Omega Flex (OFLX) Risk Factors

During 2023 and 2022, we derived 4% to 5% of our revenue from sales to customers located outside the U.S. Our ability to convince customers to expand their use of our products or renew their agreements with us is directly correlated to our direct engagement with such customers. To the extent that we are unable to engage with non-U.S. customers effectively, we may be unable to grow sales to international customers to the same degree we have experienced in the past. Our international operations are subject to a variety of risks and challenges, including: - general economic or geopolitical conditions in each country or region; - the effects of a widespread outbreak of an illness or disease, or any other public health crisis, including the COVID-19 pandemic, in each country or region; - economic uncertainty around the world; and - compliance with laws and regulations imposed on foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance. For example, in response to the continuing conflict between Russia and Ukraine, the U.S. has imposed and may further impose, and other countries may additionally impose, broad sanctions or other restrictive actions against governmental and other entities in Russia, and such sanctions or actions could cut off or impede the flow of raw materials for our products, including minerals, such as nickel, that are used in our stainless steel and copper alloys. Additionally, further escalation of geopolitical tensions could have a broader impact that extends into other markets where we do business. Any of these risks could adversely affect our international sales, reduce our international revenues, or increase our operating costs, adversely affecting our business, financial condition, or operating results.

The COVID-19 pandemic created significant uncertainty and adversely impacted many industries throughout the global economy. Although we have not seen a material impact from the COVID-19 pandemic on our business, financial position, liquidity, or ability to service customers or maintain critical operations, the extent to which a future pandemic may impact our business is difficult to predict, and it is dependent on many factors over which we have no control. Such factors include, but are not limited to, the duration and severity of the pandemic; government restrictions on businesses and individuals; potential significant adverse impacts on our employees, customers, suppliers, or service providers; the impact on U.S. and global economies, and the timing and rate of economic recovery. In case of a future pandemic, we could face liquidity shortages, weaker product demand from our customers, disruptions in our supply chain, and/or staffing shortages in our workforce due to the direct and indirect effects of a pandemic.

As of December 31, 2023, approximately 65% of our issued and outstanding common stock was owned or controlled by certain of our directors and officers and their respective affiliates, with the largest holders being: The Estate of John E. Reed, Stewart B. Reed, and Kevin R. Hoben. Stewart B. Reed currently serves as Vice Chairman of the Board of Directors, and Mr. Hoben serves as the Executive Chairman of the Board. This concentration of ownership may have the effect of reducing the volume of trading of the common stock on the NASDAQ. A decrease in trading volume could result in lower prices for the common stock because there is not a sufficient supply of shares to create a vibrant market for our shares on the NASDAQ, or inversely could drive the common stock price higher when demand exceeds supply. This concentration of ownership of common stock could exert significant influence over matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combinations. This concentration also could have the effect of delaying, preventing, or deterring a change in control of our company.

The majority of our manufacturing capacity is currently located in Exton, Pennsylvania, where we own two manufacturing facilities which are in close proximity to each other, and in Banbury, England in the U.K. where we lease a manufacturing facility. On a smaller scale we also have manufacturing operations in Houston, Texas. We do not have any operational manufacturing capacity for flexible metal hose outside of these locations. We cannot replicate our manufacturing methods at a supplier's facility due to the confidential and proprietary nature of our manufacturing process. If one of the manufacturing facilities were destroyed or damaged in a significant manner or otherwise disrupted for more than a short time, we would likely experience a delay or some interruption of our flexible metal hose operations. This could lead to a reduction in sales volume if customers were to purchase their requirements from our competitors, claims for breach of contract by certain customers with contracts for delivery of flexible metal hose by a certain date, and costs to replace our destroyed or damaged manufacturing capacity. The fittings and accessories for the flexible metal hose are manufactured for us by suppliers not located at our manufacturing facilities, and we also have outside warehouses which contain finished goods inventory. Disruption of or damage to our supply of these items could damage our business, competitive position, results of operations or financial condition.

