goods and, if deemed appropriate, record the right of return asset accordingly.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Volume Rebates (Promotional Incentives) </i>- 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:</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 72px; text-align: justify"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The amount of consideration is highly susceptible to factors outside the company’s influence.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company’s experience with similar types of contracts is limited.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The contract has a large number and broad range of possible consideration amounts.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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 products expected to be sold.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Cash Equivalents</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Accounts Receivable and Provision for
Doubtful Accounts</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Accounts receivable are
reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management
believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting
in their inability to make payments, additional allowances may be required.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The allowance for doubtful
accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the
allowance based on any known collection issues, historical experience, and other currently available evidence. The reserve for
future credits, discounts, and doubtful accounts was $918,000 and $920,000 as of March 31, 2018 and December 31, 2017, 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Inventories</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories are valued
at the lower of cost or market. 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Property and Equipment</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Property and equipment
are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives
of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in
other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are
capitalized.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Goodwill </u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, 2017. This analyses did not indicate any impairment of goodwill. There
were no circumstances that indicate that goodwill might be impaired at March 31, 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Stock-Based Compensation Plans</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In 2006, the Company adopted
a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (“Units”) to certain
key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based
upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant date,
and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes
option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note
6.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Product Liability Reserves</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Product liability reserves
represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company
uses the most current available data to estimate claims. As explained more fully under Note 5, Commitments and Contingencies, for
various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain
defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $1,000,000
per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously
defending against all known claims.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Fair Value of Financial and Nonfinancial
Instruments</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 on its actively traded share value –
a Level 1 input – in determining the fair value of the reporting unit in its annual impairment test as described in the FASB
ASC Topic 350, Intangibles - Goodwill and Other.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Earnings per Common Share</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Basic earnings per share
have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive
securities. Consequently, basic and dilutive earnings per share are the same.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Currency Translation</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Assets and liabilities
denominated in foreign currencies, most of which relate to our 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Income Taxes</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company accounts for
tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related
deferred taxes and tax benefits, and uncertainties in tax positions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.75in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.75in">The Company reflected
the effects of the Tax Cuts and Jobs Act (The Act), in its 2017 financial statements. This included the effects of the change in
the US Corporate tax rate from 35% to 21% on deferred tax assets and liabilities, and a provision related to previously deferred
taxes on earnings of the Company’s foreign subsidiary. The Company’s tax expense for the period ended March 31, 2018
includes the continuing effect of the reduction in 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Other Comprehensive Income</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">For the quarters ended
March 31, 2018 and 2017, respectively, the components of other comprehensive income consisted solely of foreign currency translation
adjustments.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Significant Concentration</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">At March 31, 2018, the
Company has one significant customer who represented more than 10% of the Company’s Accounts Receivable and more than 10%
of the Company’s total Net Sales for the quarter ending March 31, 2018. At December 31, 2017, that same customer also represented
more than 10% of the Company’s Accounts Receivable balance, and more than 10% of Net Sales for the first quarter of 2017.
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, 2017 Form 10-K.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Subsequent Events</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 9 of the condensed consolidated financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Recent Accounting Pronouncements</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In May 2014, the FASB issued
ASU 2014-09, <i>Revenue from Contracts with Customers (Topic 606)</i>, requiring an entity to recognize the amount of revenue to
which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard replaced most
existing revenue recognition guidance in U.S. GAAP once it became effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. The updated standard became effective for the Company in the first quarter
of fiscal year 2018. The Company completed its review of its customer contracts and its analysis of the impact of the disclosure
requirements of ASU 2014-09 during 2017. The Company has adopted the revenue guidance effective January 1, 2018, using the modified
retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial statements,
and is not expected to have any material impact on an ongoing basis. Although there is no material impact on the financial statements
our accounting policy for revenue recognition has been updated as described previously in Note 1 of the condensed consolidated
financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In February 2016, the
FASB issued ASU 2016-02, <i>Leases (Topic 842)</i>. Under this ASU, lessees are required to recognize right-of-use assets and
lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the
lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably
certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use
assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on
a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases
currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and
annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating its population
of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact
relates to its accounting for real estate operating leases. The Company anticipates recognition of additional assets and corresponding
liabilities related to leases upon adoption, but has not quantified these amounts at this time. The Company plans to adopt the
standard effective January 1, 2019.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>3. INVENTORIES</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories, net of reserves
of $273,000 and $479,000 at March 31, 2018 and December 31, 2017, respectively, consisted of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>March 31, 2018</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>December 31, 2017</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="6" style="text-align: center"><font style="font-size: 10pt"><b>(dollars in thousands)</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 54%"><font style="font-size: 10pt">Finished Goods</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 20%; text-align: right"><font style="font-size: 10pt">4,820</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 20%; text-align: right"><font style="font-size: 10pt">5,461</font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt"><font style="font-size: 10pt">Raw Materials</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">3,178</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">2,546</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 2.5pt"><font style="font-size: 10pt">Inventories - Net</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">7,998</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">8,007</font></td>
<td style="padding-bottom: 2.5pt"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>4. LINE OF CREDIT</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, 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 2.63%.
