# Alpha Pro Tech Ltd: Form 10-Q for the period ended Sep 30, 2022

- Company: [Alpha Pro Tech Ltd](/companies/apt.md) (CIK 884269)
- Form: 10-Q
- Filed: 2022-11-08
- Accepted by EDGAR: Nov 8, 2022, 12:29 ET
- Period: 2022-09-30
- Accession: 0001437749-22-026285
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/884269/000143774922026285/apt20220930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/884269/000143774922026285/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $14.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $49.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $9.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $32.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $4.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $16.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $4.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $12.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $647.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $3.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $159.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $808.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $503.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $2.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 12,688,381 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 12,909,870 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $2.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $349.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-01-01 to 2022-09-30 | $2.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $15.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $52.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $66.5m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $1.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $3.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $62.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,294 characters.

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report, as well as our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2022 (the “2021 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 2022 and 2023, 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:

- The effects of the COVID-19 pandemic, including effects on the business and operations of those within our supply chain and on global economic conditions generally, which have had, and could continue to have, a material adverse effect on our business, financial results and results of operations.
- The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results.
- We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements.
- Risks associated with international manufacturing could have a significant effect on our business.
- Our 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.
- Global economic conditions could adversely affect the Company’s business and financial results.
- Our joint venture may present risks that are only present when third parties are involved.
- Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations, compromise information belonging to the Company and our customers and suppliers and expose the Company to liability, which could adversely impact the Company’s business and reputation.
- The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks.
- Our common stock price is volatile, which could result in substantial losses for individual shareholders.

The foregoing list of risks is not exclusive. For a more detailed discussion of the risk factors associated with our business, see the risks described in Part I, Item IA, “Risk Factors,” in the 2021 Form 10-K. These and many other factors could affect the Company’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.

### Special Note Regarding Smaller Reporting Company Status

We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.

**Where to find more information about us.** We make available, free of charge, on our website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any Current Reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K, and any amendments to such reports, as soon as reasonably practicable following the electronic filing of such reports with the SEC. In addition, in accordance with SEC rules, we provide paper copies of our filings free of charge upon request.

### Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the periods reported. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in Note 2 – “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in Item 8 of the 2021 Form 10-K. Since December 31, 2021, there have been no material changes to our critical accounting policies and estimates as described in the 2021 Form 10-K.

### OVERVIEW

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the “Alpha Pro Tech” brand name, as well as under private label.

Our products are grouped into two business segments: (i) the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and (ii) the Disposable Protective Apparel segment, consisting of disposable protective garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields.

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

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

### Impact of the Novel Coronavirus (COVID-19)

After the start of the COVID-19 pandemic in early 2020, we experienced a significant surge in customer demand for our proprietary N-95 Particulate Respirator face mask product and other personal protective equipment (“PPE”) products as a result of COVID-19. We experienced a dramatic increase in revenue from sales of PPE products during 2020 and to a lesser extent during 2021, especially with respect to face masks and disposable protective garments, including shoecovers, coveralls, gowns, lab coats and bouffant caps.

In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company ramped up production during the first quarter of 2020 of our PPE products, in particular our N-95 face mask, which is manufactured by the Company in the United States. We addressed the growing customer demand for PPE products by increasing and improving the human, mechanical, and supply chain components behind production, but even with these increases and improvements, customer demand for PPE products exceeded industry supply from time to time.

Since 2020, we have encountered a number of constraints within our supply chain due to government-mandated shutdowns, raw materials shortages and shipping delays. Although we continue to work to alleviate these supply chain issues by securing additional supply sources, in the event of subsequent shutdowns, shortages or delays, our production and sales could be further impacted. Further, we have experienced increases in the costs of raw materials, and if the prices of raw materials continue to rise more rapidly than our sales prices, our profits may be impacted negatively.

