UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
FORM 10-Q
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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, 20182019
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. 01-1572501-15725
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 | L3R 9R2 |
Markham, Ontario, Canada |
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(Address of |
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Registrant’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 every Interactive Data File required to be submitted 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 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___ Accelerated filer ___ Non-accelerated filer __ Smaller reporting company X
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☒ |
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’s classes of common stock, as of the latest practicable date.
| Class | Outstanding | |
| Common Stock, $0.01 par value |
Alpha Pro Tech, Ltd.
Index
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PART I. FINANCIAL INFORMATION | |
ITEM 1. Financial Statements |
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Condensed Consolidated Balance Sheets (Unaudited) | 1 |
Condensed Consolidated Statements of Income (Unaudited) | 2 |
Condensed Consolidated Statements of |
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Condensed Consolidated Statements of Cash Flows (Unaudited) |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk |
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ITEM 4. Controls and Procedures |
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PART II. OTHER INFORMATION | |
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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ITEM 6. Exhibits |
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SIGNATURES |
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EXHIBITS |
Alpha Pro Tech, Ltd.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (Unaudited)
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2018 | 2017 (1) | 2019 | 2018 (1) | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 6,823,000 | $ | 8,763,000 | $ | 5,502,000 | $ | 7,007,000 | ||||||||
Investments | 289,000 | 343,000 | 735,000 | 258,000 | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $70,000 and $83,000 as of September 30, 2018 and December 31, 2017 | 5,763,000 | 4,597,000 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $58,000 and $64,000 as of June 30, 2019 and December 31, 2018 | 5,185,000 | 4,935,000 | ||||||||||||||
Accounts receivable, related party | 495,000 | 361,000 | 837,000 | 383,000 | ||||||||||||
Inventories | 9,352,000 | 10,249,000 | 10,869,000 | 9,878,000 | ||||||||||||
Right-of-use assets | 675,000 | - | ||||||||||||||
Prepaid expenses | 3,499,000 | 2,665,000 | 3,410,000 | 3,999,000 | ||||||||||||
Total current assets | 26,221,000 | 26,978,000 | 27,213,000 | 26,460,000 | ||||||||||||
Property and equipment, net | 3,158,000 | 3,158,000 | 3,232,000 | 3,244,000 | ||||||||||||
Goodwill | 55,000 | 55,000 | 55,000 | 55,000 | ||||||||||||
Definite-lived intangible assets, net | 17,000 | 21,000 | 14,000 | 16,000 | ||||||||||||
Deferred income tax assets | 19,000 | 19,000 | ||||||||||||||
Right-of-use assets, net of current portion | 2,414,000 | - | ||||||||||||||
Equity investment in unconsolidated affiliate | 4,286,000 | 3,893,000 | 4,841,000 | 4,480,000 | ||||||||||||
Total assets | $ | 33,756,000 | $ | 34,124,000 | $ | 37,769,000 | $ | 34,255,000 | ||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 646,000 | $ | 1,236,000 | $ | 696,000 | $ | 578,000 | ||||||||
Accrued liabilities | 1,072,000 | 1,565,000 | 699,000 | 1,342,000 | ||||||||||||
Lease liabilities | 666,000 | - | ||||||||||||||
Total current liabilities | 1,718,000 | 2,801,000 | 2,061,000 | 1,920,000 | ||||||||||||
Lease liabilities, net of current portion | 2,462,000 | - | ||||||||||||||
Deferred income tax liabilities, net | 141,000 | 141,000 | ||||||||||||||
Total liabilities | 4,664,000 | 2,061,000 | ||||||||||||||
Commitments | ||||||||||||||||
Shareholders' equity: | ||||||||||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 13,629,583 and 14,290,749 shares outstanding as of September 30, 2018 and December 31, 2017, respectively | 136,000 | 143,000 | ||||||||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 13,109,018 and 13,502,684 shares outstanding as of June 30, 2019 and December 31, 2018, respectively | 131,000 | 135,000 | ||||||||||||||
Additional paid-in capital | 3,130,000 | 5,415,000 | 1,356,000 | 2,669,000 | ||||||||||||
Accumulated other comprehensive loss | - | (458,000 | ) | |||||||||||||
Retained earnings | 28,772,000 | 26,223,000 | 31,618,000 | 29,390,000 | ||||||||||||
Total shareholders' equity | 32,038,000 | 31,323,000 | 33,105,000 | 32,194,000 | ||||||||||||
Total liabilities and shareholders' equity | $ | 33,756,000 | $ | 34,124,000 | $ | 37,769,000 | $ | 34,255,000 | ||||||||
(1) The condensed consolidated balance sheet as of December 31, 20172018 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 | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net sales | $ | 12,104,000 | $ | 12,049,000 | $ | 35,655,000 | $ | 34,082,000 | $ | 11,415,000 | $ | 12,109,000 | $ | 23,718,000 | $ | 23,551,000 | ||||||||||||||||
Cost of goods sold, excluding depreciation and amortization | 7,519,000 | 7,337,000 | 21,896,000 | 20,589,000 | 7,309,000 | 7,390,000 | 14,809,000 | 14,377,000 | ||||||||||||||||||||||||
Gross profit | 4,585,000 | 4,712,000 | 13,759,000 | 13,493,000 | 4,106,000 | 4,719,000 | 8,909,000 | 9,174,000 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Selling, general and administrative | 2,676,000 | 3,450,000 | 10,024,000 | 10,269,000 | 3,262,000 | 3,468,000 | 6,937,000 | 7,349,000 | ||||||||||||||||||||||||
Depreciation and amortization | 140,000 | 147,000 | 430,000 | 426,000 | 140,000 | 144,000 | 267,000 | 290,000 | ||||||||||||||||||||||||
Total operating expenses | 2,816,000 | 3,597,000 | 10,454,000 | 10,695,000 | 3,402,000 | 3,612,000 | 7,204,000 | 7,639,000 | ||||||||||||||||||||||||
Income from operations | 1,769,000 | 1,115,000 | 3,305,000 | 2,798,000 | 704,000 | 1,107,000 | 1,705,000 | 1,535,000 | ||||||||||||||||||||||||
Other income: | ||||||||||||||||||||||||||||||||
Equity in income of unconsolidated affiliate | 103,000 | 105,000 | 393,000 | 339,000 | 84,000 | 151,000 | 361,000 | 290,000 | ||||||||||||||||||||||||
Gain on sale of property | - | 385,000 | - | 385,000 | ||||||||||||||||||||||||||||
Realized gain on sales of marketable securities | 3,000 | - | 3,000 | - | ||||||||||||||||||||||||||||
Unrealized gain (loss) on marketable securities | 22,000 | - | (43,000 | ) | - | |||||||||||||||||||||||||||
Gain (loss) on marketable securities | 439,000 | (97,000 | ) | 609,000 | (65,000 | ) | ||||||||||||||||||||||||||
Interest income, net | 1,000 | 1,000 | 2,000 | 3,000 | 21,000 | 1,000 | 34,000 | 1,000 | ||||||||||||||||||||||||
Total other income | 129,000 | 491,000 | 355,000 | 727,000 | 544,000 | 55,000 | 1,004,000 | 226,000 | ||||||||||||||||||||||||
Income before provision for income taxes | 1,898,000 | 1,606,000 | 3,660,000 | 3,525,000 | 1,248,000 | 1,162,000 | 2,709,000 | 1,761,000 | ||||||||||||||||||||||||
Provision for income taxes | 359,000 | 503,000 | 653,000 | 1,068,000 | 238,000 | 203,000 | 481,000 | 294,000 | ||||||||||||||||||||||||
Net income | $ | 1,539,000 | $ | 1,103,000 | $ | 3,007,000 | $ | 2,457,000 | $ | 1,010,000 | $ | 959,000 | $ | 2,228,000 | $ | 1,467,000 | ||||||||||||||||
Basic earnings per common share | $ | 0.11 | $ | 0.07 | $ | 0.21 | $ | 0.16 | $ | 0.08 | $ | 0.07 | $ | 0.17 | $ | 0.10 | ||||||||||||||||
Diluted earnings per common share | $ | 0.11 | $ | 0.07 | $ | 0.21 | $ | 0.16 | $ | 0.08 | $ | 0.07 | $ | 0.17 | $ | 0.10 | ||||||||||||||||
Basic weighted average common shares outstanding | 13,795,007 | 14,732,173 | 14,031,518 | 14,962,606 | 13,184,321 | 14,086,277 | 13,287,583 | 14,151,734 | ||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 13,853,619 | 14,933,426 | 14,076,033 | 15,075,940 | 13,208,138 | 14,127,934 | 13,346,146 | 14,219,063 | ||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 1,539,000 | $ | 1,103,000 | $ | 3,007,000 | $ | 2,457,000 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Change in unrealized loss on marketable securities, net of tax | - | (208,000 | ) | - | (243,000 | ) | ||||||||||
Comprehensive income | $ | 1,539,000 | $ | 895,000 | $ | 3,007,000 | $ | 2,214,000 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Alpha Pro Tech, Ltd.
Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)
For the |
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 | |||||||||||||||
Common stock repurchased and retired | (427,000 | ) | (4,000 | ) | (1,632,000 | ) | - | (1,636,000 | ) | |||||||||||||||
Stock-based compensation expense | - | - | 260,000 | - | 260,000 | |||||||||||||||||||
Options exercised | 33,334 | - | 59,000 | - | 59,000 | |||||||||||||||||||
Net income | - | - | - | 2,228,000 | 2,228,000 | |||||||||||||||||||
Balance as of June 30, 2019 | 13,109,018 | $ | 131,000 | $ | 1,356,000 | $ | 31,618,000 | $ | 33,105,000 | |||||||||||||||
For the Six Months Ended June 30, 2018 |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | Common Stock | Paid-in | Comprehensive | Retained | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Total | Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 | 14,290,749 | $ | 143,000 | $ | 5,415,000 | $ | (458,000 | ) | $ | 26,223,000 | $ | 31,323,000 | 14,290,749 | $ | 143,000 | $ | 5,415,000 | $ | (458,000 | ) | $ | 26,223,000 | $ | 31,323,000 | ||||||||||||||||||||||||
Common stock repurchased and retired | (793,000 | ) | (8,000 | ) | (2,820,000 | ) | - | - | (2,828,000 | ) | (453,000 | ) | (5,000 | ) | (1,612,000 | ) | - | - | (1,617,000 | ) | ||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 312,000 | - | - | 312,000 | - | - | 196,000 | - | - | 196,000 | ||||||||||||||||||||||||||||||||||||
Options exercised | 131,834 | 1,000 | 223,000 | - | - | 224,000 | 71,667 | 1,000 | 119,000 | - | - | 120,000 | ||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 3,007,000 | 3,007,000 | - | - | - | - | 1,467,000 | 1,467,000 | ||||||||||||||||||||||||||||||||||||
Cumulative-effect adjustment of change in accounting for unrealized loss on marketable securities | - | - | - | 458,000 | (458,000 | ) | - | - | - | - | 458,000 | (458,000 | ) | - | ||||||||||||||||||||||||||||||||||
Balance as of September 30, 2018 | 13,629,583 | $ | 136,000 | $ | 3,130,000 | $ | - | $ | 28,772,000 | $ | 32,038,000 | |||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2018 | 13,909,416 | $ | 139,000 | $ | 4,118,000 | $ | - | $ | 27,232,000 | $ | 31,489,000 | |||||||||||||||||||||||||||||||||||||
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, | For the Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash Flows From Operating Activities: | ||||||||||||||||
Net income | $ | 3,007,000 | $ | 2,457,000 | $ | 2,228,000 | $ | 1,467,000 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Stock-based compensation | 312,000 | 244,000 | 260,000 | 196,000 | ||||||||||||
Depreciation and amortization | 430,000 | 426,000 | 267,000 | 290,000 | ||||||||||||
Realized gain on sale of marketable securities | (3,000 | ) | - | |||||||||||||
Unrealized loss on marketable securities | 43,000 | - | ||||||||||||||
Gain (loss) on marketable securities | (609,000 | ) | 65,000 | |||||||||||||
Equity in income of unconsolidated affiliate | (393,000 | ) | (339,000 | ) | (361,000 | ) | (290,000 | ) | ||||||||
Gain on sale of property | - | (385,000 | ) | |||||||||||||
Operating lease expense, net of accretion | 366,000 | - | ||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (1,166,000 | ) | (797,000 | ) | (250,000 | ) | (241,000 | ) | ||||||||
Accounts receivable, related party | (134,000 | ) | (276,000 | ) | (454,000 | ) | (280,000 | ) | ||||||||
Inventories | 897,000 | 1,530,000 | (991,000 | ) | 558,000 | |||||||||||
Prepaid expenses | (834,000 | ) | 254,000 | 589,000 | (1,023,000 | ) | ||||||||||
Accounts payable and accrued liabilities | (1,086,000 | ) | (440,000 | ) | (525,000 | ) | (610,000 | ) | ||||||||
Lease liabilities | (327,000 | ) | - | |||||||||||||
Net cash provided by operating activities | 1,073,000 | 2,674,000 | 193,000 | 132,000 | ||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||
Purchase of property and equipment | (424,000 | ) | (923,000 | ) | (254,000 | ) | (240,000 | ) | ||||||||
Proceeds from sales of marketable securities | 15,000 | - | 133,000 | - | ||||||||||||
Proceeds from sale of property | - | 537,000 | ||||||||||||||
Net cash used in investing activities | (409,000 | ) | (386,000 | ) | (121,000 | ) | (240,000 | ) | ||||||||
Cash Flows From Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | 224,000 | 125,000 | 59,000 | 120,000 | ||||||||||||
Repurchase of common stock | (2,828,000 | ) | (2,901,000 | ) | (1,636,000 | ) | (1,617,000 | ) | ||||||||
Net cash used in financing activities | (2,604,000 | ) | (2,776,000 | ) | (1,577,000 | ) | (1,497,000 | ) | ||||||||
Decrease in cash | (1,940,000 | ) | (488,000 | ) | (1,505,000 | ) | (1,605,000 | ) | ||||||||
Cash, beginning of the period | 8,763,000 | 9,456,000 | 7,007,000 | 8,763,000 | ||||||||||||
Cash, end of the period | $ | 6,823,000 | $ | 8,836,000 | $ | 5,502,000 | $ | 7,158,000 | ||||||||
Supplemental disclosure of non-cash financing activities:
Upon adoption of ASC 842, Leases, on January 1, 2019 the Company recorded $3,455,000 of right-use assets and relating operating leases liabilities.
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.
Thecoats), 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 consistswas combined with the Disposable Protective Apparel segment during the first quarter of a line of face masks and eye shields.2019. The disclosures herein reflect this current segmentation.
The Company’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 US generally accepted accounting principles (“US GAAP”). The interim condensed consolidated financial statements should be read in conjunction with the Company’s current year SEC filings, on Form 8-K and Form 10-Q as well as the Company’s consolidated financial statements for the year ended December 31, 2017,2018, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2017“2018 Form 10-K”), which was filed with the SEC on March 12, 2018.6, 2019. The results of operations for the ninethree and six months ended SeptemberJune 30, 20182019 reported 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, 20172018 was prepared using information from the audited consolidated balance sheet contained in the 20172018 Form 10-K and10-K; however, it does not include all disclosures required by US GAAP for annual consolidated financial statements.
TheAs of January 1, 2018, the Company adopted the new accounting standard, Accounting Standards Update 2014-09,Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606) effective January 1, 2018 on a full retrospective basis. Adoption of this. This standard did not result in significant changes to our accounting policies, business processes, systems or controls, or have a material impact on our financial position, results of operations and cash flows or related disclosures. As such, prior period financial statements were not recast. The Company recognizes revenuewas retrospectively adopted for the transfer2017 year, and there was no cumulative effect adjustment upon adoption. Under ASC 606, net sales includes revenue from products and shipping and handling charges, net of promised goodsestimates for product returns and any related sales incentives. Revenue is measured as the amount of consideration that we expect to customers in an amount that reflects the consideration to which the Company expects to be entitledreceive in exchange for those goods.transferring products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring 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, at which time a receivable is created for the invoice sent to the customer. We recognize revenue for shipping and handling charges 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. Our contracts have a single performance obligation. 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 typically satisfies its performance obligations in contracts withmanufactures certain private label goods for customers upon shipment of the goods. Generally, payment is due from customers within a fixed number of days of the invoice date, and the contracts do not have significant financing components.
The Company has determined that control does not pass to the customer at the time of manufacture, for private label goods, based onupon the nature of the private labeling.
labelling. In connection with the adoption of ASC 606, the Company determined that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. See Notes 10 and 11 for information on revenue disaggregated by type and by geographic region.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. | Stock-Based Compensation |
The Company maintains a stock 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 records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options, over the determined requisite service period, which is generally ratably over the vesting term.
For the ninesix months ended SeptemberJune 30, 2019 and 2018, 310,000 and 2017, 349,750 and 25,000 respectively, of289,750 stock options were granted under the Company’s option plan.plan, respectively. The Company recognized $312,000$260,000 and $244,000$196,000 in stock-based compensation expense for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
The Company uses 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.