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.
Prior to this, the Company had been operating in adherence with the December 29, 2014 agreement, as outlined in the December 31,
2017 Form 10-K, and filed as an Exhibit to the Current Report on Form 8-K on December 29, 2014.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">As of March 31, 2018 and
December 31, 2017, the Company had no outstanding borrowings on its line of credit, and was in compliance with all debt covenants.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>5. COMMITMENTS AND CONTINGENCIES</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Commitments:</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has salary
continuation agreements with one current employee, and one former employee who retired at the end of 2010. These agreements provide
for monthly payments to each of the employees or their designated beneficiary upon the employee’s retirement or death. The
payment benefits range from $1,000 per month to $3,000 per month with the term of such payments limited to 15 years after the employee’s
retirement. 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 $493,000 at March 31, 2018, of which $481,000
is included in Other Long Term Liabilities, and the remaining current portion of $12,000 is included in Other Liabilities, associated
with the retired employee previously noted who is now receiving benefit payments. The December 31, 2017 liability of $496,000,
had $484,000 reported in Other Long Term Liabilities, and a current portion of $12,000 in Other Liabilities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has obtained
and is the beneficiary of three whole life insurance policies with respect to the two employees discussed above, and one other
employee policy. The cash surrender value of such policies (included in Other Long Term Assets) amounts to $1,281,000 at March
31, 2018 and December 31, 2017.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">As disclosed in detail
in Note 8 of the Company’s December 31, 2017 Form 10-K, under the caption “Leases”, the Company has several lease
obligations in place that will be paid out over time. Most notably, the Company leases a facility in Banbury, England that serves
the manufacturing, warehousing and distribution functions. Additionally, the Company purchased the operating facility at 427 Creamery
Way in Exton, PA in February 2017, which was previously under lease through January 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Contingencies:</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 numbers of Claims, higher legal costs, and higher insurance deductibles
or retentions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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<sup>®</sup> 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. After further extended appellate review, on February 16, 2018 the appeals court ruled
in favor of the Company, and the prior strict liability verdict for the plaintiff has been vacated and the case remanded for a
new trial. As a result, it is expected that the cash bond of $1,600,000, which is included in Other Long Term Assets and posted
as security for the subsequent appeal, will be returned to the Company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In March 2017, a putative
class action case was re-filed against the Company and other parties in Missouri state court after the predecessor case was dismissed
without prejudice by the federal court. The Company is currently vigorously defending the case.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has in place
commercial general liability insurance policies that cover the Claims, which are subject to deductibles or retentions, ranging
primarily from $25,000 to $1,000,000 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, 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 is estimated to not exceed approximately $4,000,000, 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
settlements for existing claims. The liabilities recorded on the Company’s books at March 31, 2018 and December 31, 2017
were $215,000 and $175,000, respectively, and are included in Other Liabilities.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>6. STOCK BASED PLANS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Phantom Stock Plan</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><b><i>Plan Description.
