UNITED
      STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
 (X)  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period
ended          March 31, 2010
 
 (   )
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the transition period from
      __________________________________________ to
      ____________________________
 
 Commission
File Number     000-51372
 
 Omega
Flex, Inc.
 
 (Exact
name of registrant as specified in its charter)
 
 
 Pennsylvania
              23-1948942(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)451
      Creamery Way, Exton, PA
              19341(Address
      of principal executive offices)
              (Zip
      Code)
 
 (610)
524-7272
 
 Registrant’s
telephone number, including area code
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
[x]  No [
]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer, or a smaller reporting company
filer.  See definition of  “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange.  (Check
one):
 
 Large
accelerated filer [  ]     Accelerated filer
[ ]     Non-accelerated filer [
]     Smaller reporting Company [x]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of The Exchange Act).
 Yes [ ]  No [x]
 
 APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
 DURING
THE PRECEDING FIVE YEARS.
 
 Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 12 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
the courts.
 
 The
number of shares of the registrant’s common stock issued and outstanding as of
April 22, 2010 was 10,091,822.
  -1-
  
 
 OMEGA
FLEX, INC.
 
 QUARTERLY
REPORT ON FORM 10-Q
 FOR
THE THREE MONTHS ENDED MARCH 31, 2010
 
 INDEX
 
 PART
      I - FINANCIAL INFORMATION
              Page No.Item
      1 – Financial StatementsCondensed
      consolidated balance sheets at March 31, 2010and
      December 31, 2009 (unaudited)
              3Condensed
      consolidated statements of operations for thethree-months
      ended March 31, 2010 and 2009 (unaudited)
              4Condensed
      consolidated statements of cash flows for thethree-months
      ended March 31, 2010 and 2009 (unaudited)
              5Notes
      to the condensed consolidated financial statements
    (unaudited)
              6Item
      2- Management's Discussion and Analysis of Financial
    Conditionand
      Results of Operations
              15Item
      3 – Quantitative and Qualitative Information About Market
      Risks
              23Item
      4 – Controls and Procedures
              23PART
      II - OTHER INFORMATIONItem
      1 – Legal Proceedings
              23Item
      4 – Submission of Matter to a Vote of the Security Holders
              23Item
      6 - Exhibits
              24SIGNATURE
              25
 
 
  -2-
  PART I - FINANCIAL
INFORMATION
 
 Item 1 - Financial
Statements
 OMEGA
FLEX, INC.
 CONSOLIDATED
BALANCE SHEETS
 (unaudited)
 
 March
      31,
              December
      31,2010
              2009(Dollars
      in thousands)ASSETSCurrent
      AssetsCash
      and Cash Equivalents
              $1,906
              $1,881Accounts
      Receivable - less allowances of$160
      and $92, respectively
              6,920
              6,515Inventories-Net
              6,060
              6,188Deferred
      Taxes
              712
              712Note
      Receivable – from Former Parent
              3,250
              3,250Other
      Current Assets
              381
              542Total
      Current Assets
              19,229
              19,088Property
      and Equipment - Net
              6,119
              6,296Goodwill
              3,526
              3,526Other
      Long Term Assets
              657
              622Total
      Assets
              $29,531
              $29,532======
              ======LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      Payable
              $813
              $863Line
      of Credit
              7,500
              7,500Accrued
      Compensation
              1,025
              1,552Accrued
      Commissions & Sales Incentives
              1,270
              1,680Taxes
      Payable
              530
              226Other
      Liabilities
              1,342
              1,546Total
      Current Liabilities
              12,480
              13,367Deferred
      Taxes
              1,293
              1,372Other
      Long Term Liabilities
              1,037
              987Total
      Liabilities
              14,810
              15,726Equity:Omega
      Flex, Inc. Shareholders’ Equity:Common
      Stock – par value $0.01 Share: authorized
      20,000,000
                Shares:  10,153,633
      shares issued and 10,091,822 outstanding at
                March
      31, 2010 and December 31, 2009, respectively
              102
              102Treasury
      Stock
              (1)
              (1)Paid
      in Capital
              10,808
              10,808Retained
      Earnings
              4,259
              3,184Accumulated
      Other Comprehensive Loss
              (578)
              (434)Total
      Omega Flex, Inc. Shareholders’ Equity
              14,590
              13,659Noncontrolling
      Interest
              131
              147Total
      Shareholders’ Equity
              14,721
              13,806Total
      Liabilities and Shareholders’ Equity
              $29,531
              $29,532
 See
Accompanying Notes to Consolidated Financial Statements.
  -3-
  
 
 
 
 OMEGA
FLEX, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (unaudited)
 
 
 For
      the three-months ended
                March
      31,2010
              2009(Amounts
      in thousands, except
                earnings
      per Common Share)Net
      Sales
              $11,691
              $10,093Cost
      of Goods Sold
              5,273
              5,765Gross
      Profit
              6,418
              4,328Selling
      Expense
              2,155
              1,994General
      and Administrative Expense
              1,959
              1,163Engineering
      Expense
              584
              549Operating
      Profit
              1,720
              622Interest
      Income (Expense), Net
              ( 15)
              19Other
      Expense, Net
              (1)
              (10)Income
      Before Income Taxes
              1,704
              631Income
      Tax Expense
              638
              246Net
      Income
              $1,066
              $385Less:  Net
      Loss attributable to the Noncontrolling Interest
              9
              7Net
      Income attributable to Omega Flex, Inc.
              $1,075
              $392=====
              =====Basic
      Earnings per Common Share:Net
      Income
              $0.11
              $0.04Basic
      Weighted Average Shares Outstanding
              10,092
              10,093Diluted
      Earnings per Common Share:Net
      Income
              $0.11
              $0.04Diluted
      Weighted Average Shares Outstanding
              10,092
              10,093
 
