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 September 30, 2020

 

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. 01-15725

 

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 L3R 9R2
Markham, Ontario, Canada (Zip Code)
(Address of Principal Executive Offices)  

                   

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 November 2, 2020
Common Stock, $0.01 par value   13,577,845 shares

              

                    

 

 

 

 

Alpha Pro Tech, Ltd.

 

Index

 

PART I. FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements page
     
  Condensed Consolidated Balance Sheets (Unaudited) 1
     
  Condensed Consolidated Statements of Income (Unaudited) 2
     
  Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 5
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 26
     
ITEM 4. Controls and Procedures  26
     
PART II. OTHER INFORMATION 27
     
ITEM IA. Risk Factors 27
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
ITEM 6. Exhibits 30
     
SIGNATURES   31
     
EXHIBITS    

 

 

 

 

 

Alpha Pro Tech, Ltd.

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets (Unaudited)


 

   

September 30,

   

December 31,

 
   

2020

    2019 (1)  

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 24,583,000     $ 6,548,000  

Investments

    173,000       335,000  

Accounts receivable, net of allowance for doubtful accounts of $68,000 as of September 30, 2020 and $53,000 as of December 31, 2019

    9,137,000       3,568,000  

Accounts receivable, related party

    833,000       724,000  

Inventories

    13,155,000       11,303,000  

Prepaid expenses

    4,859,000       3,587,000  

Total current assets

    52,740,000       26,065,000  
                 

Property and equipment, net

    4,086,000       3,943,000  

Goodwill

    55,000       55,000  

Definite-lived intangible assets, net

    9,000       11,000  

Right-of-use assets

    2,501,000       3,178,000  

Equity investment in unconsolidated affiliate

    5,295,000       4,839,000  

Total assets

  $ 64,686,000     $ 38,091,000  
                 

Liabilities and Shareholders' Equity

               

Current liabilities:

               

Accounts payable

  $ 992,000     $ 501,000  

Accrued liabilities

    2,969,000       920,000  

Customer advance payments of orders

    3,218,000       -  

Lease liabilities

    893,000       882,000  

Total current liabilities

    8,072,000       2,303,000  
                 

Lease liabilities, net of current portion

    1,657,000       2,337,000  

Deferred income tax liabilities, net

    224,000       224,000  

Total liabilities

    9,953,000       4,864,000  

Commitments

               

Shareholders' equity:

               

Common stock, $.01 par value: 50,000,000 shares authorized; 13,577,847 and 12,885,273 shares outstanding as of September 30, 2020 and December 31, 2019, respectively

    136,000       129,000  

Additional paid-in capital

    2,539,000       708,000  

Retained earnings

    52,058,000       32,390,000  

Total shareholders' equity

    54,733,000       33,227,000  

Total liabilities and shareholders' equity

  $ 64,686,000     $ 38,091,000  

 

(1) The condensed consolidated balance sheet as of December 31, 2019 has been prepared using information from the audited consolidated balance sheet as of that date.

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

 

1

 

 

Alpha Pro Tech, Ltd.

 

Condensed Consolidated Statements of Income (Unaudited)


 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net sales

  $ 30,027,000     $ 12,027,000     $ 73,681,000     $ 35,745,000  
                                 

Cost of goods sold, excluding depreciation and amortization

    14,891,000       7,807,000       37,378,000       22,616,000  

Gross profit

    15,136,000       4,220,000       36,303,000       13,129,000  
                                 

Operating expenses:

                               

Selling, general and administrative

    4,580,000       3,172,000       13,236,000       10,108,000  

Depreciation and amortization

    186,000       142,000       546,000       410,000  

Total operating expenses

    4,766,000       3,314,000       13,782,000       10,518,000  
                                 

Income from operations

    10,370,000       906,000       22,521,000       2,611,000  
                                 

Other income:

                               

Equity in income of unconsolidated affiliate

    250,000       10,000       456,000       371,000  

Gain (loss) on marketable securities

    (24,000 )     (387,000 )     (42,000 )     223,000  

Interest income, net

    1,000       18,000       17,000       52,000  

Total other income

    227,000       (359,000 )     431,000       646,000  
                                 

Income before provision for income taxes

    10,597,000       547,000       22,952,000       3,257,000  
                                 

Provision for income taxes

    2,490,000       110,000       3,284,000       592,000  
                                 

Net income

  $ 8,107,000     $ 437,000     $ 19,668,000     $ 2,665,000  
                                 
                                 

Basic earnings per common share

  $ 0.60     $ 0.03     $ 1.46     $ 0.20  
                                 

Diluted earnings per common share

  $ 0.58     $ 0.03     $ 1.41     $ 0.20  
                                 

Basic weighted average common shares outstanding

    13,588,554       13,056,173       13,431,210       13,209,598  
                                 

Diluted weighted average common shares outstanding

    14,033,027       13,075,692       13,977,564       13,238,026  

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

 

2

 

 

Alpha Pro Tech, Ltd.

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)


 

For the Nine Months Ended September 30, 2020

                                 
                   

Additional

                 
   

Common Stock

   

Paid-in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance as of December 31, 2019

    12,885,273     $ 129,000     $ 708,000     $ 32,390,000     $ 33,227,000  

Net income

    -       -       -       5,341,000       5,341,000  

Common stock repurchased and retired

    (35,100 )     -       (125,000 )     -       (125,000 )

Stock-based compensation expense

    -       -       91,000       -       91,000  

Options exercised

    712,839       7,000       1,834,000       -       1,841,000  

Balance as of March 31, 2020

    13,563,012     $ 136,000     $ 2,508,000     $ 37,731,000     $ 40,375,000  

Net income

    -       -       -       6,220,000       6,220,000  

Common stock repurchased and retired

    -       -       -       -       -  

Stock-based compensation expense

    -       -       92,000       -       92,000  

Options exercised

    24,835       -       94,000       -       94,000  

Balance as of June 30, 2020

    13,587,847     $ 136,000     $ 2,694,000     $ 43,951,000     $ 46,781,000  

Net income

    -       -       -       8,107,000       8,107,000  

Common stock repurchased and retired

    (20,000 )     -       (281,000 )     -       (281,000 )

Stock-based compensation expense

    -       -       91,000       -       91,000  

Options exercised

    10,000       -       35,000       -       35,000  

Balance as of September 30, 2020

    13,577,847       136,000       2,539,000       52,058,000       54,733,000  

 

For the Nine Months Ended September 30, 2019

                                 
                                         
                   

Additional

                 
   

Common Stock

   

Paid-in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance as of December 31, 2018

    13,502,684     $ 135,000     $ 2,669,000     $ 29,390,000     $ 32,194,000  

Net income

    -       -       -       1,218,000       1,218,000  

Common stock repurchased and retired

    (255,000 )     (2,000 )     (1,006,000 )     -       (1,008,000 )

Stock-based compensation expense

    -       -       122,000       -       122,000  

Options exercised

    33,334       -       60,000       -       60,000  

Balance as of March 31, 2019

    13,281,018     $ 133,000     $ 1,845,000     $ 30,608,000     $ 32,586,000  

Net income

    -       -       -       1,010,000       1,010,000  

Common stock repurchased and retired

    (172,000 )     (2,000 )     (626,000 )     -       (628,000 )

Stock-based compensation expense

    -       -       138,000       -       138,000  

Options exercised

    -       -       -       -       -  

Balance as of June 30, 2019

    13,109,018     $ 131,000     $ 1,357,000     $ 31,618,000     $ 33,106,000  

Net income

    -       -       -       437,000       437,000  

Common stock repurchased and retired

    (121,010 )     (1,000 )     (427,000 )     -       (428,000 )

Stock-based compensation expense

    -       -       93,000       -       93,000  

Options exercised

    16,499       -       35,000       -       35,000  

Balance as of September 30, 2019

    13,004,507       130,000       1,058,000       32,055,000       33,243,000  

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

 

3

 

 

Alpha Pro Tech, Ltd.

 

Condensed Consolidated Statements of Cash Flows (Unaudited)


 

   

For the Nine Months Ended September 30,

 
   

2020

   

2019

 

Cash Flows From Operating Activities:

               

Net income

  $ 19,668,000     $ 2,665,000  

Adjustments to reconcile net income to net cash used in operating activities:

               

Stock-based compensation

    274,000       353,000  

Depreciation and amortization

    546,000       410,000  

Loss (gain) on marketable securities

    42,000       (223,000 )

Equity in income of unconsolidated affiliate

    (456,000 )     (371,000 )

Operating lease expense, net of accretion

    677,000       532,000  

Changes in assets and liabilities:

               

Accounts receivable, net

    (5,569,000 )     (479,000 )

Accounts receivable, related party

    (109,000 )     (372,000 )

Inventories

    (1,852,000 )     (1,377,000 )

Prepaid expenses

    (1,272,000 )     855,000  

Accounts payable and accrued liabilities

    2,540,000       (402,000 )

Customer advance payments of orders

    3,218,000       -  

Lease liabilities

    (669,000 )     (492,000 )
                 

Net cash provided by operating activities

    17,038,000       1,099,000  
                 

Cash Flows From Investing Activities:

               

Purchase of property and equipment

    (687,000 )     (1,164,000 )

Proceeds from sales of marketable securities

    120,000       133,000  
                 

Net cash used in investing activities

    (567,000 )     (1,031,000 )
                 

Cash Flows From Financing Activities:

               

Proceeds from exercise of stock options

    1,970,000       95,000  

Repurchase of common stock

    (406,000 )     (2,064,000 )
                 

Net cash provided (used) in financing activities

    1,564,000       (1,969,000 )
                 

Increase (decrease) in cash

    18,035,000       (1,901,000 )
                 

Cash, beginning of the period

    6,548,000       7,007,000  
                 

Cash, end of the period

  $ 24,583,000     $ 5,106,000  

 

 

Supplemental disclosure of non-cash financing activities:

Upon adoption of ASC 842, Leases, on January 1, 2019, the Company recorded $3,455,000 of right-of-use assets and related operating leases liabilities.