The following table summarizes stock option activity for the ninesix months ended SeptemberJune 30, 2018:2019:
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise Price | Exercise Price | |||||||||||||||
Options | Per Option | Options | Per Option | |||||||||||||
Options outstanding, December 31, 2017 | 884,998 | $ | 2.26 | |||||||||||||
Options outstanding, December 31, 2018 | 1,022,913 | $ | 2.69 | |||||||||||||
Granted to employees and non-employee directors | 349,750 | 3.27 | 310,000 | 3.62 | ||||||||||||
Exercised | (131,834 | ) | 1.70 | (33,334 | ) | 1.80 | ||||||||||
Canceled/expired/forfeited | - | 0.00 | - | 0.00 | ||||||||||||
Options outstanding, September 30, 2018 | 1,102,914 | 2.65 | ||||||||||||||
Options exercisable, September 30, 2018 | 415,169 | 2.13 | ||||||||||||||
Options outstanding, June 30, 2019 | 1,299,579 | 2.93 | ||||||||||||||
Options exercisable, June 30, 2019 | 664,746 | 2.39 | ||||||||||||||
As of SeptemberJune 30, 2018, $793,0002019, $723,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of 1.302.25 years.
|
|
As of September 30, 2018 and December 31, 2017, investments totaled $289,000 and $343,000, respectively, which consisted of equity securities.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following provides information regarding the Company’s marketable securities as
4. | Investments |
As of SeptemberJune 30, 20182019 and December 31, 2017:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Cost basis | $ | 535,000 | $ | 543,000 | ||||
Gains previously recognized on warrants | 380,000 | 380,000 | ||||||
Loss included in accumulated other comprehensive loss or reclassified to retained earnings on Jaunuary 1, 2018 | (580,000 | ) | (580,000 | ) | ||||
Unrealized loss recognized in earnings since January 1, 2018 | (43,000 | ) | - | |||||
| Other adjustments | (3,000 | ) | - | |||||
Fair value | $ | 289,000 | $ | 343,000 | ||||
2018, investments totaled $735,000 and $258,000, respectively, which consisted of equity securities. Certain marketable securities were sold during the ninethree months ended SeptemberJune 30, 2019, and none were sold during the three months ended June 30, 2018. NoThe total gain on marketable securities during the three months ended June 30, 2019 was $439,000, and the unrealized loss on marketable securities during the three months ended June 30, 2018 was $97,000. The gain for the three months ended June 30, 2019 was due to an unrealized gain of $387,000 and a realized gain of $52,000. Certain marketable securities were sold during the yearsix months ended December 31, 2017. Realized gains recognized fromJune 30, 2019 and none were sold during the sale ofsix months ended June 30, 2018. The total gain on marketable securities during the ninesix months ended SeptemberJune 30, 2019 was $609,000 and the unrealized loss on marketable securities during the six months ended June 30, 2018 were $3,000, which realized gains are reported inwas $65,000. The gain for the Condensed Consolidated Statements of Income (Unaudited) for that period. Thesix months ended June 30, 2019 was due to an unrealized gain of $22,000 since July 1, 2018 is recognized in the statement$554,000 and a realized gain of income for the three months ended September 30, 2018. The unrealized loss of $208,000 in the statement of comprehensive income is presented net of tax for the three months ended September 30, 2017. The tax benefit on the unrealized loss was $105,000 for the three months ended September 30, 2017. The unrealized loss of $43,000 since January 1, 2018 is recognized in the Condensed Consolidated Statement of Income( Unaudited) for the nine months ended September 30, 2018. The unrealized loss of $243,000 in the statement of comprehensive income is presented net of tax for the nine months ended September 30, 2017. The tax benefit on the unrealized loss was $113,000 for the nine months ended September 30, 2017.$55,000.
5. | Recent Accounting Pronouncements |
Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) is a comprehensive new revenue 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 exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within an annual reporting period beginning after December 15, 2017, and early adoption is not permitted. The Company adopted ASU 2014-09 during the first quarter of 2018. Management evaluated the provisions of this update and has determined that its adoption did not have a significant impact on the Company’s financial position or results of operations.
In January 2016, the FASB issued 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 guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. As a result of adopting this guidance effective January 1, 2018, the Company recorded a cumulative-effect adjustment to reclassify the $458,000 accumulated other comprehensive loss balance to retained earnings, which balance was the result of unrealized losses on marketable securities. Effective January 1, 2018, unrealized gains and losses on marketable securities are recorded in the statement of income.
In February 2016, the FASB issued ASU 2016-02, Leases, (Topic 842), which requiresintroduces the recognition of lease assets and lease liabilities by lessees to recognize mostfor those leases on the balance sheet.classified as finance leases or operating leases under previous guidance. The provisions of this guidance are effective for annual periods beginning after December 15, 2018 and interim periods within those years, with early adoption permitted. Managementupdate is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option 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 this guidance were effective for annual reporting periods beginning after December 15, 2016 and2018, including interim periods within those annualreporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, the Company adopted this guidance duringASU beginning on January 1, 2019 and elected the quarter ended March 31, 2017,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. The Company 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. The Company recordedalso elected a one-time $866,000 cumulative-effect adjustmentpractical expedient to reduce additional paid-in capitalnot separate lease and increase retained earningsnon-lease components. The Company did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the Right-of-Use (“ROU”) assets. See Note 13. Leases for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital. The adoption 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.more information.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments. 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 effective for public entities for the annual 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. Management is currently evaluating the requirements of this guidance and has not yet determined the impact on the adoption of the Company’s financial position or results from operations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. The Company adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time.
6. | Inventories |
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, inventories consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Raw materials | $ | 4,493,000 | $ | 4,567,000 | $ | 4,754,000 | $ | 4,732,000 | ||||||||
Work in process | 792,000 | 1,058,000 | 1,818,000 | 825,000 | ||||||||||||
Finished goods | 4,067,000 | 4,624,000 | 4,297,000 | 4,321,000 | ||||||||||||
| $ | 9,352,000 | $ | 10,249,000 | $ | 10,869,000 | $ | 9,878,000 | |||||||||
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.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
The capital from the initial funding and a bank loan, which loan is guaranteed exclusively by the individual shareholders of Maple Industries and associates and collateralized by the assets of Harmony, were utilized to purchase the original manufacturing facility in India. Harmony currently has four facilities in India (three owned and one rented), consisting of: (1) a 113,000 square foot building for manufacturing building products; (2) a 73,000 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; and (4) a 93,000 square foot rentalfacility (rented) for manufacturing of Building Supply segment products. All additions have been financed by Harmony with no guarantees from the Company.
In accordance with Accounting Standards Codification (“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.
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, 2018 and2019 or December 31, 2017.
For the three months ended September 30, 2018 and 2017, Alpha Pro Tech purchased $4,535,000 and $3,258,000 of inventories, respectively, from Harmony. For the nine months ended September 30, 2018 and 2017, Alpha Pro Tech purchased $12,036,000 and $11,097,000 of inventories, respectively, from Harmony.
For the three months ended September 30, 2018 and 2017, the Company recorded equity in income of unconsolidated affiliate of $103,000 and $105,000, respectively, related to Harmony. For the nine months ended September 30, 2018 and 2017, the Company recorded equity in income of unconsolidated affiliate of $393,000 and $339,000, respectively, related to Harmony.
As of September 30, 2018, the Company’s investment in Harmony was $4,286,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $3,855,000, less $942,000 in repayments of the advance and $77,000 in dividends.2018.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the three months ended June 30, 2019 and 2018, Alpha Pro Tech purchased $5,176,000 and $3,526,000 of inventories, respectively, from Harmony. For the six months ended June 30, 2019 and 2018, Alpha Pro Tech purchased $10,451,000 and $7,500,000 of inventories, respectively, from Harmony.
For the three months ended June 30, 2019 and 2018, the Company recorded equity in income of unconsolidated affiliate of $84,000 and $151,000, respectively, related to Harmony. For the six months ended June 30, 2019 and 2018, the Company recorded equity in income of unconsolidated affiliate of $361,000 and $290,000, respectively, related to Harmony.
As of June 30, 2019, the Company’s investment in Harmony was $4,841,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $4,410,000, less $942,000 in repayments of the advance and $77,000 in dividends.
