UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
FORM 10-Q |
Quarterly Report pursuant to Section
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d)
of the Securities Exchange Act of OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Septemberquarterly period ended June 30, 20172020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-157251-15725
Alpha Pro Tech, Ltd.
(exact nameExact Name of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Delaware, U.S.A. | 63-1009183 |
(State or | (I.R.S. Employer Identification No.) |
| 60 Centurian Drive, Suite 112 | |
| |
Markham, Ontario, Canada | L3R 9R2 |
(Address of | (Zip Code) |
Registrant’sRegistrant’s telephone number, including area code: (905) 479-0654
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | APT | NYSE American |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No ___☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X ☒ No ___☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer___filer ☐ Accelerated filer ___☐ Non-accelerated filer ____☐ Smaller reporting company X ☒
Emerging growth company ___☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___☐ No X ☒
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding | |
Common Stock, $0.01 par value |
|
Alpha Pro Tech, Ltd.
Index
PART I. | FINANCIAL INFORMATION | |
ITEM 1. | Financial Statements | page |
|
| |
Condensed Consolidated |
| |
Condensed Consolidated Statements of | 2 | |
| Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) | 3 | |
Condensed Consolidated | 4 | |
Notes to Condensed Consolidated Financial Statements | 5 | |
| ITEM 2. |
|
|
|
| |
ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
|
ITEM 4. | Controls and Procedures |
|
PART II. | OTHER INFORMATION | |
ITEM |
|
|
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
|
ITEM 6. | Exhibits | |
SIGNATURES |
| 30 |
EXHIBITS |
Alpha Pro Tech, Ltd.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed ConsolidatedConsolidated Balance Sheets (Unaudited)
September 30, | December 31, | |||||||
2017 | 2016 (1) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 8,968,000 | $ | 9,456,000 | ||||
Investments | 252,000 | 607,000 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $83,000 and $67,000 as of September 30, 2017 and December 31, 2016, respectively | 5,445,000 | 4,648,000 | ||||||
Accounts receivable, unconsolidated affiliate | 450,000 | 174,000 | ||||||
Inventories | 9,464,000 | 10,994,000 | ||||||
Prepaid expenses and other current assets | 3,092,000 | 3,346,000 | ||||||
Deferred income tax assets | - | 438,000 | ||||||
Total current assets | 27,671,000 | 29,663,000 | ||||||
Property and equipment, net | 3,001,000 | 2,646,000 | ||||||
Goodwill | 55,000 | 55,000 | ||||||
Definite-lived intangible assets, net | 23,000 | 34,000 | ||||||
Equity investments in unconsolidated affiliate | 3,877,000 | 3,538,000 | ||||||
Total assets | $ | 34,627,000 | $ | 35,936,000 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,048,000 | $ | 1,005,000 | ||||
Accrued liabilities | 977,000 | 1,460,000 | ||||||
Total current liabilities | 2,025,000 | 2,465,000 | ||||||
Deferred income tax liabilities | 256,000 | 807,000 | ||||||
Total liabilities | 2,281,000 | 3,272,000 | ||||||
Commitments | ||||||||
Shareholders' equity: | ||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 14,583,315 and 15,411,556 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | 146,000 | 154,000 | ||||||
Additional paid-in capital | 6,600,000 | 9,990,000 | ||||||
Accumulated other comprehensive loss | (447,000 | ) | (204,000 | ) | ||||
Retained earnings | 26,047,000 | 22,724,000 | ||||||
Total shareholders' equity | 32,346,000 | 32,664,000 | ||||||
Total liabilities and shareholders' equity | $ | 34,627,000 | $ | 35,936,000 | ||||
June 30, | December 31, | |||||||
2020 | 2019(1) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,735,000 | $ | 6,548,000 | ||||
Investments | 270,000 | 335,000 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $62,000 as of June 30, 2020 and $53,000 as of December 31, 2019 | 6,661,000 | 3,568,000 | ||||||
Accounts receivable, related party | 952,000 | 724,000 | ||||||
Inventories | 11,980,000 | 11,303,000 | ||||||
Prepaid expenses | 4,110,000 | 3,587,000 | ||||||
Total current assets | 48,708,000 | 26,065,000 | ||||||
Property and equipment, net | 4,004,000 | 3,943,000 | ||||||
Goodwill | 55,000 | 55,000 | ||||||
Definite-lived intangible assets, net | 9,000 | 11,000 | ||||||
Right-of-use assets | 2,728,000 | 3,178,000 | ||||||
Equity investment in unconsolidated affiliate | 5,045,000 | 4,839,000 | ||||||
Total assets | $ | 60,549,000 | $ | 38,091,000 | ||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 2,575,000 | $ | 501,000 | ||||
Accrued liabilities | 1,718,000 | 920,000 | ||||||
Customer advance payments of orders | 6,475,000 | - | ||||||
Lease liabilities | 889,000 | 882,000 | ||||||
Total current liabilities | 11,657,000 | 2,303,000 | ||||||
Lease liabilities, net of current portion | 1,887,000 | 2,337,000 | ||||||
Deferred income tax liabilities, net | 224,000 | 224,000 | ||||||
Total liabilities | 13,768,000 | 4,864,000 | ||||||
Commitments | ||||||||
Shareholders' equity: | ||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 13,563,012 and 12,885,273 shares outstanding as of June 30, 2020 and December 31, 2019, respectively | 136,000 | 129,000 | ||||||
Additional paid-in capital | 2,694,000 | 708,000 | ||||||
Retained earnings | 43,951,000 | 32,390,000 | ||||||
Total shareholders' equity | 46,781,000 | 33,227,000 | ||||||
Total liabilities and shareholders' equity | $ | 60,549,000 | $ | 38,091,000 | ||||
(1) The condensed consolidated balance sheet as of December 31, 20162019 has been prepared using information from the audited consolidated balance sheet as of that date.
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 12,049,000 | $ | 11,779,000 | $ | 34,082,000 | $ | 36,334,000 | ||||||||
Cost of goods sold, excluding depreciation and amortization | 7,337,000 | 7,263,000 | 20,589,000 | 23,032,000 | ||||||||||||
Gross profit | 4,712,000 | 4,516,000 | 13,493,000 | 13,302,000 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 3,450,000 | 3,158,000 | 10,269,000 | 9,950,000 | ||||||||||||
Depreciation and amortization | 147,000 | 153,000 | 426,000 | 425,000 | ||||||||||||
Total operating expenses | 3,597,000 | 3,311,000 | 10,695,000 | 10,375,000 | ||||||||||||
Income from operations | 1,115,000 | 1,205,000 | 2,798,000 | 2,927,000 | ||||||||||||
Other income: | ||||||||||||||||
Equity in income of unconsolidated affiliate | 105,000 | 242,000 | 339,000 | 433,000 | ||||||||||||
Gain on sale of property | 385,000 | - | 385,000 | - | ||||||||||||
Interest income, net | 1,000 | 1,000 | 3,000 | 3,000 | ||||||||||||
Total other income | 491,000 | 243,000 | 727,000 | 436,000 | ||||||||||||
Income before provision for income taxes | 1,606,000 | 1,448,000 | 3,525,000 | 3,363,000 | ||||||||||||
Provision for income taxes | 503,000 | 429,000 | 1,068,000 | 1,040,000 | ||||||||||||
Net income | $ | 1,103,000 | $ | 1,019,000 | $ | 2,457,000 | $ | 2,323,000 | ||||||||
Basic earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.16 | $ | 0.14 | ||||||||
Diluted earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.16 | $ | 0.14 | ||||||||
Basic weighted average common shares outstanding | 14,732,173 | 16,695,059 | 14,962,606 | 17,190,073 | ||||||||||||
Diluted weighted average common shares outstanding | 14,933,426 | 16,706,532 | 15,075,940 | 17,190,073 | ||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net sales | $ | 25,500,000 | $ | 11,415,000 | $ | 43,654,000 | $ | 23,718,000 | ||||||||
Cost of goods sold, excluding depreciation and amortization | 12,887,000 | 7,309,000 | 22,487,000 | 14,809,000 | ||||||||||||
Gross profit | 12,613,000 | 4,106,000 | 21,167,000 | 8,909,000 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative | 4,553,000 | 3,262,000 | 8,656,000 | 6,937,000 | ||||||||||||
Depreciation and amortization | 178,000 | 140,000 | 360,000 | 267,000 | ||||||||||||
Total operating expenses | 4,731,000 | 3,402,000 | 9,016,000 | 7,204,000 | ||||||||||||
Income from operations | 7,882,000 | 704,000 | 12,151,000 | 1,705,000 | ||||||||||||
Other income: | ||||||||||||||||
Equity in income of unconsolidated affiliate | 119,000 | 84,000 | 206,000 | 361,000 | ||||||||||||
Gain (loss) on marketable securities | 41,000 | 439,000 | (18,000 | ) | 609,000 | |||||||||||
Interest income, net | - | 21,000 | 16,000 | 34,000 | ||||||||||||
Total other income | 160,000 | 544,000 | 204,000 | 1,004,000 | ||||||||||||
Income before provision for income taxes | 8,042,000 | 1,248,000 | 12,355,000 | 2,709,000 | ||||||||||||
Provision for income taxes | 1,822,000 | 238,000 | 794,000 | 481,000 | ||||||||||||
Net income | $ | 6,220,000 | $ | 1,010,000 | $ | 11,561,000 | $ | 2,228,000 | ||||||||
Basic earnings per common share | $ | 0.47 | $ | 0.08 | $ | 0.87 | $ | 0.17 | ||||||||
Diluted earnings per common share | $ | 0.46 | $ | 0.08 | $ | 0.84 | $ | 0.17 | ||||||||
Basic weighted average common shares outstanding | 13,351,675 | 13,184,321 | 13,351,674 | 13,287,583 | ||||||||||||
Diluted weighted average common shares outstanding | 13,651,995 | 13,208,138 | 13,813,094 | 13,346,146 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statements of Comprehensive IncomeShareholders’ Equity (Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 1,103,000 | $ | 1,019,000 | $ | 2,457,000 | $ | 2,323,000 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Change in unrealized gain (loss) on marketable securities, net of tax | (208,000 | ) | 28,000 | (243,000 | ) | (50,000 | ) | |||||||||
Comprehensive income | $ | 895,000 | $ | 1,047,000 | $ | 2,214,000 | $ | 2,273,000 | ||||||||
For the Six Months Ended June 30, 2020 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of December 31, 2019 | 12,885,273 | $ | 129,000 | $ | 708,000 | $ | 32,390,000 | $ | 33,227,000 | |||||||||||
Net income | - | - | - | 5,341,000 | 5,341,000 | |||||||||||||||
Common stock repurchased and retired | (35,100 | ) | - | (125,000 | ) | - | (125,000 | ) | ||||||||||||
Stock-based compensation expense | - | - | 91,000 | - | 91,000 | |||||||||||||||
Options exercised | 712,839 | 7,000 | 1,834,000 | - | 1,841,000 | |||||||||||||||
Balance as of March 31, 2020 | 13,563,012 | $ | 136,000 | $ | 2,508,000 | $ | 37,731,000 | $ | 40,375,000 | |||||||||||
Net income | - | - | - | 6,220,000 | 6,220,000 | |||||||||||||||
Common stock repurchased and retired | - | - | - | - | - | |||||||||||||||
Stock-based compensation expense | - | - | 92,000 | - | 92,000 | |||||||||||||||
Options exercised | 24,835 | - | 94,000 | - | 94,000 | |||||||||||||||
Balance as of June 30, 2020 | 13,587,847 | $ | 136,000 | $ | 2,694,000 | $ | 43,951,000 | $ | 46,781,000 | |||||||||||
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
Balance as of December 31, 2018 | 13,502,684 | $ | 135,000 | $ | 2,669,000 | $ | 29,390,000 | $ | 32,194,000 | |||||||||||
Net income | - | - | - | 1,218,000 | 1,218,000 | |||||||||||||||
Common stock repurchased and retired | (255,000 | ) | (2,000 | ) | (1,006,000 | ) | - | (1,008,000 | ) | |||||||||||
Stock-based compensation expense | - | - | 122,000 | - | 122,000 | |||||||||||||||
Options exercised | 33,334 | - | 60,000 | - | 60,000 | |||||||||||||||
Balance as of March 31, 2019 | 13,281,018 | $ | 133,000 | $ | 1,845,000 | $ | 30,608,000 | $ | 32,586,000 | |||||||||||
Net income | - | - | - | 1,010,000 | 1,010,000 | |||||||||||||||
Common stock repurchased and retired | (172,000 | ) | (2,000 | ) | (626,000 | ) | - | (628,000 | ) | |||||||||||
Stock-based compensation expense | - | - | 138,000 | - | 138,000 | |||||||||||||||
Options exercised | - | - | - | - | - | |||||||||||||||
Balance as of June 30, 2019 | 13,109,018 | $ | 131,000 | $ | 1,357,000 | $ | 31,618,000 | $ | 33,106,000 | |||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 11,561,000 | $ | 2,228,000 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Stock-based compensation | 183,000 | 260,000 | ||||||
Depreciation and amortization | 360,000 | 267,000 | ||||||
Loss (gain) on marketable securities | 18,000 | (609,000 | ) | |||||
Equity in income of unconsolidated affiliate | (206,000 | ) | (361,000 | ) | ||||
Operating lease expense, net of accretion | 450,000 | 366,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (3,093,000 | ) | (250,000 | ) | ||||
Accounts receivable, related party | (228,000 | ) | (454,000 | ) | ||||
Inventories | (677,000 | ) | (991,000 | ) | ||||
Prepaid expenses | (523,000 | ) | 589,000 | |||||
Accounts payable and accrued liabilities | 2,872,000 | (525,000 | ) | |||||
Customer advance payments of orders | 6,475,000 | - | ||||||
Lease liabilities | (443,000 | ) | (327,000 | ) | ||||
Net cash provided by operating activities | 16,749,000 | 193,000 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchase of property and equipment | (419,000 | ) | (254,000 | ) | ||||
Proceeds from sales of marketable securities | 47,000 | 133,000 | ||||||
Net cash used in investing activities | (372,000 | ) | (121,000 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Proceeds from exercise of stock options | 1,935,000 | 59,000 | ||||||
Repurchase of common stock | (125,000 | ) | (1,636,000 | ) | ||||
Net cash provided (used) in financing activities | 1,810,000 | (1,577,000 | ) | |||||
Increase (decrease) in cash | 18,187,000 | (1,505,000 | ) | |||||
Cash, beginning of the period | 6,548,000 | 7,007,000 | ||||||
Cash, end of the period | $ | 24,735,000 | $ | 5,502,000 | ||||
Supplemental disclosure of non-cash financing activities:
Condensed Consolidated StatementUpon adoption of Shareholders’ Equity (Unaudited)ASC 842, Leases, on January 1, 2019, the Company recorded $3,455,000 of right-of-use assets and related operating leases liabilities.
