UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20222023
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. 01-15725001-15725
Alpha Pro Tech, Ltd.
(Exact Name of Registrant as Specified in Its Charter)
Delaware, U.S.A. | 63-1009183 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 60 Centurian Drive, Suite 112 | |
| Markham, Ontario, Canada | L3R 9R2 |
| (Address of Principal Executive Offices) | (Zip Code) |
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 ☒ 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 ☒ 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 ☒
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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding May | |
Common Stock, $0.01 par value | 12,188,206 shares |
Alpha Pro Tech, Ltd.
Index
| page | ||
PART I. | FINANCIAL INFORMATION | |
ITEM 1. | Financial Statements | |
Condensed Consolidated Balance Sheets (Unaudited) | 1 | |
Condensed Consolidated Statements of Income (Unaudited) | 2 | |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
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Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) |
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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 | |
ITEM |
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ITEM IA. Risk Factors | 23 | |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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ITEM 6. | Exhibits | |
SIGNATURES |
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| EXHIBITS |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (Unaudited)
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 (1) | 2023 | 2022 (1) | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 14,239,000 | $ | 16,307,000 | $ | 13,821,000 | $ | 16,290,000 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $71,000 as of March 31, 2022 and $64,000 as of December 31, 2021 | 7,211,000 | 3,397,000 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $35,000 as of March 31, 2023 and $45,000 as of December 31, 2022 | 8,406,000 | 5,382,000 | ||||||||||||||
Accounts receivable, related party | 1,597,000 | 1,383,000 | 726,000 | 1,591,000 | ||||||||||||
Inventories | 23,883,000 | 24,969,000 | 24,094,000 | 24,397,000 | ||||||||||||
Prepaid expenses | 6,207,000 | 6,943,000 | 4,712,000 | 4,902,000 | ||||||||||||
Total current assets | 53,137,000 | 52,999,000 | 51,759,000 | 52,562,000 | ||||||||||||
Property and equipment, net | 5,985,000 | 6,064,000 | 5,788,000 | 5,742,000 | ||||||||||||
Goodwill | 55,000 | 55,000 | 55,000 | 55,000 | ||||||||||||
Definite-lived intangible assets, net | 3,000 | 3,000 | 1,000 | 1,000 | ||||||||||||
Right-of-use assets | 2,420,000 | 2,648,000 | 1,488,000 | 1,725,000 | ||||||||||||
Equity investment in unconsolidated affiliate | 6,169,000 | 6,120,000 | 4,964,000 | 4,718,000 | ||||||||||||
Total assets | $ | 67,769,000 | $ | 67,889,000 | $ | 64,055,000 | $ | 64,803,000 | ||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 522,000 | $ | 528,000 | $ | 383,000 | $ | 674,000 | ||||||||
Accrued liabilities | 542,000 | 1,250,000 | 387,000 | 833,000 | ||||||||||||
Lease liabilities | 887,000 | 883,000 | 903,000 | 899,000 | ||||||||||||
Total current liabilities | 1,951,000 | 2,661,000 | 1,673,000 | 2,406,000 | ||||||||||||
Lease liabilities, net of current portion | 1,586,000 | 1,817,000 | 632,000 | 875,000 | ||||||||||||
Deferred income tax liabilities, net | 791,000 | 791,000 | 764,000 | 764,000 | ||||||||||||
Total liabilities | 4,328,000 | 5,269,000 | 3,069,000 | 4,045,000 | ||||||||||||
Commitments and contingincies | ||||||||||||||||
| Commitments and contingencies | ||||||||||||||||
Shareholders' equity: | ||||||||||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 12,945,341 and 13,115,341 shares outstanding as of March 31, 2022 and December 31, 2021, respectively | 130,000 | 132,000 | ||||||||||||||
Additional paid-in capital | 0 | 0 | ||||||||||||||
Common stock, $.01 par value: 50,000,000 shares authorized; 12,135,556 and 12,226,306 shares outstanding as of March 31, 2023 and December 31, 2022, respectively | 122,000 | 123,000 | ||||||||||||||
Retained earnings | 63,311,000 | 62,488,000 | 62,216,000 | 62,124,000 | ||||||||||||
Accumulated other comprehensive loss | (1,352,000 | ) | (1,489,000 | ) | ||||||||||||
Total shareholders' equity | 63,441,000 | 62,620,000 | 60,986,000 | 60,758,000 | ||||||||||||
Total liabilities and shareholders' equity | $ | 67,769,000 | $ | 67,889,000 | $ | 64,055,000 | $ | 64,803,000 | ||||||||
(1) The condensed consolidated balance sheet as of December 31, 20212022, has been prepared using information from the audited consolidated balance sheet as of that date.
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Net sales | $ | 13,800,000 | $ | 17,661,000 | ||||
Cost of goods sold, excluding depreciation and amortization | 8,818,000 | 11,219,000 | ||||||
Gross profit | 4,982,000 | 6,442,000 | ||||||
| Operating expenses: | ||||||||
Selling, general and administrative | 4,313,000 | 4,306,000 | ||||||
Depreciation and amortization | 243,000 | 212,000 | ||||||
Total operating expenses | 4,556,000 | 4,518,000 | ||||||
Income from operations | 426,000 | 1,924,000 | ||||||
| Other income: | ||||||||
Equity in income of unconsolidated affiliate | 109,000 | 49,000 | ||||||
Interest income, net | 158,000 | 1,000 | ||||||
Total other income | 267,000 | 50,000 | ||||||
Income before provision for income taxes | 693,000 | 1,974,000 | ||||||
Provision for income taxes | 141,000 | 452,000 | ||||||
Net income | $ | 552,000 | $ | 1,522,000 | ||||
Basic earnings per common share | $ | 0.05 | $ | 0.12 | ||||
Diluted earnings per common share | $ | 0.05 | $ | 0.12 | ||||
Basic weighted average common shares outstanding | 12,150,067 | 13,058,871 | ||||||
Diluted weighted average common shares outstanding | 12,193,602 | 13,159,490 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended | ||||||||
March 30, | ||||||||
2022 | 2021 | |||||||
Net sales | $ | 17,661,000 | $ | 23,161,000 | ||||
Cost of goods sold, excluding depreciation and amortization | 11,219,000 | 13,982,000 | ||||||
Gross profit | 6,442,000 | 9,179,000 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 4,306,000 | 4,578,000 | ||||||
Depreciation and amortization | 212,000 | 198,000 | ||||||
Total operating expenses | 4,518,000 | 4,776,000 | ||||||
Income from operations | 1,924,000 | 4,403,000 | ||||||
Other income: | ||||||||
Equity in income of unconsolidated affiliate | 49,000 | 322,000 | ||||||
Interest income, net | 1,000 | 1,000 | ||||||
Total other income | 50,000 | 323,000 | ||||||
Income before provision for income taxes | 1,974,000 | 4,726,000 | ||||||
Provision for income taxes | 452,000 | 1,007,000 | ||||||
Net income | $ | 1,522,000 | $ | 3,719,000 | ||||
Basic earnings per common share | $ | 0.12 | $ | 0.28 | ||||
Diluted earnings per common share | $ | 0.12 | $ | 0.27 | ||||
Basic weighted average common shares outstanding | 13,058,871 | 13,342,398 | ||||||
Diluted weighted average common shares outstanding | 13,159,490 | 13,717,404 | ||||||
For the Three Months Ended | ||||||||
March 31, | ||||||||
2023 | 2022 | |||||||
Net income | $ | 552,000 | $ | 1,522,000 | ||||
Other comprehensive income (loss)- foreign currency translation gain (loss) | 137,000 | (153,000 | ) | |||||
Comprehensive income | $ | 689,000 | $ | 1,369,000 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2022
For the Three Months Ended March 31, 2023 |
Additional | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Additional | Other | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | Common Stock | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 13,115,341 | $ | 132,000 | $ | 0 | $ | 62,488,000 | $ | 62,620,000 | |||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | 12,226,306 | $ | 123,000 | $ | - | $ | 62,124,000 | $ | (1,489,000 | ) | $ | 60,758,000 | ||||||||||||||||||||||||||||||||
Net income | - | - | - | 1,522,000 | 1,522,000 | - | - | - | 552,000 | - | 552,000 | |||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (170,000 | ) | (2,000 | ) | (55,000 | ) | (699,000 | ) | (756,000 | ) | (200,000 | ) | (2,000 | ) | (22,000 | ) | (809,000 | ) | - | (833,000 | ) | |||||||||||||||||||||||
Stock-based compensation expense | - | 0 | 55,000 | 0 | 55,000 | - | - | 22,000 | - | - | 22,000 | |||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | 12,945,341 | $ | 130,000 | $ | - | $ | 63,311,000 | $ | 63,441,000 | |||||||||||||||||||||||||||||||||||