Global shortages in important components and logistics challenges have resulted in, and will continue to cause, inflationary cost pressure in the Company’s supply chain. To date, the inflationary cost pressure has been more pronounced in the Company’s logistics costs, but these supply chain challenges have had an impact on the Company’s results of operations and ability to deliver products and services to its customers. If shortages in important supply chain materials or logistics challenges continue, the Company could fail to meet product demand. Additionally, if inflationary pressures in logistics or component costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures, all of which would adversely impact our business, financial condition, results of operations, or cash flows. In addition, the war in Ukraine has further increased existing global supply chain, logistics, and inflationary challenges.

We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees, and we have enacted enhanced operating protocols to assure their safety and well-being. We believe that we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities.

COVID-19 and other factors have resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. Additionally, we expect that demand for our Building Supply segment products could be negatively impacted as the overall market for housing starts has decreased and there is increased uncertainty in the housing market and the economy in general, although to date the negative impact on our Building Supply segment has been limited.

Overall, the increase in sales of our PPE products resulting from the pandemic had a positive impact on our 2021 and, to a lesser extent, 2022 financial results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, including the duration, scope and severity of the pandemic and new variants, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the efficacy of mass vaccinations, and the resumption of widespread economic activity in certain sectors. Due to the inherent uncertainty of the unprecedented evolving situation, we are unable to predict with any certainty the likely impact of the COVID-19 pandemic on our future operations.

Management will continue to carefully monitor the current dynamic market conditions and work to respond to them swiftly and effectively.

### RESULTS OF OPERATIONS

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

|  | For the Three Months Ended September 30, 2022 | 2021 | For the Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Gross profit | 32.7% | 34.1% | 33.9% | 36.7% |
| Selling, general and administrative expenses | 27.0% | 26.8% | 24.8% | 22.8% |
| Income from operations | 4.4% | 5.9% | 7.8% | 12.8% |
| Income before provision for income taxes | 4.5% | 6.6% | 7.1% | 13.9% |
| Net income | 3.4% | 5.3% | 5.5% | 11.1% |

### Three months ended September 30, 2022 compared to three months ended September 30, 2021

**Sales.** Consolidated sales for the three months ended September 30, 2022 increased to $14,722,000, from $14,475,000 for the three months ended September 30, 2021, representing an increase of $247,000, or 1.7%. This increase consisted of increased sales in the Disposable Protective Apparel segment of $715,000, partially offset by decreased sales in the Building Supply segment of $468,000.

### Building Supply Segment

Building Supply segment sales for the three months ended September 30, 2022 decreased by $468,000, or 4.6%, to $9,604,000, compared to $10,072,000 for the three months ended September 30, 2021. The Building Supply segment decrease during the three months ended September 30, 2022 was primarily due to a 6.0% decrease in sales of housewrap and a 12.3% decrease in sales of other woven material, partially offset by an increase in sales of synthetic roof underlayment of 3.4% compared to the same period of 2021.

The sales mix of the Building Supply segment for the three months ended September 30, 2022 was approximately 53% for synthetic roof underlayment, 41% for housewrap and 6% for other woven material. This compared to approximately 50% for synthetic roof underlayment, 43% for housewrap and 7% for other woven material for the three months ended September 30, 2021. Our synthetic roof underlayment product line primarily includes REX SynFelt®, REX TECHNOply® and TECHNO SB®, and our housewrap product line primarily consists of REX Wrap®, REX Wrap® Plus and REX Wrap Fortis®.

Core Building Supply product sales (house wrap and synthetic roof underlayment sales, excluding other woven material) in the third quarter of 2022 were the second highest quarter on record, next only to the third quarter of 2021. In addition, we have experienced the five highest quarters on record for the Building Supply segment over the past six quarters: the second and third quarters of 2021 and the first, second and third quarters of 2022. We have also experienced record quarters for the Building Supply segment in seven of the past eight quarters, as compared to each respective prior year comparative quarter.