For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
Balance as of December 31, 2016 | 15,411,556 | $ | 154,000 | $ | 9,990,000 | $ | (204,000 | ) | $ | 22,724,000 | $ | 32,664,000 | ||||||||||||
Common stock repurchased and retired | (898,242 | ) | (9,000 | ) | (2,892,000 | ) | - | - | (2,901,000 | ) | ||||||||||||||
Stock-based compensation expense | - | - | 244,000 | - | - | 244,000 | ||||||||||||||||||
Options exercised | 70,001 | 1,000 | 124,000 | - | - | 125,000 | ||||||||||||||||||
Net income | - | - | - | - | 2,457,000 | 2,457,000 | ||||||||||||||||||
Other comprehensive loss | - | - | - | (243,000 | ) | - | (243,000 | ) | ||||||||||||||||
Cumulative-effect adjustment of change in accounting for stock-based compensation | - | - | (866,000 | ) | - | 866,000 | - | |||||||||||||||||
Balance as of September 30, 2017 | 14,583,315 | $ | 146,000 | $ | 6,600,000 | $ | (447,000 | ) | $ | 26,047,000 | $ | 32,346,000 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 2,457,000 | $ | 2,323,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Stock-based compensation expense | 244,000 | 115,000 | ||||||
Depreciation and amortization | 426,000 | 425,000 | ||||||
Equity in income of unconsolidated affiliate | (339,000 | ) | (433,000 | ) | ||||
Gain on sale of property | (385,000 | ) | - | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (797,000 | ) | (1,953,000 | ) | ||||
Accounts receivable, unconsolidated affiliate | (276,000 | ) | (11,000 | ) | ||||
Inventories | 1,530,000 | 4,544,000 | ||||||
Prepaid expenses and other current assets | 254,000 | 191,000 | ||||||
Accounts payable and accrued liabilities | (440,000 | ) | 815,000 | |||||
Net cash provided by operating activities | 2,674,000 | 6,016,000 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchase of property and equipment | (923,000 | ) | (212,000 | ) | ||||
Proceeds from sale of property | 537,000 | - | ||||||
Purchase of marketable securities | - | (41,000 | ) | |||||
Net cash used in investing activities | (386,000 | ) | (253,000 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Repurchase of common stock | (2,901,000 | ) | (3,689,000 | ) | ||||
Proceeds from exercise of stock options | 125,000 | 17,000 | ||||||
Net cash used in financing activities | (2,776,000 | ) | (3,672,000 | ) | ||||
Increase (decrease) in cash | (488,000 | ) | 2,091,000 | |||||
Cash, beginning of the period | 9,456,000 | 9,681,000 | ||||||
Cash, end of the period | $ | 8,968,000 | $ | 11,772,000 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. | The Company |
Alpha Pro Tech, Ltd. (“Alpha Pro Tech”Tech,” the “Company,” “we”, “us” or the “Company”“our”) is in the business of protecting people, products and environments. The Company accomplishes this by developing, manufacturing and marketing a line of building supply products for the new home and re-roofing markets;markets and a line of disposable protective apparel for the cleanroom, industrial, and pharmaceutical, markets; and a line of infection control products for the medical and dental markets.
The Building Supply segment consists of construction weatherization products, such as housewrap and synthetic roof underlayment,, as well as other woven material.
The Disposable Protective Apparel segment consists of a complete line of shoecovers,disposable protective clothing (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats.coats), face masks and face shields. Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel products, including face masks and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in Food and Drug Administration (“FDA”) approved facilities, regardless of the market served. Based on these similarities, the Infection Control segment was combined with the Disposable Protective Apparel segment during the first quarter of 2019. The disclosures herein reflect this current segmentation.
The Infection Control segment consists of a line of face masks and eye shields.
The Company’sCompany’s products are sold under the "Alpha Pro Tech" brand name andas well as under private label, and are predominantly sold in the United States of America (“US”).
2. | Basis of Presentation and Revenue Recognition Policy |
The interim financial information included hereinin this report is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods.periods reflected herein. These interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit certain information and note disclosures that would be necessary to present the statements in accordance with USU.S. generally accepted accounting principles (“USU.S. GAAP”). The interim condensed consolidated financial statements should be read in conjunction with the Company’s current year SEC filings, on Form 10-Q and Form 8-K, as well as the Company’s consolidated financial statements for the year ended December 31, 2016,2019, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2016“2019 Form 10-K”), which was filed with the SEC on March 8, 2017.10, 2020. The results of operations for the ninethree and six months ended SeptemberJune 30, 2017 reported2020 in this Quarterly Report on Form 10-Q are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 20162019 was prepared using information from the audited consolidated balance sheet contained in the 20162019 Form 10-K and10-K; however, it does not include all disclosures required by USU.S. GAAP for annual consolidated financial statements.
The ongoing novel coronavirus (COVID-19) pandemic has adversely affected global economies, financial markets and the overall environment in which we do business, and the extent to which it may impact our future results of operations and overall financial performance remains uncertain. The pandemic had a mixed impact on second quarter and year to date results. For example, we had increase in demand for products in our disposable protective apparel segment, but government-mandated manufacturing facility closures for our disposable protective garments has led to lower available inventory levels. We will continue to monitor for developments as the pandemic continues.
Alpha Pro Tech, Ltd.
Net sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Our customer contracts have a single performance obligation: transfer control of products to customers. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring control of products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring control of the promised products to the customer, with revenue being recognized at the point in time when the customer obtains control of the products, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements, at which time a receivable is created for the invoice sent to the customer. Shipping and handling activities are performed prior to the customer obtaining control of the goods, and are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the distribution of the Company’s product to the customers, are recorded in cost of goods sold and are recognized when control of the product is transferred to the customer, which is at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates and estimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon the nature of the private labelling. The Company has determined as of June 30, 2020 that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of June 30, 2020, we had contract liabilities of $6,475,000 as a result of customer advance payments of orders in connection with the COVID-19 pandemic. No such contract liabilities existed as of December 31, 2019. See Note 10 and Note 11 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for information on revenue disaggregated by type and by geographic region.
3. | Stock-Based Compensation |
The Company maintains a stock option plan (the “2004 Option Plan”) under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant date.
The Company recordsrecords compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options.options, over the determined requisite service period, which is generally ratably over the vesting term.
For the ninesix months ended SeptemberJune 30, 2017, 25,0002020 and 2019, 0 and 310,000 stock options were granted under the Company’s option plan. For the nine months ended September 30, 2016, 810,000 stock options were granted under the Company’s option plan.plan, respectively. The Company recognized $244,000$183,000 and $115,000$260,000 in stock-based compensation expense for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively, related to the vesting of previously issued options.2019, respectively.
Stock options to purchase 999,999 shares of common stock were outstanding as of September 30, 2017, and stock options to purchase 1,065,000 shares of common stock were outstanding as of December 31, 2016.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company usesuses the Black-Scholes option-pricing model to value the options. The Company uses historical data to estimate the expected life of the options. The risk-free interest rate for periods within the contractual life of thean award is based on the US Treasury yield curve in effect at the time of grant. The estimated volatility is based on historical volatility and management’s expectations of future volatility. The Company uses an estimated dividend payout of zero, as the Company has not paid dividends in the past and, at this time, does not expect to do so in the future. The Company accounts for option forfeitures as they occur.
Alpha Pro Tech, Ltd.
The following table summarizes stock option activity for the ninesix months ended SeptemberJune 30, 2017:2020:
Weighted | Weighted Average | |||||||||||||||
Average | Exercise Price | |||||||||||||||
Exercise Price | Options | Per Option | ||||||||||||||
Shares | Per Option | |||||||||||||||
Options outstanding, December 31, 2016 | 1,065,000 | $ | 2.06 | |||||||||||||
Options outstanding, December 31, 2019 | 1,326,414 | $ | 2.86 | |||||||||||||
Granted to employees and non-employee directors | 25,000 | 3.66 | - | - | ||||||||||||
Exercised | (70,001 | ) | 1.78 | (737,674 | ) | 2.61 | ||||||||||
Canceled/expired/forfeited | (20,000 | ) | 1.58 | - | - | |||||||||||
Options outstanding, Septermber 30, 2017 | 999,999 | 2.13 | ||||||||||||||
Options exercisable, September 30, 2017 | 330,000 | 1.96 | ||||||||||||||
Options outstanding, June 30, 2020 | 588,740 | 3.33 | ||||||||||||||
Options exercisable, June 30, 2020 | 157,167 | 2.76 | ||||||||||||||
As of SeptemberJune 30, 2017, $602,0002020, $406,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of 1.701.49 years.
At the Company’s 2020 Annual Meeting of Shareholders held on June 9, 2020, the Company’s shareholders approved the Alpha Pro Tech, Ltd. 2020 Omnibus Incentive Plan (the “2020 Incentive Plan”). The 2020 Incentive Plan provides for the grant of incentive and nonqualified stock options, stock appreciation rights, awards of restricted stock and restricted stock units, performance share awards, cash awards and other equity-based awards to employees (including officers), consultants and non-employee directors of the Company and its affiliates. A total of 1,800,000 shares of the Company’s common stock are reserved for issuance under the 2020 Incentive Plan, plus the number of shares underlying any award granted under the 2004 Option Plan that expires, terminates or is cancelled or forfeited under the terms of the 2004 Option Plan. As a result of the Company adopting Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvementsapproval of the 2020 Incentive Plan, no future equity awards will be made pursuant to Employee Share-Based Payment Accounting, during the quarter ended March 31, 2017,2004 Option Plan. Although no new awards may be granted under the Company recorded a one-time $866,000 cumulative-effect adjustment2004 Option Plan, all previously granted awards under the 2004 Option Plan will continue to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital.be governed by the terms of the 2004 Option Plan.
4. | Investments |
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, investments totaled $252,000$270,000 and $607,000$335,000, respectively, which consisted of marketableequity securities.