Options exercised | 109,250 | 1,000 | - | 349,000 | - | 350,000 | ||||||||||||||||||||||||||||||||||||||
Total comprehensive income | - | - | - | - | 137,000 | 137,000 | ||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | 12,135,556 | $ | 122,000 | $ | - | $ | 62,216,000 | $ | (1,352,000 | ) | $ | 60,986,000 | ||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2021
For the Three Months Ended March 31, 2022 |
Additional | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Additional | Other | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Total | Common Stock | Paid-in | Retained | Comprehensive | ||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2020 | 13,419,847 | $ | 135,000 | $ | 409,000 | $ | 59,476,000 | $ | 60,020,000 | |||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 13,115,341 | $ | 132,000 | $ | - | $ | 62,488,000 | $ | (869,000 | ) | $ | 61,751,000 | ||||||||||||||||||||||||||||||||
Net income | - | - | - | 3,719,000 | 3,719,000 | - | - | - | 1,522,000 | - | 1,522,000 | |||||||||||||||||||||||||||||||||
Common stock repurchased and retired | (186,000 | ) | (2,000 | ) | (817,000 | ) | (1,547,000 | ) | (2,366,000 | ) | (170,000 | ) | (2,000 | ) | (55,000 | ) | (699,000 | ) | - | (756,000 | ) | |||||||||||||||||||||||
Stock-based compensation expense | - | - | 101,000 | - | 101,000 | - | - | 55,000 | - | - | 55,000 | |||||||||||||||||||||||||||||||||
Options exercised | 89,494 | 1,000 | 307,000 | - | 308,000 | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2021 | 13,323,341 | $ | 134,000 | $ | 0 | $ | 61,648,000 | $ | 61,782,000 | |||||||||||||||||||||||||||||||||||
Total comprehensive loss | - | - | - | - | (153,000 | ) | (153,000 | ) | ||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | 12,945,341 | $ | 130,000 | $ | - | $ | 63,311,000 | $ | (1,022,000 | ) | $ | 62,419,000 | ||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Cash Flows From Operating Activities: | ||||||||||||||||
Net income | $ | 1,522,000 | $ | 3,719,000 | $ | 552,000 | $ | 1,522,000 | ||||||||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: | ||||||||||||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Stock-based compensation | 55,000 | 101,000 | 22,000 | 55,000 | ||||||||||||
Depreciation and amortization | 212,000 | 198,000 | 243,000 | 212,000 | ||||||||||||
Equity in income of unconsolidated affiliate | (49,000 | ) | (322,000 | ) | (109,000 | ) | (49,000 | ) | ||||||||
Operating lease expense, net of accretion | 228,000 | 220,000 | 237,000 | 228,000 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (3,814,000 | ) | 1,384,000 | (3,024,000 | ) | (3,814,000 | ) | |||||||||
Accounts receivable, related party | (214,000 | ) | (370,000 | ) | 865,000 | (214,000 | ) | |||||||||
Inventories | 1,086,000 | (2,029,000 | ) | 303,000 | 1,086,000 | |||||||||||
Prepaid expenses | 736,000 | (4,011,000 | ) | 190,000 | 736,000 | |||||||||||
Accounts payable and accrued liabilities | (714,000 | ) | (1,795,000 | ) | (737,000 | ) | (714,000 | ) | ||||||||
Customer advance payments of orders | 0 | (96,000 | ) | |||||||||||||
Lease liabilities | (227,000 | ) | (219,000 | ) | (239,000 | ) | (227,000 | ) | ||||||||
Net cash used in operating activities | (1,179,000 | ) | (3,220,000 | ) | (1,697,000 | ) | (1,179,000 | ) | ||||||||
Cash Flows From Investing Activities: | ||||||||||||||||
Purchases of property and equipment | (133,000 | ) | (130,000 | ) | (289,000 | ) | (133,000 | ) | ||||||||
Net cash used in investing activities | (133,000 | ) | (130,000 | ) | (289,000 | ) | (133,000 | ) | ||||||||
Cash Flows From Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | 0 | 308,000 | 350,000 | - | ||||||||||||
Repurchase of common stock | (756,000 | ) | (2,366,000 | ) | (833,000 | ) | (756,000 | ) | ||||||||
Net cash used in financing activities | (756,000 | ) | (2,058,000 | ) | (483,000 | ) | (756,000 | ) | ||||||||
Decrease in cash and cash equivalents | (2,068,000 | ) | (5,408,000 | ) | ||||||||||||
Decrease in cash | (2,469,000 | ) | (2,068,000 | ) | ||||||||||||
Cash and cash equivalents, beginning of the period | 16,307,000 | 23,292,000 | 16,290,000 | 16,307,000 | ||||||||||||
Cash and cash equivalents, end of the period | $ | 14,239,000 | $ | 17,884,000 | $ | 13,821,000 | $ | 14,239,000 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
1. | The Company |
Alpha Pro Tech, Ltd. (“Alpha Pro Tech,” the “Company,” “we”, “us” or “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 and a line of disposable protective apparel for the cleanroom, industrial, pharmaceutical, medical and dental markets.
The Building Supply segment consists of construction weatherization products, such as housewrap, housewrap accessories, namely tape and flashing, and synthetic roof underlayment, as well as other woven material.
The Disposable Protective Apparel segment consists of a complete line of disposable protective garments (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. 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.
The Company’s products are sold under the "Alpha Pro Tech" brand name as well as under private label and are predominantly sold in the United States of America (“US”U.S.”).
The ongoing novel coronavirus (COVID-19) pandemic has adversely affected global economies, financial markets and the overall environment in which we do business. Overall, the increase in sales of our Disposable Protective Apparel segment products resulting from the pandemic has had a positive impact on our year-to-date results, but the positive impact in 2022 is less than in 2021 and 2020, as the effects of COVID-19 are normalizing. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic and new variants, including the Omicron variant, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the efficacy of mass vaccinations, and the resumption of widespread economic activity in certain sectors. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any certainty the likely impact of the COVID-19 pandemic on our future operations.
2. | Basis of Presentation and Revenue Recognition Policy |
The interim financial information included in 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 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 U.S. generally accepted accounting principles (“U.S. GAAP”). The interim condensed consolidated financial statements should be read in conjunction with the Company’s current year SEC filings, as well as the Company’s consolidated financial statements for the year ended December 31, 2021, 2022, which are included in the Company’s Annual Report on Form 10-K10-K for the fiscal year ended December 31, 2021 (the “20212022 (the “2022 Form 10-K”10-K”), filed with the SEC on March 11, 2022. 16, 2023. The results of operations for the three months ended March 31, 2022 2023 in this Quarterly Report on Form 10-Q10-Q are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2021 2022 was prepared using information from the audited consolidated balance sheet contained in the 20212022 Form 10-K;10-K; however, it does not include all disclosures required by U.S. GAAP for annual consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Net sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Our customer contracts have a single performance obligation: transfer control of products to customers. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring control of products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring control of the promised products to the customer, with revenue being recognized at the point in time when the customer obtains control of the products, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements, at which time a receivable is created for the invoice sent to the customer. Shipping and handling activities are performed prior to the customer obtaining control of the goods, and are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the distribution of the Company’s product to the customers, are recorded in cost of goods sold and are recognized when control of the product is transferred to the customer, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements. We estimate product returns based on historical return rates and estimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon the nature of the private labelling.labeling. The Company has determined as of March 31, 2022 2023 that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. See Note 10 and Note 11 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for information on revenue disaggregated by type and by geographic region.