 
 See
Accompanying Notes to Consolidated Financial Statements.
  -4-
  
 OMEGA
FLEX, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (unaudited)
 
 
 For
      the three-months endedMarch
      31,2010
              2009(Dollars
      in thousands)Cash
      Flows from Operating Activities:Net
      Income
              $1,066
              $385Adjustments
      to Reconcile Net Income toNet
      Cash Provided By (Used In) Operating Activities:Non-Cash
      Compensation Expense
              21
              7Depreciation
      and Amortization
              165
              116Provision
      for Losses on Accounts Receivable, net of write-offs and
      recoveries
              73
              (8)Changes
      in Assets and Liabilities:Accounts
      Receivable
              (516)
              923Inventory
              60
              2,051Accounts
      Payable
              (32)
              (1,822)Accrued
      Compensation
              (521)
              (1,972)Other
      Liabilities
              (342)
              (127)Other
      Assets
              126
              (44)Net
      Cash Provided by (Used In) Operating Activities
              100
              (491)Cash
      Flows from Investing Activities:Capital
      Expenditures
              (23)
              (313)Net
      Cash Used in Investing Activities
              (23)
              (313)Cash
      Flows from Financing Activities:Treasury
      Stock Purchases
              ---
              (24)Net
      Cash Used in Financing Activities
              ---
              (24)Net
      Increase (Decrease) in Cash and Cash Equivalents
              77
              (828)Translation
      effect on cash
              (52)
              (28)Cash
      and Cash Equivalents – Beginning of Period
              1,881
              9,773Cash
      and Cash Equivalents – End of Period
              $1,906
              $8,917=====
              =====Supplemental
      Disclosure of Cash Flow InformationCash
      paid for Income Taxes
              $408
              $403====
              ====Cash
      paid for Interest
              $75
              $---===
              ===
 See
Accompanying Notes to Consolidated Financial Statements.
  -5-
  
 OMEGA FLEX,
INC.
 
 
 NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (All
dollars in thousands except per share amounts)
 
 (Unaudited)
 
 
 1.  BASIS OF PRESENTATION AND DESCRIPTION OF
BUSINESS
 
 Basis of
Presentation
 
 The accompanying unaudited condensed
consolidated financial statements include the accounts of Omega Flex, Inc.
(Omega) and its subsidiaries (collectively the “Company”).  The
Company’s unaudited  condensed consolidated financial statements for
the quarter ended March 31, 2010 have been prepared in accordance with generally
accepted accounting principles, 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 generally accepted accounting principles 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 financial statements
be read in conjunction with the financial statements and the notes thereto
included in the Company’s latest shareholders’ annual report (Form
10-K).  All material inter-company accounts and transactions have been
eliminated in consolidation.  It is Management’s opinion that all
adjustments necessary for a fair statement of the results for the interim
periods have been made, and that all adjustments are of a normal recurring
nature or a description is provided for any adjustments that are not of a normal
recurring nature.
 
 Description of
Business
 
 The Company is a leading manufacturer
of flexible metal hose, which is used in a variety of applications to carry
gases and liquids within their particular applications.  These
applications include carrying liquefied gases in certain processing
applications, fuel gases within residential and commercial buildings and
vibration absorbers in high vibration applications.  Our industrial
flexible metal piping is used to carry other types of gases or fluids in a
number of industrial applications where the customer requires a degree of
flexibility, an ability to carry corrosive compounds or mixtures, a double
containment systems, or piping to carry gases or fluids at very high and very
low (cryogenic) temperatures.
 
 The Company manufactures flexible metal
hose at its facility in Exton, Pennsylvania, with a minor amount of
manufacturing performed in the UK, and sells its product through distributors,
wholesalers and to original equipment manufacturers (“OEMs”) throughout North
America, and in certain European markets.
 
 Accounting
Changes
 
 The Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) identifies the sources of
accounting principles and the framework for selecting the
  -6-
  principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States.  As a result of the new
codification structure, the FASB will not issue new standards in the forms of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. 
Instead, it will issue Accounting Standards Updates (ASU).  Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Company adopted this guidance in the quarter ended
September 30, 2009 and it did not have a material effect on the Company’s
consolidated statements of operations, financial position or cash
flows.
 
 2.
SIGNIFICANT ACCOUNTING POLICIES
 
 Use of
Estimates
 
 The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The most significant estimates and assumptions
relate to revenue recognition and related sales incentives, accounts receivable
valuations, inventory valuations, goodwill valuation, and accounting for income
taxes.  Actual amounts could differ significantly from these
estimates.
 
 Revenue
Recognition
 
 The Company’s revenue recognition
activities relate almost entirely to the manufacture and sale of flexible metal
hose and pipe.  Under generally accepted accounting principles,
revenues are considered to have been earned when the Company has substantially
accomplished what it must do to be entitled to the benefits represented by the
revenues.  The following criteria represent preconditions to the
recognition of revenue:
 
 ·     Persuasive
evidence of an arrangement for the sale of product or services must
exist.
 
 ·     Delivery
has occurred or services rendered.
 