Our future success depends in large part upon the continued service of key members of our senior management team. The senior executives are critical to the development of our products and our strategic direction and have a keen knowledge of business operations and processes. Their unique abilities, experience and expertise cannot be easily duplicated or replaced. Although, as much as possible, senior executives strive to educate and develop other layers of staff for succession planning purposes, and the recent retirement of senior executives and transition of their roles has gone smoothly, the loss of any members of our current senior management could seriously harm our business.

We possess a wide array of intellectual property rights, including patents, trademarks, copyrights, and applications for the above, as well as trade secrets, manufacturing know-how, and other proprietary information. Certain of these intellectual property rights form the basis of our competitive advantage in the marketplace through a superior product design, a superior business process, superior manufacturing methods or other features that we believe provide an advantage over our competitors. Intellectual property rights are sometimes subject to infringement or misappropriation by other organizations, and failing an amiable resolution, we may be forced to resort to legal proceedings to protect our rights in such intellectual property. In the past, we needed to protect our company and resort to legal action, in one instance regarding a trade secret, and other instances where we sued flexible gas pipe competitors for infringement of one or more of our U.S. patents covering our various piping and/or fitting products. In each instance, we received favorable rulings, thus solidifying the validity of our intellectual property. Although we had past success, the results we may obtain from resorting to any such legal proceedings are never assured, and it is possible that an adverse decision may be delivered in any particular proceeding. As a result, we may not be able to retain the exclusive rights to utilize and practice such intellectual property rights, and one or more of our competitors could utilize and practice such intellectual property rights. This development may lessen our competitive advantage vis-à-vis one or more competitors, and lead to a reduction in sales volume in one or more product lines, a reduction in profit margin in such product lines, or both, which would damage our business, competitive position, results of operations or financial condition.

We face certain cybersecurity threats and technology disruptions, including threats to our information technology ("IT") infrastructure, attempts to gain access to our or our customers' proprietary or confidential information, and failures of our technology tools and systems. Our IT networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. Cybersecurity threats, which include, but are not limited to, computer viruses, spyware, and malware, attempts to access information, denial of service attacks and other electronic security breaches, are persistent and evolve quickly. In general, such threats have increased in frequency, scope, and potential impact in recent years. Further, a variety of technological tools and systems, including both company-owned IT and technological services provided by outside parties, support our critical functions. These technologies are subject to failure and the user's inability to have such technologies properly supported, updated, expanded, or integrated into other technologies and, in certain cases, may contain open source and third-party software which may unbeknownst to us contain defects or viruses that pose unintended risks. These risks, if not effectively mitigated or controlled, could materially harm our business or reputation. While we believe that we have implemented appropriate measures and controls, there can be no assurance that such actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption of data. The security measures we have implemented may become subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities. For example, third parties may attempt to fraudulently induce employees or customers into disclosing usernames, passwords, or other sensitive information, which may in turn be used to access our IT systems. These security systems cannot provide absolute security. To the extent we were to experience a breach of our systems and were unable to protect sensitive data, such a breach could materially damage business partner and customer relationships and curtail or otherwise impact the use of our IT systems. Moreover, if a security breach of our IT systems affects our computer systems or results in the release of personally identifiable or other sensitive information of customers, business partners, employees and other third parties, our reputation and brand could be materially damaged, use of our products and services could decrease, and we could be exposed to a risk of loss, litigation, and potential liability. Such an event could require significant management attention and resources, negatively impact our reputation among our customers and the public, which could have a material adverse effect on our business, financial condition, or results of operations.

In the ordinary and normal conduct of our business, we are subject to periodic lawsuits, investigations, and claims (collectively, the "Claims"). We have continued to receive repeat pattern Claims relating to our flexible gas piping products, although the pace of new Claims has generally declined. While we do not believe the Claims have legal merit, and have successfully defended against such Claims, we cannot predict whether the pace of Claims will increase or subside. Any significant increase in the number of Claims, the financial magnitude of Claims brought against us, the costs of defending the Claims, particularly under higher retentions of our current product liability insurance policies, could have a detrimental and material impact on our business, competitive position, results of operations or financial condition.