3. | Stock-Based Compensation |
The Company previously granted stock options to employees and non-employee directors under a stock option plan (the “2004“2004 Option Plan”). 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 2004 Option Plan provides for a total of 5,000,000 common shares eligible for issuance. Under the 2004 Option Plan, approximately 5,009,750 options (taking into account cancelled and expired options that were added back to the plan reserve) had been granted as of December 31, 2020. Due to the cancelation and expiration of options, the 2004 Plan had 1,305,251 options available to grant at the time the 2004 Plan was replaced in 2020.
At the Company’s 2020 Annual Meeting of Shareholders, held on June 9, 2020, the Company’s shareholders approved the Alpha Pro Tech, Ltd. 2020 Omnibus Incentive Plan (the “2020“2020 Incentive Plan”). The 2020 Incentive Plan provides for the grant of incentive and nonqualified stock options, stock appreciation rights, awards of restricted stock and restricted stock units, performance share awards, cash awards and other equity-based awards to employees (including officers), consultants and non-employee directors of the Company and its affiliates. A total of 1,800,000 shares of the Company’s common stock wereare reserved for issuance under the 2020 Incentive Plan, plus the number of shares underlying any award granted under the 2004 Option Plan that expires, terminates or is cancelled or forfeited under the terms of the 2004 Option Plan. As a result of the approval of the 2020 Incentive Plan, no future equity awards will be made pursuant to the 2004 Option Plan. Although no new awards may be granted under the 2004 Option Plan, all previously granted awards under the 2004 Option Plan will continue to be governed by the terms of the 2004 Option Plan.
The Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options and restricted stock awards, over the determined requisite service period, which is generally ratably over the vesting term.
For the three months ended March 31, 2023 and 2022, and 2021, 0no stock options were granted under the 2004 Option Plan or the 2020 Incentive Plan. The Company recognized $28,000$3,000 and $74,000$28,000 in stock-based compensation expense for the three months ended March 31, 2022 2023 and 2021,2022, respectively, related to outstanding options previously granted under the 2004 Option Plan. For the three months ended March 31, 2023 and 2022, and 2021, 0no restricted stock awards were granted under the 2020 Incentive Plan. The Company recognized $27,000$18,000 and $27,000 in compensation expense associated with outstanding restricted stock awards for the three months ended March 31, 2022 2023 and 2021,2022, respectively. As of March 31, 2021, $52,0002023, $44,000 of total unrecognized compensation cost related to outstanding restricted stock awards was expected to be recognized over a weighted-average remainder period of 0.490.63 years.
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 an 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 three months ended March 31, 2022:2023:
Weighted Average | Weighted Average | |||||||||||||||
Exercise Price | Exercise Price | |||||||||||||||
Options | Per Option | Options | Per Option | |||||||||||||
Options outstanding, December 31, 2021 | 427,580 | $ | 3.50 | |||||||||||||
Options outstanding, December 31, 2022 | 410,615 | $ | 3.50 | |||||||||||||
Granted to employees and non-employee directors | 0 | 0 | - | - | ||||||||||||
Exercised | 0 | 0 | 109,250 | 3.20 | ||||||||||||
Canceled/expired/forfeited | 0 | 0 | - | - | ||||||||||||
Options outstanding, March 31, 2022 | 427,580 | 3.50 | ||||||||||||||
Options exercisable, March 31, 2022 | 322,580 | 3.47 | ||||||||||||||
Options outstanding, March 31, 2023 | 301,365 | 3.61 | ||||||||||||||
Options exercisable, March 31, 2023 | 286,665 | 3.59 | ||||||||||||||
As of March 31, 2022, $9,0002023, $33,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of 0.474.48 years.
4. | Recent Accounting Pronouncements |
In December 2019, the FASB issued ASU No.2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Adoption of the new standard in January 2021 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.
5. | Inventories |
As of March 31, 2022 2023 and December 31, 2021, 2022, inventories net of reserves consisted of the following:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Raw materials | $ | 12,625,000 | $ | 13,545,000 | $ | 12,220,000 | $ | 13,018,000 | ||||||||
Work in process | 4,765,000 | 3,890,000 | 3,013,000 | 2,225,000 | ||||||||||||
Finished goods | 6,493,000 | 7,534,000 | 8,861,000 | 9,154,000 | ||||||||||||
| $ | 23,883,000 | $ | 24,969,000 | $ | 24,094,000 | $ | 24,397,000 | |||||||||
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. | 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.
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 Company’s 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)(1) a 113,000139,000 square foot building for manufacturing building products; (2)(2) a 73,000121,000 square foot building for manufacturing coated material and sewing proprietary disposable protective apparel; (3)(3) a 16,00023,000 square foot facility for sewing proprietary disposable protective apparel; and (4)(4) a 93,000159,000 square foot facility (rented) for manufacturing Building Supply segment products. All additions have been financed by Harmony with no guarantees from the Company.
In accordance with 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 comprehensive income. The Company periodically reviews its investment in Harmony for impairment. Management has determined that no impairment was required as of March 31, 2022 2023, or December 31, 2021.2022. Under the equity method, since the Company’s reporting currency is different from of Harmony’s reporting currency, the Company is required to translate our proportionate share of equity for effects of translations in foreign currency and adjust the investment accordingly and accrue the adjustment as a component of Accumulated other comprehensive loss (“AOCL”).
For the three months ended March 31, 2022 2023 and 2021,2022, the Company purchased $6,183,000$5,036,000 and $6,354,000$6,183,000 of inventories, respectively, from Harmony. For the three months ended March 31, 2022 2023 and 2021,2022, the Company sold $258,000$0 and $370,000$258,000 of inventories, respectively, to Harmony. For the three months ended March 31, 2022 2023 and 2021,2022, the Company recorded equity in income of unconsolidated affiliate of $49,000$109,000 and $322,000,$49,000, respectively, related to Harmony.
As of March 31, 2022, 2023, the Company’s investment in Harmony was $6,169,000,$4,964,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $5,738,000,$5,885,000, less $942,000 in repayments of thean advance and $77,000 in dividends.payments of dividends and $1,352,000 in AOCL on foreign currency translations.
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. | Accrued Liabilities |
As of March 31, 2022 2023 and December 31, 2021, 2022, accrued liabilities consisted of the following:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Payroll expenses and taxes payable | $ | 276,000 | $ | 187,000 | $ | 337,000 | $ | 138,000 | ||||||||
Commissions and bonuses payable and general accrued liabilities | 266,000 | 1,063,000 | 50,000 | 695,000 | ||||||||||||
Total accrued liabilities | $ | 542,000 | $ | 1,250,000 | $ | 387,000 | $ | 833,000 | ||||||||
8. | 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 months ended March 31, 2022 2023 and 2021:2022:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net income (numerator) | $ | 1,522,000 | $ | 3,719,000 | $ | 552,000 | $ | 1,522,000 | ||||||||
Shares (denominator): | ||||||||||||||||
Basic weighted average common shares outstanding | 13,058,871 | 13,342,398 | 12,150,067 | 13,058,871 | ||||||||||||
Add: dilutive effect of common stock options | 100,619 | 375,006 | 43,535 | 100,619 | ||||||||||||
Diluted weighted average common shares outstanding | 13,159,490 | 13,717,404 | 12,193,602 | 13,159,490 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.12 | $ | 0.28 | $ | 0.05 | $ | 0.12 | ||||||||
Diluted | $ | 0.12 | $ | 0.27 | $ | 0.05 | $ | 0.12 | ||||||||
9. | Accumulated Other Comprehensive Loss |
Accumulated other comprehensive loss (“AOCL”), a component of shareholders' equity, consists of foreign currency translation adjustments related to foreign currency gains or losses on our unconsolidated affiliate as its functional currency is other than the U.S. dollar. The resulting foreign currency translation gains or losses are deferred as AOCL and reclassified to earnings only upon sale or liquidation of that business. The accumulated other comprehensive loss on equity in unconsolidated affiliate was $1,352,000 and $1,489,000 as of March 31, 2023 and December 31, 2022, respectively.