</i></b>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 <u>does
not</u> receive any of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td><font style="font-size: 10pt">ownership interest in the Company</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td><font style="font-size: 10pt">shareholder voting rights</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td><font style="font-size: 10pt">other incidents of ownership to the Company’s common stock</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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. 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Units may be <i>Full
Value,</i> 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; or <i>Appreciation Only</i>, 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 date <i>minus</i> the closing price of the Company’s common
stock at the grant date.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In certain circumstances,
the Units may be immediately vested upon the participant’s death or disability. All Units granted to a participant are forfeited
if the participant is terminated from his relationship with the Company or its subsidiary for “cause,” which is defined
under the Plan. If a participant’s employment or relationship with the Company is terminated for reasons other than for “cause,”
then any vested Units will be paid to the participant upon termination. However, Units granted to certain “specified employees”
as defined in Section 409A of the Internal Revenue Code will be paid approximately 181 days after termination.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><b><i> </i></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"><b><i>Grants of Phantom
Stock Units. </i></b>As of December 31, 2017, the Company had 21,296 unvested units outstanding, all of which were granted at <i>Full
Value</i>. On February 12, 2018, the Company granted an additional 6,450 <i>Full Value </i>Units with a fair value of $53.04 per
unit on grant date, using historical volatility. As of March 31, 2018, the Company had 18,188 unvested units outstanding.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The FASB ASC Topic 718,
Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately to
vest.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 March 31, 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The total Phantom Stock
related liability as of March 31, 2018 was $1,510,000 of which $699,000 is included in Other Liabilities, as it is expected to
be paid in February 2019, and the balance of $811,000 is included in Other Long Term Liabilities. At December 31, 2017, the total
Phantom Stock liability was $2,238,000, with $776,000 in Other Liabilities, and $1,462,000 included in Other Long Term Liabilities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Related to the Phantom
Stock Plan, in accordance with FASB ASC Topic 718, Stock Compensation, the Company recorded compensation income of approximately
$63,000 for the three months ended March 31, 2018, and compensation income of $74,000 for the first quarter of 2017. Compensation
income or expense for a given period largely depends upon fluctuations in the Company’s stock price.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The following table summarizes
information about the Company’s nonvested phantom stock Units at March 31, 2018:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Units</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Weighted Average Grant Date Fair Value</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Number of Phantom Stock Unit Awards:</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 65%; padding-left: 10pt"><font style="font-size: 10pt">Nonvested at December 31, 2017</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 11%; text-align: right"><font style="font-size: 10pt">21,296</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 18%; text-align: right"><font style="font-size: 10pt">34.74</font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Granted</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">6,450</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">53.04</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Vested</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(9,558</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">32.96</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Forfeited</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt; padding-left: 20pt"><font style="font-size: 10pt">Canceled</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-bottom: 2.5pt; padding-left: 10pt"><font style="font-size: 10pt">Nonvested at March 31, 2018</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,188</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">43.53</font></td>
<td style="padding-bottom: 2.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt; padding-left: 10pt"><font style="font-size: 10pt">Phantom Stock Unit Awards Expected to Vest</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">18,188</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">43.53</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The total unrecognized
compensation costs calculated at March 31, 2018 are $1,031,000 which will be recognized through February of 2021. The Company
will recognize the related expense over the weighted average period of 1.7 years.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>7. SHAREHOLDERS’ EQUITY</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">For the periods ending
March 31, 2018 and December 31, 2017, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share.