 ·     The
sales price to the customer is fixed or determinable.
 
 ·     Collection
is reasonably assured.
 
 The Company generally recognizes
revenue upon shipment in accordance with the above principles.
 
 Gross sales are reduced for all
consideration paid to customers for which no identifiable benefit is received by
the Company.  This includes promotional incentives, year-end rebates,
and discounts.  The amounts of certain incentives are estimated at the
time of sale.
  -7-
  
 Commissions,
for which the Company receives an identifiable benefit, are accounted for as a
sales expense.
 
 Earnings per Common
Share
 
 Basic earnings per share have been
computed using the weighted average number of common shares
outstanding.  For the periods presented, there are no dilutive
securities.  Consequently, basic and dilutive earnings per share are
the same.
 
 Currency
Translation
 
 Assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at exchange rates prevailing
on the balance sheet date.  The Statements of Operations are
translated into U.S. dollars at average exchange rates.  Adjustments
resulting from the translation of financial statements are excluded from the
determination of income and are accumulated in a separate component of
shareholders’ equity.  Exchange gains and losses resulting from
foreign currency transactions are included in operations (other income
(expense)) in the period in which they occur.
 
 Income
Taxes
 
 The
Company accounts for federal tax liabilities in accordance with the FASB ASC
Topic 740 Income Taxes.  Under this method the Company recorded tax
expense and related deferred taxes and tax benefits.
 
 Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities from a
change in tax rates is recognized in income in the period that 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.
 
 Other Comprehensive (Loss)
Income
 
 For the quarters ended March 31, 2010
and 2009, respectively, the sole component of Other Comprehensive (Loss) Income
was a foreign currency translation adjustment.
 
 Reclassifications
 
 Certain
reclassifications have been made to prior years’ financial statements to conform
to the 2010 presentation.
  -8-
  
 3.
INVENTORIES
 
 Inventories consisted of the
following:
 
 March
      31,
              December
      31,2010
              2009(dollars
      in thousands)Finished
      Goods
              $4,192
              $4,447Raw
      Materials
              1,868
              1,741Total
      Inventory
              $6,060
              $6,188
 
 4.
LINE OF CREDIT
 
 On
December 17, 2009, the Company agreed to a Revolving Line of Credit Note and a
Loan Agreement with Sovereign Bank, NA (“Sovereign”).  The Company
thereby established a line of credit facility in the maximum amount of $15,000,
maturing on December 31, 2010, with funds available for working capital purposes
and to fund dividends.  This supersedes the existing $7,500 line of
credit the Company previously had in place with Sovereign.  The loan
is collateralized by all of the Company’s tangible and intangible
assets.  The loan agreement provides for the payment of any loan under
the agreement at a rate that is either prime rate plus 0.75% or LIBOR rate plus
3%, with a 4% floor.  The Company is also required to pay a nominal
commitment fee for the additional $7,500 of available funds, and is delegated to
pay a “Line Fee” equal to 17.5 basis points of the average unused balance on a
quarterly basis.  The Company has no other loans or loan balances
outstanding.
 
 As of
March 31, 2010 and December 31, 2009, the Company was in compliance with all
debt covenants.
 
 5.
COMMITMENTS AND CONTINGENCIES
 
 Commitments:
 
 Under a
number of indemnity agreements between the Company and each of its officers and
directors, the Company has agreed to indemnify each of its officers and
directors against any liability asserted against them in their capacity as an
officer or director, or both.  The Company’s indemnity obligations
under the indemnity agreements are subject to certain conditions and limitations
set forth in each of the agreements.  Under the terms of the
Agreement, the Company is contingently liable for costs which may be incurred by
the officers and directors in connection with claims arising by reason of these
individuals’ roles as officers and directors.
  -9-
  The Company has entered into salary
continuation agreements with two employees, which provide for monthly payments
to each of the employee or his designated beneficiary upon the employee’s
retirement or death.  The payment benefits range from $1 per month to
$3 per month with the term of such payments limited to 15 years after the
employee’s retirement at age 65.  The agreements also provide for
survivorship benefits if the employee dies before attaining age 65, and
severance payments if the employee is terminated without cause, the amount of
which is dependent on the length of company service at the date of
termination.  The net present value of the retirement payments is
included in Other Long-Term Liabilities, which amounts to $413 at March 31, 2010
and $388 at December 31, 2009, respectively.  The Company has obtained
and is the beneficiary of three whole life insurance policies in respect of the
two employees discussed above, and one other policy.  The cash
surrender value of such policies (included in Other Assets) amounts to $657 at
March 31, 2010 and $622 at December 31, 2009, respectively.
 
 Contingencies:
 
 The
Company’s general liability insurance policies are subject to deductibles or
retentions and amounts ranging from $50 to $75, subject to an agreed
aggregate.  The Company is insured on a ‘first dollar’ basis for
workers’ compensation subject to statutory limits.
 
 The
Company is not presently involved in any litigation that it believes could
materially and adversely affect its financial condition or results of
operations.
 
 Warranty
Commitments:
 
 Gas transmission products such as those
made by the Company carry potentially serious personal injury risks in the event
of failures in the field.  As a result, the Company has extensive
internal testing and other quality control procedures and historically the
Company has not had a meaningful failure rate in the field due to the extensive
nature of these quality controls.  Due to the Company’s quality
systems, the warranty expense is de minimis, and accordingly,
the Company does not maintain a warranty reserve beyond a nominal
amount.
 