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

 

4

 

Alpha Pro Tech, Ltd.
 

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 and synthetic roof underlayment, as well as other woven material.

 

The Disposable Protective Apparel segment consists of a complete line of disposable protective clothing (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel products, including face masks and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in Food and Drug Administration (“FDA”) approved facilities, regardless of the market served. Based on these similarities, the Infection Control segment was combined with the Disposable Protective Apparel segment during the first quarter of 2019. The disclosures herein reflect this current segmentation.

 

The 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”).

 

The ongoing novel coronavirus (COVID-19) pandemic has adversely affected global economies, financial markets and the overall environment in which we do business. The impact of the COVID-19 pandemic continues to unfold. 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. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity 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, 2019, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”), filed with the SEC on March 10, 2020. The results of operations for the three and nine months ended September 30, 2020 in this Quarterly Report on Form 10-Q are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2019 was prepared using information from the audited consolidated balance sheet contained in the 2019 Form 10-K; however, it does not include all disclosures required by U.S. GAAP for annual consolidated financial statements.

 

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. The Company has determined as of September 30, 2020 that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of September 30, 2020, we had contract liabilities of $3,218,000 as a result of customer advance payments of orders in connection with the COVID-19 pandemic. No such contract liabilities existed as of December 31, 2019. See Note 10 and Note 11 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for information on revenue disaggregated by type and by geographic region.

 

5

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

 

3.

Stock-Based Compensation

 

The Company maintains a stock option plan (the “2004 Option Plan”) under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant date.

 

The Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options, over the determined requisite service period, which is generally ratably over the vesting term.

 

For the nine months ended September 30, 2020 and 2019, 0 and 370,000 stock options were granted under the 2004 Option Plan, respectively. The Company recognized $274,000 and $353,000 in stock-based compensation expense for the nine months ended September 30, 2020 and 2019, respectively.

 

The Company uses the Black-Scholes option-pricing model to value the options. The Company uses historical data to estimate the expected life of the options. The risk-free interest rate for periods within the contractual life of 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.

 

6

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

The following table summarizes stock option activity for the nine months ended September 30, 2020:

 

           

Weighted Average

 
           

Exercise Price

 
   

Options

   

Per Option

 
                 

Options outstanding, December 31, 2019

    1,326,414     $ 2.86  

Granted to employees and non-employee directors

    -       -  

Exercised

    (747,674 )     2.63  

Canceled/expired/forfeited

    -       -  

Options outstanding, September 30, 2020

    578,740       3.43  

Options exercisable, September 30, 2020

    172,167       3.22  

 

As of September 30, 2020, $315,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of 1.31 years.

 

At the Company’s 2020 Annual Meeting of Shareholders held on June 9, 2020, the Company’s shareholders approved the Alpha Pro Tech, Ltd. 2020 Omnibus Incentive Plan (the “2020 Incentive Plan”). The 2020 Incentive Plan provides for the grant of incentive and nonqualified stock options, stock appreciation rights, awards of restricted stock and restricted stock units, performance share awards, cash awards and other equity-based awards to employees (including officers), consultants and non-employee directors of the Company and its affiliates. A total of 1,800,000 shares of the Company’s common stock are reserved for issuance under the 2020 Incentive Plan, plus the number of shares underlying any award granted under the 2004 Option Plan that expires, terminates or is cancelled or forfeited under the terms of the 2004 Option Plan. As a result of the 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. As of September 30, 2020, no equity awards had been granted under the 2020 Incentive Plan.

 

 

 

4.

Investments

 

As of September 30, 2020 and December 31, 2019, investments totaled $173,000 and $335,000, respectively, which consisted of equity securities. Certain marketable securities were sold during the three months ended September 30, 2020, and no marketable securities were sold during the three months ended September 30, 2019. The total loss on marketable securities during the three months ended September 30, 2020 was $24,000, consisting of an unrealized loss of $42,000 and a realized gain of $18,000. Certain marketable securities were sold during both the nine months ended September 30, 2020 and 2019. The total loss on marketable securities during the nine months ended September 30, 2020 was $42,000, and the total gain on marketable securities during the nine months ended September 30, 2019 was $223,000. The loss for the nine months ended September 30, 2020 was due to an unrealized loss of $77,000 and a realized gain of $35,000. The gain for the nine months ended September 30, 2019 was due to an unrealized gain of $168,000 and a realized gain of $55,000.

 

 

5.

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, we adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet with the recognition of new right-of-use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than one year. Upon adoption, both assets and liabilities on our consolidated balance sheet increased by approximately $3,455,000. We have elected a package of transition practical expedients, which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the ROU assets. See also Note 13 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

7

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for public entities for the annual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.

 

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. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time.

 

 

6.

Inventories

 

As of September 30, 2020 and December 31, 2019, inventories consisted of the following:

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 
                 

Raw materials

  $ 7,963,000     $ 4,284,000  

Work in process

    1,905,000       2,559,000  

Finished goods

    3,287,000       4,460,000  
    $ 13,155,000     $ 11,303,000  

  

8

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

 

7.

Equity Investment in Unconsolidated Affiliate

 

In 2005, Alpha ProTech Engineered Products, Inc. (a subsidiary of Alpha Pro Tech, Ltd.) entered into a joint venture with a manufacturer in India, Maple Industries and associates, for the production of building products. Under the terms of the joint venture agreement, a private company, Harmony Plastics Private Limited (“Harmony”), was created with ownership interests of 41.66% owned by Alpha ProTech Engineered Products, Inc. and 58.34% owned by Maple Industries and associates.

 

This joint venture positions Alpha ProTech Engineered Products, Inc. to respond to current and expected increased product demand for housewrap and synthetic roof underlayment and provides future capacity for sales of specialty roofing component products and custom products for industrial applications requiring high quality extrusion coated fabrics. In addition, the joint venture now supplies products for the Disposable Protective Apparel segment.

 

The capital from the initial funding and a bank loan, which loan is guaranteed exclusively by the individual shareholders of Maple Industries and associates and collateralized by the assets of Harmony, were utilized to purchase the original manufacturing facility in India. Harmony currently has four facilities in India (three owned and one rented), consisting of: (1) a 113,000 square foot building for manufacturing building products; (2) a 73,000 square foot building for manufacturing coated material and sewing proprietary disposable protective apparel; (3) a 16,000 square foot facility for sewing proprietary disposable protective apparel; and (4) a 93,000 square foot 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 income. The Company periodically reviews its investment in Harmony for impairment. Management has determined that no impairment was required as of September 30, 2020 or December 31, 2019.

 

For the three months ended September 30, 2020 and 2019, Alpha Pro Tech purchased $4,156,000 and $4,849,000 of inventories, respectively, from Harmony. For the nine months ended September 30, 2020 and 2019, Alpha Pro Tech purchased $12,636,000 and $15,300,000 of inventories, respectively, from Harmony.

 

For the three months ended September 30, 2020 and 2019, the Company recorded equity in income of unconsolidated affiliate of $250,000 and $10,000, respectively, related to Harmony. For the nine months ended September 30, 2020 and 2019, the Company recorded equity in income of unconsolidated affiliate of $456,000 and $371,000, respectively, related to Harmony.

 

As of September 30, 2020, the Company’s investment in Harmony was $5,295,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $4,864,000, less $942,000 in repayments of the advance and $77,000 in dividends.

 

9

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

 

8.

Accrued Liabilities

 

As of September 30, 2020 and December 31, 2019, accrued liabilities consisted of the following:

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 
                 

Payroll expenses and taxes payable

  $ 1,085,000     $ 299,000  

Commissions and bonuses payable and general accrued liabilities

    1,884,000       621,000  
    $ 2,969,000     $ 920,000  

 

 

9.

Basic and Diluted Earnings Per Common Share

 

The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per common share (“EPS”), which utilizes the weighted average number of common shares outstanding without regard to dilutive shares, and “diluted” EPS, which includes all such dilutive shares, for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income (numerator)

  $ 8,107,000     $ 437,000     $ 19,668,000     $ 2,665,000  
                                 

Shares (denominator):

                               

Basic weighted average common shares outstanding

    13,588,554       13,056,173       13,431,210       13,209,598  

Add: dilutive effect of common stock options

    444,473       19,519       546,354       28,428  
                                 

Diluted weighted average common shares outstanding

    14,033,027       13,075,692       13,977,564       13,238,026  
                                 

Earnings per common share:

                               

Basic

  $ 0.60     $ 0.03     $ 1.46     $ 0.20  

Diluted

  $ 0.58     $ 0.03     $ 1.41     $ 0.20  

 

 

10.