At these dates, the number of shares issued was 10,153,633, and the total number of outstanding shares was 10,091,822, with the
61,811 variance representing shares held in Treasury.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">During 2017, the Board
of Directors (Board) revised its dividend policy to allow for and establish a record of paying regular quarterly dividends. In
furtherance of this policy, the Company announced on June 9, 2017, September 11, 2017, and December 13, 2017 that the Board had
approved a quarterly dividend in the amount of $0.22 per share to all Shareholders of record, amounting to payments of $2,220,000
in July 2017, October 2017, and January 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">On December 14, 2016, the
Board declared a special dividend of $0.85 per share to all Shareholders of record as of December 26, 2016, payable on or before
January 6, 2017. The total payment to shareholders made in January 2017 was $8,578,000.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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. 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. The Company did not make any stock repurchases since 2014.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.6pt"><b>8. RELATED PARTY TRANSACTIONS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">From time to time the
Company may have related party transactions (RPT’s). In short, RPT’s 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 RPT’s exist. Through this investigation, the Company is currently not aware of any related
party transactions 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 currently also has note agreement
assets with related parties amounting to approximately $146,000 and $147,000 at March 31, 2018 and December 31, 2017, respectively,
which are contractually secured by the Company. It should be noted that in April 2018, a majority of the amounts due from related
parties has been collected.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>9. SUBSEQUENT EVENTS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company evaluated
all events or transactions that occurred through the date of this filing. During April 2018, one of the Company’s foreign
subsidiaries paid a dividend to all shareholders of record, in the amount of approximately $10,000,000. As a majority of the foreign
entity is owned by Omega Flex, Inc, the “Parent” company, most of this cash was received by the Parent. The net cash
position of the consolidated entity was therefore largely unchanged. The Company did not have any material subsequent events that
impacted its condensed consolidated financial statements during the period.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Use of Estimates</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, inventory valuations, goodwill valuation, product liability
reserve, stock-based compensation valuations and accounting for income taxes. Actual amounts could differ significantly from these
estimates.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Revenue Recognition</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Effective January 1, 2018,
the Company adopted the requirements of Accounting Standards Update 2014-09, <i>Revenue from Contracts with Customers (Topic 606)</i>.
The standard is a comprehensive new 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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The principle of Topic
606 was achieved through applying the following five-step approach:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"><i> </i></p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Identification of the contract, or contracts, with a customer —</i> 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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Identification of the performance obligations in the contract — </i>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.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Determination of the transaction price</i> —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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Allocation of the transaction price to the performance obligations in the contract </i>— 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.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Recognition of revenue when, or as, the Company satisfies a performance obligation</i> — 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:</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 72px"> </td>
<td style="width: 24px; text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company has a present right to payment</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has legal title to the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company has transferred physical possession of the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has the significant risks and rewards of ownership of the goods</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The customer has accepted the goods</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">Based upon
the above, the Company has concluded that transfer of control substantively transfers to the customer upon shipment.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Other considerations of
Topic 606 include the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Contract Costs - </i>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 customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt.</font></td></tr>
<tr style="vertical-align: top">
<td> </td>
<td> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Warranties </i>- the Company does not offer customers to purchase a warranty separately. 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.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: -0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px; text-align: justify"> </td>
<td style="width: 24px; text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Returned Goods</i> - 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. Upon implementation of Topic 606, the Company will monitor pending authorized returns of goods and, if deemed appropriate, record the right of return asset accordingly.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"> </td>
<td style="text-align: justify"> </td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td style="text-align: justify"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt"><i>Volume Rebates (Promotional Incentives) </i>- 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:</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 72px; text-align: justify"> </td>
<td style="width: 24px"><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The amount of consideration is highly susceptible to factors outside the company’s influence.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The Company’s experience with similar types of contracts is limited.</font></td></tr>
<tr style="vertical-align: top">
<td style="text-align: justify"> </td>
<td><font style="font-size: 10pt">●</font></td>
<td style="text-align: justify"><font style="font-size: 10pt">The contract has a large number and broad range of possible consideration amounts.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in">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 products expected to be sold.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0 0 0 0.75in; text-align: justify; text-indent: 0.25in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Cash Equivalents</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Accounts Receivable and Provision for