10. | Activity of Business Segments |
The Company operates through 2two business segments:
(1)(1) Building Supply: consisting of a line of construction supply weatherization products. The construction supply weatherization products consist of housewrap and housewrap accessories including window and door flashing and seam tape, 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)(2) Disposable Protective Apparel: consisting of a complete line of disposable protective garments, including 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 dental 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.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The accounting policies of the segments are the same as those described previously under Summary of Significant Accounting Policies (see Note 2)2). Segment data excludes charges allocated
The following table presents consolidated net sales for each segment for the three months ended March 31, 2022 2023 and 2021:2022:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Building Supply | $ | 10,237,000 | $ | 8,340,000 | $ | 8,631,000 | $ | 10,237,000 | ||||||||
Disposable Protective Apparel | 7,424,000 | 14,821,000 | 5,169,000 | 7,424,000 | ||||||||||||
Consolidated net sales | $ | 17,661,000 | $ | 23,161,000 | $ | 13,800,000 | $ | 17,661,000 | ||||||||
The following table presents the reconciliation of consolidated segment income to consolidated net income for the three months ended March 31, 2022 2023 and 2021:2022:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Building Supply | $ | 1,667,000 | $ | 1,551,000 | $ | 956,000 | $ | 1,667,000 | ||||||||
Disposable Protective Apparel | 1,701,000 | 4,750,000 | 784,000 | 1,701,000 | ||||||||||||
Total segment income | 3,368,000 | 6,301,000 | 1,740,000 | 3,368,000 | ||||||||||||
Unallocated corporate overhead expenses | 1,394,000 | 1,575,000 | 1,047,000 | 1,394,000 | ||||||||||||
Provision for income taxes | 452,000 | 1,007,000 | 141,000 | 452,000 | ||||||||||||
Consolidated net income | $ | 1,522,000 | $ | 3,719,000 | $ | 552,000 | $ | 1,522,000 | ||||||||
The following table presents the consolidated net property and equipment, goodwill and definite-lived intangible assets (“consolidated assets”) by segment as of March 31, 2022 2023 and December 31, 2021:2022:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Building Supply | $ | 3,556,000 | $ | 3,600,000 | $ | 3,486,000 | $ | 3,395,000 | ||||||||
Disposable Protective Apparel | 1,394,000 | 1,419,000 | 1,298,000 | 1,327,000 | ||||||||||||
Total segment assets | 4,950,000 | 5,019,000 | 4,784,000 | 4,722,000 | ||||||||||||
Unallocated corporate assets | 1,093,000 | 1,103,000 | 1,060,000 | 1,076,000 | ||||||||||||
Total consolidated assets | $ | 6,043,000 | $ | 6,122,000 | $ | 5,844,000 | $ | 5,798,000 | ||||||||
| Financial Information about Geographic Areas |
The following table summarizes the Company’s net sales by geographic region for the three months ended March 31, 2022 2023 and 2021:2022:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net sales by geographic region | ||||||||||||||||
United States | $ | 17,076,000 | $ | 20,898,000 | $ | 13,694,000 | $ | 17,076,000 | ||||||||
International | 585,000 | 2,263,000 | 106,000 | 585,000 | ||||||||||||
Consolidated net sales | $ | 17,661,000 | $ | 23,161,000 | $ | 13,800,000 | $ | 17,661,000 | ||||||||
Net sales by geographic region are based on the countries in which our customers are located. For the three months ended March 31, 2022 2023 and 2021,2022, the Company generated approximately $474,000$45,000 and $2,115,000$474,000, respectively, in sales from Canada. No country other than the United States was 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 March 31, 2022 2023 and December 31, 2021:2022:
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Long-lived assets by geographic region | ||||||||||||||||
United States | $ | 4,668,000 | $ | 4,623,000 | $ | 4,460,000 | $ | 4,380,000 | ||||||||
International | 1,418,000 | 1,441,000 | 1,328,000 | 1,362,000 | ||||||||||||
Consolidated total long-lived assets | $ | 5,985,000 | $ | 6,064,000 | $ | 5,788,000 | $ | 5,742,000 | ||||||||
| Related Party Transactions |
As of March 31, 2022, 2023, the Company had no related party transactions, other than the Company’s transactions with its unconsolidated affiliate, Harmony. See Note 6 of these Notes to Condensed Consolidated Financial Statements (Unaudited).
| Leases |
The Company has operating leases for the Company’s corporate office and manufacturing facilities, which expire at various dates through 2025. The Company’s primary operating lease commitments at March 31, 2022 2023 related to the Company’s manufacturing facilities in Valdosta, Georgia; Nogales, Arizona; and Salt Lake City, Utah, as well as the Company’s corporate headquarters in Markham, Ontario, Canada.Utah.
As of March 31, 2022, 2023, the Company had operating lease right-of-use assets of $2,420,000$1,488,000 and operating lease liabilities of $2,473,000.$1,535,000. As of March 31, 2022, we2023, the Company did not have any finance leases recorded on the Company’s condensed consolidated balance sheet. Operating lease expense was approximately $279,000$322,000, during the three months ended March 31, 2022.2023.
The aggregate future minimum lease payments and reconciliation to lease liabilities as of March 31, 2022 2023 were as follows:
March 31, | March 31, | |||||||
2022 | 2023 | |||||||
Remaining nine months of 2022 | $ | 757,000 | ||||||
2023 | 1,017,000 | |||||||
Remaining nine months of 2023 | $ | 763,000 | ||||||
2024 | 484,000 | 484,000 | ||||||
2025 | 365,000 | 365,000 | ||||||
Total future minimum lease payments | 2,623,000 | 1,612,000 | ||||||
Less imputed interest | (150,000 | ) | (77,000 | ) | ||||
Total Lease liabilities | $ | 2,473,000 | ||||||
Total lease liabilities | $ | 1,535,000 | ||||||
As of March 31, 2022, 2023, the weighted average remaining lease term of the Company’s operating leases was 2.891.9 years. During the three months ended March 31, 2022, 2023, the weighted average discount rate with respect to these leases was 4.07%.
| Income taxes |
The Company accounts for income taxes using the asset and liability method. A valuation allowance is recorded to reduce the carrying amounts of deferred income tax assets unless it is more likely than not that such assets will be realized. The Company’s policy is to record any interest and penalties assessed by the Internal Revenue Service as a component of the provision for income taxes. The Company provides allowances for uncertain income tax positions when it is more likely than not that the position will not be sustained upon examination by the tax authority.
Alpha Pro Tech, Ltd. and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions.
An employer generally does not claim a corporate income tax deduction (which would be in an amount equal to the amount of income recognized by the employee) upon the exercise of its employee's incentive stock options (“ISOs”) unless the employee does not meet the holding period requirements and sells early, making a disqualifying disposition, or if the options otherwise do not qualify as ISOs under applicable tax laws. With non-qualified stock options (“NQSOs”), on the other hand, the employer is typically eligible to claim a deduction upon its employee's exercise of the NQSOs.
| Contingencies |
On June 7, 2022, the Company filed a lawsuit (the “Lawsuit”) in Utah naming as defendants the vendors from which the Company ordered equipment for its facility in Utah (collectively the “Defendants”). The Lawsuit relates to certain equipment ordered from Defendants and paid for by the Company, which Defendants never delivered. In the Lawsuit the Company is seeking the following relief: compensatory damages in the amount $490,000, representing the money the Company paid for the machines it never received, lost profits in the form of mask sales it could have made if Defendants had delivered the machines on the promised date, and other monetary and equitable relief. As of March 31, 2023, the Company has written off the $490,000 balance of the deposit paid for the equipment, pending any recovery in the Lawsuit. As of the date hereof, no counterclaims have been asserted against the Company. The Company believes there would not be any meritorious claims against the Company in the Lawsuit. The Lawsuit has not been resolved and the final outcome, including the potential amount of any recovery for the Company’s claims, is uncertain. Any potential recovery represents a gain contingency in accordance with ASC 450, Contingencies, that has not been recorded as the matter was not resolved as of March 31, 2023. Any recovery will be recorded when received.