8. | Accrued Liabilities |
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, accrued liabilities consisted of the following:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Payroll expenses and tax payable | $ | 114,000 | $ | 232,000 | ||||
Commission and bonuses payable and general accrued liabilities | 958,000 | 1,333,000 | ||||||
| $ | 1,072,000 | $ | 1,565,000 | |||||
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Payroll expenses and taxes payable | $ | 247,000 | $ | 269,000 | ||||
Commissions and bonuses payable and general accrued liabilities | 452,000 | 1,073,000 | ||||||
| $ | 699,000 | $ | 1,342,000 | |||||
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, 20182019 and 2017.2018:
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, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2018 | 2018 | |||||||||||||||||||||||||
Net income (numerator) | $ | 1,539,000 | $ | 1,103,000 | $ | 3,007,000 | $ | 2,457,000 | $ | 1,010,000 | $ | 959,000 | $ | 2,228,000 | $ | 1,467,000 | ||||||||||||||||
Shares (denominator): | ||||||||||||||||||||||||||||||||
Basic weighted average common shares outstanding | 13,795,007 | 14,732,173 | 14,031,518 | 14,962,606 | 13,184,321 | 14,086,277 | 13,287,583 | 14,151,734 | ||||||||||||||||||||||||
Add: dilutive effect of common stock options | 58,612 | 201,253 | 44,515 | 113,334 | 23,817 | 41,657 | 58,563 | 67,329 | ||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 13,853,619 | 14,933,426 | 14,076,033 | 15,075,940 | 13,208,138 | 14,127,934 | 13,346,146 | 14,219,063 | ||||||||||||||||||||||||
Earnings per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.11 | $ | 0.07 | $ | 0.21 | $ | 0.16 | $ | 0.08 | $ | 0.07 | $ | 0.17 | $ | 0.10 | ||||||||||||||||
Diluted | $ | 0.11 | $ | 0.07 | $ | 0.21 | $ | 0.16 | $ | 0.08 | $ | 0.07 | $ | 0.17 | $ | 0.10 | ||||||||||||||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
10. | 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.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 20182019 and 2017:2018:
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, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Building Supply | $ | 6,979,000 | $ | 7,076,000 | $ | 20,220,000 | $ | 19,298,000 | $ | 6,710,000 | $ | 6,572,000 | $ | 13,208,000 | $ | 13,241,000 | ||||||||||||||||
Disposable Protective Apparel | 3,922,000 | 3,845,000 | 11,542,000 | 10,914,000 | 4,705,000 | 5,537,000 | 10,510,000 | 10,310,000 | ||||||||||||||||||||||||
Infection Control | 1,203,000 | 1,128,000 | 3,893,000 | 3,870,000 | ||||||||||||||||||||||||||||
Consolidated net sales | $ | 12,104,000 | $ | 12,049,000 | $ | 35,655,000 | $ | 34,082,000 | $ | 11,415,000 | $ | 12,109,000 | $ | 23,718,000 | $ | 23,551,000 | ||||||||||||||||
The following table presents the reconciliation of consolidated segment income to consolidated net income for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017:2018:
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, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Building Supply | $ | 1,130,000 | $ | 1,339,000 | $ | 3,191,000 | $ | 3,471,000 | $ | 900,000 | $ | 1,067,000 | $ | 1,809,000 | $ | 2,061,000 | ||||||||||||||||
Disposable Protective Apparel | 809,000 | 764,000 | 1,990,000 | 1,977,000 | 878,000 | 1,284,000 | 2,301,000 | 2,308,000 | ||||||||||||||||||||||||
Infection Control | 385,000 | 396,000 | 1,512,000 | 1,405,000 | ||||||||||||||||||||||||||||
Total segment income | 2,324,000 | 2,499,000 | 6,693,000 | 6,853,000 | 1,778,000 | 2,351,000 | 4,110,000 | 4,369,000 | ||||||||||||||||||||||||
Unallocated corporate overhead expenses | 426,000 | 893,000 | 3,033,000 | 3,328,000 | 530,000 | 1,189,000 | 1,401,000 | 2,608,000 | ||||||||||||||||||||||||
Provision for income taxes | 359,000 | 503,000 | 653,000 | 1,068,000 | 238,000 | 203,000 | 481,000 | 294,000 | ||||||||||||||||||||||||
Consolidated net income | $ | 1,539,000 | $ | 1,103,000 | $ | 3,007,000 | $ | 2,457,000 | $ | 1,010,000 | $ | 959,000 | $ | 2,228,000 | $ | 1,467,000 | ||||||||||||||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents the consolidated net property and equipment, goodwill and definite-lived intangible assets (“consolidated assets”) by segment as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Building Supply | $ | 1,970,000 | $ | 2,098,000 | $ | 1,867,000 | $ | 1,908,000 | ||||||||
Disposable Protective Apparel | 305,000 | 336,000 | 387,000 | 400,000 | ||||||||||||
Infection Control | 11,000 | 13,000 | ||||||||||||||
Total segment assets | 2,286,000 | 2,447,000 | 2,254,000 | 2,308,000 | ||||||||||||
Unallocated corporate assets | 944,000 | 787,000 | 1,047,000 | 1,007,000 | ||||||||||||
Total consolidated assets | $ | 3,230,000 | $ | 3,234,000 | $ | 3,301,000 | $ | 3,315,000 | ||||||||
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
11. | Financial Information about Geographic Areas |
The following table summarizes the Company’s net sales by geographic region for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018:
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, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net sales by geographic region | ||||||||||||||||||||||||||||||||
United States | $ | 11,918,000 | $ | 11,739,000 | $ | 34,977,000 | $ | 33,469,000 | $ | 11,158,000 | $ | 11,861,000 | $ | 23,197,000 | $ | 23,059,000 | ||||||||||||||||
International | 186,000 | 310,000 | 678,000 | 613,000 | 257,000 | 248,000 | 521,000 | 492,000 | ||||||||||||||||||||||||
Consolidated net sales | $ | 12,104,000 | $ | 12,049,000 | $ | 35,655,000 | $ | 34,082,000 | $ | 11,415,000 | $ | 12,109,000 | $ | 23,718,000 | $ | 23,551,000 | ||||||||||||||||
Net sales by geographic region are based on the countries in which our customers are located. For the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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.
The following table summarizes the locations of the Company’s long-lived assets by geographic region as of SeptemberJune 30, 20182019 and December 31, 2017.2018:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Long-lived assets by geographic region | ||||||||||||||||
United States | $ | 2,554,000 | $ | 2,593,000 | $ | 2,474,000 | $ | 2,528,000 | ||||||||
International | 604,000 | 565,000 | 758,000 | 716,000 | ||||||||||||
Consolidated total long-lived assets | $ | 3,158,000 | $ | 3,158,000 | $ | 3,232,000 | $ | 3,244,000 | ||||||||
|
|
The Company previously used a law firm for certain legal matters whose majority member was a member of the Company’s Board of Directors until his resignation on March 31, 2017. For the nine months ended September 30, 2018 and 2017, the Company expensed $0 and $65,000, respectively, for legal services from this related party. As of September 30, 2018 and 2017, the Company’s outstanding balance to this related party was $0 and $0, respectively.
|
|
Legal Proceedings: The Company is subject to various pending and threatened litigation actions in the ordinary course of business. Although it is not possible to determine with certainty at this point in time what liability, if any, the Company will have as a result of such litigation, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on the Company’s financial condition and results of operations.
Alpha Pro Tech, Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
12. | Related Party Transactions |
As of June 30, 2019, the Company had no related party transactions, other than the Company’s transactions with its non-consolidated affiliate, Harmony. See Note 7.
13. | Leases |
The Company had operating leases for the Company’s corporate office and manufacturing facilities, which expire at various dates through 2024. The Company’s primary operating lease commitments at June 30, 2019 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, Canada.
As of June 30, 2019, the Company had operating lease right-of-use assets of $3,089,000 and operating lease liabilities of $3,128,000. As of June 30, 2019, we did not have any finance leases recorded on the Company’s condensed consolidated balance sheet. Operating lease expense was approximately $201,000 and $402,000 during the three and six months ended June 30, 2019, respectively.
The aggregate future minimum lease payments and reconciliation to lease liabilities as of June 30, 2019 are as follows:
June 30, | ||||
2019 | ||||
Remaining six months of 2019 | $ | 360,000 | ||
2020 | 797,000 | |||
2021 | 776,000 | |||
2022 | 670,000 | |||
2023 | 676,000 | |||
Thereafter | 135,000 | |||
Total future minimum lease payments | 3,414,000 | |||
Less imputed interest | (286,000 | ) | ||
Total Lease liabilities | $ | 3,128,000 | ||
As of June 30, 2019, the weighted average remaining lease term of the Company’s operating leases was 4.76 years. During the six months ended June 30, 2019, the weighted average discount rate with respect to these leases was 4.32%.
14. | Subsequent Events |
The Company has reviewed and evaluated whether subsequent events have occurred from the condensed consolidated balance sheet date of SeptemberJune 30, 20182019 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, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2019 (the “2018Form 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 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 based on these forward-looking statements are subject to risks and uncertainties.uncertainties, including the risks described in Part I, Item. These and many other factors could affect the Company’s future operating results andA, “Risk Factors, “in the 2018 Form 10-Kand 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.
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 website (http://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 US generally accepted accounting principles (“US 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. 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 critical accounting policies 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, and, effective January 1, 2018, unrealized gains and losses are reported as a component of net income in the statements of income. Prior to January 1, 2018, unrealized gains and losses were reported as other comprehensive income as a component of equity. 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.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.
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: The Company recognizesNet sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Revenue is measured as the transferamount of promised goodsconsideration that we expect to customers in an amount that reflects the consideration to which the Company expects to be entitledreceive in exchange for those goods.transferring products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring the promised products to the customer, with revenue being recognized at the point in time the customer obtains control of the products, which is generally when title passes to the customer upon delivery at which time a receivable is created for the invoice sent to the customer. We recognize revenue for shipping and handling charges 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. Our contracts have a single performance obligation. Sales taxes and value added taxes in domestic and foreign 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 typically satisfies its performance obligations in contracts withmanufactures certain private label goods for customers upon shipment of the goods. Generally, payment is due from customers within a fixed number of days of the invoice date, and the contracts do not have significant financing components.
The Company has determined that control does not pass to the customer at the time of manufacture, for private label goods, based onupon the nature of the private labeling.labelling. The Company has determined that it has no material contract assets, and has concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables.
See Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements (Unaudited), which appear elsewhere in this report, for information on revenue disaggregated by type and by geographic region.
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.
Alpha Pro Tech, Ltd.
Stock-Based Compensation: WeThe Company accounts for stock-based awards using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation. ASC 718 requires companies to record compensation expense for the fair value of stock-based awards determined on the date of grant,all outstanding and unvested share-based payments, including employee stock options over the determined requisite service period, which is generally ratably over the vesting term.and similar awards.
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’s expectations of future volatility, risk-free interest rates based on the U.S. Treasury yield curve in effect at the time of grant,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.
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, and 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.
Alpha Pro Tech, Ltd.
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 asclothing (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.
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 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.
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 Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Gross profit | 37.9 | % | 39.1 | % | 38.6 | % | 39.6 | % | 36.0 | % | 39.0 | % | 37.6 | % | 39.0 | % | ||||||||||||||||
Selling, general and administrative expenses | 22.1 | % | 28.6 | % | 28.1 | % | 30.1 | % | 28.6 | % | 28.6 | % | 29.2 | % | 31.2 | % | ||||||||||||||||
Income from operations | 14.6 | % | 9.3 | % | 9.3 | % | 8.2 | % | 6.2 | % | 9.1 | % | 7.2 | % | 6.5 | % | ||||||||||||||||
Income before provision for income taxes | 15.7 | % | 13.3 | % | 10.3 | % | 10.3 | % | 10.9 | % | 9.6 | % | 11.4 | % | 7.5 | % | ||||||||||||||||
Net income | 12.7 | % | 9.2 | % | 8.4 | % | 7.2 | % | 8.8 | % | 7.9 | % | 9.4 | % | 6.2 | % | ||||||||||||||||
Three and NineSix months ended SeptemberJune 30, 2018201,9, compared to Three Three and NineSix months ended SeptemberJune 30, 20172018
Sales. Consolidated sales for the three months ended SeptemberJune 30, 2018 increased2019 decreased to $12,104,000$11,415,000 from $12,049,000$12,109,000 for the three months ended SeptemberJune 30, 2017,2018, representing an increasea decrease of $55,000,$694,000, or 0.5%5.7%. This increasedecrease consisted of increaseddecreased sales in the Disposable Protective Apparel segment (now including face masks and face shields) of $77,000 and increased sales in the Infection Control segment of $75,000,$832,000, partially offset by decreasedincreased sales in the Building Supply segment of $97,000.$138,000.
Building Supply segment sales for the three months ended SeptemberJune 30, 2018 decreased2019 increased by $97,000,$138,000, or 1.4%2.1%, to $6,979,000,$6,710,000, compared to $7,076,000$6,572,000 for the same period of 2017.2018. This segment decreaseincrease was primarily due to a decreasean increase in sales of the economy TECHNO SB® family brand of synthetic roof underlayment, (including REX™, TECHNOply™ and our new TECHNO SB®) and, to a lesser extent,partially offset by a decrease in sales of economy REX™ Wrap brand housewrap. Theof housewrap and a decrease wasin other woven material. For the three months ended June 30, 2019, synthetic roof underlayment increased by 23.2%, partially offset by an increasea decrease in saleshousewrap of premium REX™ Wrap Fortis housewrap with JX ALTA 360° Drainage Technology™8.6% and an increasea decrease in sales of other woven material.material of 14.2% compared to the same period of 2018. Early in the second quarter of 2019, we announced the expansion of our TECHNO family of spunbond based (SB) products, which we expect to significantly expand our market share in the synthetic roof underlayment market. We are pleased with the early success of our new TECHNO SB® 25 product, which was a driving force in our 23.2% growth in synthetic roof underlayment during the second quarter of 2019. A softening in U.S. housing starts affected our housewrap sales during the quarter, and our other woven material sales were down as a result of our largest customer in this category having excess inventory and a slowdown in orders from their customers and we do expect this to continue for the remainder of the year. The sales mix of the Building Supply segment for the three months ended SeptemberJune 30, 20182019 was 44%47% for synthetic roof underlayment, 42%43% for housewrap and 14%10% for other woven material. This sales mix is compared to 48%39% for synthetic roof underlayment, 42%49% for housewrap and 10%12% for other woven material for the three months ended SeptemberJune 30, 2017.2018.
We believe that our total housewrap sales, which decreased by only $41,000Sales for the Disposable Protective Apparel segment for the three months ended SeptemberJune 30, 2019 decreased by $832,000, or 15.0%, to $4,705,000, compared to $5,537,000 for the same period of 2018. This segment decrease was primarily due to a decrease in sales of our disposable protective clothing, partially offset by an increase in sales of face masks and face shields. The decrease was primarily due to lower sales to our major international supply chain partner, partially as a result of an inventory rebalancing, as well as one of its customers, who made a large purchase of disposable protective clothing in the prior year, deciding to exit the market. In addition, the second quarter of 2019 was a challenging comparative quarter in that last year’s second quarter sales with this partner were a record high. On a year-to-date basis, however, sales to this partner have increased, currently trending on an annualized basis to be a record high and disposable protective clothing sales are up almost 6.0% for the six months ended June 30, 2019 compared to the same period last year. The sales mix of the Disposable Protective Apparel segment for the three months ended June 30, 2019 was 74% for disposable protective clothing, 17% for masks and 9% for shields. This sales mix is compared to 79% for disposable protective clothing, 14% for face masks and 7% for face shields for the three months ended June 30, 2018.
Consolidated sales for the six months ended June 30, 2019 increased to $23,718,000 from $23,551,000 for the six months ended June 30, 2018, would likely haverepresenting an increase of $167,000, or 0.7%. This increase consisted of increased for the eleventh quarter in a row on a comparative basis, had it not been for a drop in housing starts in September, which we believe resulting in large part from Hurricane Florence. Sales of our new REX™ Wrap Fortis housewrap continued to trend positively in the third quarter, and we expect growth of housewrap sales in the coming quarters.Disposable Protective Apparel Segment of $200,000, partially offset by decreased sales in the Building Supply segment of $33,000.
Alpha Pro Tech, Ltd.
Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2018 increased by $77,000, or 2.0%, to $3,922,000, compared to $3,845,000 for the same period of 2017. The increase was primarily due to increased sales to our national distributors. Although sales growth slowed during the third quarter of 2018, we expect sales growth for the full year of 2018 to be in line with or above the current year-to-date nine month growth percentage of 5.8% for this segment.
Infection Control segment sales for the three months ended September 30, 2018 increased by $75,000, or 6.6%, to $1,203,000, compared to $1,128,000 for the same period of 2017. Shield sales were up by 33.5%, or $127,000, to $506,000, primarily due to increased sales to our national distributors. Mask sales were down by 7.0%, or $52,000, to $697,000, primarily due to lower sales to a private label distributor.
Consolidated sales for the nine months ended September 30, 2018 increased to $35,655,000 from $34,082,000 for the nine months ended September 30, 2017, representing an increase of $1,573,000, or 4.6%. This increase consisted of increased sales in the Building Supply segment of $922,000, increased sales in the Disposable Protective Apparel of $628,000 and increased sales in the Infection Control segment of $23,000.
Building Supply segment sales for the ninesix months ended SeptemberJune 30, 2018 increased2019 decreased by $922,000,$33,000, or 4.8%0.2%, to $20,220,000,$13,208,000, compared to $19,298,000$13,241,000 for the same period of 2017. This segment increase was primarily due to an increase in sales2018. Our synthetic roof underlayment product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of housewrap (including REX™ Wrap, REX™ Wrap Plus and our new REX™ Wrap Fortis with JX ALTA 360° Drainage Technology™) and an increaseFortis. This slight Building Supply segment decrease was primarily due to a decrease in sales of housewrap of 5.2%, a decrease in sales of other woven material of 6.3% and an increase in rebates, partially offset by a decreasean increase in sales of synthetic roof underlayment (including REX™of 8.1%, TECHNOply™compared to the same period of 2018. Synthetic roof underlayment sales have increased as a result of increased sales of the TECHNO family products. Housewrap sales in the first half of 2019 have been negatively affected by softer U.S. housing starts due in part to unusually severe weather across many parts of the country. Other woven material sales are down, as mentioned above, due to lower orders from a customer that currently has excess inventory and our new TECHNO SB®).has seen a decline in its business. The sales mix of the Building Supply segment for the ninesix months ended SeptemberJune 30, 20182019 was 43%46% for synthetic roof underlayment, 45%44% for housewrap and 12%10% for other woven material. This compared to 51%43% for synthetic roof underlayment, 41%46% for housewrap and 8%11% for other woven material for the ninesix months ended SeptemberJune 30, 2017.2018.
Sales for the Disposable Protective Apparel segment for the ninesix months ended SeptemberJune 30, 20182019 increased by $628,000,$200,000, or 5.8%1.9%, to $11,542,000,$10,510,000, compared to $10,914,000$10,310,000 for the same period of 2017.2018. This segment increase was primarily due to a 5.7% increase in disposable protective clothing, partially offset by a decrease in sales of masks and to a lesser extent shields. The increase was primarily due to increased sales to our major international supply chain partner, as well as national and regional distributors.partner. Mask sales have been negatively affected by a less severe flu season in 2019. The Company is achieving sales growth as a resultmix of bolstering its sales and marketing efforts, and we expect this trend to continue.