The following provides information regarding the Company’s marketable securities as of September 30, 2017 and December 31, 2016:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Cost basis | $ | 543,000 | $ | 543,000 | ||||
Gains previously recognized on warrants | 380,000 | 380,000 | ||||||
Loss included in accumulated other comprehensive loss before tax benefit | (671,000 | ) | (316,000 | ) | ||||
Fair value | $ | 252,000 | $ | 607,000 | ||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
No marketable securities were sold during the ninethree months ended SeptemberJune 30, 20172020, and the year ended December 31, 2016. The change in unrealized loss of $208,000 and unrealized gain of $28,000 forcertain marketable securities were sold during the three months ended SeptemberJune 30, 20172019. The total gain on marketable securities during the three months ended June 30, 2019 was $439,000, consisting of an unrealized gain of $387,000 and 2016, respectively, ina realized gain of $52,000. Certain marketable securities were sold during both the statements of comprehensive income are presented net of taxsix months ended June 30, 2020 and 2019. The total loss on marketable securities during the six months ended June 30, 2020 was $18,000, and the total gain on marketable securities during the six months ended June 30, 2019 was $609,000. The loss for the quarterssix months ended SeptemberJune 30, 2017 and 2016, respectively. The tax benefit on the unrealized loss2020 was $105,000, and the tax expense on the unrealized gain was $15,000 for the quarters ended September 30, 2017 and 2016, respectively. The change indue to an unrealized loss of $243,000$35,000 and $50,000a realized gain of $17,000. The gain for the ninesix months ended SeptemberJune 30, 20172019 was due to an unrealized gain of $554,000 and 2016, respectively, in the statementsa realized gain of comprehensive income are presented net of tax for the nine months ended September 30, 2017 and 2016. The tax benefit on the unrealized loss was $113,000 and $31,000 for the nine months ended September 30, 2017 and 2016, respectively.$55,000.
5. | Recent Accounting Pronouncements |
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“In February 2016, the FASB issued ASU 2014-09”) is a comprehensive new revenue2016-02, Leases, which introduces the recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration that it expects to receive in exchangelease assets and lease liabilities by lessees for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09leases classified as operating leases under previous guidance. The update is effective for the first interim period within an annual reporting periodperiods beginning after December 15, 2017, and2018, including interim periods within those reporting periods, with early adoption is not permitted. The Company will adopt ASU 2014-09 duringoriginal guidance required application on a modified retrospective basis with the first quarter of 2018. Management is evaluating the provisions of this update and at this point in time has determined that its adoption will have limited to no impact on the Company’s financial position or results of operations.
earliest period presented. In November 2015,August 2018, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of Deferred Taxes, which requires deferred income tax liabilities and assets to be classifiedASC 842, Leases, as noncurrentthe date of initial application of transition. Based on the effective date, we adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet ratherwith the recognition of new right-of-use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than being separated intoone year. Upon adoption, both assets and liabilities on our consolidated balance sheet increased by approximately $3,455,000. We have elected a package of transition practical expedients, which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the ROU assets. See also Note 13 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.
Alpha Pro Tech, Ltd.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and noncurrent. The guidance wasreasonable and supportable forecasts. ASU 2016-13 is effective for public entities for the annual periods, including interim periods within those annual periods, beginning after December 15, 2016 and interim periods within those annual periods, with early adoption being permitted. The Company adopted this2019. This guidance inis applicable to the first quarter of 2017. The Company netted $410,000 in deferred tax assets against deferred tax liabilities asCompany’s fiscal year beginning January 1, 2020. Adoption of the end of the first quarter of 2017. Prior periods werenew standard did not retrospectively adjusted.have a material impact on our consolidated financial statements.
In January 2016,June 2018, the FASB issued ASU 2016-01, Financial Instruments2018-07, Compensation - Overall (Subtopic 825-10): Recognition and MeasurementStock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of Financial Assets and Financial Liabilities, which providesshare-based compensation issued to non-employees by making the guidance consistent with accounting for the recognition, measurement, presentation and disclosure of financial instruments. The new guidance revises the accounting requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also changes certain disclosure requirements associated with the fair value of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity and recognize the changes in fair value within net income. The guidanceemployee share-based compensation. ASU 2018-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company has not yet adopted this guidance and has not yet determined the impact of adoption on the Company’s financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018 and interim periods within those years,annual periods, with early adoptions permitted but no earlier than an entity’s adoption permitted. Managementdate of ASC Topic 606. The new guidance is evaluatingrequired to be applied retrospectively with the requirementscumulative effect recognized at the date of initial application. We adopted the provisions of this guidance and has not yet determinedASU in the impactfirst quarter of 2019. Adoption of the adoptionnew standard did not have a material impact on the Company’sour consolidated financial position or results of operations.statements.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In March 2016,December 2019, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) No. 2019-12, “Income Taxes (Topic 740): Improvements to Employee Share-Based Payment Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies severalis intended to simplify various aspects ofrelated to accounting for share-based payment transactions, includingincome taxes. ASU 2019-12 removes certain exceptions to the income tax consequences, classification of awards as either equity or liabilities, an optiongeneral principles in Topic 740 and also clarifies and amends existing guidance to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The provisions of thisimprove consistent application. This guidance wereis effective for annual reporting periods beginning after December 15, 2016fiscal years, and interim periods within those annual periods,fiscal years, beginning after December 15, 2020, with early adoption permitted. TheThe Company adopted this guidance duringis currently evaluating the quarter ended March 31, 2017, and the Company recorded a one-time $866,000 cumulative-effect adjustment to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital. The adoptionimpact of this guidance also increased the number of dilutive shares because excess tax benefits are no longer included in the assumed proceeds when calculating the number of dilutive shares. In addition, the effective tax rate will be reduced in future periods when there are excess tax benefits from stock options exercised.standard on its consolidated financial statements and related disclosures.
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion.discussion at this time.
6. | Inventories |
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, inventories consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Raw materials | $ | 4,081,000 | $ | 4,313,000 | ||||
Work in process | 1,609,000 | 2,535,000 | ||||||
Finished goods | 3,774,000 | 4,146,000 | ||||||
| $ | 9,464,000 | $ | 10,994,000 | |||||
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Raw materials | $ | 6,711,000 | $ | 4,284,000 | ||||
Work in process | 2,626,000 | 2,559,000 | ||||||
Finished goods | 2,643,000 | 4,460,000 | ||||||
| $ | 11,980,000 | $ | 11,303,000 | |||||
7. | Equity Investment in Unconsolidated Affiliate |
In 2005, Alpha ProTech Engineered Products, Inc. (a subsidiary of Alpha Pro Tech, Ltd.) entered into a joint venture with a manufacturer in India, Maple Industries and associates, for the production of building products. Under the terms of the joint venture agreement, a private company,, Harmony Plastics Private Limited (“Harmony”), was created with ownership interests of 41.66% owned by Alpha ProTech Engineered Products, Inc. and 58.34% owned by Maple Industries and Associates.associates.
This joint venture positions Alpha ProTech Engineered Products, Inc. to respond to current and expected increased product demand for housewrap and synthetic roof underlayment and provides future capacity for sales of specialty roofing component products and custom products for industrial applications requiring high quality extrusion coated fabrics. In addition, the joint venture now supplies products for the Disposable Protective Apparel segment.segment.
Alpha Pro Tech, Ltd.
The capital from the initial funding and a bank loan, which loan is guaranteed exclusively by the individual shareholders of Maple Industries and Associatesassociates and collateralized by the assets of Harmony, were utilized to purchase the original manufacturing facility in India. Harmony currently has fivefour facilities in India (three owned and twoone rented), consisting of: (1) a 102,000113,000 square foot building for manufacturing building products; (2) a 71,50073,000 square foot building for manufacturing coated material and sewing proprietary disposable protective apparel; (3) a 16,000 square foot facility for sewing proprietary disposable protective apparel; (4) a 12,000 square foot rented facility for coating material; and (5)(4) a 93,000 square foot rented facility (rented) for the manufacturing of buildingBuilding Supply segment products. All additions have been financed by Harmony with no guarantees from the Company.
In accordance with Accounting Standards Codification (“ASC”)ASC 810, Consolidation,, the Company assesses whether or not related entities are variable interest entities (“VIEs”). For those related entities that qualify as VIEs, ASC 810 requires the Company to determine whether or not the Company is the primary beneficiary of the VIE, and, if so, to consolidate the VIE. The Company has determined that Harmony is not a VIE and is, therefore, considered to be an unconsolidated affiliate.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company records its investment in Harmony as “equity investment in unconsolidated affiliate” in the accompanying condensed consolidated balance sheets. The Company records its equity interest in Harmony’s results of operations as “equity in income of unconsolidated affiliate” in the accompanying condensed consolidated statements of income. The Company periodically reviews its investment in Harmony for impairment. Management has determined that no impairment was required as of SeptemberJune 30, 2017.2020 or December 31, 2019.
For the three months ended SeptemberJune 30, 20172020 and 2016,2019, Alpha Pro Tech purchased $3,258,000$3,774,000 and $3,716,000$5,176,000 of inventories, respectively, from Harmony. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, Alpha Pro Tech purchased $11,097,000$8,480,000 and $9,646,000$10,451,000 of inventories, respectively, from Harmony.
For the three months ended SeptemberJune 30, 20172020 and 2016,2019, the Company recorded equity in income of unconsolidated affiliate of $105,000$119,000 and $242,000,$84,000, respectively, related to Harmony. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the Company recorded equity in income of unconsolidated affiliate of $339,000$206,000 and $433,000,$361,000, respectively, related to Harmony.
As of SeptemberJune 30, 2017,2020, the Company’s investment in Harmony was $3,877,000,$5,045,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $3,446,000,$4,614,000, less $942,000 in repayments of the advance and $77,000 in dividends.
8. | Accrued Liabilities |
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, accrued liabilities consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Bonuses payable | $ | 696,000 | $ | 904,000 | ||||
Payroll expenses | 281,000 | 556,000 | ||||||
| $ | 977,000 | $ | 1,460,000 | |||||
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Payroll expenses and taxes payable | $ | 448,000 | $ | 299,000 | ||||
Commissions and bonuses payable and general accrued liabilities | 1,270,000 | 621,000 | ||||||
| $ | 1,718,000 | $ | 920,000 | |||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. | Basic and Diluted Earnings Per Common Share |
The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per common share (“EPS”), which utilizes the weighted average number of common shares outstanding without regard to dilutive shares, and “diluted” EPS, which includes all such dilutive shares, for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016.2019:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (numerator) | $ | 1,103,000 | $ | 1,019,000 | $ | 2,457,000 | $ | 2,323,000 | ||||||||
Shares (denominator): | ||||||||||||||||
Basic weighted average common shares outstanding | 14,732,173 | 16,695,059 | 14,962,606 | 17,190,073 | ||||||||||||
Add: dilutive effect of common stock options | 201,253 | 11,473 | 113,334 | - | ||||||||||||
Diluted weighted average common shares outstanding | 14,933,426 | 16,706,532 | 15,075,940 | 17,190,073 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.06 | $ | 0.16 | $ | 0.14 | ||||||||
Diluted | $ | 0.07 | $ | 0.06 | $ | 0.16 | $ | 0.14 | ||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (numerator) | $ | 6,220,000 | $ | 1,010,000 | $ | 11,561,000 | $ | 2,228,000 | ||||||||
Shares (denominator): | ||||||||||||||||
Basic weighted average common shares outstanding | 13,351,675 | 13,184,321 | 13,351,674 | 13,287,583 | ||||||||||||
Add: dilutive effect of common stock options | 300,320 | 23,817 | 461,420 | 58,563 | ||||||||||||
Diluted weighted average common shares outstanding | 13,651,995 | 13,208,138 | 13,813,094 | 13,346,146 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.47 | $ | 0.08 | $ | 0.87 | $ | 0.17 | ||||||||
Diluted | $ | 0.46 | $ | 0.08 | $ | 0.84 | $ | 0.17 | ||||||||
| Activity of Business Segments |
The Company operates through threetwo business segments:
(1) Building Supply: consisting of a line of construction supply weatherization products. The construction supply weatherization products consist of housewrap and synthetic roof underlayment, as well as other woven material. The majority of the Company’s equity in income of unconsolidated affiliate (Harmony) is included in the total segment income for the Building Supply segment.
(2) Disposable Protective Apparel: consisting of a complete line of disposable protective clothing, such asincluding shoecovers (including the Aqua Trak® and spunbond shoecovers), bouffant caps, coveralls, frocks, lab coats, gowns and hoods, as well as face masks and face shields for the pharmaceutical, cleanroom, industrial, medical and medicaldental markets. A portion of the Company’s equity in income of unconsolidated affiliate (Harmony) is included in the total segment income for the Disposable Protective Apparel segment.
Infection Control: consisting of a line ofPreviously, face masks and eye shields.face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel, including face masks and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in FDA-approved facilities, regardless of the market served. Based on these similarities, we determined that it would be best to consolidate the Infection Control segment into the Disposable Protective Apparel segment beginning with the first quarter of 2019.
Segment data excludes charges allocated to the principal executive office and other unallocated corporate overhead expenses and income tax. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales.