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.
16. | Subsequent Events |
The Company has reviewed and evaluated whether subsequent events have occurred from the condensed consolidated balance sheet date of March 31, 2022 2023 through the filing date of this Quarterly Report on Form 10-Q10-Q that would require accounting or disclosure and has concluded that there are no such subsequent events.
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, as well as our Annual Report on Form 10-K for the year ended December 31, 2021,2022, filed with the Securities and Exchange Commission (the “SEC”) on March 11, 202216, 2023 (the “2021“2022 Form 10-K”).
Special Note Regarding Forward-Looking Statements
Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions, including, without limitation, our expected orders, production levels and sales in 20222023 and 2024, 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.
The following are some of the risks that could affect our financial performance or that could cause actual results to differ materially from those expressed or implied in our forward-looking statements:
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● | Failure to remediate the material weakness in our internal control over financial reporting could result in us being unable to accurately and timely report our financial results or comply with the requirements of being a public company, which would adversely affect |
● | We are subject to risks associated with our joint venture. |
● | The effects of the COVID-19 pandemic, including effects on the business and operations of those within our supply chain and on global economic conditions generally, which have had, and could continue to have, a material adverse effect on our business, financial results and results of operations. |
● | The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results. |
● | We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements. |
● | Risks associated with international manufacturing could have a significant effect on our business. |
● | Our |
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● | Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales. |
● | The Company’s results are affected by competitive conditions and customer preferences. |
● | The Company’s growth objectives are largely dependent on the timing and market acceptance of our new product offerings, including our ability to continually renew our pipeline of new products and to bring those products to market. |
● | Global economic conditions could adversely affect the Company’s business and financial results. |
● | Our joint venture may present risks that are only present when third parties are involved. |
● | Global economic conditions could adversely affect the Company’s business and financial results. |
● | We are subject to risks related to climate change and natural disasters or other events beyond our control. |
● | Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and our customers and suppliers and expose the Company to liability, which could adversely impact the Company’s business and reputation. |
● | The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks. |
● | Our common stock price is volatile, which could result in substantial losses for individual shareholders. |
The foregoing list of risks is not exclusive. For a more detailed discussion of the risk factors associated with our business, see the risks described in Part I, Item IA, “Risk Factors,” in the 20212022 Form 10-K. These and many other factors could affect the Company’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.
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 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 SEC. In addition, in accordance with SEC rules, we provide paper copies of our filings free of charge upon request.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the periods reported. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in Note 23 – “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in Item 8.8 of the 20212022 Form 10-K. Since December 31, 2021,2022, there have been no material changes to our critical accounting policies and estimates as described in the 20212022 Form 10-K.
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 products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the “Alpha Pro Tech” brand name, as well as under private label.
Our products are grouped into two business segments: (i) the Building Supply segment, consisting of construction weatherization products, such as housewrap and housewrap accessories and synthetic roof underlayment as well as other woven material; and (ii) the Disposable Protective Apparel segment, consisting of disposable protective garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields.
Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.
Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.
Impact of the Novel Coronavirus (COVID-19)
After the start of the COVID-19 pandemic in early 2020, we experienced a significant surge in customer demand for our proprietary N-95 Particulate Respirator face mask product and other personal protective equipment (“PPE”) products as a result of COVID-19. We experienced a dramatic increase in revenue from sales of PPE products during 2020 and to a lesser extent during 2021, especially with respect to face masks and disposable protective garments, including shoecovers, coveralls, gowns, lab coats and bouffant caps.
In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company ramped up production during the first quarter of 2020 of our PPE products, in particular our N-95 face mask, which is manufactured by the Company in the United States. We addressed the growing customer demand for PPE products by increasing and improving the human, mechanical, and supply chain components behind production, but even with these increases and improvements, customer demand for PPE products exceeded industry supply from time to time.
Since 2020, we have encountered a number of constraints within our supply chain due to government-mandated shutdowns, raw materials shortages and shipping delays. Although we continue to work to alleviate these supply chain issues by securing additional supply sources, in the event of subsequent shutdowns, shortages or delays, our production and sales could be further impacted. Further, we have experienced increases in the costs of raw materials, and if the prices of raw materials continue to rise more rapidly than our sales prices, our profits may be impacted negatively.
Global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in the Company’s supply chain. To date, the inflationary cost pressure has been more pronounced in the Company’s logistics costs, but these supply chain challenges have had a [limited]an impact on the Company’s results of operations and ability to deliver products and services to its customers. However, ifIf shortages in important supply chain materials or logistics challenges continue, the Company could fail to meet product demand. Additionally, if inflationary pressures in logistics or component costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows.
We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees, In addition, the war in Ukraine has further increased existing global supply chain, logistics, and we have enacted enhanced operating protocols to assure their safety and well-being. We believe that we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time. While this remains a fluid situation, all of our U.S. manufacturing sites are currently operating at or above normal production rates. inflationary challenges.
COVID-19 hasand other factors have resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. Additionally, we expect that demand for our Building Supply segment products could be negatively impacted if we experience a decrease inas the overall market for housing starts has decreased and there is increased uncertainty in the housing market and the economy in general, although to date we have not experienced any materialthe negative impact inon our Building Supply segment.segment has been limited.
The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our PPE products resulting from the pandemic had a positive impact on our 2021 and, to a lesser extent, 2022 financial results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, including the duration, scope and severity of the pandemic and new variants, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the efficacy of mass vaccinations, and the resumption of widespread economic activity in certain sectors. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any certainty the likely impact of the COVID-19 pandemic on our future operations.
Management will continue to carefully monitor the current dynamic market conditions and work to respond to them swiftly and effectively.
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 March 31, | For the Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross profit | 36.5 | % | 39.6 | % | 36.1 | % | 36.5 | % | ||||||||
Selling, general and administrative expenses | 24.4 | % | 19.8 | % | 31.3 | % | 24.4 | % | ||||||||
Income from operations | 10.9 | % | 19.0 | % | 3.1 | % | 10.9 | % | ||||||||
Income before provision for income taxes | 11.2 | % | 20.4 | % | 5.0 | % | 11.2 | % | ||||||||
Net income | 8.6 | % | 16.1 | % | 4.0 | % | 8.6 | % | ||||||||
Three months ended March 31, 20222023 compared to three months ended March 31, 20212022
Sales. Consolidated sales for the three monthsquarter ended March 31, 2023 decreased to $13,800,000, from $17,661,000 for the quarter ended March 31, 2022, decreased to $17,661,000, from $23,161,000 for the three months ended March 31, 2021, representing a decrease of $5,500,000,$3,861,000, or 23.7%21.9%. This decrease consisted of decreased sales in both the Building Supply segment of $1,606,000 and the Disposable Protective Apparel segment of $7,397,000, partially offset$2,255,000.
Building Supply Segment
Building Supply segment sales for the quarter ended March 31, 2023 decreased by increased$1,606,000, or 15.7%, to $8,631,000, compared to $10,237,000 for the quarter ended March 31, 2022. The Building Supply segment decrease during the quarter ended March 31, 2023 was primarily due to a 6.9% decrease in sales of housewrap, a 28.7% decrease in sales of synthetic roof underlayment and a 5.6% decrease in sales of other woven material.
The sales mix of the Building Supply segment for the quarter ended March 31, 2023 was approximately 41% for synthetic roof underlayment, 45% for housewrap and 14% for other woven material. That is compared to approximately 48% for synthetic roof underlayment, 40% for housewrap and 12% for other woven material for the quarter ended March 31, 2022. Our synthetic roof underlayment product line primarily includes REX SynFelt®, REX TECHNOply® and TECHNO SB®, and our housewrap product line primarily consists of $1,897,000.REX Wrap®, REX Wrap Plus® and REX™ Wrap Fortis. Housewrap accessories consist of REXTREME Window and Door Flashing and REX™ Premium Seam Tape.