In the third quarter of 2022, synthetic roof underlayment sales were the second highest quarter on record, primarily due to healthy sales of our economy TECHNO family of products that increased 7.8%, partially offset by an industry-wide decline in premium synthetic roof underlayment sales. There has been an overall increase in inventory levels at the retail level on economy roof underlayment products. The higher inventories, as well as a general retraction in the building and re-roofing markets are expected to continue, which could affect our sales in the near future. Housewrap sales in the third quarter of 2022, also declined as a result of a slowdown in new home construction starts and inventory stockpiles at the dealer side. One of our housewrap growth strategies is to pursue additional market share of the multi-family building market, through the education of architects and introducing new products, which are currently in development, to meet the needs of ever changing building code requirements and customers’ needs. Other woven material sales decreased in the third quarter of 2022 compared to the same period of 2021 by 12.3% due to decreased sales to our major customer, product overstocks and the economic slowdown. As a result, we now expect negative growth in the near term with this product line.

The Company has committed to increasing production capacity in our Building Supply segment by investing approximately $4.0 million in new equipment, a part of which became operational in the latter part of the third quarter of 2021. This equipment, which is expected to increase our production capacity, has been further delayed as a result of supply chain issues, and is now expected in the latter part of the fourth quarter of 2022 and is expected to be operational in the following quarter.

The Building Supply segment has seen some softening during the third quarter of 2022 as a result of a slowdown in new home construction starts, re-roofing expenditures and inventory stockpiles at the dealer side. Even with the slowdown, synthetic roof underlayment sales in the third quarter of 2022 reached the second highest on record, which is due to additional distribution channels becoming operational. To counter balance the slowdown in the single family construction segment, we continue to focus on expanding distribution into the multi-family and commercial construction segments. We expect to see a general slowdown in sales during the fourth quarter as new home construction starts continue to decrease but we do not expect it to be as severe as the deterioration in the broader construction market, since we are also expanding our distribution reach and market share to offset the reduction in construction spending. We are also working to expand our product offerings focused on the wall and roof weatherization side of the construction process. As these new products are introduced, we expect to see an increase in revenue based on completing the overall systems used in construction. Management is encouraged about our growth potential in the coming year. However, there is uncertainty in the economy in relation to interest rates and a possible recession and the continued slowdown in building that could impact the Building Supply segment.

### Disposable Protective Apparel Segment

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2022 increased by $715,000, or 16.2%, to $5,118,000, compared to $4,403,000 for the same period of 2021. This segment increase was due to a 33.0% increase in sales of disposable protective garments, partially offset by a 25.1% decrease in sales of face masks and a 5.6% decrease in sales of face shields.

The sales mix of the Disposable Protective Apparel segment for the three months ended September 30, 2022 was approximately 78% for disposable protective garments, 15% for face masks and 7% for face shields. This sales mix is compared to approximately 69% for disposable protective garments, 23% for face masks and 8% for face shields for the three months ended September 30, 2021.

Sales of disposable garments were significantly higher due to increased customer demand in the third quarter of 2022 compared to demand in the third quarter of 2021. Our customers’ supply chains were overstocked in the third quarter of 2021, due to record sales in the first six months of 2021, which led to lower sales in that quarter. Sales for the disposable protective garments also increased significantly in the third quarter of 2022, primarily due to improved sales to our major international channel partner. Sales of face masks in the third quarter of 2022 were down compared to the same quarter of 2021, which was still aided by increased COVID-19-related demand. Sales of face masks this quarter were in line with pre-pandemic levels but are expected to be lower in the coming months as the market is saturated with face masks. Sales of face shields in the third quarter of 2022 were down compared to the same quarter of 2021 but more in line with pre-pandemic levels. Face shield sales are expected to be lower in the near term. We are continuing to work closely with our channel partners to uncover new end-customer sales opportunities, but expect sales of face masks and face shields to continue to decrease to pre-pandemic levels due to the saturated market.

### Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

Consolidated sales for the nine months ended September 30, 2022 decreased to $49,756,000 from $55,442,000 for the nine months ended September 30, 2021, representing a decrease of $5,686,000, or 10.3%. This decrease consisted of decreased sales in the Disposable Protective Apparel Segment of $8,133,000, partially offset by increased sales in the Building Supply segment of $2,447,000.

### Building Supply Segment

Building Supply segment sales for the nine months ended September 30, 2022 increased by $2,447,000, or 8.7%, to $30,657,000, compared to $28,210,000 for the same period of 2021. The Building Supply segment increase was primarily due to an increase in sales of housewrap of 5.9%, an increase in sales of synthetic roof underlayment of 3.0%, and an increase in sales of other woven material of 75.1% compared to the same period of 2021.

Building Supply segment sales during the first nine months of 2022 experienced growth due to increased demand for our housewrap products, other non-woven products and, to a lesser extent, synthetic roof underlayment products. The housewrap family of products continued to grow with a 5.9% year to date increase over the prior year to date due to growth in new market share as well as high demand for new home construction during the first half of 2022. Other woven material sales increased year to date by 75.1% due to increased sales to our major customer, as well as a new customer. Synthetic roof underlayment sales increased by 3.0% compared to the first nine months of 2021, which was primarily due to robust sales of our economy TECHNO family of products that have increased 10.2% year to date, partially offset by an industry-wide decline in premium synthetic roof underlayment sales.

The sales mix of the Building Supply segment for the nine months ended September 30, 2022 was 47% for synthetic roof underlayment, 41% for housewrap and 12% for other woven material. This compared to 50% for synthetic roof underlayment, 42% for housewrap and 8% for other woven material for the nine months ended September 30, 2021.

### Disposable Protective Apparel Segment

Sales for the Disposable Protective Apparel segment for the nine months ended September 30, 2022 decreased by $8,133,000, or 29.9%, to $19,099,000, compared to $27,232,000 for the same period of 2021. This segment decrease was due to a 22.6% decrease in sales of disposable protective garments, a 47.6% decrease in sales of face masks, and a 25.1% decrease in sales of face shields, all primarily due to increased customer demand associated with the pandemic in 2021. Although sales of disposable protective garments, face masks and face shields are down year to date compared to the same period in 2021, they are above pre-pandemic levels. In addition, our major international channel partner’s sales to its end users of our Disposable Protective Apparel products in 2022 have been significantly higher than pre-pandemic levels.

The sales mix of the Disposable Protective Apparel segment for the nine months ended September 30, 2022 was 67% for disposable protective garments, 21% for face masks and 12% for face shields. This sales mix is compared to 61% for disposable protective garments, 28% for face masks and 11% for face shields for the nine months ended September 30, 2021.

**Gross Profit.** Gross profit decreased by $124,000, or 2.5%, to $4,818,000 for the three months ended September 30, 2022, from $4,942,000 for the three months ended September 30, 2021. The gross profit margin was 32.7% for the three months ended September 30, 2022, compared to 34.1% for the three months ended September 30, 2021.

Gross profit decreased by $3,481,000, or 17.1%, to $16,872,000 for the nine months ended September 30, 2022, from $20,353,000 for the same period of 2021. The gross profit margin was 33.9% for the nine months ended September 30, 2022, compared to 36.7% for the same period of 2021.

Although the gross profit margin has been negatively affected in 2022 by significant increases in ocean freight and other transportation costs, ocean freight rates have started to come down. Additionally, our portfolio of products has been affected by much higher than normal raw material costs and increased labor costs. In the current environment, cost increases may rise more rapidly than our sales prices, which affects gross profit. In order to offset cost increases, the Company increased prices on many products during the latter part of the third quarter of 2022, which should have a positive effect in the coming quarters. Management expects the gross profit margin to improve next year, although continuing inflationary pressures could limit such improvements.