Activity of Business Segments

 

The Company operates through two business segments:

 

(1) Building Supply: consisting of a line of construction supply weatherization products. The construction supply weatherization products consist of housewrap and synthetic roof underlayment, as well as other woven material. The majority of the Company’s equity in income of unconsolidated affiliate (Harmony) is included in the total segment income for the Building Supply segment.

 

(2) Disposable Protective Apparel: consisting of a complete line of disposable protective clothing, 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.

 

Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel, including face masks and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in FDA-approved facilities, regardless of the market served. Based on these similarities, we determined that it would be best to consolidate the Infection Control segment into the Disposable Protective Apparel segment beginning with the first quarter of 2019.   

 

10

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

Segment data excludes charges allocated to the principal executive office and other unallocated corporate overhead expenses and income tax. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales.

 

The following table presents consolidated net sales for each segment for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Building Supply

  $ 7,668,000     $ 7,215,000     $ 22,677,000     $ 20,423,000  

Disposable Protective Apparel

    22,359,000       4,812,000       51,004,000       15,322,000  

Consolidated net sales

  $ 30,027,000     $ 12,027,000     $ 73,681,000     $ 35,745,000  

 

 

The following table presents the reconciliation of consolidated segment income to consolidated net income for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Building Supply

  $ 1,307,000     $ 1,010,000     $ 4,023,000     $ 2,819,000  

Disposable Protective Apparel

    10,880,000       839,000       23,733,000       3,140,000  

Total segment income

    12,187,000       1,849,000       27,756,000       5,959,000  
                                 

Unallocated corporate overhead expenses

    1,590,000       1,302,000       4,804,000       2,702,000  

Provision for income taxes

    2,490,000       110,000       3,284,000       592,000  

Consolidated net income

  $ 8,107,000     $ 437,000     $ 19,668,000     $ 2,665,000  

 

 

The following table presents the consolidated net property and equipment, goodwill and definite-lived intangible assets (“consolidated assets”) by segment as of September 30, 2020 and December 31, 2019:

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 
                 

Building Supply

  $ 1,913,000     $ 1,867,000  

Disposable Protective Apparel

    1,193,000       1,087,000  

Total segment assets

    3,106,000       2,954,000  
                 

Unallocated corporate assets

    1,044,000       1,055,000  

Total consolidated assets

  $ 4,150,000     $ 4,009,000  

 

11

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

 

11.

Financial Information about Geographic Areas

 

The following table summarizes the Company’s net sales by geographic region for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales by geographic region

                               

United States

  $ 24,295,000     $ 11,806,000     $ 62,461,000     $ 35,004,000  

International

    5,732,000       221,000       11,220,000       741,000  
                                 

Consolidated net sales

  $ 30,027,000     $ 12,027,000     $ 73,681,000     $ 35,745,000  

 

Net sales by geographic region are based on the countries in which our customers are located.  For the three and nine months ended September 30, 2020, the Company generated approximately $4,514,000 and $6,567,000, respectively, in sales from Australia. No other single country other than the United States was significant to consolidated net sales.  During the three and nine months ended September 30, 2019, the Company did not generate sales from any single country, other than the United States, that were significant to the Company’s consolidated net sales.

 

The following table summarizes the locations of the Company’s long-lived assets by geographic region as of September 30, 2020 and December 31, 2019:

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Long-lived assets by geographic region

               

United States

  $ 2,642,000     $ 2,450,000  

International

    1,444,000       1,493,000  
                 

Consolidated total long-lived assets

  $ 4,086,000     $ 3,943,000  

 

 

12.

Related Party Transactions

 

As of September 30, 2020, the Company had no related party transactions, other than the Company’s transactions with its unconsolidated affiliate, Harmony. See Note 7 of these Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

13.

Leases

 

The Company has operating leases for the Company’s corporate office and manufacturing facilities, which expire at various dates through 2024. The Company’s primary operating lease commitments at September 30, 2020 related to the Company’s manufacturing facilities in Valdosta, Georgia; Nogales, Arizona; and Salt Lake City, Utah, as well as the Company’s corporate headquarters in Markham, Ontario, Canada.

 

As of September 30, 2020, the Company had operating lease right-of-use assets of $2,501,000 and operating lease liabilities of $2,550,000. As of September 30, 2020, we did not have any finance leases recorded on the Company’s condensed consolidated balance sheet. Operating lease expense was approximately $201,000 and $603,000 during the three and nine months ended September 30, 2020, respectively.

 

12

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

The aggregate future minimum lease payments and reconciliation to lease liabilities as of September 30, 2020 were as follows:

 

   

September 30,

 
   

2020

 

Remaining three months of 2020

  $ 273,000  

2021

    1,000,000  

2022

    670,000  

2023

    676,000  

Thereafter

    126,000  

Total future minimum lease payments

    2,745,000  

Less imputed interest

    (195,000 )

Total Lease liabilities

  $ 2,550,000  

 

 

As of September 30, 2020, the weighted average remaining lease term of the Company’s operating leases was 3.97 years. During the nine months ended September 30, 2020, the weighted average discount rate with respect to these leases was 4.28%.

 

 

14.

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 NQSO.

 

The company had an estimated nonrecurring tax benefit of $2.0 million in the first quarter of 2020 as a result of the exercise of disqualified ISOs and the exercise of NQSOs, partially offset by tax expense of an estimated $1.0 million.

 

On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in the 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. The CARES Act currently has minimal impact on the Company.

 

13

 

Alpha Pro Tech, Ltd.
 

Notes to Condensed Consolidated Financial Statements (Unaudited)


 

 
15.

Subsequent Events

 

The Company has reviewed and evaluated whether subsequent events have occurred from the condensed consolidated balance sheet date of September 30, 2020 through the filing date of this Quarterly Report on Form 10-Q that would require accounting or disclosure and has concluded that there are no such subsequent events. 

 

14

 

 

Alpha Pro Tech, Ltd.
 


 

ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2020 (the “2019 Form 10-K”).

 

Special Note Regarding Forward-Looking Statements

 

Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions, including, without limitation, our expected orders, production levels and sales in 2020 and 2021, and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.

 

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:

 

 

Global economic conditions could adversely affect the Company’s business and financial results.

 

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, could have a material adverse effect on our business, financial results and results of operations.

 

The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results.

 

We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements.

 

Risks associated with international manufacturing could have a significant effect on our business.

 

Our joint venture may present risks that are only present when third parties are involved.

 

Our success depends in part on protection of our intellectual property, and our failure to protect our intellectual property could adversely affect our competitive advantage, our brand recognition and our business.

 

Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales.

 

The Company’s results are affected by competitive conditions and customer preferences.

 

The Company’s growth objectives are largely dependent on the timing and market acceptance of our new product offerings, including our ability to continually renew our pipeline of new products and to bring those products to market.

 

Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and our customers and suppliers and expose the Company to liability, which could adversely impact the Company’s business and reputation.

 

The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks.

 

Our common stock price is volatile, which could result in substantial losses for individual shareholders.

 

We invest in a publicly traded entity with a common stock price that is volatile, which could result in substantial losses for the Company.

 

15

 

Alpha Pro Tech, Ltd.
 


 

The foregoing list of risks is not exclusive. For a more detailed discussion of the risk factors associated with our business, see the risks described in Part I, Item IA, “Risk Factors,” in the 2019 Form 10-K and in Part II, Item IA, “Risk Factors,” in this Quarterly Report on Form 10-Q. 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

 

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. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in Note 2 – “Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements in Part I, Item 8 of the 2019 Form 10-K. Our critical accounting policies and estimates include the following:

 

Accounts Receivable: Accounts receivable are recorded at the invoice amount and do not bear interest. The general terms for receivables is net 30 days.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.  The Company determines the allowance based upon historical write-off experience and known conditions about customers’ current ability to pay.  Account balances are charged against the allowance when the potential for recovery is considered remote. For new customers with no order history with the Company we may require advance payments to reduce our credit risk.

 

Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

Leases: We determine if an arrangement is a lease at inception. Operating leases are included as right-of-use (“ROU”) assets and lease liabilities on our condensed consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate, and, therefore, we estimate our incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our condensed consolidated balance sheet with a term of one year or less. We elected a package of transition practical expedients, which included not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.

 

16

 

Alpha Pro Tech, Ltd.
 


 

Revenue Recognition: Net sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Our customer contracts have a single performance obligation: transfer control of products to customers. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring control of products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring control of the promised products to the customer, with revenue being recognized at the point in time when the customer obtains control of the products, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements, at which time a receivable is created for the invoice sent to the customer. Shipping and handling activities are performed prior to the customer obtaining control of the goods, and are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the distribution of the Company’s product to the customers, are recorded in cost of goods sold and are recognized when control of the product is transferred to the customer, which is at the time products are delivered to the 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. The Company has determined that, as of September 30, 2020, it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of September 30, 2020, the Company had contract liabilities of $3,218,000 as a result of customer advance payments of orders connected to the COVID-19 pandemic (see “Impact of the Novel Coronavirus (COVID-19)” below). No such contract liabilities existed as of December 31, 2019.