The following table presents consolidated net sales for each segment for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Building Supply | $ | 7,076,000 | $ | 7,022,000 | $ | 19,298,000 | $ | 21,700,000 | $ | 7,452,000 | $ | 6,710,000 | $ | 15,008,000 | $ | 13,208,000 | ||||||||||||||||
Disposable Protective Apparel | 3,845,000 | 3,698,000 | 10,914,000 | 11,147,000 | 18,048,000 | 4,705,000 | 28,646,000 | 10,510,000 | ||||||||||||||||||||||||
Infection Control | 1,128,000 | 1,059,000 | 3,870,000 | 3,487,000 | ||||||||||||||||||||||||||||
Consolidated net sales | $ | 12,049,000 | $ | 11,779,000 | $ | 34,082,000 | $ | 36,334,000 | $ | 25,500,000 | $ | 11,415,000 | $ | 43,654,000 | $ | 23,718,000 | ||||||||||||||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the reconciliation of consolidated segment income to consolidated net income for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Building Supply | $ | 1,339,000 | $ | 1,618,000 | $ | 3,471,000 | $ | 4,287,000 | ||||||||
Disposable Protective Apparel | 764,000 | 617,000 | 1,977,000 | 1,327,000 | ||||||||||||
Infection Control | 396,000 | 375,000 | 1,405,000 | 1,211,000 | ||||||||||||
Total segment income | 2,499,000 | 2,610,000 | 6,853,000 | 6,825,000 | ||||||||||||
Unallocated corporate overhead expenses | 893,000 | 1,162,000 | 3,328,000 | 3,462,000 | ||||||||||||
Provision for income taxes | 503,000 | 429,000 | 1,068,000 | 1,040,000 | ||||||||||||
Consolidated net income | $ | 1,103,000 | $ | 1,019,000 | $ | 2,457,000 | $ | 2,323,000 | ||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Building Supply | $ | 1,307,000 | $ | 900,000 | $ | 2,716,000 | $ | 1,809,000 | ||||||||
Disposable Protective Apparel | 8,400,000 | 878,000 | 12,854,000 | 2,301,000 | ||||||||||||
Total segment income | 9,707,000 | 1,778,000 | 15,570,000 | 4,110,000 | ||||||||||||
Unallocated corporate overhead expenses | 1,665,000 | 530,000 | 3,215,000 | 1,401,000 | ||||||||||||
Provision for income taxes | 1,822,000 | 238,000 | 794,000 | 481,000 | ||||||||||||
Consolidated net income | $ | 6,220,000 | $ | 1,010,000 | $ | 11,561,000 | $ | 2,228,000 | ||||||||
The following table presents the consolidated net property and equipment, goodwill and definite-lived intangible assets (“consolidated assets”) by segment as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Building Supply | $ | 2,168,000 | $ | 2,208,000 | $ | 1,909,000 | $ | 1,867,000 | ||||||||
Disposable Protective Apparel | 341,000 | 346,000 | 1,112,000 | 1,087,000 | ||||||||||||
Infection Control | 14,000 | 140,000 | ||||||||||||||
Total segment assets | 2,523,000 | 2,694,000 | 3,021,000 | 2,954,000 | ||||||||||||
Unallocated corporate assets | 556,000 | 41,000 | 1,047,000 | 1,055,000 | ||||||||||||
Total consolidated assets | $ | 3,079,000 | $ | 2,735,000 | $ | 4,068,000 | $ | 4,009,000 | ||||||||
11. | Financial Information about Geographic Areas |
The following table summarizes the Company’s net sales by geographic region for the three and six months ended June 30, 2020 and 2019:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net sales by geographic region | ||||||||||||||||
United States | $ | 22,546,000 | $ | 11,158,000 | $ | 38,165,000 | $ | 23,197,000 | ||||||||
International | 2,954,000 | 257,000 | 5,489,000 | 521,000 | ||||||||||||
Consolidated net sales | $ | 25,500,000 | $ | 11,415,000 | $ | 43,654,000 | $ | 23,718,000 | ||||||||
Net sales by geographic region are based on the countries in which our customers are located. For the three and six months ended June 30, 2020 and 2019, the Company did not generate sales from any single country, other than the United States, that were significant to the Company’s consolidated net sales.
Alpha Pro Tech, Ltd.
The following table summarizes the locations of the Company’s long-lived assets by geographic region as of June 30, 2020 and December 31, 2019:
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Long-lived assets by geographic region | ||||||||
United States | $ | 2,544,000 | $ | 2,450,000 | ||||
International | 1,460,000 | 1,493,000 | ||||||
Consolidated total long-lived assets | $ | 4,004,000 | $ | 3,943,000 | ||||
| Related Party Transactions |
As of June 30, 2020, the Company had no related party transactions, other than the Company’s transactions with its unconsolidated affiliate, Harmony. See Note 7 of these Notes to Condensed Consolidated Financial Statements (Unaudited).
13. | Leases |
The Company has historically used a law firmoperating leases for the Company’s corporate office and manufacturing facilities, which expire at various legal matters whose majority member was a memberdates through 2024. The Company’s primary operating lease commitments at June 30, 2020 related to the Company’s manufacturing facilities in Valdosta, Georgia, Nogales, Arizona and Salt Lake City, Utah, as well as the Company’s corporate headquarters in Markham, Ontario, Canada.
As of June 30, 2020, the Company’s Board had operating lease right-of-use assets of Directors. Effective March 31, 2017,$2,728,000 and operating lease liabilities of $2,776,000. As of June 30, 2020, we did not have any finance leases recorded on the Board member resigned from the Board of Directors, which removed the related party relationship with this law firm. ForCompany’s condensed consolidated balance sheet. Operating lease expense was approximately $201,000 and $402,000 during the three and six months ended SeptemberJune 30, 2016, the Company expensed $95,000 for legal services from this related party. For the nine months ended September 30, 2017 and 2016, the Company expensed $65,000 and $145,000, respectively, for legal services from this related party. As of December 31, 2016, the Company’s outstanding balance to this related party was $163,000.2020, respectively.
|
|
The Company is presently involved in protracted litigation against a competitor in an action styled Alpha Pro Tech, Inc. v. VWR International, LLC, pending inaggregate future minimum lease payments and reconciliation to lease liabilities as of June 30, 2020 were as follows:
June 30, | ||||
2020 | ||||
Remaining six months of 2020 | $ | 547,000 | ||
2021 | 1,000,000 | |||
2022 | 670,000 | |||
2023 | 676,000 | |||
Thereafter | 126,000 | |||
Total future minimum lease payments | 3,019,000 | |||
Less imputed interest | (243,000 | ) | ||
Total Lease liabilities | $ | 2,776,000 | ||
As of June 30, 2020, the U.S. District Court forweighted average remaining lease term of the Eastern District of Pennsylvania, CV 12-1615, whereinCompany’s operating leases was 3.99 years. During the Company originally sought damages for unfair trade practices and false advertising againstsix months ended June 30, 2020, the competitor, and the competitor has counterclaimed asserting similar claims against the Company. In August of 2017, the court ruled against the Company on its claims against the competitor, and the competitor is presently seeking attorneys’ fees and costs as the prevailing partyweighted average discount rate with respect to those claims. The Company is in the process of evaluating, with current litigation counsel, the remaining counterclaims against the Company and the claim for attorneys’ fees and costs and intends to vigorously defend against these claims. Although the Company believes that it will prevail in its defense of these claims, any material loss amount that might be incurred cannot reasonably be estimated at this time.leases was 4.34%.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
14. | Income taxes |
The Company accounts for income taxes using the asset and liability method. A valuation allowance is subjectrecorded to other pendingreduce the carrying amounts of deferred income tax assets unless it is more likely than not that such assets will be realized. The Company’s policy is to record any interest and threatened litigation actionspenalties assessed by the Internal Revenue Service as a component of the provision for income taxes. The Company provides allowances for uncertain income tax positions when it is more likely than not that the position will not be sustained upon examination by the tax authority.
Alpha Pro Tech, Ltd. and its subsidiaries file income tax returns in the ordinary courseU.S. federal jurisdiction, and in various state and foreign jurisdictions.
An employer generally does not claim a corporate income tax deduction (which would be in an amount equal to the amount of business. Although itincome recognized by the employee) upon the exercise of its employee's Incentive Stock Options (“ISOs”) unless the employee does not meet the holding period requirements and sells early, making a disqualifying disposition, or if the options otherwise do not qualify as ISOs under applicable tax laws. With Non-Qualified Stock Options (“NQSOs”), on the other hand, the employer is not possibletypically eligible to determine with certainty at this pointclaim a deduction upon its employee's exercise of the NQSO.
The company had an estimated nonrecurring tax benefit of $2.0 million in time what liability, if any, the Company will havefirst quarter of 2020 as a result of such litigation, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resultingexercise of disqualified ISOs and the exercise of NQSOs, partially offset by tax expense of an estimated $1.0 million.
On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in the 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from such litigation will have a material effect30% to 50% of EBITDA. The CARES Act currently has minimal impact on the Company’s financial condition and results of operations.Company.
| 15.
| Subsequent Events |
The Company has reviewed and evaluated whether subsequent events have occurred from the condensed consolidated balance sheet date of SeptemberJune 30, 20172020 through the filing date of this Quarterly Report on Form 10-Q that would require accounting or disclosure and has concluded that there are no such subsequent events.
Alpha Pro Tech, Ltd.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report.report, as well as our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2020 (the “2019 Form 10-K”).
Special Note Regarding Forward-Looking Statements
Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions, relating to potential acquisitionsincluding, without limitation, our expected orders and production levels in 2020 and 2021, and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.
Any expectations basedThe following are some of the risks that could affect our financial performance or that could cause actual results to differ materially from those expressed or implied in our forward-looking statements:
● | Global economic conditions could adversely affect the Company’s business and financial results. |
● | The effects of the COVID-19 pandemic could have a material adverse effect on our business, financial results and results of operations. |
● | The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results. |
● | We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements. |
● | Risks associated with international manufacturing could have a significant effect on our business. |
● | Our joint venture may present risks that are only present when third parties are involved. |
● | Our success depends in part on protection of our intellectual property, and our failure to protect our intellectual property could adversely affect our competitive advantage, our brand recognition and our business. |
● | Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales. |
● | The Company’s results are affected by competitive conditions and customer preferences. |
● | The Company’s growth objectives are largely dependent on the timing and market acceptance of our new product offerings, including our ability to continually renew our pipeline of new products and to bring those products to market. |
● | Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and our customers and suppliers and expose the Company to liability, which could adversely impact the Company’s business and reputation. |
● | The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks. |
● | Our common stock price is volatile, which could result in substantial losses for individual shareholders. |
● | We invest in a publicly traded entity with a common stock price that is volatile, which could result in substantial losses for the Company. |
The foregoing list of risks is not exclusive. For a more detailed discussion of the risk factors associated with our business , see the risks described in Part I, Item IA, “Risk Factors,” in the 2019 Form 10-K and in Part II, Item IA, “Risk Factors,” in this Quarterly Report on these forward-looking statements are subject to risks and uncertainties.Form 10-Q. These and many other factors could affect the Company’sCompany’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.
Alpha Pro Tech, Ltd.
Special Note Regarding Smaller Reporting Company Status
We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.
Where to find more information about us. We make available, free of charge, on our Internet website (http:(http://www.alphaprotech.com)www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reportsCurrent Reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K, and any amendments to such reports, as soon as reasonably practicable following the electronic filing of such reports with the Securities and Exchange Commission (“SEC”).SEC. In addition, in accordance with SEC rules, we provide electronic or paper copies of our filings free of charge upon request.
Critical Accounting Policies
The preparation of our financial statements in conformity with USU.S. generally accepted accounting principles (“USU.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods.periods reported. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in Note 2 – “Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements in Part I, Item 8 of the 2019 Form 10-K. Our critical accounting policiespolicies and estimates include the following:
Marketable Securities: The Company periodically invests a portion of its cash in excess of short-term operating needs in marketable equity securities. These investments are classified as available-for-sale in accordance with US GAAP. The Company does not have any investments classified as held-to-maturity or trading securities. Available-for-sale investments are carried at their fair value using quoted prices in active markets for identical securities, with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income (loss). Realized gains and losses, and declines in value deemed to be other-than-temporary on available-for-sale investments, are recognized in earnings. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than one year are classified as long-term investments in the accompanying condensed consolidated balance sheets.
Alpha Pro Tech, Ltd.
Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and quantities on hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Accounts Receivable:Accounts receivable are recorded at the invoice amount and do not bear interest. The general terms for receivables is net 30 days. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about customers’ current ability to pay. Account balances are charged against the allowance when management determines that the potential for recovery is considered remote. For new customers with no order history with the Company we may require advance payments to reduce our credit risk.
Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Alpha Pro Tech, Ltd.