**Selling, General and Administrative Expenses.** Selling, general and administrative expenses increased by $86,000, or 2.2%, to $3,970,000 for the three months ended September 30, 2022, from $3,884,000 for the three months ended September 30, 2021. As a percentage of net sales, selling, general and administrative expenses increased slightly to 27.0% for the three months ended September 30, 2022, from 26.8% for the same period of 2021, primarily as a result of higher expenses.

The change in expenses by segment for the three months ended September 30, 2022 was as follows: Disposable Protective Apparel was down $50,000, or 4.1%; Building Supply was up $69,000, or 4.4%; and corporate unallocated expenses were up $67,000, or 5.8%. The decrease in the Disposable Protective Apparel segment expenses was primarily related to decreased employee compensation, general factory, expenses, partially offset by increased commission, sales travel and rent expenses. The increase in the Building Supply segment expenses was primarily related to increased employee compensation, sales travel, insurance and general office expenses, partially offset by a decrease in marketing and commission expenses. The increase in corporate unallocated expenses was primarily due to higher professional fees and insurance expense.

Selling, general and administrative expenses decreased by $320,000, or 2.5%, to $12,341,000 for the nine months ended September 30, 2022, from $12,661,000 for the nine months ended September 30, 2021. As a percentage of net sales, selling, general and administrative expenses increased to 24.8% for the nine months ended September 30, 2022, up from 22.8% for the same period of 2021, primarily as a result of lower net sales.

The change in expenses by segment for the nine months ended September 30, 2022 was as follows: Disposable Protective Apparel was down $595,000, or 14.0%; Building Supply was up $656,000, or 15.5%; and corporate unallocated expenses were down $381,000, or 9.1%. The decrease in the Disposable Protective Apparel segment expenses was primarily related to decreased employee compensation and general factory expenses, partially offset by increased rent and utilities. The increase in the Building Supply segment expenses was related to increased employee compensation, marketing, travel, insurance and general office expenses, partially offset by decreased commission expense. The decrease in corporate unallocated expenses was primarily due to decreased accrued bonuses, stock option expenses, and public company and general office expenses, partially offset by increased employee compensation and insurance expenses.

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 $36,000 was accrued for the three months ended September 30, 2022, compared to $51,000 for the three months ended September 30, 2021. A bonus amount of $186,000 was accrued for the nine months ended September 30, 2022, compared to $406,000 for the same period of 2021.

**Depreciation and Amortization.** Depreciation and amortization expense decreased by $8,000, or 3.8%, to $201,000 for the three months ended September 30, 2022, from $209,000 for the three months ended September 30, 2021. Depreciation and amortization expense increased by $30,000, or 4.9%, to $641,000 for the nine months ended September 30, 2022, from $611,000 for the same period of 2021. The year to date increase was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment.

**Income from Operations.** Income from operations decreased by $202,000, or 23.8%, to $647,000 for the three months ended September 30, 2022, compared to $849,000 for the three months ended September 30, 2021. The decreased income from operations was primarily due to a decrease in gross profit of $124,000 and an increase in selling, general and administrative expenses of $86,000, partially offset by a decrease in depreciation and amortization expense of $8,000. Income from operations as a percentage of net sales for the three months ended September 30, 2022 was 4.4%, compared to 5.9% for the same period of 2021.

Income from operations decreased by $3,191,000, or 45.1%, to $3,890,000 for the nine months ended September 30, 2022, compared to $7,081,000 for the nine months ended September 30, 2021. The decreased income from operations was primarily due to a decrease in gross profit of $3,481,000 and an increase in depreciation and amortization expense of $30,000, partially offset by a decrease in selling, general and administrative expenses of $320,000. Income from operations as a percentage of net sales for the nine months ended September 30, 2022 was 7.8%, compared to 12.8% for the same period of 2021.

