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<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Basis of Presentation</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 June
30, 2017 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Description of Business</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company is a
leading manufacturer of flexible metal hose, and is currently engaged in a number of different markets, including construction,
manufacturing, petrochemical transfer, pharmaceutical and other industries.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company’s
business is managed 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, with
a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s
primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility
and ease of use, the Company’s TracPipe<sup>®</sup> and TracPipe<sup>® </sup>CounterStrike<sup>® </sup>flexible
gas piping, along with its fittings distributed under the trademarks AutoSnap<sup>®</sup> and AutoFlare<sup>®</sup>,
allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s
products are manufactured primarily at its Exton, Pennsylvania facilities in the United States, and in Banbury, Oxfordshire in
the United Kingdom. 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.</p>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>2. SIGNIFICANT ACCOUNTING POLICIES</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Use of Estimates</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The preparation
of financial statements in conformity with generally accepted accounting principles (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
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 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Revenue Recognition</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company’s
revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP,
revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 24px; line-height: 115%"> </td>
<td style="width: 24px; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Persuasive evidence of an arrangement for the sale of product or services must exist.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="text-align: justify; line-height: 115%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Delivery has occurred or services rendered.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="text-align: justify; line-height: 115%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">The sales price to the customer is fixed or determinable.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="text-align: justify; line-height: 115%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Collection is reasonably assured.</font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company recognizes
revenue upon shipment in accordance with the above principles.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Gross sales are
reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional
incentives, which includes various programs including year-end rebates and discounts. The amounts of certain incentives are known
with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at
the reporting date. Commissions are accounted for as a sales expense.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Cash Equivalents</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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 $839,000 and $926,000 as of June 30, 2017 and December 31, 2016, 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Inventories</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Property and Equipment</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Goodwill</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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, 2016. This analysis did not indicate any impairment of goodwill.
There were no circumstances that indicate that Goodwill might be impaired at June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>  </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Stock-Based Compensation Plans</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Product Liability Reserves</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Earnings per Common Share</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Currency Translation</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 income (expense))
in the period in which they occur.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Income Taxes</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 records tax expense,
related deferred taxes and tax benefits, and uncertainties in tax positions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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. The Company elected to recognize
interest and penalties related to income tax matters as a component of the income tax provision in the consolidated statements
of income. For additional information regarding ASC 740-10, see Note 8 of the Company’s December 31, 2016 Form 10-K.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Other Comprehensive Income</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">For the three and
six months ended June 30, 2017 and 2016, respectively, the components of other comprehensive income consisted solely of foreign
currency translation adjustments.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Significant Concentration</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has
one significant customer who represents more than 10% of the Company’s Net Sales for the three and six months ended June
30, 2017 and 2016, and more than 10% of the Company’s Accounts Receivable balance at June 30, 2017 and December 31, 2016.
Geographically, the Company has a significant amount of sales in the United States versus internationally. These concentrations
are discussed in detail in the Company’s December 31, 2016 Form 10-K, and there has been no significant change as of this
quarterly report.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Subsequent Events</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Recent Accounting Pronouncements</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a
full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company
in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017
fiscal year. The Company has reviewed the respective guidance and currently does not anticipate that the updated standard will
have a significant impact on the way the Company currently records revenue, if any, or on the consolidated financial statements
as a whole.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In July 2015, the
FASB issued ASU 2015-11, <i>Simplifying the Measurement of Inventory (Topic 330)</i>. Under this ASU, inventory will be measured
at the “lower of cost and net realizable value” and options that currently exist for “market value” will
be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early
application was permitted and should be applied prospectively. The Company has evaluated the provisions of this statement, and
concluded that the adoption of ASU 2015-11 did not have a material impact on the Company’s financial position or results
of operations.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 evaluating the provisions of this
statement, including which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company’s
financial position or results of operations.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>3. INVENTORIES</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories, net
of reserves consisted of the following:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>June 30, 2017</b></font></td>
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>December 31, 2016</b></font></td>
<td style="text-align: center; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="6" style="text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>(dollars in thousands)</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 58%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Finished Goods</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">6,049</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">5,254</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Raw Materials</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2,425</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2,118</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Inventories-Net</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">8,474</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">7,372</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>4. LINE OF CREDIT</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">On December 29,
2014, the Company entered into an Amended and Restated Committed Revolving Line of Credit Note (“the Line”) and a Second
Amendment to the Loan Agreement with Santander Bank, N.A. (“Santander”). The Line facility in the maximum amount of
$15,000,000, has a five year term maturing on December 31, 2019, with funds available for working capital purposes and to fund
dividends, and is unsecured. The Line provides for the payment of any borrowings at an interest rate of either LIBOR plus 1.00%