The Building Supply segment showed some weakness in sales in the first quarter of 2023, due to a significant decrease in demand for new home starts as a result of interest rates hikes and economic uncertainty, as well as high levels of inventory on the dealer and distributor side. In the first quarter of 2023, single family housing starts were down 28.6% compared to the same period a year ago. Overall, sales of housewrap products and accessories were down only 6.9%, which is much better than the slowdown in housing starts. Sales of our REX Wrap® and REX Wrap Plus®, our entry level housewrap products, were down 13.0%, despite the major decrease in housing starts as we have continued to acquire new dealers across the country. Management is encouraged by our growth opportunities in REX™ Wrap Fortis, our premium housewrap line, as we continue to make inroads into the multi-family and commercial construction sector as evidenced by an increase of 21.6% in sales in the first quarter of 2023. This is also evident with a 65% increase in sales of housewrap accessories, REXTREME Window and Door Flashing and REX™ Premium Seam Tape, in the first quarter of 2023. Based on product information provided to a growing number of architects who could specify our products as well as the number of jobs we are specified on and the growth of additional bids taking place, Management expects that we will see positive trends relative to the industry for both our entry level and premium housewrap product lines.
Synthetic roof underlayment sales have been significantly affected by the factors mentioned above as well as a push in the market to reduce product selling prices. Synthetic roof underlayment sales were down 28.7% in the first quarter of 2023 compared to the first quarter of 2022, while our actual volume shipped has not been affected nearly as much due to price reductions. Management believes that as we move into the year, we should see a rebound in sales as inventory is alleviated at the dealer and distribution levels. In addition, we are preparing to launch our new line of self-adhered roofing products which we expect will bring additional revenue to our current synthetic roof underlayment line of products.
There is uncertainty in the economy in relation to interest rates and a possible recession and the continued slowdown in building that could impact the Building Supply segment, but we are encouraged regarding the future growth potential for this segment.
Disposable Protective Apparel Segment
Sales for the Disposable Protective Apparel segment for the three monthsquarter ended March 31, 20222023 decreased by $7,397,000,$2,255,000, or 49.9%30.4%, to $7,424,000,$5,169,000, compared to $14,821,000$7,424,000 for the same period of 2021.2022. This segment decrease was due toexperienced an increase of 10.6% in sales of disposable protective garments, offset by a 59.4%75.2% decrease in sales of face masks a 52.2% decrease in face shields and a 41.2%an 81.0% decrease in sales of disposable protective garments, all primarily due to reduced customer demand in the first quarter of 2022 compared to demand in the first quarter of 2021 associated with the COVID-19 pandemic.face shields.
The sales mix of the Disposable Protective Apparel segment for the three monthsquarter ended March 31, 20222023 was approximately 85% for disposable protective garments, 11% for face masks and 4% for face shields. This sales mix is compared to approximately 53% for disposable protective garments, 31% for face masks and 16% for face shields. This sales mix is compared to approximately 45%shields for the quarter ended March 31, 2022.
Sales of disposable protective garments 38% for face masks and 17% for face shields for the three months ended March 31, 2021.
The decrease in face mask sales in the first quarter of 2022, primarily2023 were up 10.6% as our proprietary N-95 Particulate Respirator face mask, resulted from very significant customer demand associated with the COVID-19 pandemic in the same period of 2021.channel partners and our end customers are working through their inventory and their ordering patterns return to normal. Face mask sales in the first quarter of 2022, which were aided by the Omicron variant of COVID-19, were significantly higher than all quarterly sales since the first quarter of 2021. Excluding the first quarter of 2021, face mask sales in the first quarter of 2022 were higher than any other quarter on record with the exception of quarters of past pandemics in 2020 (COVID-19) and 2009 (H1N1) and the outbreak in 2003 (SARS).
The decrease in face shield sales in the first quarter of 2022 was also due to the decline in demand compared to the same period in 2021 associated withare still suffering from the COVID-19 pandemic. As with face mask sales, face shield sales inresidual excess inventories at the first quarter of 2022 were significantly higher than all quarterly sales since the first quarter of 2021 and higher than all other quarters on record except for quarters in 2020 (COVID-19) and a quarter in the early nineties.
Due to COVID-19 variants and other challenges related to efforts to reduce the duration, scope and severity of the pandemic,distributor level. Comparatively, sales of face masks and face shields are expected to remain higher than pre-pandemic levels in the short term, but it is uncertain how long this will continue.
Sales for the disposable protective garments decreased in the first quarter of 2022, primarily due to record sales in the first and second quarters of 2021 resulting from strong orders received from our major international channel partner in 2020 in response to COVID-19. Sales in the first quarter of 2022, as with sales in the second half of 2021, were negatively affected as inventory levels in the supply chain, primarily with our partner mentioned above, were higher than historical. Open orders from this partner have recently improved, indicating that their inventory levels have likely normalized. Although our sales were downinordinately high during the first quarter of 2022 and more in line with pre-pandemic levels, this partner’s salesdue to its end usersthe ongoing demand for the same period were significantly higher than pre-pandemic levels. We are working closely with all of our channel partners to uncover new end-customer sales opportunities.COVID-19 products.
Building Supply Segment
Building Supply segment sales forDuring the three months ended March 31, 2022 increased2023, our Disposable Protective Apparel sales and marketing team presented at numerous national trade shows and distributor meetings for the first time in three years. We are at a point where our team is now directly interacting with our channel partners and end-customers on a regular basis. We are also engaged in many product demonstrations and evaluations in the marketplace. To that end, we just signed an agreement with a larger channel partner and together, we expect to open new doors leading to organic growth.
Gross Profit. Gross profit decreased by $1,897,000,$1,460,000, or 22.7%, to the highest quarter on record of $10,237,000, compared to $8,340,000$4,982,000 for the three monthsquarter ended March 31, 2021. The Building Supply segment increase during2023, from $6,442,000 for the three monthsquarter ended March 31, 2022 was primarily due to a 13.9% increase in sales of synthetic roof underlayment, an 18.4% increase in sales of housewrap and a 116.2% increase in sales of other woven material compared to the same period of 2021.
The sales mix of the Building Supply segment for the three months ended March 31, 2022 was approximately 48% for synthetic roof underlayment, 40% for housewrap and 12% for other woven material. This compared to approximately 52% for synthetic roof underlayment, 41% for housewrap and 7% for other woven material for the three months ended March 31, 2021. Our synthetic roof underlayment product line includes REX SynFelt®, REX TECHNOply® and TECHNO SB®, and our housewrap product line consists of REX Wrap®, REX Wrap® Plus and REX Wrap Fortis®.
Building Supply segment sales have had record quarters in each of the past six quarters, with the highest quarters on record in the second and then third quarters of 2021 and now in the first quarter of 2022. In addition, the fourth quarter of 2020 and the first and fourth quarters of 2021 were quarterly records, at that time, compared to any prior year comparative quarter.
Building Supply segment sales during the first quarter of 2022 experienced continued significant growth due to strong demand for both our synthetic roof underlayment and housewrap products. Synthetic roof underlayment sales increased by 13.9% compared to the first quarter of 2021, which was primarily due to robust sales of our TECHNO SB®25 product line. The housewrap family of products continued to grow with an 18.4% first quarter increase over the prior-year quarter due to growth in new market share as well as high demand for new home construction. Other woven material sales increased in the first quarter of 2022 compared to the same period of 2021 by a significant 116.2% due to increased sales to our major customer.
The Company has committed to increasing production capacity in our Building Supply segment by investing approximately $4.0 million in new equipment, a part of which became operational in the latter part of the third quarter of 2021. This equipment, which is expected to increase our production capacity, has been delayed as a result of supply chain issues, and is now expected in the latter part of the second quarter of 2022 and is expected to be operational in the following quarter.
Management is encouraged by the current demand for the Company’s Building Supply products and anticipates continued growth in 2022. The Company has continued to enjoy increased sales, and being vertically integrated and having control of our manufacturing, unlike most of our competitors, aides in minimizing the effects of worldwide supply chain issues. The synthetic roofing market was strong in 2021 and into early 2022, although the Company has recently seen some retraction in new home starts and re-roofing expenditures. By adding dealers, distribution channels and products in the roofing sector, we remain optimistic with respect to achieving sales growth in 2022. Assuming new home construction remains high, we expect our housewrap sales will continue to grow despite the aforementioned retraction, as our distribution channels continue to expand and we introduce new products for this market.