Infection Controlthe Disposable Protective Apparel segment sales for the ninesix months ended SeptemberJune 30, 2018 increased by $23,000, or 0.6%, to $3,893,000,2019 was 76% for disposable protective clothing, 16% for masks and 8% for shields. This sales mix is compared to $3,870,00074% for disposable protective clothing, 18% for masks and 8% for shields for the same period of 2017. Shield sales were up by 14.9%, or $177,000, to $1,350,000, primarily due to higher sales to national distributors. Mask sales were down by 5.7%, or $154,000, to $2,543,000, primarily due to lower sales to a private label distributor.six months ended June 30, 2018.
Gross Profit. Gross profit decreased by $127,000,$613,000, or 2.7%13.0%, to $4,585,000$4,106,000 for the three months ended SeptemberJune 30, 2018,2019, from $4,712,000$4,719,000 for the same period of 2017.2018. The gross profit margin was 37.9%36.0% for the three months ended SeptemberJune 30, 2018,2019, compared to 39.1%39.0% for the same period of 2017.
Gross profit increased by $266,000, or 2.0%, to $13,759,000 for the nine months ended September 30, 2018, from $13,493,000 for the same period of 2017. The gross profit margin was 38.6% for the nine months ended September 30, 2018, compared to 39.6% for the same period of 2017.
2018. For the three and nine months ended SeptemberJune 30, 2018, the2019, gross profit margin was affected by increased rebates, increased freight cost and a change in product mix in the Building Supply segment. We expectsegment, with significant growth in the economy line of synthetic roof underlayment, which has lower gross margin. In addition, both segments were negatively impacted by increased rebates.
Gross profit decreased by $265,000, or 2.9%, to $8,909,000 for the six months ended June 30, 2019, from $9,174,000 for the same period of 2018. The gross profit margin was 37.6% for the six months ended June 30, 2019, compared to 39.0% for the same period of 2018. Certain products that were duty free until June 4, 2019 under the U.S. Customs and Borders Protection Generalized System of Preferences (GSP) will no longer be duty free, as the government program was terminated. As a result of this and a change in product mix, management expects gross profit margin to be lower for the full year of 2018 but still to be in the highmid thirty percent range.range going forward.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $774,000,$206,000, or 22.4%5.9%, to $2,676,000$3,262,000 for the three months ended SeptemberJune 30, 20182019, from $3,450,000$3,468,000 for the three months ended SeptemberJune 30, 2017.2018. As a percentage of net sales, selling, general and administrative expenses remained flat at 28.6% for the three months ended June 30, 2019, compared to the same period of 2018. The decrease in selling, general and administrative expenses was primarily the result of lower employee compensation and lower commission on sales of Disposable Protective Apparel segment products, partially offset by increased foreign exchange expense.
The change in expenses by segment for the three months ended June 30, 2019 was as follows: Disposable Protective Apparel (which now includes expenses from the former Infection Control segment) was down $125,000, or 11.2%; Building Supply was up $21,000, or 1.6%; and corporate unallocated expenses were down $102,000, or 9.5%. The decrease in the Disposable Protective Apparel expenses was primarily due to decreased employee compensation and sales commission, and the decrease in corporate unallocated expenses was also primarily due to lower employee compensation. The increase in the Building Supply expenses was primarily a result of increased marketing expenses.
Selling, general and administrative expenses decreased by $412,000, or 5.6%, to $6,937,000 for the six months ended June 30, 2019, from $7,349,000 for the six months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses decreased to 22.1%29.2% for the threesix months ended SeptemberJune 30, 2018,2019, from 28.6%31.2% for the same period of 2017.
2018. The decrease in selling, general and administrative expenses was primarily the result of recovery efforts from our former litigation counsel in relation to the accrual of expenses associated with a mediated settlement of thea litigation matter described in Part II, Item 1 –Legal Proceedings, decreased overall employee compensation and lower general office expenditures as compared toduring the first quarter of 2018 that did not recur for the same period last year.of 2019.
The change in expenses by segment for the six months ended June 30, 2019 was as follows: Disposable Protective Apparel was down $57,000 or 2.7%; Building Supply was up $145,000, or 5.6%; and corporate unallocated expenses were down $500,000, or 19.8%. The decrease in the Disposable Protective Apparel segment expenses was related to lower commissions and the increase in the Building Supply segment expenses was primarily due to increased trade show and sales-related travel expenses. The decrease in corporate unallocated expenses was primarily due to expenses for the mediated settlement mentioned above.
Alpha Pro Tech, Ltd.
The change in expenses by segment was as follows: Building Supply was up $8,000, or 0.7%; Disposable Protective Apparel was up $42,000, or 4.9%; Infection Control was up $4,000, or 2.6%; and corporate unallocated expenses were down $828,000, or 65.3%. The increases in the Building Supply and Disposable Protective Apparel segments were primarily as a result of our expanded sales team and enhancement of our marketing programs to support future growth.
Selling, general and administrative expenses decreased by $245,000, or 2.4%, to $10,024,000 for the nine months ended September 30, 2018 from $10,269,000 for the nine months ended September 30, 2017. As a percentage of net sales, selling, general and administrative expenses decreased to 28.1% for the nine months ended September 30, 2018, from 30.1% for the same period of 2017. The decrease in selling, general and administrative expenses was primarily due to an overall decrease in employee compensation expense.
The change in expenses by segment was as follows: Building Supply was up $242,000, or 6.8%; Disposable Protective Apparel was up $256,000, or 9.8%; Infection Control was down $11,000, or 2.7%; and corporate unallocated expenses were down $732,000, or 19.8%. The increases in the Building Supply and Disposable Protective Apparel segments were primarily as a result of our expanded sales team and enhancement of our marketing programs to support future growth.
In accordance with the terms of his employment agreement, the Company’s current President and Chief Executive Officer in 2018 is entitled to an annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. In 2017, pursuant to their employment agreements, the Company’s current Chief Executive Officer and former President were each entitled to a bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. A bonus amount of $100,000$58,000 was accrued for the three months ended SeptemberJune 30, 2018,2019, as compared to $190,000$61,000 for the same period of 2017.2018. A bonus amount of $193,000$135,000 was accrued for the ninesix months ended SeptemberJune 30, 2018,2019, as compared to $392,000$93,000 for the same period of 2017.2018.
Depreciation and Amortization. Depreciation and amortization expense decreased by $7,000,$4,000, or 4.8%2.8%, to $140,000 for the three months ended SeptemberJune 30, 2018,2019, from $147,000$144,000 for the three months ended SeptemberJune 30, 2017.2018. Depreciation and amortization expense increaseddecreased by $4,000,$23,000, or 0.9%7.9%, to $430,000$267,000 for the ninesix months ended SeptemberJune 30, 2018,2019, from $426,000$290,000 for the same period of 2017.2018. The decrease was primarily attributable to decreased depreciation for machinery and equipment in the Building Supply segment.
Income from Operations. Income from operations increaseddecreased by $654,000,$403,000, or 58.7%36.4%, to $1,769,000$704,000 for the three months ended SeptemberJune 30, 2018,2019, compared to $1,115,000$1,107,000 for the three months ended SeptemberJune 30, 2017.2018. The decreased income from operations was primarily due to a decrease in gross profit of $613,000, partially offset by a decrease in selling, general and administrative expenses of $206,000 and a decrease in depreciation and amortization expense of $4,000. Income from operations as a percentage of net sales for the three months ended June 30, 2019 was 6.2%, compared to 9.1% for the same period of 2018.
Income from operations increased by $170,000, or 11.1%, to $1,705,000 for the six months ended June 30, 2019, compared to $1,535,000 for the six months ended June 30, 2018. The increased income from operations was primarily due to a decrease in selling, general and administrative expenses of $774,000, which resulted primarily from the recovery efforts form our former litigation counsel in relation to settlement of the litigation matter described in Part II, Item 1 – Legal Proceedings, and a decrease in overall employee compensation expense,$412,000 and a decrease in depreciation and amortization expense of $7,000,$23,000, partially offset by a decrease in gross profit of $127,000.$265,000.
Income from operationsOther Income. Other income increased by $507,000, or 18.1%,$489,000 to $3,305,000$544,000 for the ninethree months ended SeptemberJune 30, 2018, compared to $2,798,0002019 from $55,000 for the nine months ended September 30, 2017.same period of 2018. The increased income from operationsincrease was primarily due to an increase in gross profitgain on marketable securities of $266,000$536,000 and an increase in interest income of $20,000 due to restructuring the interest terms on our operating cash accounts, partially offset by a decrease in selling, general and administrative expensesequity in income of $245,000, primarily due to a decrease in overall employee compensation expense, partially offset by an increase in depreciation and amortization expenseunconsolidated affiliate of $4,000.