Leases: We determine if an arrangement is a lease at inception. Operating leases are included as right-of-use (“ROU”) assets and lease liabilities on our condensed consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate, and, therefore, we estimate our incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our condensed consolidated balance sheet with a term of one year or less. We elected a package of transition practical expedients, which included not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.
Revenue Recognition: For Net sales transactions,includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Our customer contracts have a single performance obligation: transfer control of products to customers. Revenue is measured as the amount of consideration that we complyexpect to receive in exchange for transferring control of products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring control of the promised products to the customer, with revenue being recognized at the point in time when the customer obtains control of the products, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements, at which time a receivable is created for the invoice sent to the customer. Shipping and handling activities are performed prior to the customer obtaining control of the goods, are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the provisionsdistribution of the SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should beCompany’s product to the customers, are recorded in cost of goods sold and are recognized when allcontrol of the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) title transfers andproduct is transferred to the customer, assumeswhich is at the risk of loss; (3)time the selling price is fixedproducts are delivered to or determinable;picked up by the customer. We estimate product returns based on historical return rates and (4) collectionestimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the resulting receivable is reasonably assured. These criteriacontract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are satisfiedcollected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon shipmentthe nature of product,the private labelling. The Company has determined as of June 30, 2020 that it had no material contract assets, and sales are recognized accordingly.concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of June 30, 2020, we had contract liabilities of $6,475,000 as a result of customer advance payments of orders connected to the COVID-19 pandemic (see “Impact of the Novel Coronavirus (COVID-19)” below). No such contract liabilities existed as of December 31, 2019.
Sales Returns, Rebates and Allowances: Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user product-specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.
Stock-Based Compensation: We record compensation expense The Company accounts for stock awards in accordance with ASC 718, Stock Compensation. ASC 718 requires companies to estimate the fair value of stock-basedequity-based awards determined on the date of grant including employee stock options.with the related compensation expense recognized ratably over the requisite service period, which generally matches the vesting term.
The fair values of stock option grants are determined using the Black-Scholes option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management’smanagement’s expectations of future volatility, risk-free interest rates from published sources, expected lifeterm based on historical data and no dividend yield, as the Board of Directors currently has no current plans to pay dividends in the nearforeseeable future. The Company accounts for option forfeitures as they occur. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. TheIn addition, the option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value of such options.
Alpha Pro Tech, Ltd.
OVERVIEW
Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the "Alpha Pro Tech" brand name, as well as under private label.
Our products are grouped into threetwo business segments: the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and the Disposable Protective Apparel segment, consisting of disposable protective apparel such asgarments (including shoecovers, bouffant caps, gowns, coveralls, lab coats,gowns, frocks and other miscellaneous products; and the Infection Control segment, consisting oflab coats), face masks and eyeface shields. All financial information presented hereinin this report reflects the current segmentation.
Alpha Pro Tech, Ltd.
Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel, including face masks (including the Company’s proprietary N-95 Particulate Respiratory face mask) and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in FDA approved facilities, regardless of the market served. Based on these similarities we determined that it would be best to consolidate the Infection Control segment into the Disposable Protective Apparel segment beginning with the first quarter of 2019.
Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing,, medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.
Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.
Impact of the Novel Coronavirus (COVID-19)
In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. COVID-19 has had, and we expect the virus to continue to have, a number of effects, both positive and negative, on our business operations and financial condition.
We have experienced a significant surge in customer demand for our proprietary N-95 Particulate Respirator face mask product, face shield products and other personal protective equipment (“PPE”) products as a result of COVID-19. We experienced a dramatic increase in revenue from sales of these products during the first six months and expect additional increases for the remainder of 2020, and even beyond. We have seen significant increases not only in near-term demand, but also in longer-term ongoing purchase orders that have request dates that extend into the first half of 2021.
In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company began ramping up production during the first quarter of 2020 of our N-95 face mask, which is manufactured by the Company in the United States. As of August 1, 2020, the Company had booked approximately $66 million in orders for the Company’s N-95 face mask since January 27, 2020, of which approximately 10% have request dates in 2021. The Company fulfilled approximately $12 million of the orders through the first six months of 2020. At this time, the Company expects approximately $43 million of booked N-95 face mask orders with request dates in 2020 to be fulfilled by the end of the year, and approximately $23 million of the orders will be fulfilled in 2021.
Alpha Pro Tech, Ltd.
During the second quarter of 2020, the Company brought all available phase 1 N-95 production lines into service and secured raw material to support the fulfillment of our anticipated 2020 orders. In the second quarter, one of the raw materials did have availability constraints; however,; the Company has now added additional supply sources, which the Company expects to remove any further bottlenecks and allow full production capacity of phase 1 in the latter part of the third quarter of 2020. Based on increased production capacity and current order demand, the Company expects N-95 face mask sales in the third quarter of 2020 to be significantly higher than the second quarter. The Company continues to expect the phase 2 expansion of additional N-95 face mask manufacturing lines to be initially operational by the latter part of the third quarter of 2020. Once phase 2 is operational, the Company will ramp up production throughout the remainder of 2020 and expects that for fiscal 2021 the production capacity for the N-95 face mask will be over $100 million.
The Company has also seen a significant increase in orders of the Company’s face shield products since January 27, 2020, with approximately $6 million of face shield orders fulfilled in the first six months of 2020. At this time, the Company expects face shield sales in the second half of 2020 to exceed the $6 million in sales through the first six months of the year.
The Company’s other disposable protective garment product line, which include coveralls, gowns, lab coats, shoecovers and bouffant caps, has also seen a significant increase in demand, which primarily began in early March and continued throughout the second quarter. For the remainder of 2020, the Company expects increased demand for these products to continue. During the second quarter of 2020, the Company’s India joint venture ceased production due to a government-mandated COVID-19 shutdown, which impacted inventory levels. With the reopening of the joint venture in June, subsequent to the end of the shutdown, shipping of inventory has recommenced, but the temporary shutdown will impact production and sales of disposable protective garments in the third quarter, and production and sales could be further impacted by subsequent shutdowns. Even with these actual and potential delays, however, the Company expects disposable protective garment sales for the second half of 2020 to show continued top line growth.
The majority of the products that we manufacture are deemed essential by the various jurisdictions in which we operate. We have implemented significant protective measures throughout our facilities, including travel and visitor restrictions, work from home policies, employee screenings, social distancing and use of face coverings as we continue to service our customers. While this remains a fluid situation, all of our U.S. manufacturing sites are currently operating, with the majority of them at or above normal production rates.
Alpha Pro Tech, Ltd.
With the increase in demand has come a number of challenges. Although we remain committed to allocating the necessary resources and procuring the necessary raw materials in an effort to meet the unprecedented demand for our PPE products, we have experienced issues with raw material shortages and supply chain delays due, in large part, to government regulation and mandated closures around the world. For example, our joint venture in India that manufacturers the Company’s PPE lines that include coveralls, gowns, lab coats, shoecovers and bouffant caps was under a country-wide, government mandated closure beginning in late March and lasting through May, 2020. Although we believe that we have back-up options for raw material sourcing and manufacturing, those may be limited, and we expect some continued supply chain disruptions to impact sales in these and other product lines. Government regulation may impact our ability to supply and ship our products to certain customers, which could lead to cancellation of some orders. Further, we expect the prices of raw materials to rise more rapidly than our sales prices, therefore decreasing the gross profit per item that we expect to receive.
We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees. We have enacted enhanced operating protocols to assure the safety and well-being of our employees, placed restrictions on non-essential travel and otherwise adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing and complying with shelter-in-place orders. We believe that we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state or local authorities. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time.
COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. And, despite the tremendous surge in demand for our PPE products in recent months, we expect that demand for our Building Supply segment products could be negatively impacted by decreased housing starts and increased uncertainty in the housing market and the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment. .
The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our PPE products resulting from the pandemic had a positive impact on our first and second quarter results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.
Alpha Pro Tech, Ltd.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of net sales for the periods indicated:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months | For the Six Months | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Gross profit | 39.1 | % | 38.3 | % | 39.6 | % | 36.6 | % | 49.5 | % | 36.0 | % | 48.5 | % | 37.6 | % | ||||||||||||||||
Selling, general and administrative expenses | 28.6 | % | 26.8 | % | 30.1 | % | 27.4 | % | 17.9 | % | 28.6 | % | 19.8 | % | 29.2 | % | ||||||||||||||||
Income from operations | 9.3 | % | 10.2 | % | 8.2 | % | 8.1 | % | 30.9 | % | 6.2 | % | 27.8 | % | 7.2 | % | ||||||||||||||||
Income before provision for income taxes | 13.3 | % | 12.3 | % | 10.3 | % | 9.3 | % | 31.5 | % | 10.9 | % | 28.3 | % | 11.4 | % | ||||||||||||||||
Net income | 9.2 | % | 8.7 | % | 7.2 | % | 6.4 | % | 24.4 | % | 8.8 | % | 26.5 | % | 9.4 | % | ||||||||||||||||
ThreeThree and nine months ended September 30, 2017 compared to three and nineSix months ended June 30, 20September20, compared to Three and Six months ended June 30, 20169
Sales.Consolidated sales for the three months ended SeptemberJune 30, 20172020 increased to $12,049,000$25,500,000 from $11,779,000$11,415,000 for the three months ended SeptemberJune 30, 2016,2019, representing an increase of $270,000,$14,085,000, or 2.3%123.4%. This increase consisted of increased sales in the Building Supply segment of $54,000, increased sales in the Disposable Protective Apparel segment of $147,000$13,343,000 and increased sales in the Infection ControlBuilding Supply segment of $69,000.$742,000.
Building Supply segment sales for the three months ended SeptemberJune 30, 20172020 increased by $54,000,$742,000, or 0.8%11.1%, to $7,076,000,$7,452,000, compared to $7,022,000$6,710,000 for the same period of 2016. Thisthree months ended June 30, 2019. The Building Supply segment increase was primarily due to a 20.3%an 11.7% increase in sales of our core building products, including an increase in sales of housewrap of 13.1% and a 37.2%an increase in sales of other woven material, partially offset by a 14.9% decrease in sales of synthetic roof underlayment (including REX™, TECHNOply™ and TECHNO SB)of 9.9%. Sales of other woven material increased by 8.5% compared to the same period of 2019. The sales mix of the Building Supply segment for the three months ended SeptemberJune 30, 20172020 was 48%approximately 46% for synthetic roof underlayment, 42%44% for housewrap and 10% for other woven material. This compared to 57%approximately 47% for synthetic roof underlayment, 35%43% for housewrap and 8%10% for other woven material for the three months ended SeptemberJune 30, 2016.
Although2019. Our synthetic roof underlayment segment sales were down,product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of REX™ Wrap, REX™ Wrap Plus and REX™ Wrap Fortis.
The increase in our housewrap sales remained strong,is attributable to our increases in sales of our “system warranty” with increased saleshousewrap, window flashings and seam tape products on our higher-end housewrap products. Even though the pandemic has slowed our ability to be in the third quarter of 20.3%field, we have been able to effectively convey the system warranty program to all market segments. As we continue to attract more builders and 10.0% yearhave expanded our distribution network to date. At the endcapture increased demand for our housewrap, window flashing and seam tape. In addition to benefitting from cash flow that has enabled us to build a strong inventory position, we have managed to avoid many of the third quarter,challenges faced by competitors that rely heavily on third-party imported products from countries hit hard by the pandemic by relying on our U.S.-based manufacturing and our joint venture partner. This ultimately has brought us new distribution outlets, as we announced a new, innovative and exciting product lineare able to our housewrap family, REX™ Wrap Fortis with JX ALTA 360° Drainage Technology™. With its one-of-a-kind construction, this product uniquely enables the drainage of water in EVERY direction to protect buildings from the elements exponentially better than a traditional housewrap, while decreasing job site material waste, simplifying installation to reduce labor and allowing feweroffer products to be carried. This new product offering will compete inthe market at a segmentreduced lead time. Sales of the housewrap market that is currently untapped for us, and we anticipate that it will provide us with significant growth opportunities. Synthetic roof underlayment sales were down in the third quarter of 2017, primarily due to lower sales to private label customers and competitive pricing pressure. In particular, sales to oneother woven material increased as a result of our largest private label distributors were down significantlycustomer in the third quarter as well as year to date, as they are strugglingthis category increasing its order volume with a general decline in their overall building sales. In addition, sales to another smaller private label distributor were down due to a change in strategy during 2016. Although sales were down, the number of rolls of label synthetic roof underlayment sold, excluding sales to the two distributors mentioned above, were actually up 5.9% for the quarter.us. We believe that our line of synthetic roof underlayment will be a growth driver in the coming year. Management expects the Building Supply segment to experienceexpect continued growth in 2018.this market segment, though given the uncertainty of the economy as a result of the COVID-19 pandemic, short-term growth could be affected.