Doubtful Accounts</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Accounts receivable are
reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on specific analysis of accounts in the receivable portfolio and historical write-off experience. While management
believes the allowance to be adequate, if the financial condition of the Company’s customers were to deteriorate, resulting
in their inability to make payments, additional allowances may be required.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The allowance for doubtful
accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the
allowance based on any known collection issues, historical experience, and other currently available evidence. The reserve for
future credits, discounts, and doubtful accounts was $918,000 and $920,000 as of March 31, 2018 and December 31, 2017, 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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Inventories</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories are valued
at the lower of cost or market. 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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Property and Equipment</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Property and equipment
are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives
of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in
other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements
are capitalized.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Goodwill </u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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, 2017. This analyses did not indicate any impairment of goodwill. There
were no circumstances that indicate that goodwill might be impaired at March 31, 2018.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Stock-Based Compensation Plans</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In 2006, the Company adopted
a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (“Units”) to
certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future
based upon the market value of the Company’s common stock. The Units follow a vesting schedule of three years from the grant
date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Stock Compensation, the Company uses the Black-Scholes
option pricing model as its method for determining the fair value of the Units. Further details of the Plan are provided in Note
6.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Product Liability Reserves</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Product liability reserves
represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company
uses the most current available data to estimate claims. As explained more fully under Note 5, Commitments and Contingencies,
for various product liability claims covered under the Company’s general liability insurance policies, the Company must
pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000
to $1,000,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company
is vigorously defending against all known claims.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Fair Value of Financial and Nonfinancial
Instruments</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 on its
actively traded share value – a Level 1 input – in determining the fair value of the reporting unit in its annual
impairment test as described in the FASB ASC Topic 350, Intangibles - Goodwill and Other.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Earnings per Common Share</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Basic earnings per share
have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive
securities. Consequently, basic and dilutive earnings per share are the same.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Currency Translation</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Assets and liabilities
denominated in foreign currencies, most of which relate to our 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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Income Taxes</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company accounts for
tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related
deferred taxes and tax benefits, and uncertainties in tax positions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.75in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.75in">The Company reflected
the effects of the Tax Cuts and Jobs Act (The Act), in its 2017 financial statements. This included the effects of the change
in the US Corporate tax rate from 35% to 21% on deferred tax assets and liabilities, and a provision related to previously deferred
taxes on earnings of the Company’s foreign subsidiary. The Company’s tax expense for the period ended March 31, 2018
includes the continuing effect of the reduction in 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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Other Comprehensive Income</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">For the quarters ended
March 31, 2018 and 2017, respectively, the components of other comprehensive income consisted solely of foreign currency translation
adjustments.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Subsequent Events</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">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 9 of the condensed consolidated financial statements.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Recent Accounting Pronouncements</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In May 2014, the FASB issued
ASU 2014-09, <i>Revenue from Contracts with Customers (Topic 606)</i>, requiring an entity to recognize the amount of revenue to
which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard replaced most
existing revenue recognition guidance in U.S. GAAP once it became effective and permits the use of either a full retrospective
or retrospective with cumulative effect transition method. The updated standard became effective for the Company in the first quarter
of fiscal year 2018. The Company completed its review of its customer contracts and its analysis of the impact of the disclosure
requirements of ASU 2014-09 during 2017. The Company has adopted the revenue guidance effective January 1, 2018, using the modified
retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial statements,
and is not expected to have any material impact on an ongoing basis. Although there is no material impact on the financial statements
our accounting policy for revenue recognition has been updated as described previously in Note 1 of the condensed consolidated
financial statements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In February 2016, the
FASB issued ASU 2016-02, <i>Leases (Topic 842)</i>. Under this ASU, lessees are required to recognize right-of-use assets and
lease liabilities for all leases not considered short-term leases. By definition, a short-term lease is one in which: (a) the
lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably
certain to exercise. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which right-of-use
assets and lease liabilities are not recognized and lease payments are generally recognized as expense over the lease term on
a straight-line basis. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases
currently accounted for as operating leases under the legacy lease accounting guidance. ASU 2016-02 is effective for interim and
annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating its population
of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact
relates to its accounting for real estate operating leases. The Company anticipates recognition of additional assets and corresponding
liabilities related to leases upon adoption, but has not quantified these amounts at this time. The Company plans to adopt the
standard effective January 1, 2019.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories, net of reserves
of $273,000 and $479,000 at March 31, 2018 and December 31, 2017, respectively, consisted of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>March 31, 2018</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>December 31, 2017</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td>
<td style="text-align: center"> </td>
<td colspan="6" style="text-align: center"><font style="font-size: 10pt"><b>(dollars in thousands)</b></font></td>
<td style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td> </td>
<td> </td>
<td colspan="2"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 54%"><font style="font-size: 10pt">Finished Goods</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 20%; text-align: right"><font style="font-size: 10pt">4,820</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 20%; text-align: right"><font style="font-size: 10pt">5,461</font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt"><font style="font-size: 10pt">Raw Materials</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">3,178</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">2,546</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 2.5pt"><font style="font-size: 10pt">Inventories - Net</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">7,998</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">8,007</font></td>
<td style="padding-bottom: 2.5pt"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The following table summarizes
information about the Company’s nonvested phantom stock Units at March 31, 2018:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 12pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Units</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center"><font style="font-size: 10pt"><b>Weighted Average Grant Date Fair Value</b></font></td>
<td style="padding-bottom: 1.5pt; text-align: center"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td><font style="font-size: 10pt">Number of Phantom Stock Unit Awards:</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"> </td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 65%; padding-left: 10pt"><font style="font-size: 10pt">Nonvested at December 31, 2017</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 11%; text-align: right"><font style="font-size: 10pt">21,296</font></td>
<td style="width: 1%"> </td>
<td style="width: 1%"> </td>
<td style="width: 1%"><font style="font-size: 10pt">$</font></td>
<td style="width: 18%; text-align: right"><font style="font-size: 10pt">34.74</font></td>
<td style="width: 1%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Granted</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">6,450</font></td>
<td> </td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">53.04</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Vested</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">(9,558</font></td>
<td><font style="font-size: 10pt">)</font></td>
<td> </td>
<td><font style="font-size: 10pt">$</font></td>
<td style="text-align: right"><font style="font-size: 10pt">32.96</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt"><font style="font-size: 10pt">Forfeited</font></td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td>
<td> </td>
<td> </td>
<td style="text-align: right"><font style="font-size: 10pt">—</font></td>
<td> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt; padding-left: 20pt"><font style="font-size: 10pt">Canceled</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">—</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-bottom: 2.5pt; padding-left: 10pt"><font style="font-size: 10pt">Nonvested at March 31, 2018</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">18,188</font></td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: black 2.25pt double"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right"><font style="font-size: 10pt">43.53</font></td>
<td style="padding-bottom: 2.5pt"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-bottom: 1.5pt; padding-left: 10pt"><font style="font-size: 10pt">Phantom Stock Unit Awards Expected to Vest</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">18,188</font></td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="padding-bottom: 1.5pt"> </td>
<td style="border-bottom: black 1.5pt solid"><font style="font-size: 10pt">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right"><font style="font-size: 10pt">43.53</font></td>
<td style="padding-bottom: 1.5pt"> </td></tr>
</table>
<p style="margin: 0pt"></p>
2018
10091822
10092000
10092000
273000
479000
761000
761000
-215000
42000
83000
-262000
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Significant Concentration</u></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">At March 31, 2018, the
Company has one significant customer who represented more than 10% of the Company’s Accounts Receivable and more than 10%
of the Company’s total Net Sales for the quarter ending March 31, 2018. At December 31, 2017, that same customer also represented
more than 10% of the Company’s Accounts Receivable balance, and more than 10% of Net Sales for the first quarter of 2017.
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, 2017 Form 10-K.</p>
15000000
2022-12-01
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 2.63%.
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.
P5Y
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).
0.21
3072000
3079000
36000
-40000
1000
3000
493000
496000
481000
484000
12000
12000
1281000
1281000
1600000
25000
1000000
0
1000000
4000000
215000
175000
through February of 2021
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.
1000000
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.
18188
21296
6450
53.04
53.04
0.00
1510000
2238000
699000
776000
811000
1462000
63000
74000
1031000
P1Y8M12D
18188
21296
6450
-9558
18188
43.53
34.74
32.96
43.53
61811
61811
0.85
0.22
0.22
0.22
-8578000
-2220000
-2220000
-2220000
10000000
1000000
5000000
61811
932000
15
146000
147000
The Company reflected the effects of the Tax Cuts and Jobs Act (The Act), in its 2017 financial statements. This included the effects of the change in the US Corporate tax rate from 35% to 21% on deferred tax assets and liabilities, and a provision related to previously deferred taxes on earnings of the Companys foreign subsidiary. The Companys tax expense for the period ended March 31, 2018 includes the continuing effect of the reduction in the U.S. federal tax rate from 35% to 21%, effective for the Companys 2018 tax year.