 

Sales Returns, Rebates and Allowances: Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user product-specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.

 

Stock-Based Compensation: The Company accounts for stock-based awards in accordance with ASC 718, Stock Compensation. ASC 718 requires companies to estimate the fair value of equity-based awards on the date of grant with the related compensation expense recognized ratably over the requisite service period, which generally matches the vesting term.

 

The fair values of stock option grants are determined using the Black-Scholes option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management’s expectations of future volatility, risk-free interest rates from published sources, expected term based on historical data and no dividend yield, as the Board of Directors currently has no plans to pay dividends in the foreseeable future. The Company accounts for option forfeitures as they occur. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, the option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value of such options.

 

17

 

Alpha Pro Tech, Ltd.
 


 

OVERVIEW

 

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel 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: the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and the Disposable Protective Apparel segment, consisting of disposable protective garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. All financial information presented in this report reflects the current segmentation.

 

Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel, including face masks (including the Company’s proprietary N-95 Particulate Respiratory face mask) and face shields, are sold through similar distribution channels, are single-use and disposable, have the purpose of protecting people, products and environments, and have to be produced in FDA-approved facilities, regardless of the market served. Based on these similarities, we determined that it would be best to consolidate the Infection Control segment into the Disposable Protective Apparel segment beginning with the first quarter of 2019.

 

Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing, medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.

 

Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.

 

Impact of the Novel Coronavirus (COVID-19)

 

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. COVID-19 has had, and we expect the virus to continue to have, a number of effects, both positive and negative, on our business operations and financial condition.

 

We have experienced a significant surge in customer demand for our proprietary N-95 Particulate Respirator face mask product 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 the first nine months of the year and expect additional increases for the remainder of 2020, and even beyond, especially with respect to face masks and disposable protective garments, including coveralls, gowns, lab coats and bouffant caps. We have seen significant increases not only in near-term demand, but also in longer-term ongoing purchase orders that have request dates that extend into 2021. Although orders of the Company’s face shield products are expected to remain above historic levels through the fourth quarter of 2020, management now believes that, due to increased competition resulting from relatively low barriers to entry in the face shield market and a surplus of face shields now available to consumers, face shield sales during the fourth quarter will be down from the unprecedented levels experienced in the second and third quarters of 2020, and face shield sales for the second half of the year will be less than the approximately $6.0 million previously expected.

 

18

 

Alpha Pro Tech, Ltd.
 


 

In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company began ramping up production during the first quarter of 2020 of our PPE products, in particular our N-95 face mask, which is manufactured by the Company in the United States. We have addressed the growing customer demand for PPE products by increasing and improving the human, mechanical and supply chain components behind production. Even with these increases and improvements, customer demand for PPE products, face masks in particular, continues to exceed industry supply in many instances, and we believe that this may continue for some time. Due to this customer demand and the current state of the industry, we expect continued face mask sales growth during the fourth quarter and into 2021, but much of our production will be presold. Industry-wide reports also appear to indicate that, even with the significant increase in supply, demand will continue to outpace capacity for immediate utilization, with longer-term stockpiling not realistic until late 2021 and into 2022.

 

We have encountered over the last several months 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 (which have improved since the second quarter) by securing additional supply sources, in the event of subsequent shutdowns, shortages or delays, our production and sales could be further impacted. Further, we expect that prices of raw materials may rise more rapidly in the current environment than our sales prices, which could decrease our profits.

 

We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees. We have enacted enhanced operating protocols to assure the safety and well-being of our employees, placed restrictions on non-essential travel and otherwise adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing. 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. 

 

COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. And, despite the tremendous surge in demand for our PPE products in recent months, we expect that demand for our Building Supply segment products could be negatively impacted by decreased housing starts and increased uncertainty in the housing market and the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment.

 

The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our PPE products resulting from the pandemic has had a positive impact on our year-to-date results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity 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.

 

RESULTS OF OPERATIONS

 

The following table sets forth certain operational data as a percentage of net sales for the periods indicated:

 

   

For the Three Months
Ended September 30,

   

For the Nine Months
Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales

    100.0 %     100.0 %     100.0 %     100.0 %

Gross profit

    50.4 %     35.1 %     49.3 %     36.7 %

Selling, general and administrative expenses

    15.3 %     26.4 %     18.0 %     28.3 %

Income from operations

    34.5 %     7.5 %     30.6 %     7.3 %

Income before provision for income taxes

    35.3 %     4.5 %     31.2 %     9.1 %

Net income

    27.0 %     3.6 %     26.7 %     7.5 %

 

Three months ended September 30, 2020, compared to three months ended September 30, 2019

 

Sales.  Consolidated sales for the three months ended September 30, 2020 increased to $30,027,000, from $12,027,000 for the three months ended September 30, 2019, representing an increase of $18,000,000, or 149.7%. This increase consisted of increased sales in the Disposable Protective Apparel segment of $17,547,000 and increased sales in the Building Supply segment of $453,000.

 

19

 

Alpha Pro Tech, Ltd.
 


 

Building Supply Segment

 

Building Supply segment sales for the three months ended September 30, 2020 increased by $453,000, or 6.3%, to $7,668,000, compared to $7,215,000 for the three months ended September 30, 2019. The Building Supply segment increase was primarily due to an increase in sales of synthetic roof underlayment of 6.7%, an increase in sales of housewrap of 2.1% and an increase of other woven material of 27.8% compared to the same period of 2019.

 

The sales mix of the Building Supply segment for the three months ended September 30, 2020 was approximately 49% for synthetic roof underlayment, 44% for housewrap and 7% for other woven material. This compared to approximately 48% for synthetic roof underlayment, 46% for housewrap and 6% for other woven material for the three months ended September 30, 2019. 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®.

 

The increase in our synthetic underlayment sales was a result of damage stemming from multiple storms in the southeast as well as demand associated with re-roofing and remodeling growth that has been on the rise this year. We have also expanded our distribution network with new dealers for our line of synthetic roof underlayment. The third quarter of 2020 was a record quarter for housewrap sales, and, even though sales in the third quarter were only slightly higher than in the comparative quarter of 2019, sales in the third quarter of 2019 were a record up to that point. The housewrap sales increase was aided by a strong inventory position in the Company’s manufacturing facility in the United States. Sales of both synthetic roof underlayment and housewrap have benefitted from an increase in new home construction during 2020 and management’s determination to expand the Company’s distribution reach to cover the new home growth.

 

At the end of the third quarter of 2020, our backlog of open orders for both the synthetic roof underlayment and housewrap product lines was at higher than historical levels. As a result of the backlog, we anticipate continued growth for the fourth quarter and for 2021 as the industry is forecasting growth of new home construction, along with demand for re-roofing in 2021. Although we expect continued long-term growth in this market segment, given the uncertainty of the economy as a result of the COVID-19 pandemic, short-term growth could be affected.

 

Disposable Protective Apparel Segment

 

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2020 increased by $17,547,000, or 364.7%, to $22,359,000, compared to $4,812,000 for the same period of 2019. This segment increase was due to a 1,627.9% increase in sales of face masks, a 1,024.1% increase in face shields and a 23.8% increase in sales of disposable protective garments.

 

The increase in face mask sales was primarily attributable to increased sales of our proprietary N-95 Particulate Respirator face mask resulting from increased customer demand associated with the COVID-19 pandemic. Face mask sales have grown during each quarter of 2020. Third quarter 2020 face mask sales were $13.4 million, compared to $8.5 million in the second quarter of 2020 and $4.5 million in the first quarter of 2020. Management anticipates significant continued quarterly growth of face masks in the fourth quarter of 2020 and into 2021.

 

The increase in face shield sales was also attributable to the pandemic and further benefited from the Company’s strong inventory position. Due to the surplus of face shields in the market discussed above, the Company expects sales of face shields to decrease significantly in the coming quarters but still to remain above historical levels as the pandemic persists.

 

Disposable protective garment sales experienced a 23.8% increase in the quarter, largely as a result of the pandemic. The Company’s joint venture in India, which is the primary supply source for these products, was under a government-mandated closure that ended in late May 2020, and the manufacturing facilities did not immediately resume full operation, as many employees did not return after the mandate was lifted and new employees had to be trained. This supply chain disruption negatively affected availability and, therefore, sales of the Company’s disposable protective garments in the third quarter of 2020. Conditions at the current time have improved, so similar constraints are not expected to have a material impact on sales in the fourth quarter of 2020.

 

The sales mix of the Disposable Protective Apparel segment for the three months ended September 30, 2020 was approximately 20% for disposable protective garments, 60% for face masks and 20% for face shields. This compared to approximately 76% for disposable protective garments, 16% for face masks and 8% for face shields for the three months ended September 30, 2019.

 

20

 

Alpha Pro Tech, Ltd.
 


 

Nine months ended September 30, 2020 Compared to nine months ended September 30, 2019

 

Consolidated sales for the nine months ended September 30, 2020 increased to $73,681,000 from $35,745,000 for the nine months ended September 30, 2019, representing an increase of $37,936,000, or 106.1%. This increase consisted of increased sales in the Disposable Protective Apparel Segment of $35,682,000 and increased sales in the Building Supply segment of $2,254,000.