Alpha Pro Tech, Ltd.
Sales for the Disposable Protective Apparel segment for the three months ended SeptemberJune 30, 20172020 increased by $147,000,$13,343,000, or 4.0%283.6%, to $3,845,000,$18,048,000, compared to $3,698,000$4,705,000 for the same period of 2016,2019. This segment increase was due to a 991.3% increase in sales of face masks, a 973.2% increase in face shields and a 42.3% increase in sales of disposable protective garments. The increase in face mask sales was primarily dueattributed to increased sales of our N-95 face mask due to our major internationalthe COVID-19 pandemic. Although face mask sales increased very significantly during the quarter as a result of the COVID-19 pandemic, sales could have been even higher without a supply chain partner, partially offset by decreasedissue that we experienced. Management anticipates that this issue will be resolved in the third quarter of 2020 and that resolving this issue should bolster sales and inventory levels in the coming quarters. The increase in face shield sales was also due to nationalthe pandemic and regional distributors.
Infection Controlhaving a strong inventory position. Disposable protective garments sales experienced a 42.3% increase in the quarter, as a result of the pandemic and having a strong inventory position. The Company’s joint venture in India, which manufacturers the disposable protective garment lines and has historically been the primary supply source for these products, was under a country-wide, government mandated closure that started in late March and ended in late May 2020. This two-month closure has adversely affected our supply chain. Although customer demand for disposable protective garments remains strong, the Company does expect some short-term third quarter impact on sales as a result of the India mandated closure. The sales mix of the Disposable Protective Apparel segment sales for the three months ended SeptemberJune 30, 2017 increased by $69,000, or 6.5%, to $1,128,000,2020 was approximately 28% for disposable protective garments, 47% for face masks and 25% for face shields. This compared to $1,059,000approximately 74% for disposable protective garments, 17% for face masks and 9% for face shields for the same period of 2016. Mask sales were up by 6.1%, or $43,000, to $751,000, and shield sales were up by 7.4%, or $26,000, to $377,000.three months ended June 30, 2019.
Consolidated sales for the ninesix months ended SeptemberJune 30, 2017 decreased2020 increased to $34,082,000$43,654,000 from $36,334,000$23,718,000 for the ninesix months ended SeptemberJune 30, 2016,2019, representing a decreasean increase of $2,252,000,$19,936,000, or 6.2%84.1%. This decrease was due to decreasedincrease consisted of increased sales in the Disposable Protective Apparel Segment of $18,136,000 and increased sales in the Building Supply segment of $2,402,000 and decreased sales in the Disposable Protective Apparel segment of $233,000, partially offset by increased sales in the Infection Control segment of $383,000.$1,800,000.
Building Supply segment sales for the ninesix months ended SeptemberJune 30, 2017 decreased2020 increased by $2,402,000,$1,800,000, or 11.1%13.6%, to $19,298,000,$15,008,000, compared to $21,700,000$13,208,000 for the same period of 2016. This2019. Our synthetic roof underlayment product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of REX™ Wrap, REX™ Wrap Plus and REX™ Wrap Fortis. The Building Supply segment decreaseincrease was primarily due to a 25.3% decreasean increase in sales of housewrap of 16.5%, an increase in sales of synthetic roof underlayment (including REX™, TECHNOply™of 11.0% and our new TECHNO SB), partially offset by a 10.0% increase in sales of housewrap and a 30.3%an increase in sales of other woven material.material of 17.0% compared to the same period of 2019. Synthetic roof underlayment sales increased as a result of increased sales of the TECHNO family products. Housewrap sales in the first half of 2020 were positively affected by increased system warranty sales (as discussed above) and improved U.S. housing starts. Other woven material sales were up as a result of our largest customer in this category increasing its volume with us. The sales mix of the Building Supply segment for the ninesix months ended SeptemberJune 30, 20172020 was 51%45% for synthetic roof underlayment, 41%45% for housewrap and 8%10% for other woven material. This compared to 61%46% for synthetic roof underlayment, 33%44% for housewrap and 6%10% for other woven material for the ninesix months ended SeptemberJune 30, 2016.2019. As the impact of COVID-19 pandemic continues to unfold, there could be a negative impact in our Building Supply segment, as there could be increased uncertainty with the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment.
Sales for the Disposable Protective Apparel segment for the ninesix months ended SeptemberJune 30, 2017 decreased2020 increased by $233,000,$18,136,000, or 2.1%172.6%, to $10,914,000,$28,646,000, compared to $11,147,000$10,510,000 for the same period of 2016. Although2019. This segment increase was due to a 691.1% increase in sales of face masks, a 621.8% increase in face shields and a 21.3% increase in sales of disposable protective garments. The increase in sales in this business segment was primarily due to the COVID-19 pandemic. Open purchase orders for these product lines remain very strong (see “Impact of the Novel Coronavirus (COVID-19)” above. The sales mix of the Disposable Protective Apparel segment for the six months ended June 30, 2020 was 34% for disposable protective garments, 46% for masks and 20% for shields. This sales were down yearmix is compared to date, sales have been up in76% for disposable protective garments, 16% for masks and 8% for shields for the two most recent quarters. The year to date decrease was primarily due to decreased sales to our national and regional distributors, partially offset by an increase to our major international supply chain partner.six months ended June 30, 2019.
Infection Control segment salesGross Profit. Gross profit increased by $8,507,000, or 207.2%, to $12,613,000 for the ninethree months ended SeptemberJune 30, 2017 increased by $383,000, or 11.0%, to $3,870,000, compared to $3,487,0002020, from $4,106,000 for the same period of 2016. Mask sales were up by 12.7%, or $303,000, to $2,695,000, and shield sales were up by 7.3%, or $80,000, to $1,175,000.
Gross Profit. Gross2019. The gross profit increased by $196,000, or 4.3%, to $4,712,000margin was 49.5% for the three months ended SeptemberJune 30, 20172020, compared to 36.0% for the three months ended June 30, 2019. Gross profit margin was positively affected by the significant change in product mix, with a surge in customer demand as a result of the COVID-19 pandemic for face masks, in particular our N-95 Particulate Respirator face mask, and face shields, which generally have a higher gross profit margin than our other products. The Company expects these higher gross profit margin products to be in high demand for at least the rest of 2020 due to the COVID-19 pandemic.
Gross profit increased by $12,258,000, or 137.6%, to $21,167,000 for the six months ended June 30, 2020, from $4,516,000$8,909,000 for the same period of 2016.2019. The gross profit margin was 39.1%48.5% for the threesix months ended SeptemberJune 30, 2017,2020, compared to 38.3%37.6% for the same period of 2016.
Gross profit increased by $191,000, or 1.4%, to $13,493,000 for the nine months ended September 30, 2017 from $13,302,000 for the same period of 2016. The gross profit margin was 39.6% for the nine months ended September 30, 2017, compared to 36.6% for the same period of 2016.
Management expects gross profit margin to be around 39% for fiscal 2017.2019.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $292,000,$1,291,000, or 9.2%39.6%, to $3,450,000$4,553,000 for the three months ended SeptemberJune 30, 20172020, from $3,158,000$3,262,000 for the three months ended SeptemberJune 30, 2016. As2019. However, as a percentage of net sales, selling, general and administrative expenses increaseddecreased to 28.6%17.9% for the three months ended SeptemberJune 30, 2017,2020, from 26.8%28.6% for the same period of 2016.
2019. The changeincrease in selling, general and administrative expenses forwas primarily the third quarterresult of 2017 by segment was as follows: Building Supply was up $153,000, or 14.6%, Infection Control was up $2,000, or 1.5%, Disposable Protective Apparel was up $29,000, or 3.5%,increased employee compensation, increased sales commission, increased accrued bonuses, increased insurance costs and corporate unallocatedincreased factory-related expenses were up $108,000, or 9.3%. The increase was primarily due to an increase in sales and marketing expenses, as we invested in additional sales representatives primarily in the Building Supply segment.COVID-19 pandemic.
Alpha Pro Tech, Ltd.
The change in expenses by segment comparing the three months ended June 30, 2020 to the three months ended June 30, 2019 was as follows: Disposable Protective Apparel increased by $559,000, or 56.6%; corporate unallocated expenses increased by $706,000, or 72.2%; and Building Supply increased by $26,000, or 2.0%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased insurance costs, increased factory expenses and increased commission primarily as a result of increased sales. The increase in corporate unallocated expenses was a result of increased accrued bonuses as well as increased public company expenses and professional fees primarily due to the COVID-19 pandemic.
Selling, general and administrative expenses increased by $319,000,$1,719,000, or 3.2%24.8%, to $10,269,000$8,656,000 for the ninesix months ended SeptemberJune 30, 20172020, from $9,950,000$6,937,000 for the ninesix months ended SeptemberJune 30, 2016. As2019.However, as a percentage of net sales, selling, general and administrative expenses increaseddecreased to 30.1%19.8% for the ninesix months ended SeptemberJune 30, 2017,2020, down from 27.4%29.2% for the same period of 2016.2019, primarily as a result of the growth in net sales.
The change in expenses by segment for the six months ended June 30, 2020 was as follows: Disposable Protective Apparel was up $619,000, or 28.3%; Building Supply was down $53,000, or 1.9%; and corporate unallocated expenses were up $1,153,000, or 57.1%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased factory expenses and increased commission as a result of increased sales. The increase in corporate unallocated expenses was primarily due to increased accrued bonuses, increased public company expenses and increased professional fees. The increase in selling general and administrative expenses for the first nine monthswas a result of 2017 by segment was as follows: Building Supply was up $204,000, or 6.1%, Infection Control was up $4,000, or 1.0%, corporate unallocatedincreased expenses were up $234,000, or 6.8%,in all selling general and Disposable Protective Apparel was down $123,000, or 4.5%.administrative expense categories to support significant sales growth during 2020.
Pursuant to theirIn accordance with the terms of his employment agreements,agreement, the Company’s current President and Chief Executive Officer and President are eachis entitled to aan annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. Bonusesexpense, up to a maximum of $190,000 were$1.0 million. A bonus amount of $423,000 was accrued for the three months ended SeptemberJune 30, 2017,2020, compared to $58,000 for the three months ended June 30, 2019. A bonus amount of $650,000 was accrued for the six months ended June 30, 2020, as compared to $76,000$135,000 for the same period of 2016. Bonuses of $392,000 were accrued for the nine months ended September 30, 2017, as compared to $177,000 for the same period of 2016. The Chief Executive Officer was not entitled to receive this bonus during 2016.2019.
Depreciation and Amortization. Depreciation and amortization expense decreasedincreased by $6,000,$38,000, or 3.9%27.1%, to $147,000$178,000 for the three months ended SeptemberJune 30, 20172020, from $153,000$140,000 for the three months ended June 30, 2019. Depreciation and amortization expense increased by $93,000, or 34.8%, to $360,000 for the six months ended June 30, 2020, from $267,000 for the same period of 2016.2019. The increase for the quarter and six month period was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment and increased corporate depreciation related to computer technology.
Depreciation and amortization expense Income from Operations. Income from operations increased by $1,000,$7,178,000, or 0.2%1019.6%, to $426,000$7,882,000 for the ninethree months ended SeptemberJune 30, 2017 from $425,0002020, compared to $704,000 for the same period of 2016.
Income from Operations. Income from operations decreased by $90,000, or 7.5%, to $1,115,000 for the three months ended September 30, 2017, compared to $1,205,000 for the three months ended September 30, 2016.2019. The decreasedincreased income from operations was primarily due to an increase in gross profit of $8,507,000, partially offset by an increase in selling, general and administrative expenses of $292,000, partially offset by$1,291,000, and an increase in gross profitdepreciation and amortization expense of $196,000.$38,000. Income from operations as a percentage of net sales for the three months ended June 30, 2020 was 30.9%, compared to 6.2% for the same period of 2019.
Income from operations decreasedincreased by $129,000,$10,446,000, or 4.4%612.7%, to $2,798,000$12,151,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $2,927,000$1,705,000 for the ninesix months ended SeptemberJune 30, 2016.2019. The decreasedincreased income from operations was primarily due to an increase in gross profit of $12,258,000, partially offset by an increase in selling, general and administrative expenses of $319,000,$1,719,000, and an increase in depreciation and amortization expense of $93,000. Income from operations as a percentage of net sales for the six months ended June 30, 2020 was 27.8%, compared to 7.2% for the same period of 2019.