to plus 1.35% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime from 0.00% to plus 0.10%, depending upon the Company’s
then existing financial ratios. At June 30, 2017, the Company’s financial ratios would allow for the most favorable rate
under the agreement’s range, which would be a rate of 2.3%. Under the terms of the agreement, the Company is required to
pay on a quarterly basis an unused facility fee equal to 10 basis points of the average unused balance of the total Line commitment.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">As of June 30, 2017
and December 31, 2016, the Company had no outstanding borrowings on its line of credit, and was in compliance with all debt covenants.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>5. COMMITMENTS AND CONTINGENCIES</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Commitments:</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify">  </p>
<p style="font: 10pt/normal 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 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 associated with these agreements is $515,000
at June 30, 2017 and December 31, 2016, of which $503,000 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.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 $1,212,000 at
June 30, 2017 and $1,169,000 at December 31, 2016.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">As disclosed in
detail in Note 9 of the Company’s December 31, 2016 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Contingencies:</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 higher numbers of Claims, higher legal costs,
and higher insurance deductibles or retentions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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. The Company is currently appealing the trial court’s decision not to grant
a new trial in this matter in spite of the Supreme Court decision. As a result of this new appeal, the Company was required during
the second quarter of 2016 to post approximately $1,600,000 as security to proceed with the current appeal, and that collateral
security is included in Other Long Term Assets as of June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">  </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In February 2012,
the Company was made aware of a fraud perpetrated by a third party broker involving insurance related premiums that the Company
had prepaid for umbrella coverage. Upon discovery of the fraud, the Company replaced the aforementioned insurance coverage. The
stolen assets were seized by a governmental agency investigating the case, and in the second quarter of 2016, the Company received
restitution from the United States Department of Justice in the amount of $282,000. Of the amount received, $213,000 relieved the
value of the assets on the books and the remaining $69,000 was recorded as a reduction of operating expenses. The Company also
filed suit against a third party advisor arising from the transaction, alleging failure to exercise due diligence into the qualifications
of the broker. In December 2016, the Company settled its suit with the advisor and its insurer for $132,500, which was included
in Other Current Assets at December 31, 2016, and the case was dismissed, thus reducing insurance costs. These settlement proceeds
were collected in January 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In 2013, the Company
won two of the Claims at two separate trials, both of which were held in U.S. District Court; one in St. Louis, Missouri and the
other in Bridgeport, Connecticut. In both cases, the jury unanimously found that the Company was not negligent in designing its
TracPipe<sup>®</sup> product, and that the TracPipe<sup>®</sup> product was not defective or unreasonably dangerous.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In May 2016, a putative
class action case had been filed against the Company and other parties in U.S. District Court in the Western District of Missouri,
titled <u>George v. Powercet Corporation, et. al</u>.; however, that case was dismissed by the court without prejudice in December
2016. Plaintiffs have recently filed a similar complaint in Missouri state court, which was removed to U.S. District Court in the
Western District of Missouri.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 June 30, 2017 and December 31, 2016 were
$337,000 and $273,000, respectively, and are included in Other Liabilities.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>6. STOCK BASED PLANS</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>Phantom Stock Plan</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 107%"> </td>
<td style="width: 24px; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">ownership interest in the Company</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: justify; line-height: 107%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">shareholder voting rights</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: justify; line-height: 107%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">other incidents of ownership to the Company’s common stock</font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0">  </p>
<p style="font: 10pt/normal 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, 2016, the Company had 23,671 unvested units outstanding, all of which were granted
at <i>Full Value</i>. On February 14, 2017, the Company granted an additional 7,750 <i>Full Value </i>Units with a fair value of
$41.68 per unit on grant date, using historical volatility. As of June 30, 2017, the Company had 20,962 unvested units outstanding.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The total Phantom
Stock related liability as of June 30, 2017 was $1,664,000 of which $694,000 is included in Other Liabilities, as it is expected
to be paid in February 2018, and the balance of $970,000 is included in Other Long Term Liabilities. At December 31, 2016, the
total Phantom Stock liability was $1,624,000, with $506,000 in Other Liabilities, and $1,118,000 included in Other Long Term Liabilities.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 expense of approximately
$468,000 and $296,000 for the six months ended June 30, 2017 and 2016, respectively. Compensation income or expense for a given
period largely depends upon fluctuations in the Company’s stock price.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0">  </p>
<p style="font: 10pt/normal 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 June 30, 2017:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Units</b></font></td>
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Weighted Average</b></font><br />
<font style="font: 10pt Times New Roman, Times, Serif"><b>Grant Date Fair Value</b></font></td>
<td style="text-align: center; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Number of Phantom Stock Unit Awards:</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 60%; padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Nonvested at December 31, 2016</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 17%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">23,671</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 17%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">27.87</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Granted</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">7,750</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">41.68</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Vested</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(10,459</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">25.73</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Forfeited</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Canceled</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Nonvested at June 30, 2017</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">20,962</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">34.63</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Phantom Stock Unit Awards Expected to Vest</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">20,962</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">34.63</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The total unrecognized
compensation costs calculated at June 30, 2017 are $1,036,000 which will be recognized through February of 2020. The Company will
recognize the related expense over the weighted average period of 1.5 years.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>7. SHAREHOLDERS’ EQUITY</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">As of June 30, 2017
and December 31, 2016, the Company had authorized 20,000,000 common stock shares with par value of $0.01 per share. At both 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">On June 9, 2017,
the Company announced that the Board of Directors (Board) declared a quarterly dividend of $0.22 per share to all Shareholders
of record as of June 20, 2017, payable on July 3, 2017. The total payment to shareholders made in July 2017 was $2,220,000. In
declaring this regular dividend, the Board has revised its dividend policy to establish a record of paying regular quarterly dividends.