 6.
STOCK BASED PLANS
 
 Phantom
Stock Plan
 
 Plan
Description.On April 1, 2006, the Company adopted the Omega
Flex, Inc. 2006 Phantom Stock Plan (the “Plan”).  The Plan authorizes
the grant of up to one million units of phantom stock to employees, officers or
directors of the Company and of any of its subsidiaries.  The phantom
stock units ("Units") each represent a contractual right to payment of
compensation in the future based on the market value of the Company’s common
stock.  The Units are not shares of the Company’s common stock, and a
recipient of the Units does not receive any
of the following:
 
 §
              ownership
      interest in the Company
 §
              shareholder
      voting rights
 §
              dividends
      or distributions
 §
              other
      incidents of ownership to the Company’s common
  stock
  -10-
  
 The Units
are granted to participants upon the recommendation of the Company’s CEO, and
the approval of the compensation committee.  Each of the Units that
are granted to a participant will be initially valued by the compensation
committee, and at a minimum, the Unit’s value will be in an amount equal to the
closing price of the Company’s common stock on the grant date.  The
Units follow a vesting schedule, with a maximum vesting schedule of 3 years
after the grant date.  Upon vesting, the Units represent a contractual
right to the payment of the value of the Unit.  The Units will be paid
on their maturity date, one year after all of the Units granted in a particular
award have fully vested, unless an acceptable event occurs under the terms of
the Plan prior to one year, which would allow for earlier
payment.  The amount to be paid to the participant on the maturity
date is dependent on the type of Unit granted to the participant.
 
 The Units
may be Full Value, in
which the value of each Unit at the maturity date, will equal the closing price
of the Company’s common stock as of the maturity date; or Appreciation Only, in which
the value of each Unit at the maturity date will be equal to the closing price
of the Company’s common stock at the maturity date minus the closing price of
the Company’s common stock at the grant date.
 
 On
December 9, 2009, the Board of Directors authorized an amendment to the Plan to
pay an amount equal to the value of any cash or stock dividend declared by the
Company on its common stock to be accrued to the phantom stock units outstanding
as of the record date of the common stock dividend.  The dividend
equivalent will be paid at the same time the underlying phantom stock units are
paid to the participant.
 
 In
certain circumstances, the Units may be immediately vested upon the
participant’s death or disability.  All Units granted to a participant
are forfeited if the participant is terminated from his relationship with the
Company or its subsidiary for “cause,” which is defined under the
 Plan.  If
a participant’s employment or relationship with the Company is terminated for
reasons other than for “cause,” then any vested Units will be paid to the
participant upon termination.  However, Units granted to certain
“specified employees” as defined in Section 409A of the Internal Revenue Code
will be paid approximately 181 days after that termination.
 
 Grants of Phantom
Stock Units.As of December 31, 2009, the Company had 12,937
unvested units outstanding, all of which were granted at Full Value.  On
March 3, 2010, the Company granted an additional 8,100 Full Value Units with a fair
value at grant date of $10.52 per unit.  In all cases, the grant price
was equal to the closing price of the Company’s common stock at the grant
date.
 
 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 service or
vesting period of each grant or award.
 
 The FASB ASC Topic 718 Stock
Compensation requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates in order to derive the Company’s best estimate of awards
ultimately to vest.
  -11-
  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 for March
31, 2010.
 
 In accordance with FASB ASC Topic 718
Stock Compensation, the Company recorded compensation expense of approximately
$21 and $7 related to the Phantom Stock Plan for the three months ended March
31, 2010 and 2009, respectively.  The related liability was $188 and
$167 at March 31, 2010 and December 31, 2009, respectively.
 
 The fair value of the Units granted
through the first quarter March 31, 2010 using the Black-Scholes option-pricing
model as of the grant date, uses the following assumptions:
 
 Year
      Ended
                December 31,
              Expected Term
              Expected
      Volatility
                Factor
              Expected
      Dividend
                Amount
              Risk-Free
                Interest
      Rate2010
              3.0
              77.12%
              7.14%
              1.34%
 
 The Company has elected to use the
“Simplified” method for calculating the Expected Term in accordance with SAB
107, and has opted to use the Expected Dividend Amount rather than an Expected
Dividend Yield.
 
 The
following table summarizes information about the Company’s nonvested phantom
stock Units at March 31, 2010:
 
 Units
              Weighted
      Average
                Grant Date Fair ValueNumber
      of Phantom Stock Unit Awards:Nonvested
      at December 31, 2009
              12,937
              $14.77Granted
              8,100
              $  8.49Vested
              (5,482)
              ($15.30)Forfeited
              (---)
              ($---)Canceled
              (---)
              ($---)Nonvested
      at March 31, 2010
              15,555
              $11.32Phantom
      Stock Unit Awards Expected to Vest
              15,555
              $11.32
 
 
 At March 31, 2010, a total of 8,990
Units have vested including 5,482, which vested during the first quarter of
2010.  The Units granted are expected to vest in one year intervals
over three years, subject to earlier termination or forfeiture.
 