 

Building Supply Segment

 

Building Supply segment sales for the nine months ended September 30, 2020 increased by $2,254,000, or 11.0%, to $22,677,000, compared to $20,423,000 for the same period of 2019. The Building Supply segment increase was primarily due to an increase in sales of housewrap of 11.2%, an increase in sales of synthetic roof underlayment of 9.4% and an increase in sales of other woven material of 19.6% compared to the same period of 2019. Synthetic roof underlayment sales increased as a result of increased sales of the Company’s TECHNO family of products. Synthetic roof underlayment and housewrap sales were positively affected by improved U.S. housing starts. Other woven material sales were up as a result of our largest customer in this category increasing its order volume. The sales mix of the Building Supply segment for the nine months ended September 30, 2020 was 46% for synthetic roof underlayment, 45% for housewrap and 9% for other woven material. This compared to 47% for synthetic roof underlayment, 45% for housewrap and 8% for other woven material for the nine months ended September 30, 2019. As the impact of the COVID-19 pandemic continues to unfold, there could be a negative impact in our Building Supply segment, as there could be increased uncertainty with the economy in general. However, to date, we have not experienced any material negative impact in our Building Supply segment.

 

Disposable Protective Apparel Segment

 

Sales for the Disposable Protective Apparel segment for the nine months ended September 30, 2020 increased by $35,682,000, or 232.9%, to $51,004,000, compared to $15,322,000 for the same period of 2019. This segment increase was due to a 989.6% increase in sales of face masks, a 755.6% increase in face shields and a 22.1% increase in sales of disposable protective garments, all primarily due to increased customer demand associated with the pandemic. Open purchase orders for face masks and disposable protective garments remain very strong. The sales mix of the Disposable Protective Apparel segment for the nine months ended September 30, 2020 was 28% for disposable protective garments, 52% for masks and 20% for shields. This sales mix is compared to 76% for disposable protective garments, 16% for masks and 8% for shields for the nine months ended September 30, 2019.

 

Gross Profit.  Gross profit increased by $10,916,000, or 258.7%, to $15,136,000 for the three months ended September 30, 2020, from $4,220,000 for the same period of 2019. The gross profit margin was 50.4% for the three months ended September 30, 2020, compared to 35.1% for the three months ended September 30, 2019. The gross profit margin was positively affected by the significant change in product mix, which was altered due to a surge in customer demand as a result of the COVID-19 pandemic for face masks, in particular our N-95 Particulate Respirator face mask, and face shields, which generally have a higher gross profit margin than our other products.

 

Gross profit increased by $23,174,000, or 176.5%, to $36,303,000 for the nine months ended September 30, 2020, from $13,129,000 for the same period of 2019. The gross profit margin was 49.3% for the nine months ended September 30, 2020, compared to 36.7% for the same period of 2019.

 

21

 

Alpha Pro Tech, Ltd.
 


 

The gross profit margin could be slightly affected in the fourth quarter of 2020 as a result of increases in the prices of some raw materials. However, management expects continued higher gross profit margin for the rest of 2020 and into 2021 due to sales associated with the pandemic.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased by $1,408,000, or 44.4%, to $4,580,000 for the three months ended September 30, 2020, from $3,172,000 for the three months ended September 30, 2019. However, as a percentage of net sales, selling, general and administrative expenses decreased to 15.3% for the three months ended September 30, 2020, from 26.4% for the same period of 2019, primarily as a result of the growth in net sales. The increase in selling, general and administrative expenses was primarily the result of increased employee compensation, increased sales commissions, increased accrued bonuses, increased insurance costs, increased general office expenses and increased factory-related expenses, largely associated with the pandemic.

 

The change in expenses by segment comparing the three months ended September 30, 2020 to the three months ended September 30, 2019 was as follows: Disposable Protective Apparel increased by $665,000, or 65.6%; corporate unallocated expenses increased by $625,000, or 67.9%; and Building Supply increased by $118,000, or 9.6%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased insurance costs, increased factory expenses, increased general office expenses and increased commissions as a result of increased sales. The increase in corporate unallocated expenses was a result of increased accrued bonuses as well as increased public company expenses, general office expenses and professional fees primarily due to the pandemic. The increase in the Building Supply segment expenses was related to increased employee compensation and increased insurance costs.

 

Selling, general and administrative expenses increased by $3,128,000, or 30.9%, to $13,236,000 for the nine months ended September 30, 2020, from $10,108,000 for the nine months ended September 30, 2019. However, as a percentage of net sales, selling, general and administrative expenses decreased to 18.0% for the nine months ended September 30, 2020, down from 28.3% for the same period of 2019, primarily as a result of the growth in net sales.

 

The change in expenses by segment for the nine months ended September 30, 2020 was as follows: Disposable Protective Apparel was up $1,285,000, or 40.1%; Building Supply was up $65,000, or 1.6%; and corporate unallocated expenses were up $1,778,000, or 60.5%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased factory expenses and increased commissions as a result of increased sales. The increase in the Building Supply segment expenses was related to increased employee compensation and increased insurance costs. The increase in corporate unallocated expenses was primarily due to increased accrued bonuses, increased public company expenses and increased professional fees.

 

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 $350,000 was accrued for the three months ended September 30, 2020, compared to $36,000 for the three months ended September 30, 2019. A bonus amount of $1,000,000 was accrued for the nine months ended September 30, 2020, as compared to $171,000 for the same period of 2019.

 

Depreciation and Amortization. Depreciation and amortization expense increased by $44,000, or 31.0%, to $186,000 for the three months ended September 30, 2020, from $142,000 for the three months ended September 30, 2019. Depreciation and amortization expense increased by $136,000, or 33.2%, to $546,000 for the nine months ended September 30, 2020, from $410,000 for the same period of 2019. The increase for the quarter and nine month period was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment and increased corporate depreciation related to computer technology.

 

Income from Operations. Income from operations increased by $9,464,000, or 1044.6%, to $10,370,000 for the three months ended September 30, 2020, compared to $906,000 for the same period of 2019. The increased income from operations was primarily due to an increase in gross profit of $10,916,000, partially offset by an increase in selling, general and administrative expenses of $1,408,000 and an increase in depreciation and amortization expense of $44,000. Income from operations as a percentage of net sales for the three months ended September 30, 2020 was 34.5%, compared to 7.5% for the same period of 2019.

 

22

 

Alpha Pro Tech, Ltd.

 


 

Income from operations increased by $19,910,000, or 762.5%, to $22,521,000 for the nine months ended September 30, 2020, compared to $2,611,000 for the nine months ended September 30, 2019. The increased income from operations was primarily due to an increase in gross profit of $23,174,000, partially offset by an increase in selling, general and administrative expenses of $3,128,000 and an increase in depreciation and amortization expense of $136,000. Income from operations as a percentage of net sales for the nine months ended September 30, 2020 was 30.6%, compared to 7.3% for the same period of 2019.

 

Other Income. Other income increased by $586,000 to $227,000 for the three months ended September 30, 2020, from a loss of $359,000 for the same period of 2019. The increase was primarily due to an increase in equity in income of unconsolidated affiliate of $240,000 and a net increase of $363,000 on a loss on marketable securities resulting in a gain of $24,000 for the three months ended September 30, 2020 compared to a loss on marketable securities of $387,000 and a decrease in interest income of $17,000 during the same period of 2019.

 

Other income consisted of equity in income of unconsolidated affiliate of $250,000 and interest income of $1,000, partially offset by a loss on marketable securities of $24,000 for the three months ended September 30, 2020. Other income consisted of equity in income of unconsolidated affiliate of $10,000, a loss on marketable securities of $387,000 and interest income of $18,000 for the three months ended September 30, 2019.

 

Other income decreased by $215,000 to $431,000 for the nine months ended September 30, 2020, from $646,000 for the same period of 2019. The decrease was primarily due to a loss on marketable securities in 2020 compared to a gain on marketable securities during the same period of 2019, for a net decrease of $265,000, and a decrease in interest income of $35,000, partially offset by an increase in equity in income of unconsolidated affiliate of $85,000.

 

Other income consisted primarily of equity in income of unconsolidated affiliate of $456,000, a loss on marketable securities of $42,000 and interest income of $17,000 for the nine months ended September 30, 2020. Other income consisted of equity in income of unconsolidated affiliate of $371,000, a gain on marketable securities of $223,000 and interest income of $52,000 for the nine months ended September 30, 2019.

 

Income before Provision for Income Taxes.  Income before provision for income taxes for the three months ended September 30, 2020 was $10,597,000, compared to income before provision for income taxes of $547,000 for the same period of 2019, representing an increase of $10,050,000, or 1,837.3%. This increase in income before provision for income taxes was primarily due to an increase in income from operations of $9,464,000 and an increase in other income of $586,000.

 

Income before provision for income taxes for the nine months ended September 30, 2020 was $22,952,000, compared to income before provision for income taxes of $3,257,000 for the nine months ended September 30, 2019, representing an increase of $19,695,000, or 604.7%. This increase in income before provision for income taxes was due to an increase in income from operations of $19,910,000, partially offset by a decrease in other income of $215,000.