Gross Profit. Gross profit decreased by $2,737,000, or 29.8%, to $6,442,000 for the three months ended March 31, 2022, from $9,179,000 for the three months ended March 31, 2021. The gross profit margin was 36.1% for the quarter ended March 31, 2023, compared to 36.5% for the three monthsquarter ended March 31, 2022, compared to 39.6% for the three months ended March 31, 2021.2022.
Management believes thatThe gross profit margin likely will continue to beis being negatively affected by significant increases ininventory purchased during last year, which incurred high ocean freight and other transportation costs. Additionally,Ocean freight rates have come down significantly since the latter part of the fourth quarter but our portfolio of products has been affected by much higher than normal raw material costs and increased labor costs. Inlower cost inventory will start to be sold in the current environment, cost increases may rise more rapidly than our sales prices, whichcoming months. Management expects the gross profit margin to improve in 2023, although continuing inflationary pressures could continue to decrease gross profit.affect such improvements.
Selling, General and Administrative Expenses.Expenses. Selling, general and administrative expenses decreasedincreased by $272,000,$7,000, or 5.9%0.2%, to $4,313,000 for the quarter ended March 31, 2023, from $4,306,000 for the three monthsquarter ended March 31, 2022, from $4,578,000 for the three months ended March 31, 2021. However, as2022. As a percentage of net sales, selling, general and administrative expenses increased to 24.4%31.3% for the three monthsquarter ended March 31, 2022, up2023, from 19.8%24.4% for the same period of 2021,2022, primarily as a result of lower net sales.
The change in expenses by segment for the three monthsquarter ended March 31, 20222023 was as follows: Disposable Protective Apparel was down $453,000,up $22,000, or 27.0%1.8%; Building Supply was up $363,000,$174,000, or 26.9%10.2%; and corporate unallocated expenses were down $182,000,$189,000, or 11.8%13.9%. The decreaseincrease in the Disposable Protective Apparel segment expenses was primarily related to marketing and sales travel expenses, partially offset by decreased employee compensation, marketing and commission expenses.compensation. The increase in the Building Supply segment expenses was primarily related to increased employee compensation, marketinginsurance and travel expenses.expenses, partially offset by decreased commission expense. The decrease in corporate unallocated expenses was primarily due to lowerdecreased accrued bonuses, stock option and lower public company expenses.restricted stock expenses and foreign exchange expense.
In accordance with the terms of his employment agreement, the Company’s current President and Chief Executive Officer is entitled to an annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense, up to a maximum of $1.0 million. A bonus amount of $104,000$37,000 was accrued for the three monthsquarter ended March 31, 2022,2023, compared to $249,000$104,000 for the three monthsquarter ended March 31, 2021.2022.
Depreciation and Amortization.Amortization. Depreciation and amortization expense increased by $14,000,$31,000, or 7.1%14.6%, to $243,000 for the quarter ended March 31, 2023, from $212,000 for the three monthsquarter ended March 31, 2022, from $198,000 for the three months ended March 31, 2021.2022. The increase was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment.
Income from Operations.Operations. Income from operations decreased by $2,479,000,$1,498,000, or 56.3%77.9%, to $426,000 for the quarter ended March 31, 2023, compared to $1,924,000 for the three monthsquarter ended March 31, 2022, compared to $4,403,000 for the three months ended March 31, 2021.2022. The decreased income from operations was primarily due to a decrease in gross profit of $2,737,000$1,460,000, an increase in selling, general and administrative expenses of $7,000 and an increase in depreciation and amortization expense of $14,000, partially offset by a decrease in selling, general and administrative expenses of $272,000.$31,000. Income from operations as a percentage of net sales for the three monthsquarter ended March 31, 20222023 was 10.9%3.1%, compared to 19.0%10.9% for the same period of 2021.2022.
Other Income. Other income decreasedincreased by $273,000, or 84.5%,$217,000, to $267,000 for the quarter ended March 31, 2023, from $50,000 for the three months ended March 31, 2022, from $323,000 for the three months ended March 31, 2021.same period of 2022. The decreaseincrease was primarily due to a decreasean increase in equity in income of unconsolidated affiliate of $273,000.$60,000 and an increase in interest income of $157,000.
Income before Provision for Income Taxes. Income before provision for income taxes for the three monthsquarter ended March 31, 20222023 was $1,974,000,$693,000, compared to income before provision for income taxes of $4,726,000$1,974,000 for the same period of 2021,2022, representing a decrease of $2,752,000,$1,281,000, or 58.2%64.9%. This decrease in income before provision for income taxes was due to a decrease in income from operations of $2,479,000 and a decrease$1,498,000, partially offset by an increase in other income of $273,000.$217,000.
Provision for Income TaxesTaxes. . The provision for income taxes for the three monthsquarter ended March 31, 20222023 was $452,000,$141,000, compared to $1,007,000$452,000 for the same period of 2021.2022. The estimated effective tax rate was 20.3% for the quarter ended March 31, 2023, compared to 22.9% for the three monthsquarter ended March 31, 2022, compared to 21.3% for the three months ended March 31, 2021.2022. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.
Net Income. Income. Net income for the three monthsquarter ended March 31, 20222023 was $1,522,000,$552,000, compared to net income of $3,719,000$1,522,000 for the three months ended March 31, 2021,same period of 2022, representing a decrease of $2,197,000,$970,000, or 59.1%63.7%. The decrease in net income was largely associated with the surge in product demand due to the COVID-19 pandemic. The net income decrease comparing the 2022first quarter of 2023 and 2021 periods2022 was due to a decrease in income from operations of $1,498,000 partially offset by an increase in other income of $217,000, resulting in a decrease in income before provision for income taxes of $2,752,000,$1,281,000, partially offset by a decrease in provision for income taxes of $555,000.$311,000. Net income as a percentage of net sales for the three monthsquarter ended March 31, 20222023 was 8.6%4.0%, and net income as a percentage of net sales for the same period of 20212022 was 16.1%8.6%. Basic earnings per common share for the three monthsquarter ended March 31, 2023 and 2022 were $0.05 and 2021 were $0.12, and $0.28, respectively. Diluted earnings per common share for the three monthsquarter ended March 31, 2023 and 2022 were $0.05 and 2021 were $0.12, and $0.27, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2022,2023, the Company had cash and cash equivalents (“cash”) of $14,239,000$13,821,000 and working capital of $51,186,000.$50,086,000. As of March 31, 2022,2023, the Company’s current ratio (current assets/current liabilities) was 27:31:1, compared to a current ratio of 20:22:1 as of December 31, 2021.2022. Cash decreased by 12.7%15.2%, or $2,068,000,$2,469,000 to $14,239,000$13,821,000 as of March 31, 2022,2023, compared to $16,307,000$16,290,000 as of December 31, 2021,2022, and working capital increaseddecreased by $855,000$70,000 from $50,331,000$50,156,000 as of December 31, 2021.2022. The decrease in cash from December 31, 20212022, was due to cash used in operating activities of $ 1,179,000,$1,697,000, cash used in investing activities of $133,000$289,000 and cash used in financing activities of $756,000.$483,000.
Net cash used in operating activities of $1,179,000$1,697,000 for the three months ended March 31, 20222023 was due to net income of $1,522,000, impacted$552,000, as adjusted primarily by the following: stock-based compensation expense of $55,000,$22,000, depreciation and amortization expense of $212,000,$243,000, equity in income of unconsolidated affiliate of $49,000,$109,000, operating lease expense net of accretion of $228,000,$237,000, an increase in accounts receivable of $3,814,000,$3,024,000, a decrease in accounts receivable related party of $865,000, a decrease in prepaid expenses of $736,000,$190,000, a decrease in inventory of $1,086,000,$303,000, a decrease in accounts payable and accrued liabilities of $714,000,$737,000, and a decrease in lease liabilities of $227,000,$239,000, all compared to December 31, 2021.2022.