 As of March 31, 2010, the unrecognized
compensation costs related to Plan Units vesting will be primarily recognized at
various times through 2013.
  -12-
  
 
 
 (Amounts in thousands)Fiscal year ending
              2010
              2011
              2012
              2013
              TotalCompensation
      Expense
              $66
              $69
              $26
              $4
              $165
 
 
 The Units outstanding and exercisable
at March 31, 2010 were in the following exercise price ranges:
 
 Units
      OutstandingYear
              Range
      of
                Exercise
      Price
              Number
      of
                Units
      Outstanding
              Weighted
      Average
                Remaining
                Contractual
      Life
              Weighted
      Average
                Exercise
      Price
              Aggregate
                Intrinsic
      Value2007
              $22.02
              2,724
              ---
              $22.02
              ---2008
              $15.76
              5,076
              0.92
              $15.76
              ---2009
              $15.62
              8,645
              1.84
              $15.62
              ---2010
              $10.52
              8,100
              2.93
              $10.52
              ---
 
 
 Units
      ExercisableYear
              Range
      of
                Exercise
      Price
              Number
      of
                Units
      Exercisable
              Weighted-Average
                Remaining
                Contractual
      Life
              Weighted-Average
                Exercise
      Price
              Aggregate
                Intrinsic
      Value2007
              $22.02
              2,724
              ---
              $22.02
              ---2008
              $15.76
              ---
              0.92
              $15.76
              ---2009
              $15.62
              ---
              1.84
              $15.62
              ---2010
              $10.52
              ---
              2.93
              $10.52
              ---
 
 
 7.  NONCONTROLLING
INTERESTS
 
 As of December 31, 2009, the Company’s
net equity of $13,806 consisted of $41 other comprehensive income pertaining to
foreign currency translation and $147 comprehensive income, both related to our
Noncontrolling Interest.  During the first quarter of 2010 the
Noncontrolling Interest represented a $9 loss and $8 income within the total
Consolidated Company Income of $1,066 and Other Comprehensive Loss of $144,
respectively.
 
 8.
SHAREHOLDERS’ EQUITY
 (Amounts in thousands, except share
amounts)
 
 As of March 31, 2010 and December 31,
2009, the Company had authorized 20,000,000 common stock shares with par value
of $0.01 per share.  Shares outstanding for the same periods were
10,091,822.  Shares issued for the same periods were
10,153,633.
  -13-
  
 
 On
December 9, 2009, the Board of Directors declared a dividend of $2.00 per share,
payable on December 24, 2009 to shareholders of record on December 21, 2009,
amounting to $20,183.
 
 On
September 11, 2009, the Company’s Board of Directors authorized an extension of
the stock repurchase program for an additional 24 months.  The
original program established in September of 2007 authorized the purchase of up
to $5,000 of its common stock.  The purchases may be made from
time-to-time in 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.  The Company had no purchases under the program during
2010.  Since inception, the Company has purchased a total of 61,811
shares for approximately $932, or $15 per share.
 
 In connection with the aforementioned
share buyback program, on September 15, 2009 the Company entered into an
amendment of the Rule 10b5-1 Repurchase Plan (the “Plan”) dated September 15,
2008 with Hunter Associates, Inc. (“Hunter”), by which Hunter will continue to
implement the share buyback program by purchasing shares of the Company’s common
stock in accordance with the terms of the Plan and within the safe harbor
afforded by Rule 10b5-1.
 
 9.      SUBSEQUENT
EVENTS
 
 During the second quarter of 2009,
the Company adopted a new accounting standard, which established general
standards of evaluation and disclosure of events, which occur after the balance
sheet date.  The Company evaluated all events or transactions that
occurred through the date on which the Company issued these financial
statements.  During this period, the Company did not have any material
subsequent events that impacted its consolidated financial
statements.
 
  -14-
  
 
 Item 2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 
 This report contains forward-looking
statements, which are subject to inherent uncertainties.  These
uncertainties include, but are not limited to, variations in weather, changes in
the regulatory environment, customer preferences, general economic conditions,
increased competition, the outcome of outstanding litigation, and future
developments affecting environmental matters.  All of these are
difficult to predict, and many are beyond the ability of the Company to
control.
 
 Certain statements in this Quarterly
Report on Form 10-Q that are not historical facts, but rather reflect the
Company’s current expectations concerning future results and events, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  The words “believes”, “expects”,
“intends”, “plans”, “anticipates”, “hopes”, “likely”, “will”, and similar
expressions identify such forward-looking statements.  Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from
future results, performance or achievements expressed or implied by such
forward-looking statements.
 
 Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management’s
view only as of the date of this Form 10-Q.  The Company undertakes no
obligation to update the result of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events, conditions or
circumstances.
 
  -15-
  
 OVERVIEW
 
 The Company is a leading manufacturer
of flexible metal hose, and is currently engaged in a number of different
markets, including construction, manufacturing, transportation, petrochemical,
pharmaceutical and other industries.
 
 The Company’s business is controlled as
a single operating segment that consists of the manufacture and sale of flexible
metal hose and accessories.  The Company’s products are concentrated
in residential and commercial construction, and general industrial markets. The
Company’s primary product line, flexible gas piping, is used for gas piping
within residential and commercial buildings.  Through its flexibility
and ease of use with patented fittings distributed under the trademark
AutoFlare®, the
TracPipe® and
CounterStrike®
flexible gas piping systems allows users to substantially cut the time required
to install the gas piping, as compared to traditional methods.  Most
of the Company’s products are manufactured at the Company’s Exton, Pennsylvania
facility with a minor amount of manufacturing performed in the UK.  A
majority of the Company’s sales across all industries are generated through
independent outside sales organizations such as sales representatives,
wholesalers and distributors, or a combination of both.  The Company
has a broad distribution network in North America and to a lesser extent in
other global markets.
 