 

Provision for Income Taxes. The provision for income taxes for the three months ended September 30, 2020 was $2,490,000, compared to $110,000 for the same period of 2019. The effective tax rate was 23.5% for the three months ended September 30, 2020, compared to 20.1% for the same period of 2019. The Company does not record a tax provision on equity in income of unconsolidated affiliate.

 

The provision for income taxes for the nine months ended September 30, 2020 was $3,284,000, compared to $592,000 for the same period of 2019. The provision for income taxes consisted of an estimated nonrecurring tax benefit of $2.0 million in the first quarter of 2020 as a result of the exercise of disqualified Incentive Stock Options and the exercise of Non-Qualified Stock Options. The estimated effective tax rate was 14.3% for the nine months ended September 30, 2020, compared to 18.2% for the nine months ended September 30, 2019. Excluding the estimated nonrecurring tax benefit of $2.0 million, the estimated effective tax rate was 23.0% for the nine months ended September 30, 2020. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.

 

23

 

Alpha Pro Tech, Ltd.

 


 

Net Income. Net income for the three months ended September 30, 2020 was $8,107,000, compared to net income of $437,000 for the same period of 2019, representing an increase of $7,670,000, or 1,755.1%. The net income increase was due to an increase in income before provison for income taxes of $10,050,000, partially offset by an increase in provision for income taxes of $2,380,000. Net income as a percentage of net sales for the three months ended September 30, 2020 was 27.0%, and net income as a percentage of net sales for the three months ended September 30, 2019 was 3.6%. Basic earnings per common share for the three months ended September 30, 2020 and 2019 were $0.60 and $0.03, respectively. Diluted earnings per common share for the three months ended September 30, 2020 and 2019 were $0.58 and $0.03, respectively.

 

Net income for the nine months ended September 30, 2020 was $19,668,000, compared to net income of $2,665,000 for the same period of 2019, representing an increase of $17,003,000, or 638.0%. Net income for the nine-month period significantly exceeded the Company’s previous net income record for a full annual period – $9.0 million for the year ended December 31, 2009, which resulted primarily from increased sales due to the H1N1 pandemic. The net income increase comparing the 2020 and 2019 periods was due to an increase in income before provision for income taxes of $19,695,000, partially offset by an increase in provision for income taxes of $2,692,000. As mentioned above, a tax benefit from stock options exercised positively impacted net income in the first quarter of 2020. Net income as a percentage of net sales for the nine months ended September 30, 2020 was 26.7%, and net income as a percentage of net sales for the same period of 2019 was 7.5%. Basic earnings per common share for the nine months ended September 30, 2020 and 2019 were $1.46 and $0.20, respectively. Diluted earnings per common share for the nine months ended September 30, 2020 and 2019 were $1.41 and $0.20, respectively.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2020, the Company had cash of $24,583,000 and working capital of $44,668,000, representing an increase in working capital of $20,906,000 from $23,762,000 as of December 31, 2019. As of September 30, 2020, the Company’s current ratio (current assets/current liabilities) was 7:1, compared to a current ratio of 11:1 as of December 31, 2019. The change in current ratio was primarily a result of customer advance payments for future dated PPE orders, which totaled $3.2 million at the end of the third quarter of 2020. Cash increased by 275.4%, or $18,035,000, to $24,583,000 as of September 30, 2020, compared to $6,548,000 as of December 31, 2019. Approximately $3.2 million of the increase in cash was attributable to customer advance payments for future dated PPE orders. The increase in cash from December 31, 2019 was due to cash provided by operating activities of $17,038,000 and cash provided by financing activities of $1,564,000, partially offset by cash used in investing activities of $567,000.

 

We previously had a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. This credit line expired in May 2020, and the Company decided not to renew. The Company has continued its relationship with Wells Fargo, with the exception of the line of credit. The Company determined that the credit line is not necessary at this time, as it had not been used in several years, and the Company currently has sufficient funding from operations.

 

Net cash provided by operating activities of $17,038,000 for the nine months ended September 30, 2020 was due to net income of $19,668,000, impacted primarily by the following: stock-based compensation expense of $274,000, depreciation and amortization expense of $546,000, loss on marketable securities of $42,000, equity in income of unconsolidated affiliate of $456,000, operating lease expense net of accretion of $677,000, an increase in accounts receivable of $5,678,000, an increase in prepaid expenses of $1,272,000, an increase in inventory of $1,852,000, an increase in accounts payable and accrued liabilities of $5,758,000 and a decrease in lease liabilities of $669,000.

 

Accounts receivable increased by $5,678,000, or 132.3%, to $9,970,000 as of September 30, 2020, from $4,292,000 as of December 31, 2019. The increase in accounts receivable was related to increased sales. The number of days that sales remained outstanding as of September 30, 2020, calculated by using an average of accounts receivable outstanding and annual revenue, was 35 days, compared to 34 days as of December 31, 2019.

 

24

 

Alpha Pro Tech, Ltd.

 


 

Inventory increased by $1,852,000, or 16.4%, to $13,155,000 as of September 30, 2020, from $11,303,000 as of December 31, 2019. The increase was primarily due to an increase in inventory for the Disposable Protective Apparel segment of $2,964,000, or 52.9%, to $8,572,000, partially offset by a decrease in inventory for the Building Supply segment of $1,112,000, or 19.5%, to $4,583,000.

 

Prepaid expenses increased by $1,272,000, or 35.5%, to $4,859,000 as of September 30, 2020, from $3,587,000 as of December 31, 2019. The increase was primarily due to prepayments for machinery and equipment, as well as inventory.

 

Right-of-use assets as of September 30, 2020 decreased by $677,000 to $2,501,000 from $3,178,000 as of December 31, 2019 as a result of amortization of the balance.

 

Lease liabilities as of September 30, 2020 decreased by $669,000 to $2,550,000 from $3,219,000 as of December 31, 2019. The recording of the lease liabilities was the result of adopting ASC 842, Leases. The decrease in the lease liabilities was the result of lease payments made during the year.

 

Accounts payable and accrued liabilities as of September 30, 2020 increased by $2,540,000, or 178.8%, to $3,961,000, from $1,421,000 as of December 31, 2019. The increase was primarily due to an increase in accounts payable as a result of increased raw material purchases, an increased in accrued liabilities, an increase in accrued bonuses and an increase in accrued taxes.

 

Customer advance payment of orders as of September 30, 2020 was $3,218,000, which was the result of customer deposits for future dated PPE orders in response to the COVID-19 pandemic. There were no advance payments of this nature as of December 31, 2019.

 

Net cash used in investing activities was $567,000 for the nine months ended September 30, 2020, compared to net cash used in investing activities of $1,031,000 for the same period of 2019. Investing activities for the nine months ended September 30, 2020 consisted of the purchase of property and equipment of $687,000 for both the Building Supply segment and the Disposable Protective Apparel segment and proceeds from the sale of marketable securities of $120,000. Investing activities for the nine months ended September 30, 2019 consisted of the purchase of property and equipment of $1,164,000 for both the Building Supply segment and the Disposable Protective Apparel segment and proceeds from the sale of marketable securities of $133,000.

 

Net cash provided by financing activities was $1,564,000 for the nine months ended September 30, 2020, compared to net cash used in financing activities of $1,969,000 for the same period of 2019. Net cash provided by financing activities for the nine months ended September 30, 2020 resulted from proceeds of $1,970,000 from the exercise of stock options, partially offset by the payment of $406,000 for the repurchase of common stock. Net cash used in financing activities for the nine months ended September 30, 2019 resulted from the payment of $2,064,000 for the repurchase of common stock, partially offset by proceeds of $95,000 from the exercise of stock options.

 

As of September 30, 2020, we had $6,745,000 available for additional stock purchases under our stock repurchase program. For the nine months ended September 30, 2020, we repurchased 55,100 shares of common stock at a cost of $406,000. As of September 30, 2020, we had repurchased a total of 17,942,917 shares of common stock at a cost of $35,774,000 through our repurchase program. We retire all stock upon repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.

 

We believe that our current cash balance will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.

 

25

 

Alpha Pro Tech, Ltd.

 


 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, we adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet with the recognition of new right-of-use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than one year. Upon adoption, both assets and liabilities on our consolidated balance sheet increased by approximately $3,455,000. We have elected a package of transition practical expedients, which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the ROU assets. See also Note 13 of the Notes to Condensed Consolidated Financial Statements (Unaudited), which appear elsewhere in this report, for more information.

 

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for public entities for the annual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.

 

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. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

Management periodically reviews new accounting standards that are issued.  Management has not identified any other new standards that it believes merit further discussion 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 September 30, 2020, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Disclosure controls and procedures are the controls and other procedures that we have designed to ensure that we record, process, summarize and report in a timely manner the information that we must disclose in reports that we file with or submit to the SEC under the Exchange Act, 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.

 

26

 

Alpha Pro Tech, Ltd.

 


 

In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and that we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective 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 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 2019 Form 10-K. There have been no material changes to our risk factors from those disclosed in Part I, Item 1A, “Risk Factors” in the 2019 Form 10-K, other than as described in the risk factor below.

 

The effects of the COVID-19 pandemic could have a material adverse effect on our business, financial results and results of operations.