Other Income. Other income decreased by $362,000, or 73.7%, to $129,000 for the three months ended September 30, 2018 from $491,000 for the same period of 2017. The decrease of $362,000 was primarily due to the gain on the sale of property of $385,000 for the three months ended September 30, 2017.$67,000.
Other income consisted of equity in income of unconsolidated affiliate of $103,000,$84,000, a realized gain on sale of marketable securities of $3,000, an unrealized gain on marketable securities of $22,000$439,000 and interest income of $1,000$21,000 for the three months ended SeptemberJune 30, 2018.2019. Other income consisted of equity in income of unconsolidated affiliate of $105,000,$151,000, a gainloss on the salemarketable securities of property of $385,000$97,000 and interest income of $1,000 for the three months ended SeptemberJune 30, 2017.2018.
Other income increased by $778,000 to $1,004,000 for the six months ended June 30, 2019, from $226,000 for the same period of 2018. The increase was primarily due to the gain on marketable securities in 2019 compared to a loss on marketable securities during the same period of 2018, for a net change of $674,000, an increase in equity in income of unconsolidated affiliate of $71,000 and an increase in interest income of $33,000.
Alpha Pro Tech, Ltd.
Other income decreased by $372,000, or 51.2%, to $355,000 for the nine months ended September 30, 2018, from $727,000 for the same period of 2017. The decrease of $372,000 was primarily due to the gain on the sale of property of $385,000 during the third quarter of 2017, which was not repeated in 2018.
Other income consisted of equity in income of unconsolidated affiliate of $393,000,$361,000, a realized gain on sale of marketable securities of $3,000, an unrealized loss on marketable securities of $43,000$609,000 and interest income of $2,000$34,000 for the ninesix months ended SeptemberJune 30, 2018.2019. Other income consisted primarily of equity in income of unconsolidated affiliate of $339,000,$290,000, a gainloss on the salemarketable securities of property of $385,000$65,000 and interest income of $3,000$1,000 for the ninesix months ended SeptemberJune 30, 2017.2018.
Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended SeptemberJune 30, 20182019 was $1,898,000,$1,248,000, compared to income before provision for income taxes of $1,606,000$1,162,000 for the three months ended SeptemberJune 30, 2017,2018, representing an increase of $292,000,$86,000, or 18.2%7.4%. This increase in income before provision for income taxes was primarily due to an increase in other income from operations of $654,000,$489,000, partially offset by a decrease in other income from operations of $362,000.$403,000.
Income before provision for income taxes for the ninesix months ended SeptemberJune 30, 20182019 was $3,660,000,$2,709,000, compared to income before provision for income taxes of $3,525,000$1,761,000 for the ninesix months ended SeptemberJune 30, 2017,2018, representing an increase of $135,000,$948,000, or 3.8%53.8%. This increase in income before provision for income taxes was primarily due to an increase in income from operations of $507,000, partially offset by a decrease$170,000 and an increase in other income of $372,000.$778,000.
Provision for Income Taxes. The provision for income taxes for the three months ended SeptemberJune 30, 20182019 was $359,000,$238,000, compared to $503,000$203,000 for the same period of 2017.2018. The effective tax rate was 18.9%19.1% for the three months ended SeptemberJune 30, 2018,2019, compared to 31.3%17.5% for the same period of 2017.2018. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.affiliate.
The provision for income taxes for the ninesix months ended SeptemberJune 30, 20182019 was $653,000,$481,000, compared to $1,068,000$294,000 for the same period of 2017.2018. The effective tax rate was 17.8% for the ninesix months ended SeptemberJune 30, 2018,2019, compared to 30.3%16.7% for the same period of 2017.2018. As mentioned above, the Company does not record a tax provision on equity in income of unconsolidated affiliate.
The lower effective rate for the three and nine months ended September 30, 2018 compared to the same period of 2017 was due to U.S. tax reform (U.S. Tax Cuts and Jobs Act) that was enacted in December 2017, which lowered the federal tax rate for corporations from 35% to 21%.
Net Income. Net income for the three months ended SeptemberJune 30, 20182019 was $1,539,000,$1,010,000, compared to net income of $1,103,000$959,000 for the same period of 2017,2018, representing an increase of $436,000,$51,000, or 39.5%5.3%. The net income increase was due to an increase in income before provision for income taxes of $292,000 and a decrease$86,000, partially offset by an increase in provision for income taxes of $144,000.$35,000. Net income as a percentage of net sales for the three months ended SeptemberJune 30, 20182019 was 12.7%8.8%, and net income as a percentage of net salescompared to 7.9% for the same period of 2017 was 9.2%.2018. Basic and diluted earnings per common share for the three months ended SeptemberJune 30, 2019 and 2018 and 2017 were $0.11$0.08 and $0.07, respectively.
Net income for the ninesix months ended SeptemberJune 30, 20182019 was $3,007,000,$2,228,000, compared to net income of $2,457,000$1,467,000 for the same period of 2017,2018, representing an increase of $550,000,$761,000, or 22.4%51.9%. The net income increase was due to an increase in income before provision for income taxes of $135,000 and a decrease$948,000, partially offset by an increase in provision for income taxes of $415,000.$187,000. Net income as a percentage of net sales for the ninesix months ended SeptemberJune 30, 20182019 was 8.4%9.4%, and net income as a percentage of net sales for the same period of 20172018 was 7.2%6.2%. Basic and diluted earnings per common share for the ninesix months ended SeptemberJune 30, 2019 and 2018 were $0.17 and 2017 were $0.21 and $0.16,$0.10, respectively.
Alpha Pro Tech, Ltd.
LIQUIDITY AND CAPITAL RESOURCES
As of SeptemberJune 30, 2018,2019, the Company had cash of $6,823,000$5,502,000 and working capital of $24,503,000,$25,152,000, representing an increase in working capital of $326,000$612,000 from $24,540,000 as of December 31, 2017.2018. As of SeptemberJune 30, 2018,2019, the Company’s current ratio (current assets/current liabilities) was 15:13:1, compared to a 10:14:1 current ratio as of December 31, 2017.2018. Cash decreased by 22.1%21.5%, or $1,940,000,$1,505,000, to $6,823,000$5,502,000 as of SeptemberJune 30, 2018,2019, compared to $8,763,000$7,007,000 as of December 31, 2017.2018 but increased from $4,488,000 as of March 31, 2019. The decrease in cash from December 31, 2018 was due to cash provided by operating activities of $193,000, cash used in financing activities of $2,604,000$1,577,000 and cash used in investing activities of $409,000, partially offset by cash provided by operating activities of $1,073,000.$121,000.
We have 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 SeptemberJune 30, 2018,2019, the prime interest rate was 5.25%5.50%. This credit line will expire in May 2020. The available line of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit was $3,500,000 as of SeptemberJune 30, 2018.2019. As of SeptemberJune 30, 2018,2019, we did not have any borrowings under this credit facility and do not anticipate using it in the near future.
Net cash provided by operating activities The credit facility includes customary financial and non-financial debt covenants. As of $1,073,000 for the nine months ended SeptemberJune 30, 2018 was due to net income of $3,007,000, impacted primarily by the following: stock-based compensation expense of $312,000, depreciation and amortization expense of $430,000, gain on sales of marketable securities of $3,000, an unrealized loss on marketable securities of $43,000, equity2019 we believe that we are in income of unconsolidated affiliate of $393,000, an increase in accounts receivable of $1,300,000, an increase in prepaid expenses of $834,000, a decrease in inventory of $897,000, and a decrease in accounts payable and accrued liabilities of $1,086,000.
Accounts receivable increased by $1,300,000, or 26.2%, to $6,258,000 as of September 30, 2018, from $4,958,000 as of December 31, 2017. The increase in accounts receivable was primarily related to increased revenue in the third quarter of 2018 compared to the fourth quarter of 2017. The number of days that sales remained outstanding as of September 30, 2018, calculated by using an average of accounts receivable outstanding and annual revenue, was 45 days, compared to 41 days as of December 31, 2017.
Inventory decreased by $897,000, or 8.8%, to $9,352,000 as of September 30, 2018, from $10,249,000 as of December 31, 2017. The decrease was primarily due to a decrease in inventory for the Disposable Protective Apparel segment of $418,000, or 12.1%, to $3,046,000, and a decrease in inventory for the Building Supply segment of $552,000, or 12.1%, to $4,016,000, partially offset by an increase in inventory for the Infection Control segment of $73,000, or 3.3%, to $2,290,000.
Prepaid expenses and other current assets increased by $834,000, or 31.3%, to $3,499,000 as of September 30, 2018, from $2,665,000 as of December 31, 2017. The increase was primarily due to an increase in deposits for the purchase of inventory and prepaid insurance.
Accounts payable and accrued liabilities as of September 30, 2018 decreased by $1,086,000, or 38.8%, to $1,718,000, from $2,801,000 as of December 31, 2017. The change was primarily due to a decrease in trade payables and a decrease in accrued liabilities due to timing differences.