In determining the amount of a regular quarterly dividend, the Board will review the cash needs of the Company, the results of
operations, financial condition, capital expenditure plans, possible acquisitions, as well as such other factors as the Board may
consider relevant.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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, and 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">On December 10,
2015, the Board declared a special dividend of $0.85 per share to all Shareholders of record as of December 21, 2015, and payable
on or before January 6, 2016. The total payment to shareholders made in January 2016 was $8,578,000.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 of 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 has not made any stock repurchases since 2009.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>8. RELATED PARTY TRANSACTIONS</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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 employees, directors or officers outside the scope of their normal
business functions or expected contractual duties. The Company does however 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. Lastly, the Company has
a note agreement with its UK noncontrolling interest in the amount of £100,000, which is secured by any future distributions
that the UK subsidiary may elect to make.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b>9. SUBSEQUENT EVENTS</b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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 this period, the Company did not have any material
subsequent events that impacted its condensed consolidated financial statements.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Use of Estimates</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The preparation
of financial statements in conformity with generally accepted accounting principles (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
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 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Revenue Recognition</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company’s
revenue recognition activities relate almost entirely to the manufacture and sale of flexible metal hose and pipe. Under GAAP,
revenues are considered to have been earned when the Company has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues. The following criteria represent preconditions to the recognition of revenue:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 24px; line-height: 107%"> </td>
<td style="width: 24px; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Persuasive evidence of an arrangement for the sale of product or services must exist.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: justify; line-height: 107%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Delivery has occurred or services rendered.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: justify; line-height: 107%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">The sales price to the customer is fixed or determinable.</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: justify; line-height: 107%"> </td></tr>
<tr style="vertical-align: top">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">●</font></td>
<td style="text-align: justify; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Collection is reasonably assured.</font></td></tr>
</table>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company recognizes
revenue upon shipment in accordance with the above principles.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Gross sales are
reduced for all consideration paid to customers for which no identifiable benefit is received by the Company. This includes promotional
incentives, which includes various programs including year-end rebates and discounts. The amounts of certain incentives are known
with reasonable certainty at the time of sale, while others are projected based upon the most reliable information available at
the reporting date. Commissions are accounted for as a sales expense.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Cash Equivalents</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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 $839,000 and $926,000 as of June 30, 2017 and December 31, 2016, 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Inventories</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Property and Equipment</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Goodwill</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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, 2016. This analysis did not indicate any impairment of goodwill.
There were no circumstances that indicate that Goodwill might be impaired at June 30, 2017.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Stock-Based Compensation Plans</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Product Liability Reserves</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Earnings per Common Share</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Currency Translation</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 income (expense))
in the period in which they occur.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Income Taxes</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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 records tax expense,
related deferred taxes and tax benefits, and uncertainties in tax positions.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal 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. The Company elected to recognize
interest and penalties related to income tax matters as a component of the income tax provision in the consolidated statements
of income. For additional information regarding ASC 740-10, see Note 8 of the Company’s December 31, 2016 Form 10-K.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Other Comprehensive Income</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">For the three and
six months ended June 30, 2017 and 2016, respectively, the components of other comprehensive income consisted solely of foreign
currency translation adjustments.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has
one significant customer who represents more than 10% of the Company’s Net Sales for the three and six months ended June
30, 2017 and 2016, and more than 10% of the Company’s Accounts Receivable balance at June 30, 2017 and December 31, 2016.