 
 
 CHANGES
IN FINANCIAL CONDITION
 (All
dollars in thousands)
 
 Accounts Receivable at March 31, 2010
was $6,920, compared to $6,515 at December 31, 2009, an increase of
$405.  The increase is primarily the result of increased sales between
the month of March of 2010 and December of 2009.
 
 Accrued Compensation has decreased $527
as a result of the annual first quarter scheduled compensation payment less the
2010 accrued expense.
 
 Accrued Commissions and Sales
Incentives decreased $410, moving from $1,680 at December 31, 2009, to $1,270 at
March 31, 2010.  Consistent with prior years, the Company paid
approximately one-third of the sales incentives obligations for the preceding
year during the first quarter of the current year.  This was then
offset partially by the recording of the 2010 obligations.
  -16-
  RESULTS
OF OPERATIONS
 (All
dollars in thousands)
 
 
 Three-months ended March 31,
2010 vs. March 31, 2009
 
 The Company reported comparative
results from continuing operations for the three-month period ended March 31,
2010 and 2009 as follows:
 
 
 Three-months ended March
  31,(in
      thousands)2010
              2010
              2009
              2009($000)
              %
              ($000)
              %Net
      Sales
              $11,691
              100.0%
              $10,093
              100.0%Gross
      Profit
              $  6,418
              54.9%
              $  4,328
              42.9%Operating
      Profits
              $ 1, 720
              14.7%
              $     622
              6.2%
 
 The
Company’s sales increased $1,598 (15.8%) from $10,093 in the three-month period
ended March 31, 2009 as compared to $11,691 in the three-month period March 31,
2010.
 
 Revenue
for the three-months ended March 31, 2010 reflects increased customer demand for
our proprietary products.  Overall volume for the quarter was up
approximately 18% compared to the prior year quarter.
 
 The
Company’s gross profit margins increased from 42.9% in the three-month period
ended March 31, 2009 to 54.9% in the three-month period ended March 31,
2010.  The increase in margin is primarily the result of increased
volume, and also decreases in cost of materials of approximately 7.5 percentage
points to sales, which included a $278 decrease in obsolescence.  To a
lesser extent, the Company recognized production efficiencies and shed royalty
costs.
 
 Selling
Expenses.  Selling expenses consist primarily of employee
salaries and associated overhead costs, commissions, and the cost of marketing
programs such as advertising, trade shows, and related communication costs and
freight.  Selling expense was $1,994 and $2,155 for the three months
ended March 31, 2009 and 2010, respectively.  The monetary rise was
attributable to various insignificant components.  Sales expense as a
percentage of sales decreased from 19.8% for the three-months ended March 31,
2009 to 18.4% for the three-months ended March 31, 2010, largely due to the
fixed selling costs in relation to the sales growth.
 
 General and Administrative
Expenses.  General and administrative expenses consist
primarily of employee salaries, benefits for administrative, executive, and
finance personnel, legal and accounting, and corporate general and
administrative services.  General and administrative expenses were
$1,163 and $1,959 for the three months ended March 31, 2009 and 2010,
respectively.  The $796 increase in expenses is partially attributable
to an increase in employee salaries of $478, mostly related to executive
incentive compensation, while the prior year’s expenses were offset by the cash
settlement of the Parker Hannifin case, as outlined in the
  -17-
  Company’s
December 31, 2008 Form 10-K, which resulted in income of $265, along with other
insignificant components.  Administrative expense, as a percentage of
sales, increased from 11.5% for the three months ended March 31, 2009 to 16.8%
at March 31, 2010.
 
 Engineering
Expense.  Engineering expenses consist of development expenses
associated with the development of new products and enhancements to existing
products, and manufacturing engineering costs.  Engineering expenses
were $549 and $584 for the three months ended March 31, 2009 and 2010,
respectively.  Engineering expenses as a percentage of sales decreased
from 5.4% for the three months ended March 31, 2009 to 5.0% for the three months
ended March 31, 2010.
 
 Reflecting
all of the factors mentioned above, Operating Profit margins increased $1,098
from a profit of $622 in the three-month period ended March 31, 2009 to a profit
of $1,720 in the three-month period ended March 31, 2010.
 
 Interest Income
(Expense)-Net.  Interest income includes interest income on the
note receivable from Mestek for the first quarter of 2010, and interest income
on our interest-bearing investments for both quarters ending March 31, 2009 and
2010.  Interest expense was recorded at 4% on the $7,500 line of
credit outstanding during the first quarter of 2010.
 
 Other
Income-Net.  Other Income-net primarily consists of foreign
currency exchange gains (losses) on transactions with Omega Flex Limited, our
U.K. subsidiary.
 
 Income Tax
Expense.  The Company’s effective tax rate in 2010 approximates
the 2009 rate and does not differ materially from expected statutory
rates.
 
 
 CRITICAL ACCOUNTING POLICIES
AND USE OF ESTIMATES
 (All
Amounts in Thousands)
 
 Financial Reporting Release No. 60,
released by the Securities and Exchange Commission, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements.  Note 2 of the Notes to the
Consolidated Financial Statements includes a summary of the significant
accounting policies and methods used in the preparation of our Consolidated
Financial Statements. The following is a brief discussion of the Company’s more
significant accounting policies.
 