Other Income. Other income decreased by $384,000, or 70.6%, to $160,000 for the three months ended June 30, 2020, from $544,000 for the same period of 2019. The decrease was primarily due to a decrease of $398,000 of realized and unrealized gains on marketable securities for the three months ended June 30, 2020 compared to the same period of 2019, and a decrease in interest income of $21,000, partially offset by an increase in gross profitequity in income of $191,000.unconsolidated affiliate of $35,000.
Other Income.
Alpha Pro Tech, Ltd.
Other income increased by $248,000 to $491,000consisted of equity in income of unconsolidated affiliate of $119,000 and a gain on marketable securities of $41,000 for the three months ended SeptemberJune 30, 20172020. Other income consisted of equity in income of unconsolidated affiliate of $84,000, a gain on marketable securities of $439,000 and interest income of $21,000 for the three months ended June 30, 2019.
Other income decreased by $800,000 to $204,000 for the six months ended June 30, 2020, from $243,000$1,004,000 for the same period of 2016. 2019. The decrease was primarily due to a loss on marketable securities in 2020 compared to a gain on marketable securities during the same period of 2019, for a net decrease of $627,000, a decrease in equity in income of unconsolidated affiliate of $155,000 and a decrease in interest income of $18,000.
Other income consisted primarily of equity in income of unconsolidated affiliate of $105,000,$206,000, a gainloss on the salemarketable securities of property of $385,000$18,000 and interest income of $1,000$16,000 for the threesix months ended SeptemberJune 30, 2017.2020. Other income consisted primarily of equity in income of unconsolidated affiliate of $242,000$361,000, a gain on marketable securities of $609,000 and interest income of $1,000$34,000 for the threesix months ended SeptemberJune 30, 2016.
Other income increased by $291,000 to $727,000 for the nine months ended September 30, 2017 from $436,000 for the same period of 2016. Other income consisted primarily of equity in income of unconsolidated affiliate of $339,000, a gain on the sale of property of $385,000 and interest income of $3,000 for the nine months ended September 30, 2017. Other income consisted primarily of equity in income of unconsolidated affiliate of $433,000 and interest income of $3,000 for the nine months ended September 30, 2016.2019.
Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended SeptemberJune 30, 20172020 was $1,606,000,$8,042,000, compared to income before provision for income taxes of $1,448,000$1,248,000 for the three months ended September 30, 2016,same period of 2019, representing an increase of $158,000,$6,794,000, or 10.9%544.4%. This increase in income before provision for income taxes was primarily due to an increase in other income from operations of $248,000,$7,178,000, partially offset by a decrease in other income from operations of $90,000.$384,000.
Alpha Pro Tech, Ltd.
Income before provision for income taxes for the ninesix months ended SeptemberJune 30, 20172020 was $3,525,000,$12,355,000, compared to income before provision for income taxes of $3,363,000$2,709,000 for the ninesix months ended SeptemberJune 30, 2016,2019, representing an increase of $162,000,$9,646,000, or 4.8%356.1%. TheThis increase in income before provision for income taxes was primarily due to an increase in other income from operations of $291,000,$10,446,000, partially offset by a decrease in other income from operations of $129,000.$800,000.
Provision for Income Taxes.Taxes. The provision for income taxes for the three months ended SeptemberJune 30, 20172020 was $503,000,$1,822,000, compared to $429,000$238,000 for the same period of 2016.2019. The effective tax rate was 31.3%22.7% for the three months ended SeptemberJune 30, 2017,2020, compared to 29.6%19.1% for the same period of 2016.2019. The Company does not record a tax provision on equity in income of unconsolidated affiliate. For the three months ended September 30, 2017, the estimated effective tax rate would have been 33.5% if the equity in income of unconsolidated affiliate was taxable. Management expects the effective tax rate to be in the low 30% range for fiscal 2017.
The provision for income taxes for the ninesix months ended SeptemberJune 30, 20172020 was $1,068,000,$794,000, compared to $1,040,000$481,000 for the same period of 2016.2019. The provision for income taxes consisted of an estimated nonrecurring tax benefit of $2.0 million in the first quarter of 2020 as a result of the exercise of disqualified Incentive Stock Options and the exercise of Non-Qualified Stock Options. The estimated effective tax rate was 30.3%6.4% for the ninesix months ended SeptemberJune 30, 2017,2020, compared to 30.9%17.8% for the same periodsix months ended June 30, 2019. Excluding the estimated nonrecurring tax benefit of 2016.$2.0 million, the estimated effective tax rate was 22.6% for the six months ended June 30, 2020. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.
Net Income.Net income for the three months ended SeptemberJune 30, 20172020 was $1,103,000,$6,220,000, compared to net income of $1,019,000$1,010,000 for the same period of 2019, representing an increase of $5,210,000, or 515.8%. The net income increase was due to an increase in income before benefit for income taxes of $6,794,000, partially offset by an increase in provision for income taxes of $1,584,000. Net income as a percentage of net sales for the three months ended SeptemberJune 30, 2016,2020 was 24.4%, and net income as a percentage of net sales for the three months ended June 30, 2019 was 8.8%. Basic earnings per common share for the three months ended June 30, 2020 and 2019 were $0.47 and $0.08, respectively. Diluted earnings per common share for the three months ended June 30, 2020 and 2019 were $0.46 and $0.08, respectively.
Alpha Pro Tech, Ltd.
Net income for the six months ended June 30, 2020 was $11,561,000, compared to net income of $2,228,000 for the same period of 2019, representing an increase of $84,000,$9,333,000, or 8.2%418.9%. This six month period significantly exceeds even our highest annual net income that we experienced – annual net income of $9.0 million in 2009, resulting from the H1N1 pandemic. The net income increase was due to an increase in income before provision for income taxes of $158,000,$9,646,000, partially offset by an increase in provision for income taxes of $74,000.$313,000. As mentioned above, a tax benefit from stock options exercised positively impacted net income in the first quarter of 2020. Net income as a percentage of net sales for the threesix months ended SeptemberJune 30, 20172020 was 9.2%26.5%, and net income as a percentage of net sales for the same period of 20162019 was 8.7%9.4%. Basic and diluted earnings per common share for the threesix months ended SeptemberJune 30, 20172020 and 20162019 were $0.07$0.87 and $0.06,$0.17, respectively.
Net income for the nine months ended September 30, 2017 was $2,457,000, compared to net income of $2,323,000 for the nine months ended September 30, 2016, representing an increase of $134,000, or 5.8%. The net income increase was due to an increase in income before provision for income taxes of $162,000, partially offset by an increase in provision for income taxes of $28,000. Net income as a percentage of net sales for the nine months ended September 30, 2017 was 7.2%, and net income as a percentage of net sales for the same period of 2016 was 6.4%. Basic and diluted Diluted earnings per common share for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 were $0.16$0.84 and $0.14,$0.17, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of SeptemberJune 30, 2017, we2020, the Company had cash of $8,968,000$24,735,000 and working capital of $25,646,000,$37,051,000, representing a decreasean increase in working capital of 5.7%, or $1,552,000,$13,289,000 from $23,762,000 as of December 31, 2016.2019. As of SeptemberJune 30, 2017, our2020, the Company’s current ratio (current assets/current liabilities) was 14:4:1, compared to a 12:1 current ratio as of December 31, 2016.2019. The change in current ratio is as a result of customer advance payments for future dated PPE orders. Cash decreasedincreased by 5.2%277.7%, or $488,000,$18,187,000, to $8,968,000$24,735,000 as of SeptemberJune 30, 2017,2020, compared to $9,456,000$6,548,000 as of December 31, 2016.2019. Approximately $6.5 million of the increase in cash is attributable to prepayments on future PPE sales. The decreaseincrease in cash from December 31, 2019 was due to cash used inprovided by operating activities of $16,749,000, cash provided by financing activities of $2,776,000$1,810,000 and cash used in investing activities of $386,000, partially offset by cash provided by operating activities of $2,674,000.$372,000.
We havepreviously had a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. As of September 30, 2017, the prime interest rate was 4.25%. This credit line was renewedexpired in May 20162020, and expires in May 2018.the Company decided not to renew. The available lineCompany has continued its relationship with Wells Fargo, with the exception of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit. The Company determined the credit line was $3,500,000not necessary at this time, as of September 30, 2017. As of September 30, 2017, we didit had not have any borrowings under this credit facilitybeen used in several years and do not anticipate using it in the near future.Company currently has sufficient funding from operations.
Net cash provided by operating activities of $2,674,000$16,749,000 for the ninesix months ended SeptemberJune 30, 20172020 was due to net income of $2,457,000, adjusted$11,561,000, impacted primarily by the following: stock-based compensation expense of $244,000,$183,000, depreciation and amortization expense of $426,000,$360,000, loss on marketable securities of $18,000, equity in income of unconsolidated affiliate of $339,000, gain on sale$206,000, operating lease expense net of propertyaccretion of $385,000,$450,000, an increase in accounts receivable of $1,073,000, a decrease$3,321,000, an increase in prepaid expenses of $523,000, an increase in inventory of $1,530,000, a decrease in prepaid expenses and other current assets of $254,000 and a decrease$677,000, an increase in accounts payable and accrued liabilities of $440,000.$9,347,000 and a decrease in lease liabilities of $443,000.
Alpha Pro Tech, Ltd.
Accounts receivable increased by $1,073,000,$3,321,000, or 22.3%77.4%, to $5,895,000$7,613,000 as of SeptemberJune 30, 20172020, from $4,822,000$4,292,000 as of December 31, 2016.2019. The increase in accounts receivable was primarily related to increased revenue in the third quarter of 2017 compared to the fourth quarter of 2016.sales. The number of days that sales remained outstanding as of SeptemberJune 30, 2017,2020, calculated by using an average of accounts receivable outstanding and annual revenue, was 4228 days, compared to 3034 days as of December 31, 2016.2019.
Inventory decreasedincreased by $1,530,000,$677,000, or 13.9%6.0%, to $9,464,000$11,980,000 as of SeptemberJune 30, 20172020, from $10,994,000$11,303,000 as of December 31, 2016.2019. The decreaseincrease was primarily due to a decreasean increase in inventory for the Disposable Protective Apparel segment of $1,014,000,$1,385,000, or 27.1%24.7%, to $2,722,000,$6,993,000, partially offset by a decrease in inventory for the Building Supply segment of $474,000,$708,000, or 9.7%12.4%, to $4,435,000, and a decrease in inventory for the Infection Control segment of $42,000, or 1.8%, to $2,307,000.$4,987,000.
Prepaid expenses and other current assets decreasedincreased by $254,000,$523,000, or 7.6%14.6%, to $3,092,000$4,110,000 as of SeptemberJune 30, 20172020, from $3,346,000$3,587,000 as of December 31, 2016.2019. The decreaseincrease was primarily due to prepayments for machinery and equipment.
Right-of-use assets as of June 30, 2020 decreased by $450,000 to $2,728,000 from $3,178,000 as of December 31, 2019, as a result of amortization of the balance.
Lease liabilities as of June 30, 2020 decreased by $443,000 to $2,776,000 from $3,219,000 as of December 31, 2019. The recording of the lease liabilities was the result of adopting ASC 842, Leases. The decrease in deposits for the purchaselease liabilities was the result of inventory.lease payments made during the quarter.
Alpha Pro Tech, Ltd.
Accounts payable and accrued liabilities as of SeptemberJune 30, 2017 decreased2020 increased by $440,000,$2,872,000, or 17.8%202.1%, to $2,025,000,$4,293,000, from $2,465,000$1,421,000 as of December 31, 2016.2019. The changeincrease was primarily due to an increase in accounts payable as a decreaseresult of increased raw material purchases, and an increased in accrued liabilities as of $483,000 and an increase in trade payablesaccrued bonuses.
Customer advance payment of $43,000.orders as of June 30, 2020 was $6,475,000, which was the result of customer deposits for future-dated PPE orders in response to the COVID-19 pandemic. There were no advance payments of this nature as of December 31, 2019.
Net cash used in investing activities was $386,000$372,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net cash used in investing activities of $253,000$121,000 for the same period of 2016. Our investing2019. Investing activities for the ninesix months ended SeptemberJune 30, 20172020 consisted of the purchase of property and equipment of $923,000$419,000, primarily for the Building Supply segment, and proceeds of $537,000 from the sale of property. Our investingmarketable securities of $47,000. Investing activities for the ninesix months ended SeptemberJune 30, 20162019 consisted of the purchase of property and equipment of $212,000$254,000 and proceeds from the purchasesale of marketable securities of $41,000.$133,000.