Geographically, the Company has a significant amount of sales in the United States versus internationally. These concentrations
are discussed in detail in the Company’s December 31, 2016 Form 10-K, and there has been no significant change as of this
quarterly report.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Subsequent Events</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Recent Accounting Pronouncements</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal 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
will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a
full retrospective or retrospective with cumulative effect transition method. The updated standard becomes effective for the Company
in the first quarter of fiscal year 2018. Early adoption is permitted beginning in the first quarter of the Company’s 2017
fiscal year. The Company has reviewed the respective guidance and currently does not anticipate that the updated standard will
have a significant impact on the way the Company currently records revenue, if any, or on the consolidated financial statements
as a whole.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">In July 2015, the
FASB issued ASU 2015-11, <i>Simplifying the Measurement of Inventory (Topic 330)</i>. Under this ASU, inventory will be measured
at the “lower of cost and net realizable value” and options that currently exist for “market value” will
be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early
application was permitted and should be applied prospectively. The Company has evaluated the provisions of this statement, and
concluded that the adoption of ASU 2015-11 did not have a material impact on the Company’s financial position or results
of operations.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 10pt/normal 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 evaluating the provisions of this statement, including
which period to adopt, and has not determined what impact the adoption of ASU 2016-02 will have on the Company’s financial
position or results of operations.</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">Inventories, net
of reserves consisted of the following:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>June 30, 2017</b></font></td>
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>December 31, 2016</b></font></td>
<td style="text-align: center; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td colspan="6" style="text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>(dollars in thousands)</b></font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="width: 58%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Finished Goods</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">6,049</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 18%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">5,254</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Raw Materials</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2,425</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">2,118</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Inventories-Net</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">8,474</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">7,372</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="font: 10pt/normal 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 June 30, 2017:</p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 11pt Calibri, Helvetica, Sans-Serif; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1.5pt"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Units</b></font></td>
<td style="text-align: center; line-height: 107%"> </td>
<td style="text-align: center; line-height: 107%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; text-align: center; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif"><b>Weighted Average</b></font><br />
<font style="font: 10pt Times New Roman, Times, Serif"><b>Grant Date Fair Value</b></font></td>
<td style="text-align: center; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Number of Phantom Stock Unit Awards:</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"> </td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="width: 60%; padding-left: 10pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Nonvested at December 31, 2016</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 17%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">23,671</font></td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"> </td>
<td style="width: 1%; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 17%; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">27.87</font></td>
<td style="width: 1%; line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Granted</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">7,750</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">41.68</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Vested</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">(10,459</font></td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">25.73</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Forfeited</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="padding-left: 20pt; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Canceled</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">—</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: #CCEEFF">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Nonvested at June 30, 2017</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">20,962</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">34.63</font></td>
<td style="line-height: 107%"> </td></tr>
<tr style="vertical-align: bottom; background-color: white">
<td style="line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">Phantom Stock Unit Awards Expected to Vest</font></td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">20,962</font></td>
<td style="line-height: 107%"> </td>
<td style="line-height: 107%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 1.5pt solid; text-align: right; line-height: 107%"><font style="font: 10pt Times New Roman, Times, Serif">34.63</font></td>
<td style="line-height: 107%"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b><u>Significant Concentration</u></b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify"><b> </b></p>
<p style="font: 10pt/normal Times New Roman, Times, Serif; margin: 0; text-align: justify; text-indent: 0.5in">The Company has
one significant customer who represents more than 10% of the Company’s Net Sales for the three and six months ended June
30, 2017 and 2016, and more than 10% of the Company’s Accounts Receivable balance at June 30, 2017 and December 31, 2016.
Geographically, the Company has a significant amount of sales in the United States versus internationally. These concentrations
are discussed in detail in the Company’s December 31, 2016 Form 10-K, and there has been no significant change as of this
quarterly report.</p>
The Line provides for the payment of any borrowings at an interest rate of either LIBOR plus 1.00% to plus 1.35% (for borrowings with a fixed term of 30, 60, or 90 days), or Prime from 0.00% to plus 0.10%, depending upon the Company’s then existing financial ratios. At June 30, 2017, the Company’s financial ratios would allow for the most favorable rate under the agreement’s range, which would be a rate of 2.3%.
On December 29, 2014, the Company entered into an Amended and Restated Committed Revolving Line of Credit Note (“the Line”) and a Second Amendment to the Loan Agreement with Santander Bank, N.A. (“Santander”).
2017