 The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. The most significant estimates and assumptions
relate to revenue recognition, accounts receivable valuations, inventory
valuations, goodwill and intangible asset valuations, product liability costs,
workers compensation claims reserves, and accounting for income taxes. Actual
amounts could differ significantly from these estimates.
  -18-
  
 Our critical accounting policies and
significant estimates and assumptions are described in more detail as
follows:
 
 Revenue
Recognition
 
 The Company’s revenue recognition
activities relate almost entirely to the manufacture and sale of flexible metal
hose and pipe.  Under generally accepted accounting principles,
revenues are considered to have been earned when the Company has substantially
accomplished what it must do to be entitled to the benefits represented by the
revenues.  The following criteria represent preconditions to the
recognition of revenue:
 
 ·     Persuasive
evidence of an arrangement for the sale of product or services must
exist.
 
 ·     Delivery
has occurred or services rendered.
 
 ·     The
sales price to the customer is fixed or determinable.
 
 ·     Collection
is reasonably assured.
 
 The
Company generally recognizes revenue upon shipment in accordance with the above
principles.
 
 Gross sales are reduced for all
consideration paid to customers for which no identifiable benefit is received by
the Company.  This includes promotional incentives, year-end rebates,
and discounts.  The amounts of certain incentives are estimated at the
time of sale.
 
 Commissions, for which the Company
receives an identifiable benefit, are accounted for as a sales
expense.
 
 Accounts
Receivable
 
 Accounts receivable are reduced by an
allowance for amounts that may become uncollectible in the future. The estimated
allowance for uncollectible amounts is based primarily on specific analysis of
accounts in the receivable portfolio and historical write-off experience. While
management believes the allowance to be adequate, if the financial condition of
the Company’s customers were to deteriorate, resulting in their inability to
make payments, additional allowances may be required.
 
 Inventory
 
 Inventories are valued at the lower of
cost or market.  Cost of inventories are determined by the first-in,
first-out (FIFO) method.  The Company generally considers inventory
quantities beyond two-years’ usage, measured on a historical usage basis, to be
excess inventory and reduces the gross carrying value of inventory
accordingly.
  -19-
  Goodwill and Intangible
Assets
 
 In accordance with Intangibles –
Goodwill and Other Topic 350 of the FASB ASC, the Company ceased recording
amortization of goodwill and intangible assets with indefinite lives effective
January 1, 2002.  The Company performed annual impairment tests in
accordance with this guidance as of December 31, 2009 and December 31,
2008.  These analyses did not indicate any impairment of
goodwill.
 
 Product Liability
Reserves
 
 As explained more fully under
Contingencies, the Company retains some liability for various product liability
claims on a per occurrence basis under its general liability insurance policies,
ranging from $25 to $75, depending on the policy year.  To date, the
Company has not experienced a meaningful product failure rate.
 
 Workers Compensation Claims
Reserves
 
 Prior to
the Spin-Off, the Company provided workers compensation coverage principally
through commercial insurance carriers using “high deductible” programs, which
required the Company to reserve for and pay a high proportion of its workers
compensation claims payable and to rely upon the expertise of its insurance
carriers and its own historical experience in setting the reserves related to
these claims.  One such workers compensation claim is still
outstanding from the pre-Spin-Off period for which the company remains liable
for amounts up to the deductible. The Company maintains a reserve for these
amounts.  The remaining potential liability is minimal, as this case
is reaching the maximum deductible.
 
 The Company is insured on a ‘first
dollar’ basis.
 
 Accounting for Income
Taxes
 
 The Company accounts for federal tax
liabilities in accordance with ASC Topic 740.  Under this method the
Company recorded tax expense and related deferred taxes and tax
benefits.
 
 Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities from a
change in tax rates is recognized in income in the period that 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.
  -20-
  LIQUIDITY AND CAPITAL
RESOURCES
 (All
dollars in thousands)
 
 Three Months ended March 31,
2010
 
 The
Company’s cash balance at March 31, 2010 was $1,906, compared to $1,881 at
December 31, 2009, which represents an increase of $25 between
periods.
 
 Operating
Activities
 
 The company generated cash from
operations of $100 during the first three months of 2010, versus a deterioration
of $491 in 2009, a change of $591.  The overall change in cash was
attributable to a mix of variables.  The favorable components included
accounts payable and accrued compensation, while reductions in operating cash
were significantly related to accounts receivable and inventory.
 
 Regarding the favorable components,
accounts payable outflows were reduced by $1,790.  The first quarter
of 2009 required higher payments for the settlement of liabilities connected to
the increased sales from 2008, and in addition, included a unique raw material
payment of $490.  Accrued compensation required $1,451 less cash due
to the diminished 2009 results, which also impacted the compensation
formulas.
 
 Pertaining to cash diminishment, cash
used for inventory increased $1,991 between periods, as purchases were
significantly reduced during the first quarter of 2009 as management focused on
trimming inventory levels to match sales volume.  Inventory turns
however were fairly consistent between the periods being 3.2 and 3.9 for 2009
and 2010, respectively.  Also, accounts receivable collections went
down $1,439.  This was primarily due to the decrease in sales from the
fourth quarter of 2008 to the same quarter in 2009, thus impacting the eventual
cash collections during the first quarter of the succeeding year.
 .
 Investing
Activities
 
 Cash improved $290 relative to
investing activities.  Capital spending was $23 and $313 for 2010 and
2009, respectively.  As stated in Note 12 of the Company’s December
31, 2009 Form 10-K, the Company expects the collection of a $3,250 note to its
former parent Mestek, Inc. in October of 2010.
 