 

In December 2019, COVID-19 surfaced in Wuhan, China, and over the course of the first quarter of 2020, the World Health Organization escalated its assessment of the COVID-19 threat, finally characterizing it as a pandemic on March 11, 2020. The situation relating to the COVID-19 pandemic is complex and still evolving, with a broad number of governmental and commercial efforts to contain the spread of the virus globally. The duration and extent of the impact of the COVID-19 pandemic on our business, operations and financial results depends on factors that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees, customers, industry partners, suppliers and third-party dealers and distributors.

 

Federal, state and local governments, as well as foreign governments, have imposed numerous protocols and regulations in an effort to limit the spread of the COVID-19. We have implemented a number of measures in an effort to protect our employees’ health and well-being, including having certain office workers work remotely and suspending employee travel. The potential negative effects to our operations, including reductions in production levels, research and development activities and increased costs resulting from our efforts to mitigate the impact of COVID-19, may adversely affect our ability to provide our products. Conversely, the implications of unsuccessfully implementing health and well-being measures, which could, for example, result in workers at our manufacturing facilities testing positive for COVID-19, would also adversely affect our business, including resulting in a product recall. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time.

 

27

 

Alpha Pro Tech, Ltd.

 


 

Although we have experienced increased sales and significantly increased demand for our PPE products, the global COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities. Disruptions relating to the COVID-19 pandemic, including shelter-in-place orders in the U.S., Mexico, India and other countries, have prevented and could continue to prevent employees, suppliers, distributors and others from accessing manufacturing facilities and from transporting our products or the components required to manufacture our products. For example, the government-mandated closure in India, which started in late March and ended in May 2020, impacted our order fulfillment and revenue growth related to our disposable protective garments. Any government regulation may also impact our ability to supply and ship our products to certain customers, which could lead to cancellation of some orders. Further, worldwide supply chain disruption relating to the COVID-19 pandemic has resulted in product shortages that have impacted and may continue to impact our ability to manufacture our products. We currently utilize third parties to, among other things, manufacture certain components and materials for our products, and to provide services such as sterilization services, and we purchase these materials and services from numerous suppliers worldwide. If either we or any third parties in the supply chain for materials used in the production of our products are adversely impacted by the COVID-19 pandemic, including the restrictions resulting from the COVID-19 pandemic, our supply chain may continue to be disrupted, limiting our ability to manufacture our products. These disruptions may, among other things, continue to impact our ability to produce and supply products in quantities necessary to meet market demand.

 

Further, in connection with the COVID-19 pandemic and in an effort to increase the wider availability of needed medical and other supplies and products, we may elect to, or governments may require us to, allocate our products (for example, pursuant to the U.S. Defense Production Act (the “DPA”)) in a way that adversely affects our regular operations and financial results, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. Likewise, suppliers of our raw materials who are subject to requests under the DPA may be unable to fulfill our orders for those raw materials, or such fulfillment could be delayed. In addition, unpredictable increases in demand for certain of our products could, or in some cases may continue to, exceed our capacity to meet such demand, which could adversely affect our financial results and customer relationships and result in negative publicity.

 

As a result of the COVID-19 pandemic, we have experienced a significant increase in orders of our PPE products from both legacy and new customers. Because of the uncertainty associated with the pandemic, we may experience a decrease in sales from certain of these customers at the point at which conditions related to the virus change or improve and demand for these products subsides, which could impact our expectations of future orders and sales.

 

COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy, which has, in turn, negatively impacted interest rates and foreign currency exchange rates. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced and may continue to experience cost increases from some of our suppliers. Additionally, decreased housing starts and increased uncertainty in the housing market could negatively impact demand for our Building Supply segment products.

 

Moreover, the impacts of the COVID-19 pandemic may exacerbate other pre-existing risks, such as political, regulatory, social, financial, operational and cybersecurity risks, and those associated with global economic conditions, any of which could have a material adverse effect on our business.

 

28

 

Alpha Pro Tech, Ltd.

 


 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act:

 

   

Issuer Purchases of Equity Securities

 

Period

 

Total Number of
Shares Purchased

   

Weighted Average
Price Paid per Share

   

Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (1)

   

Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Program (1)

 

July 1 - 31, 2020

    -       -       -     $ 2,027,000  

August 1 - 31, 2020

    -       -       -       2,027,000  

September 1 - 30, 2020

    20,000     $ 13.96       20,000       6,745,000  
      20,000               20,000          

 

(1) Pursuant to the Company’s share repurchase program, on September 22, 2020, the Company announced that the Board of Directors had authorized a $5,000,000 expansion of the Company’s existing share repurchase program. All of the shares included in this table were purchased pursuant to this program.

 

SECURITIES SOLD

 

We did not sell unregistered equity securities during the period covered by this report.

 

29

 

Alpha Pro Tech, Ltd.
 


 

ITEM 6. EXHIBITS

 

3.1.1(P)

Certificate of Incorporation of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(f) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893).

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).

3.2(P)

Bylaws of Alpha Pro Tech, Ltd., incorporated by reference to Exhibit 3(g) to Form 10-K for the year ended December 31, 1994, filed on March 31, 1995 (File No. 000-19893).

31.1

Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – President and Chief Executive Officer.

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.

101

Interactive Data Files for Alpha Pro Tech, Ltd’s Form 10-Q for the period ended September 30, 2020.

 

(P) Indicates a paper filing with the SEC.

 

30

 

Alpha Pro Tech, Ltd.
 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

     

ALPHA PRO TECH, LTD.

 

 

     

 

 

 

DATE:

November 6, 2020    

BY:

/s/ Lloyd Hoffman 

 

 

     

 

Lloyd Hoffman 

 

 

     

 

President and Chief Executive Officer

 

             
DATE: November 6, 2020     BY: /s/Colleen McDonald  
          Colleen McDonald  
          Chief Financial Officer   

 

31
ex_210702.htm

Alpha Pro Tech, Ltd.

 

Certification Under Exchange Act Rules 13a – 14(a) and 15d – 14(a) Exhibit 31.1

 

I, Lloyd Hoffman, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Alpha Pro Tech, Ltd.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

 

 

 

 

DATE: November 6, 2020  

BY:

/s/ Lloyd Hoffman

 

 

 

 

 

Lloyd Hoffman

 

 

 

 

 

President and Chief Executive Officer

 

        (Principal Executive Officer)  
 
ex_210703.htm

Alpha Pro Tech, Ltd.

 

Certification Under Exchange Act Rules 13a – 14(a) and 15d – 14(a) Exhibit 31.2

 

I, Colleen McDonald, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Alpha Pro Tech, Ltd.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

DATE:  November 6, 2020  

BY:

/s/ Colleen McDonald

 

 

 

 

 

Colleen McDonald

 

 

 

 

 

Chief Financial Officer

 

        (Principal Financial and Accounting Officer)  

 

 
ex_210704.htm

Alpha Pro Tech, Ltd.

 

Exhibit 32.1

 

 

Alpha Pro Tech, Ltd.

 

CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

 

AS ADOPTED PURSUANT TO

 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Alpha Pro Tech, Ltd. (the “Company”) on Form 10-Q for the quarter ended September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lloyd Hoffman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

DATE:

November 6, 2020

 

BY:

/s/ Lloyd Hoffman

 

 

 

 

 

Lloyd Hoffman

 

 

 

 

 

President and Chief Executive Officer

 

 

 
ex_210705.htm

Alpha Pro Tech, Ltd.

 

Exhibit 32.2

 

 

Alpha Pro Tech, Ltd.

 

CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

 

AS ADOPTED PURSUANT TO

 

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

In connection with the Quarterly Report of Alpha Pro Tech, Ltd. (the “Company”) on Form 10-Q for the quarter ended September 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Colleen McDonald, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

 

DATE:

November 6, 2020 

 

BY:

/s/ Colleen McDonald

 

 

 

 

 

Colleen McDonald

 

 

 

 

 

Chief Financial Officer

 

              