Net cash used in investing activities was $409,000 for the nine months ended September 30, 2018, compared to net cash used in investing activities of $386,000 for the same period of 2017. Investing activities for the nine months ended September 30, 2018 consisted of the purchase of property and equipment of $424,000 and proceeds from the sale of marketable securities of $15,000. Investing activities for the nine months ended September 30, 2017 consisted of the purchase of property and equipment of $923,000 and proceeds of $537,000 from the sale of property.
Net cash used in financing activities was $2,604,000 for the nine months ended September 30, 2018, compared to net cash used in financing activities of $2,901,000 for the same period of 2017. Net cash used in financing activities for the nine months ended September 30, 2018 resulted from the payment of $2,828,000 for the repurchase of common stock, partially offset by proceeds of $224,000 from the exercise of stock options. Net cash used in financing activities for the nine months ended September 30, 2017 resulted from the payment of $2,901,000 for the repurchase of common stock, partially offset by the proceeds from the exercise of stock options of $125,000.compliance with all such covenants.
Alpha Pro Tech, Ltd.
Net cash provided by operating activities of $193,000 for the six months ended June 30, 2019 was due to net income of $2,228,000, impacted primarily by the following: stock-based compensation expense of $260,000, depreciation and amortization expense of $267,000, gain on marketable securities of $609,000, equity in income of unconsolidated affiliate of $361,000, operating lease expense net of accretion of $366,000, an increase in accounts receivable of $704,000, a decrease in prepaid expenses of $589,000, an increase in inventory of $991,000, a decrease in accounts payable and accrued liabilities of $525,000 and a decrease in lease liabilities of $327,000.
Accounts receivable increased by $704,000, or 13.2%, to $6,022,000 as of June 30, 2019, from $5,318,000 as of December 31, 2018. The increase in accounts receivable was primarily related to increased sales in the latter half of the second quarter of 2019 compared to the same period fourth quarter of 2018. The number of days that sales remained outstanding as of June 30, 2019, calculated by using an average of accounts receivable outstanding and annual revenue, was 56 days, compared to 40 days as of December 31, 2018.
Inventory increased by $991,000, or 10.0%, to $10,869,000 as of June 30, 2019, from $9,878,000 as of December 31, 2018. The increase was primarily due to an increase in inventory for the Building Supply segment of $1,082,000, or 25.1%, to $5,384,000, partially offset by a decrease in inventory for the Disposable Protective Apparel segment of $91,000, or 1.6%, to $5,485,000,
Prepaid expenses decreased by $589,000, or 14.7%, to $3,410,000 as of June 30, 2019, from $3,999,000 as of December 31, 2018. The decrease was primarily due to a decrease in deposits for the purchase of inventory for the Building Supply segment.
Right-of-use assets as of June 30, 2019 decreased by $366,000 to $3,089,000 from $3,455,000 as of January 1, 2019 when ASC 842 was adopted.
Accounts payable and accrued liabilities as of June 30, 2019 decreased by $525,000, or 27.3%, to $1,395,000, from $1,920,000 as of December 31, 2018. The change was primarily due to a decrease in accrued liabilities as a result of payments of 2018 year-end commissions and bonuses.
Lease liabilities as of June 30, 2019 decreased by $327,000 to $3,128,000 from $3,455,000 as of January 1, 2019. This is the result of adopting ASC 842, Leases.
Net cash used in investing activities was $121,000 for the six months ended June 30, 2019, compared to net cash used in investing activities of $240,000 for the same period of 2018. Investing activities for the six months ended June 30, 2019 consisted of the purchase of property and equipment of $254,000 and proceeds from the sale of marketable securities of $133,000. Investing activities for the six months ended June 30, 2018 consisted of the purchase of property and equipment of $240,000.
Net cash used in financing activities was $1,577,000 for the six months ended June 30, 2019, compared to net cash used in financing activities of $1,497,000 for the same period of 2018. Net cash used in financing activities for the six months ended June 30, 2019 resulted from the payment of $1,636,000 for the repurchase of common stock, partially offset by proceeds of $59,000 from the exercise of stock options. Net cash used in financing activities for the six months ended June 30, 2018 resulted from the payment of $1,617,000 for the repurchase of common stock, partially offset by proceeds of $120,000 from the exercise of stock options.
As of SeptemberJune 30, 2018,2019, we had $1,451,000$1,063,000 available for additional stock purchases under our stock repurchase program. For the ninesix months ended SeptemberJune 30, 2018,2019, we repurchased 793,000427,000 shares of common stock at a cost of $2,828,000.$1,636,000. As of SeptemberJune 30, 2018,2019, we had repurchased a total of 16,997,00717,630,907 shares of common stock at a cost of $31,769,000$33,405,000 through our repurchase program. We retire all stock upon 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) (“ASU 2014-09”) is a comprehensive new revenue 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 exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within an annual reporting period beginning after December 15, 2017, and early adoption is not permitted. The Company adopted ASU 2014-09 during the first quarter of 2018. Management evaluated the provisions of this update and has determined that its adoption did not have a significant impact on the Company’s financial position or results of operations.
In January 2016, the FASB issued 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 guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. As a result of adopting this guidance effective January 1, 2018, the Company recorded a cumulative-effect adjustment to reclassify the $458,000 accumulated other comprehensive loss balance to retained earnings, which balance was the result of unrealized losses on marketable securities. Effective, January 1, 2018 unrealized gains and losses on marketable securities are recorded on the statement of income.
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, with early adoption permitted. Management is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option 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 this guidance were effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. The Company adopted this guidance during 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 adoption 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.
Alpha Pro Tech, Ltd.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 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 to the Condensed Consolidated Financial Statements (Unaudited), which appear elsewhere in this report.
In June 2016, the FASB issued ASU 2016-13 Financial Instruments- Credit Losses (Topic 326): Measurement ofCredit Losses on Financial Instruments.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 effective for public entities for the annual 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. Management is currently evaluating the requirements of this guidance and has not yet determined the impact ofon the adoption onof the Company’s financial position or results from operations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoptions permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information otherwise required by this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer (principal executive 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, 2018,2019, 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.
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 officer and principal financial officer concluded that our disclosure controls and procedures were effective 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, the Company was involved in protracted litigation against a competitor in an action styled Alpha Pro Tech, Inc. v. VWR International, LLC, pending in the U.S. District Court for the Eastern District of Pennsylvania, CV 12-1615, wherein the Company originally sought damages for unfair trade practices and false advertising against the competitor, and the competitor counterclaimed asserting similar claims against the Company. In August of 2017, the court ruled against the Company on its claims against the competitor. The competitor, as the prevailing party with respect to those claims, subsequently filed a motion seeking to recover from the Company an amount in excess of $2 million in attorneys’ fees and costs, which motion was granted by the court. In November of 2017, the Company, in consultation with new litigation counsel, filed a motion to reconsider the attorneys’ fee award. The court heard arguments on the motion to reconsider at a hearing in February of 2018. At the hearing, the court encouraged the parties to attempt to settle the matter in advance of a ruling on the motion to reconsider (which motion was ultimately denied), and the parties subsequently mediated the matter in April of 2018. As a result of the mediation and the parties’ further discussions, the parties reached an agreement in May of 2018 to settle the matter, and the matter has subsequently been dismissed. The Company has paid all amounts due under the settlement agreement. During the third quarter of 2018, the Company successfully pursued and recovered a significant portion of the settlement amount from former litigation counsel.
Alpha Pro Tech, Ltd.
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, 2018 | 70,100 | $ | 3.43 | 70,100 | $ | 2,420,000 | ||||||||||
August 1 - 31, 2018 | 122,900 | 3.51 | 122,900 | 1,985,000 | ||||||||||||
September 1 - 30, 2018 | 147,000 | 3.60 | 147,000 | 1,451,000 | ||||||||||||
| 340,000 | 3.72 | 340,000 | ||||||||||||||
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) | ||||||||||||
April 1 - 30, 2019 | 66,300 | $ | 3.60 | 66,300 | $ | 1,450,000 | ||||||||||
May 1 - 31, 2019 | 66,100 | 3.65 | 66,100 | 1,206,000 | ||||||||||||
June 1 - 30, 2019 | 39,600 | 3.57 | 39,600 | 1,063,000 | ||||||||||||
| 172,000 | 3.61 | 172,000 | ||||||||||||||
(1) On June 22,December 20, 2018, the Company announced that the Board of Directors had authorized a $2,000,000 expansion of the Company’s existing share repurchase program.
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 | 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). |
3.1.2 | 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). |
3.1.3 | 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). |
3.2 | 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). |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | Interactive Data Files for Alpha Pro Tech, Ltd’s Form 10-Q for the period ended |
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.
ALPHA PRO TECH, LTD. | |
| DATE: August 6, 2019 | BY:/s/ Lloyd Hoffman |
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Lloyd Hoffman | |
President and Chief Executive Officer | |
| DATE: August 6, 2019 | BY:/s/ Colleen McDonald |
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Colleen McDonald | Chief Financial Officer |
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