 Financing
 
 Cash used
in financing activities during the first quarter of 2009 was $24, compared with
no finance spending in 2010.
 
 On
September 11, 2009, the Company’s Board of Directors authorized an extension of
the stock repurchase program for an additional 24 months.  The
original program established in September of 2007 authorized the purchase of up
to $5,000 of its common stock.  The purchases may be made from
time-to-time in 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
tim-to-time.
  -21-
  
 During
2009, the Company had purchased 1,986 shares of treasury stock for $24, as noted
above.  No purchases have been made during 2010.
 
 On
December 17, 2009, the Company agreed to a Revolving Line of Credit Note and a
Loan Agreement with Sovereign Bank, NA (“Sovereign”).  The Company
thereby established a line of credit facility in the maximum amount of $15,000,
maturing on December 31, 2010, with funds available for working capital purposes
and to fund dividends.  This supersedes the existing $7,500 line of
credit the Company previously had in place with Sovereign.  The loan
is collateralized by all of the Company’s tangible and intangible
assets.  The loan agreement provides for the payment of any loan under
the agreement at a rate that is either prime rate plus 0.75%, or LIBOR rate plus
3%, with a 4% floor.  The Company was also required to pay a nominal
commitment fee for the additional $7,500 of available funds, and is delegated to
pay a “Line Fee” equal to 17.5 basis points of the average unused balance on a
quarterly basis.  The Company has no other loans or loan balances
outstanding at March 31, 2010.
 
 The
Company anticipates payments against the principal balance of the aforementioned
$7,500 outstanding line of credit to start during the second quarter of 2010 and
may potentially payoff the entire balance of the debt by the end of the
year.
 
 The
Company believes its liquidity position as of March 31, 2010 is fully adequate
to meet foreseeable future needs and that the Company will possess adequate cash
reserves to meet its day-to-day needs including any acquisitions or capital
expenditures or stock repurchases it can reasonably foresee at this
time.
 
 There are
currently no other known trends, demands, commitments or uncertainties that the
Company anticipates will significantly increase or decrease
liquidity.
 
 CONTINGENT LIABILITIES AND
GUARANTEES
 
 See Note
5 to the Company’s financial statements.
 
 OFF-BALANCE SHEET
ARRANGEMENTS
 
 Refer to
Item 7 of the Company’s 2009 year-end Form 10-K under the caption “Tabular
Disclosure of Contractual Obligations and Off-Balance Sheet
Arrangements”.
  -22-
  Item 3. Quantitative And
Qualitative Information About Market Risks
 
 The Company does not engage in the
purchase or trading of market risk sensitive instruments.  The Company
does not presently have any positions with respect to hedge transactions such as
forward contracts relating to currency fluctuations.  No market risk
sensitive instruments are held for speculative or trading purposes.
 
 Item 4 – Controls And
Procedures
 
 (a)           Evaluation
of Disclosure Controls and Procedures.
 
 At the end of the fiscal first quarter
of 2010, the Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures.  The Company’s disclosure
controls and procedures are designed to ensure that the Company records,
processes, summarizes and reports in a timely manner the information required to
be disclosed in the periodic reports filed by the Company with the Securities
and Exchange Commission.  The Company’s management, including the
chief executive officer, chief financial officer and principal accounting
officer, have conducted an evaluation of the effectiveness of the design and
operation of the Company’s Disclosure Controls and Procedures as defined in the
Rule 13a-15(e) of Securities Exchange Act of 1934.  Based on that
evaluation, the chief executive officer, chief financial officer and principal
accounting officer have concluded that, as of the date of this report, the
Company’s disclosure controls and procedures are effective to provide reasonable
assurance of achieving the purposes described in Rule 13a-15(e), and no changes
are required at this time.
 
 (b)           Changes
in Internal Controls.
 
 There was
no change in the Company’s “internal control over financial reporting” (as
defined in rule 13a-15(f) of the Securities Exchange Act of 1934) identified in
connection with the evaluation required by Rule 13a-15(d) of the Securities
Exchange Act of 1934 that occurred during the three-month period covered by this
Report on Form 10-Q that has materially affected or is reasonably likely to
materially affect the Company’s internal control over financial reporting
subsequent to the date the chief executive officer and chief financial officer
and principal accounting officer completed their evaluation.
 
 PART II - OTHER
INFORMATION
 
 Item 1 – Legal
Proceedings
 
 The Company is not presently involved
in any litigation that it believes could materially and adversely affect its
financial condition or results of operations.
 
 Item 4 – Submission of
Matter to a Vote of the Security Holders
 
 No matters were submitted to the
security holders of the Company for a vote during the first quarter of
2010.
  -23-
  
 Item 6 -
Exhibits
 
 Exhibit
 No.   Description
 
 31.1
              Certification
      of Chief Executive Officer of Omega Flex, Inc. pursuant to Rule 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.
 
 31.2
              Certification
      of Chief Financial Officer of Omega Flex, Inc. pursuant to 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.
 
 32.1
              Certification
      of Chief Executive Officer and Chief Financial Officer of Omega Flex,
      Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.
  
  
 
  -24-
  
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 
 OMEGA
      FLEX, INC.(Registrant)Date:
      May 7, 2010
              By: /S/ Paul J.
      KanePaul
      J. KaneVice
      President – Financeand
      Chief Financial Officer