Accounts receivable increased by $4,028,000,$2,159,000, or 84.3%31.0%, to $8,808,000$9,132,000 as of March 31, 2022,2023, from $4,780,000$6,973,000 as of December 31, 2021.2022. The increase in accounts receivable was primarily related to increased payment terms to our major international channel partner and to higher sales asin March 2023 compared to the fourth quarter of 2021.December 2022. The number of days that sales remained outstanding as of March 31, 2022,2023, calculated by using an average of accounts receivable outstanding and annual revenue, was 3540 days, compared to 2435 days as of December 31, 2021.2022.
Inventory decreased by $1,086,000,$303,000, or 4.3%1.2%, to $23,883,000$24,094,000 as of March 31, 2022,2023, from $24,969,000$24,397,000 as of December 31, 2021.2022. The decrease was due to a decrease in inventory for the Disposable Protective Apparel segment of $1,508,000,$181,000, or 9.3%1.3%, to $14,728,000 offset by an increase$14,204,000 and a decrease in inventory for the Building Supply segment of $421,000$122,000, or 4.8%1.2%, to $9,155,000.$9,890,000.
Prepaid expenses decreased by $736,000,$190,000, or 10.6%3.9%, to $6,207,000$4,712,000 as of March 31, 2022,2023, from $6,943,000$4,902,000 as of December 31, 2021.2022. The decrease was primarily due to decrease indecreased prepaid inventory, partially offset by increased prepayments for tax payments and prepaid inventory.insurance.
Right-of-use assets as of March 31, 20222023, decreased by $228,000$237,000 to $2,420,000$1,488,000 from $2,648,000$1,725,000 as of December 31, 20212022, as a result of amortization of the balance.
Lease liabilities as of March 31, 20222023, decreased by $227,000$239,000 to $2,473,000$1,535,000 from $2,700,000$1,774,000 as of December 31, 2021. The recording of the lease liabilities was the result of adopting ASC 842, Leases.2022. The decrease in the lease liabilities was the result of lease payments made during the year.
Accounts payable and accrued liabilities as of March 31, 20222023 decreased by $714,000,$737,000, or 40.2%48.9%, to $1,064,000,$770,000, from $1,778,000$1,507,000 as of December 31, 2021.2022. The decrease was primarily due to a decrease in accrued bonuses and a decrease in trade accounts payable.payroll.
Net cash used in investing activities was $133,000$289,000 for the three months ended March 31, 2022,2023, compared to net cash used in investing activities of $130,000$133,000 for the same period of 2021.2022. Investing activities for the three months ended March 31, 2023 and 2022 consisted of the purchase of property and equipment of $133,000. Investing activities for the three months ended March 31, 2021 consisted of the purchase of property and equipment of $130,000.equipment.
Net cash used in financing activities was $756,000$483,000 for the three months ended March 31, 2022,2023, compared to net cash used in financing activities of $2,058$756,000 for the same period of 2021.2022. Net cash used in financing activities for the three months ended March 31, 2023 resulted from the payment of $833,000 for the repurchase of common stock partially offset by the proceeds of $350,000 from the exercise of stock options. Net cash used in financing activities for the three months ended March 31, 2022 resulted from the payment of $756,000 for the repurchase of common stock. Net cash used in financing activities for the three months ended March 31, 2021 resulted from the payment of $2,366,000 for the repurchase of common stock partially offset by the proceeds of $308,000 from the exercise of stock options.stocks.
As of March 31, 2022,2023, we had $1,322,000$1,362,000 available for additional stock purchases under our stock repurchase program. During the three months ended March 31, 2022,2023, we repurchased 170,000200,000 shares of common stock at a cost of $756,000.$833,000. As of March 31, 2022,2023, we had repurchased a total of 18,719,91719,660,617 shares of common stock at a cost of approximately $43,198,000$47,158,000 through our repurchase program.program which commenced in 1999. We retire all stock upon repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.
We have committed to increasing production capacity in our Building Supply segment by investing approximately $4.0 million in new equipment, a part of which became operational in the latter part of the third quarter of 2021. As a result of delays in the supply chain the most expensive piece of equipment, for which an approximately $1,000,000 balance remains outstanding, has had a further delay. This amount has not been prepaid and will be paid in full upon delivery of equipment. The equipment was originally anticipated to arrive in the latter part of the fourth quarter of 2021 and is now expected in the latter part of the second quarter of 2022 and is expected to be operational in the third quarter of 2022. The Company expects to fund the remaining balance from cash flow from operations.
We believe that our current cash balance and expected cash flow from operations will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Adoption of the new standard in January 2021 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 March 31, 2022,2023, 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, and such controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
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 at the reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
During the quarter to which this report relates, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 7, 2022, the Company filed a lawsuit (the “Lawsuit”) in Utah naming as defendants the vendors from which the Company ordered equipment for its facility in Utah (collectively the “Defendants”). The Lawsuit relates to certain equipment ordered from Defendants and paid for by the Company, which Defendants never delivered. In the Lawsuit the Company is seeking the following relief: compensatory damages in the amount $490,000, representing the money the Company paid for the machines it never received, lost profits in the form of mask sales it could have made if Defendants had delivered the machines on the promised date, and other monetary and equitable relief. As of March 31, 2023, the Company has written off the $490,000 balance of the deposit paid for the equipment, pending any recovery in the Lawsuit. As of the date hereof, no counterclaims have been asserted against the Company. The Company believes there would not be any meritorious claims against the Company in the Lawsuit. The Lawsuit remains unresolved and the final outcome, including the potential amount of any recovery for the Company’s claims, is uncertain. Any potential recovery represents a gain contingency in accordance with ASC 450, Contingencies, that has not been recorded as the matter was not resolved as of March 31, 2023. Any recovery will be recorded when received.
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.
ITEM 1A. RISK FACTORS
A list of factors that could materially affect our business, financial condition or operating results is described in Part I, Item 1A, “Risk Factors” in the 20212022 Form 10-K. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 20212022 Form 10-K.
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 | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (1) | Approximate Dollar Value Purchased Under the Program (1) | ||||||||||||
January 1 - 31, 2022 | 25,000 | $ | 5.15 | 25,000 | $ | 1,948,000 | ||||||||||
February 1 - 28, 2022 | 40,000 | 4.45 | 40,000 | 1,768,000 | ||||||||||||
March 1 - 31, 2022 | 105,000 | 4.22 | 105,000 | 1,322,000 | ||||||||||||
| 170,000 | $ | 4.41 | 170,000 | |||||||||||||
Issuer Purchases of Equity Securities | ||||||||||||||||
Period | Total Number of Shares Purchased | 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) | ||||||||||||
January 1 - 31, 2023 | 79,000 | $ | 4.11 | 79,000 | $ | 1,868,000 | ||||||||||
February 1 - 28, 2023 | 28,300 | 4.22 | 28,300 | 1,748,000 | ||||||||||||
March 1 - 31, 2023 | 92,700 | 4.12 | 92,700 | 1,362,000 | ||||||||||||
| 200,000 | $ | 4.13 | 200,000 | |||||||||||||
(1) Pursuant to the Company’s share repurchase program, onOn December 15, 2021,2022, the Company announced that the Board of Directors had authorized a $2,000,000 expansion of the Company’s existing share repurchase program. All of the shares included in this table were purchased pursuant to this program. Since the inception of the share repurchase program in 1999, the Company has authorized the repurchase of $48,520,000 of common stock, of which $1,362,000 was available for repurchase as of March 31, 2023. The share repurchase programplan expires on December 15, 2022.2024.
UNREGISTERED SALES OF EQUITY SECURITIES SOLDAND USE OF PROCEEDS
We did not sell any unregistered equity securities during the periodperiods covered by this report.Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
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3.1.1(P) | Certificate of Incorporation of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(f) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893). |
3.1.2(P) | 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(P) | 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). |
| |
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 March 31, |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| (P) Indicates a paper filing with the SEC. |
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: | May 10, | BY: | /s/ Lloyd Hoffman | ||
Lloyd Hoffman | |||||
President and Chief Executive Officer | |||||
DATE: | May 10, | BY: | /s/ Colleen McDonald | ||
Colleen McDonald | |||||
Chief Financial Officer |