Net cash used inprovided by financing activities was $2,776,000$1,810,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to net cash used in financing activities of $3,672,000$1,577,000 for the same period of 2016. The net2019. Net cash provided by financing activities for the six months ended June 30, 2020 resulted from proceeds of $1,935,000 from the exercise of stock options, partially offset by the payment of $125,000 for the repurchase of common stock. Net cash used in financing activities for the ninesix months ended SeptemberJune 30, 2017 was due to2019 resulted from the payment of $2,901,000$1,636,000 for the repurchase of shares of our common stock, partially offset by proceeds of $59,000 from the exercise of stock options of $125,000. The net cash used in financing activities for the nine months ended September 30, 2016 was due to the payment of $3,689,000 for the repurchase of shares of our common stock, offset by proceeds from exercise of stock options of $17,000.options.
As of SeptemberJune 30, 2017,2020, we had $1,604,000$2,027,000 available for additional stock purchases under our stock repurchase program. DuringFor the ninesix months ended SeptemberJune 30, 2017,2020, we repurchased 898,24235,100 shares of common stock at a cost of $2,901,000.$125,000. As of SeptemberJune 30, 2017,2020, we had repurchased a total of 15,869,77317,922,917 shares of common stock at a cost of $27,916,000$35,493,000 through our repurchase program. We retire all stock upon its repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.
We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.
Recent Accounting Pronouncements
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“In February 2016, the FASB issued ASU 2014-09”) is a comprehensive new revenue2016-02, Leases, which introduces the recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration that it expects to receive in exchangelease assets and lease liabilities by lessees for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09leases classified as operating leases under previous guidance. The update is effective for the first interim period within an annual reporting periodperiods beginning after December 15, 2017, and2018, including interim periods within those reporting periods, with early adoption is not permitted. The Company will adoptoriginal guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2014-09 during2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the first quartereffective date of 2018. ManagementASC 842, Leases, as the date of initial application of transition. Based on the effective date, we adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet with the recognition of new right-of-use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than one year. Upon adoption, both assets and liabilities on our consolidated balance sheet increased by approximately $3,455,000. We have elected a package of transition practical expedients, which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the ROU assets. See also Note 13 of the Notes to Consolidated Financial Statements (Unaudited), which appear elsewhere in this report, for more information.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is evaluatingeffective for public entities for the provisionsannual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. Adoption of this update and at this point in time has determined that its adoption willthe new standard did not have limited to noa material impact on the Company’sour condensed consolidated financial position or results of operations.statements.
Alpha Pro Tech, Ltd.
In November 2015,June 2018, the FASB issued ASU 2015-17, Income Taxes2018-07, Compensation - Stock Compensation (Topic 740): Balance Sheet Classification718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of Deferred Taxes, which requires deferred income tax liabilities and assetsshare-based compensation issued to be classified as noncurrent onnon-employees by making the balance sheet rather than being separated into current and noncurrent. The guidance was effectiveconsistent with accounting for public entities for annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption being permitted. The Company adopted this guidance in the first quarter of 2017. The Company netted $410,000 in deferred tax assets netted against deferred tax liabilities as of the end of the first quarter of 2017. Prior periods were not retrospectively adjusted.
In January 2016, the FASB issuedemployee share-based compensation. ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation and disclosure of financial instruments. The new guidance revises the accounting requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The guidance also changes certain disclosure requirements associated with the fair value of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity and recognize the changes in fair value within net income. The guidance2018-07 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company has not yet adopted this guidance and has not yet determined the impact of adoption on the Company’s financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018 and interim periods within those years,annual periods, with early adoptions permitted but no earlier than an entity’s adoption permitted. Managementdate of ASC Topic 606. The new guidance is evaluatingrequired to be applied retrospectively with the requirementscumulative effect recognized at the date of initial application. We adopted the provisions of this guidance and has not yet determinedASU in the impactfirst quarter of 2019. Adoption of the adoptionnew standard did not have a material impact on the Company’sour condensed consolidated financial position or results of operations.statements.
In March 2016,December 2019, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718)No. 2019-12, “Income Taxes (Topic 740): Improvements to Employee Share-Based Payment Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies severalis intended to simplify various aspects ofrelated to accounting for share-based payment transactions, includingincome taxes. ASU 2019-12 removes certain exceptions to the income tax consequences, classification of awards as either equity or liabilities, an optiongeneral principles in Topic 740 and also clarifies and amends existing guidance to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The provisions of thisimprove consistent application. This guidance wereis effective for annual reporting periods beginning after December 15, 2016fiscal years, and interim periods within those annual periods,fiscal years, beginning after December 15, 2020, with early adoption permitted. TheThe Company adopted this guidance duringis currently evaluating the quarter ended March 31, 2017, and the Company recorded a one-time $866,000 cumulative-effect adjustment to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital. The adoptionimpact of this guidance also increased the number of dilutive shares because excess tax benefits are no longer included in the assumed proceeds when calculating the number of dilutive shares. In addition, the effective tax rate will be reduced in future periods when there are excess tax benefits from stock options exercised.standard on its consolidated financial statements and related disclosures.
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion.discussion at this time.
ITEM 3. QUANTITATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information otherwise required by this Item.
ITEMITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our President and Chairman and our Chief Executive Officer (principal executive officers)officer) and our Chief Financial Officer (principal financial officer), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of SeptemberJune 30, 2017,2020, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Disclosure controls and procedures are the controls and other procedures that we have designed to ensure that we record, process, summarize and report in a timely manner the information that we must disclose in reports that we file with or submit to the SEC under the Exchange Act. Act, and such controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
Alpha Pro Tech, Ltd.
In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and that we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation, our principal executive officers officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
During the quarter to which this report relates, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Alpha Pro Tech, Ltd.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 2019 Form 10-K. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 2019 Form 10-K, other than as described in the risk factor below.
The Companyeffects of the COVID-19 pandemic could have a material adverse effect on our business, financial results and results of operations.
In December 2019, COVID-19 surfaced in Wuhan, China, and over the course of the first quarter of 2020, the World Health Organization escalated its assessment of the COVID-19 threat, finally characterizing it as a pandemic on March 11, 2020. The situation relating to the COVID-19 pandemic is presently involved in protracted litigation againstcomplex and still evolving, with a competitorbroad number of governmental and commercial efforts to contain the spread of the virus globally. The duration and extent of the impact of the COVID-19 pandemic on our business, operations and financial results depends on factors that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees, customers, industry partners, suppliers and third-party dealers and distributors.
Federal, state and local governments, as well as foreign governments, have imposed numerous protocols and regulations in an action styled effort to limit the spread of the COVID-19. We have implemented a number of measures in an effort to protect our employees’ health and well-being, including having certain office workers work remotely and suspending employee travel. The potential negative effects to our operations, including reductions in production levels, research and development activities and increased costs resulting from our efforts to mitigate the impact of COVID-19, may adversely affect our ability to provide our products. Conversely, the implications of unsuccessfully implementing health and well-being measures, which could, for example, result in workers at our manufacturing facilities testing positive for COVID-19, would also adversely affect our business, including resulting in a product recall. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time.
Although we have experienced increased sales and significantly increased demand for our PPE products, the global COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities. Disruptions relating to the COVID-19 pandemic, including shelter-in-place orders in the U.S., Mexico, India and other countries, have prevented and could continue to prevent employees, suppliers, distributors and others from accessing manufacturing facilities and from transporting our products or the components required to manufacture our products. For example, the government-mandated closure in India, which started in late March and ended in May 2020, impacted our order fulfillment and revenue growth related to our disposable protective garments. Any government regulation may also impact our ability to supply and ship our products to certain customers, which could lead to cancellation of some orders. Further, worldwide supply chain disruption relating to the COVID-19 pandemic has resulted in product shortages that have impacted and may continue to impact our ability to manufacture our products. We currently utilize third parties to, among other things, manufacture certain components and materials for our products, and to provide services such as sterilization services, and we purchase these materials and services from numerous suppliers worldwide. If either we or any third parties in the supply chain for materials used in the production of our products are adversely impacted by the COVID-19 pandemic, including the restrictions resulting from the COVID-19 pandemic, our supply chain may continue to be disrupted, limiting our ability to manufacture our products. These disruptions may, among other things, impact our ability to produce and supply products in quantities necessary to meet market demand.
Alpha Pro Tech, Inc. v. VWR International, LLC, pendingLtd.
Further, in connection with the COVID-19 pandemic and in an effort to increase the wider availability of needed medical and other supplies and products, we may elect to, or governments may require us to, allocate our products (for example, pursuant to the U.S. Defense Production Act (the “DPA”)) in a way that adversely affects our regular operations and financial results, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. Likewise, suppliers of our raw materials who are subject to requests under the DPA may be unable to fulfill our orders for those raw materials, or such fulfillment could be delayed. In addition, unpredictable increases in demand for certain of our products could, or in some cases may continue to, exceed our capacity to meet such demand, which could adversely affect our financial results and customer relationships and result in negative publicity.
As a result of the COVID-19 pandemic, we have experienced a significant increase in orders of our PPE products from both legacy and new customers. Because of the uncertainty associated with the pandemic, we may experience a decrease in sales from certain of these customers at the point at which conditions related to the virus change or improve and demand for these products subsides, which could impact our expectations of future orders and sales.
COVID-19 has resulted in a downturn in the U.S. District Court for the Eastern District of Pennsylvania, CV 12-1615, wherein the Company originally sought damages for unfair trade practicesglobal financial markets and false advertising against the competitor, and the competitor has counterclaimed asserting similar claims against the Company. In August of 2017, the court ruled against the Company on its claims against the competitor, and the competitor is presently seeking attorneys’ fees and costs as the prevailing party with respect to those claims. The Company isa slowdown in the processglobal economy, which has, in turn, negatively impacted interest rates and foreign currency exchange rates. This economic environment may impact some of evaluating,our customers’ ability to pay or lead them to request extended payment terms, and we have experienced and may continue to experience cost increases from some of our suppliers. Additionally, decreased housing starts and increased uncertainty in the housing market could negatively impact demand for our Building Supply segment products.
Moreover, the impacts of the COVID-19 pandemic may exacerbate other pre-existing risks, such as political, regulatory, social, financial, operational and cybersecurity risks, and those associated with current litigation counsel, the remaining counterclaims against the Company and the claim for attorneys’ fees and costs and intends to vigorously defend against these claims. Although the Company believes that it will prevail in its defenseglobal economic conditions, any of these claims, anywhich could have a material loss amount that might be incurred cannot reasonably be estimated at this time.adverse effect on our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,,” as defined in Rule 10b-18(a)(3) of the Exchange Act:
Issuer Purchases of Equity Securities | ||||||||||||||||
Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) | ||||||||||||
July 1 - 31, 2017 | 167,000 | $ | 3.33 | 167,000 | $ | 2,321,000 | ||||||||||
August 1 - 31, 2017 | 135,200 | 3.46 | 135,200 | 1,850,000 | ||||||||||||
September 1 - 30, 2017 | 70,742 | 3.45 | 70,742 | 1,604,000 | ||||||||||||
| 372,942 | 3.40 | 372,942 | ||||||||||||||
Issuer Purchases of Equity Securities | ||||||||||||||||
Period | Total Number of | Weighted Average | Total Number of | Approximate Dollar Value | ||||||||||||
April 1 - 30, 2020 | - | - | - | $ | 2,027,000 | |||||||||||
May 1 - 31, 2020 | - | - | - | 2,027,000 | ||||||||||||
June 1 - 30, 2020 | - | - | - | 2,027,000 | ||||||||||||
| - | - | |||||||||||||||
(1) On June 22, 2017,Pursuant to the Company’s share repurchase program, on December 11, 2019, the Company announced that the Board of Directors had authorized a $2,000,000 expansion of the Company’s existing share repurchase program. We did not repurchase any shares during the period covered by this report.
SECURITIES SOLD
We did not sell unregistered equity securities during the period covered by this report.
Alpha Pro Tech, Ltd.
ITEM 6. EXHIBITS
| |||
3.1.1(P) | Certificate of Incorporation of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(f) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893). | ||
| Certificate of Amendment of Certificate of Incorporation of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(j) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893). | ||
| Certificate of Ownership and Merger (BFD Industries, Inc. into Alpha Pro Tech, Ltd.), incorporated by reference to Exhibit 3(l) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893). | ||
| Bylaws of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(g) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893). | ||
10.1 | |||
31.1 | |||
| |||
| |||
32.1 | |||
32.2 | |||
| |||
101 | Interactive Data Files for Alpha Pro Tech, | ||
(P) Indicates a paper filing with the SEC.
Alpha Pro Tech, Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| ||||||
|
|
|
| |||||
DATE: | August 6, 2020 | BY: |
|
| ||||
| ||||||||
| Lloyd Hoffman |
| ||||||
| President and Chief Executive Officer | ||||||||
| DATE: | August 6, 2020 | BY: | /s/ Colleen McDonald | |||
| ||||||
| Chief Financial Officer |
24