 
v3.20.2
Document And Entity Information - shares
9 Months Ended
Sep. 30, 2020
Nov. 02, 2020
Document Information [Line Items]    
Entity Registrant Name ALPHA PRO TECH LTD  
Entity Central Index Key 0000884269  
Trading Symbol apt  
Current Fiscal Year End Date --12-31  
Entity Filer Category Non-accelerated Filer  
Entity Current Reporting Status Yes  
Entity Emerging Growth Company false  
Entity Small Business true  
Entity Interactive Data Current Yes  
Entity Common Stock, Shares Outstanding (in shares)   13,577,845
Entity Shell Company false  
Document Type 10-Q  
Document Period End Date Sep. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Title of 12(b) Security Common Stock, $0.01 par value  
v3.20.2
Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($)
Sep. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 24,583,000 $ 6,548,000 [1]
Investments 173,000 335,000 [1]
Accounts receivable, net of allowance for doubtful accounts of $68,000 as of September 30, 2020 and $53,000 as of December 31, 2019 9,137,000 3,568,000 [1]
Accounts receivable, related party 833,000 724,000 [1]
Inventories 13,155,000 11,303,000 [1]
Prepaid expenses 4,859,000 3,587,000 [1]
Total current assets 52,740,000 26,065,000 [1]
Property and equipment, net 4,086,000 3,943,000 [1]
Goodwill 55,000 55,000 [1]
Definite-lived intangible assets, net 9,000 11,000 [1]
Right-of-use assets 2,501,000 3,178,000 [1]
Equity investment in unconsolidated affiliate 5,295,000 4,839,000 [1]
Total assets 64,686,000 38,091,000 [1]
Current liabilities:    
Accounts payable 992,000 501,000 [1]
Accrued liabilities 2,969,000 920,000 [1]
Customer advance payments of orders 3,218,000 [1]
Lease liabilities 893,000 882,000 [1]
Total current liabilities 8,072,000 2,303,000 [1]
Lease liabilities, net of current portion 1,657,000 2,337,000 [1]
Deferred income tax liabilities, net 224,000 224,000 [1]
Total liabilities 9,953,000 4,864,000 [1]
Commitments
Shareholders' equity:    
Common stock, $.01 par value: 50,000,000 shares authorized; 13,577,847 and 12,885,273 shares outstanding as of September 30, 2020 and December 31, 2019, respectively 136,000 129,000 [1]
Additional paid-in capital 2,539,000 708,000 [1]
Retained earnings 52,058,000 32,390,000 [1]
Total shareholders' equity 54,733,000 33,227,000 [1]
Total liabilities and shareholders' equity $ 64,686,000 $ 38,091,000 [1]
[1] The condensed consolidated balance sheet as of December 31, 2019 has been prepared using information from the audited consolidated balance sheet as of that date.
v3.20.2
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($)
Sep. 30, 2020
Dec. 31, 2019
[1]
Allowance for doubtful accounts $ 68,000 $ 53,000
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 50,000,000 50,000,000
Common stock, shares outstanding (in shares) 13,577,847 12,885,273
[1] The condensed consolidated balance sheet as of December 31, 2019 has been prepared using information from the audited consolidated balance sheet as of that date.
v3.20.2
Condensed Consolidated Statements of Income (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Net sales $ 30,027,000 $ 12,027,000 $ 73,681,000 $ 35,745,000
Cost of goods sold, excluding depreciation and amortization 14,891,000 7,807,000 37,378,000 22,616,000
Gross profit 15,136,000 4,220,000 36,303,000 13,129,000
Operating expenses:        
Selling, general and administrative 4,580,000 3,172,000 13,236,000 10,108,000
Depreciation and amortization 186,000 142,000 546,000 410,000
Total operating expenses 4,766,000 3,314,000 13,782,000 10,518,000
Income from operations 10,370,000 906,000 22,521,000 2,611,000
Other income:        
Equity in income of unconsolidated affiliate 250,000 10,000 456,000 371,000
Gain (loss) on marketable securities (24,000) (387,000) (42,000) 223,000
Interest income, net 1,000 18,000 17,000 52,000
Total other income 227,000 (359,000) 431,000 646,000
Income before provision for income taxes 10,597,000 547,000 22,952,000 3,257,000
Provision for income taxes 2,490,000 110,000 3,284,000 592,000
Net income $ 8,107,000 $ 437,000 $ 19,668,000 $ 2,665,000
Basic earnings per common share (in dollars per share) $ 0.60 $ 0.03 $ 1.46 $ 0.20
Diluted earnings per common share (in dollars per share) $ 0.58 $ 0.03 $ 1.41 $ 0.20
Basic weighted average common shares outstanding (in shares) 13,588,554 13,056,173 13,431,210 13,209,598
Diluted weighted average common shares outstanding (in shares) 14,033,027 13,075,692 13,977,564 13,238,026
v3.20.2
Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($)
Common Stock [Member]
Additional Paid-in Capital [Member]
AOCI Attributable to Parent [Member]
Retained Earnings [Member]
Total
Balance (in shares) at Dec. 31, 2018 13,502,684        
Balance at Dec. 31, 2018 $ 135,000 $ 2,669,000 $ 29,390,000 $ 32,194,000  
Net income 1,218,000 1,218,000  
Common stock repurchased and retired (in shares) (255,000)        
Common stock repurchased and retired $ (2,000) (1,006,000) (1,008,000)  
Stock-based compensation expense 122,000 122,000  
Options exercised (in shares) 33,334        
Options exercised 60,000 60,000  
Balance (in shares) at Mar. 31, 2019 13,281,018        
Balance at Mar. 31, 2019 $ 133,000 1,845,000 30,608,000 32,586,000  
Balance (in shares) at Dec. 31, 2018 13,502,684        
Balance at Dec. 31, 2018 $ 135,000 2,669,000 29,390,000 32,194,000  
Net income         $ 2,665,000
Balance (in shares) at Sep. 30, 2019 13,004,507        
Balance at Sep. 30, 2019 $ 130,000 1,058,000 32,055,000 33,243,000  
Balance (in shares) at Mar. 31, 2019 13,281,018        
Balance at Mar. 31, 2019 $ 133,000 1,845,000 30,608,000 32,586,000  
Net income 1,010,000 1,010,000  
Common stock repurchased and retired (in shares) (172,000)        
Common stock repurchased and retired $ (2,000) (626,000) (628,000)  
Stock-based compensation expense 138,000 138,000  
Options exercised (in shares)        
Options exercised  
Balance (in shares) at Jun. 30, 2019 13,109,018        
Balance at Jun. 30, 2019 $ 131,000 1,357,000 31,618,000 33,106,000  
Net income 437,000 437,000 $ 437,000
Common stock repurchased and retired (in shares) (121,010)        
Common stock repurchased and retired $ (1,000) (427,000) (428,000)  
Stock-based compensation expense 93,000 93,000  
Options exercised (in shares) 16,499        
Options exercised 35,000 35,000  
Balance (in shares) at Sep. 30, 2019 13,004,507        
Balance at Sep. 30, 2019 $ 130,000 1,058,000 32,055,000 33,243,000  
Balance (in shares) at Dec. 31, 2019 12,885,273       12,885,273 [1]
Balance at Dec. 31, 2019 $ 129,000 708,000 32,390,000 33,227,000 $ 33,227,000 [2]
Net income 5,341,000 5,341,000  
Common stock repurchased and retired (in shares) (35,100)        
Common stock repurchased and retired (125,000) (125,000)  
Stock-based compensation expense 91,000 91,000  
Options exercised (in shares) 712,839        
Options exercised $ 7,000 1,834,000 1,841,000  
Balance (in shares) at Mar. 31, 2020 13,563,012        
Balance at Mar. 31, 2020 $ 136,000 2,508,000 37,731,000 40,375,000  
Balance (in shares) at Dec. 31, 2019 12,885,273       12,885,273 [1]
Balance at Dec. 31, 2019 $ 129,000 708,000 32,390,000 33,227,000 $ 33,227,000 [2]
Net income         $ 19,668,000
Options exercised (in shares)         747,674
Balance (in shares) at Sep. 30, 2020 13,577,847       13,577,847
Balance at Sep. 30, 2020 $ 136,000 2,539,000 52,058,000 54,733,000 $ 54,733,000
Balance (in shares) at Mar. 31, 2020 13,563,012        
Balance at Mar. 31, 2020 $ 136,000 2,508,000 37,731,000 40,375,000  
Net income 6,220,000 6,220,000  
Common stock repurchased and retired (in shares)        
Common stock repurchased and retired  
Stock-based compensation expense 92,000 92,000  
Options exercised (in shares) 24,835        
Options exercised 94,000 94,000  
Balance (in shares) at Jun. 30, 2020 13,587,847        
Balance at Jun. 30, 2020 $ 136,000 2,694,000 43,951,000 46,781,000  
Net income 8,107,000 8,107,000 $ 8,107,000
Common stock repurchased and retired (in shares) (20,000)        
Common stock repurchased and retired (281,000) (281,000)  
Stock-based compensation expense 91,000 91,000  
Options exercised (in shares) 10,000        
Options exercised 35,000 35,000  
Balance (in shares) at Sep. 30, 2020 13,577,847       13,577,847
Balance at Sep. 30, 2020 $ 136,000 $ 2,539,000 $ 52,058,000 $ 54,733,000 $ 54,733,000
[1] The condensed consolidated balance sheet as of December 31, 2019 has been prepared using information from the audited consolidated balance sheet as of that date.
[2] The condensed consolidated balance sheet as of December 31, 2019 has been prepared using information from the audited consolidated balance sheet as of that date.
v3.20.2
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Cash Flows From Operating Activities:        
Net income $ 8,107,000 $ 437,000 $ 19,668,000 $ 2,665,000
Adjustments to reconcile net income to net cash used in operating activities:        
Stock-based compensation     274,000 353,000
Depreciation and amortization 186,000 142,000 546,000 410,000
Loss (gain) on marketable securities 24,000 387,000 42,000 (223,000)
Equity in income of unconsolidated affiliate (250,000) (10,000) (456,000) (371,000)
Operating lease expense, net of accretion     677,000 532,000
Changes in assets and liabilities:        
Accounts receivable, net     (5,569,000) (479,000)
Accounts receivable, related party     (109,000) (372,000)
Inventories     (1,852,000) (1,377,000)
Prepaid expenses     (1,272,000) 855,000
Accounts payable and accrued liabilities     2,540,000 (402,000)
Customer advance payments of orders     3,218,000
Lease liabilities     (669,000) (492,000)
Net cash provided by operating activities     17,038,000