**Other Income.** Other income decreased by $98,000, or 86.7%, to $15,000 for the three months ended September 30, 2022, from $113,000 for the three months ended September 30, 2021. The decrease was due to a decrease in equity in income of unconsolidated affiliate of $125,000 (equity in loss of unconsolidated affiliate of $13,000, compared to equity in income of unconsolidated affiliate of $112,000), partially offset by an increase in interest income of $27,000.

Other income decreased by $989,000 to a loss of $364,000 for the nine months ended September 30, 2022, from other income of $625,000 for the same period of 2021. The decrease was primarily due a loss on fixed assets of $490,000, and a decrease in equity in income of unconsolidated affiliate of $536,000, partially offset by an increase in interest income of $37,000. The loss on fixed assets was due to equipment for the Disposable Protective Apparel segment that was not delivered and the Company has recently filed a lawsuit (the “Lawsuit”) in this matter. See Part II, Item 1, “Legal Proceedings,” for more information on the Lawsuit.

**Income before Provision for Income Taxes.** Income before provision for income taxes for the three months ended September 30, 2022 was $662,000, compared to income before provision for income taxes of $962,000 for the same period of 2021, representing a decrease of $300,000, or 31.2%. This decrease in income before provision for income taxes was due to a decrease in income from operations of $202,000 and a decrease in other income of $98,000.

Income before provision for income taxes for the nine months ended September 30, 2022 was $3,526,000, compared to income before provision for income taxes of $7,706,000 for the nine months ended September 30, 2021, representing a decrease of $4,180,000, or 54.2%. This decrease in income before provision for income taxes was due to a decrease in income from operations of $3,191,000 and a decrease in other income of $989,000.

**Provision for Income Taxes**. The provision for income taxes for the three months ended September 30, 2022 was $159,000, compared to $196,000 for the same period of 2021. The estimated effective tax rate was 24.0% for the three months ended September 30, 2022, compared to 20.4% for the three months ended September 30, 2021. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.

The provision for income taxes for the nine months ended September 30, 2022 was $808,000, compared to $1,550,000 for the same period of 2021. The estimated effective tax rate was 22.9% for the nine months ended September 30, 2022, compared to 20.1% for the nine months ended September 30, 2021. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.

**Net Income.** Net income for the three months ended September 30, 2022 was $503,000, compared to net income of $766,000 for the three months ended September 30, 2021, representing a decrease of $263,000, or 34.3%. The decrease in net income was largely associated with lower gross margin as a result of increased freight and transportation costs, increased raw material costs and selling, general and administrative costs and a decrease in equity in income of unconsolidated affiliate. The net income decrease for the three months ended September 30, 2022 compared to the same period of 2021 was due to a decrease in income from operations of $202,000 and a decrease in other income of $98,000, resulting in a decrease in income before provision for income taxes of $300,000, partially offset by a decrease in provision for income taxes of $37,000. Net income as a percentage of net sales for the three months ended September 30, 2022 was 3.4%, and net income as a percentage of net sales for the same period of 2021 was 5.3%. Basic earnings per common share for the three months ended September 30, 2022, and 2021 were $0.04 and $0.06, respectively. Diluted earnings per common share for the three months ended September 30, 2022 and 2021 were $0.04 and $0.06, respectively.

Net income for the nine months ended September 30, 2022 was $2,718,000, compared to net income of $6,156,000 for the same period of 2021, representing a decrease of $3,438,000, or 55.8%. The net income decrease comparing the 2022 and 2021 periods was due to a decrease in income from operations of $3,191,000 and a decrease in other income of $989,000, resulting in a decrease in income before provision for income taxes of $4,180,000, partially offset by a decrease in provision for income taxes of $742,000. As mentioned above, the $490,000 loss on assets has negatively impacted our net income in 2022. Net income as a percentage of net sales for the nine months ended September 30, 2022 was 5.5%, and net income as a percentage of net sales for the same period of 2021 was 11.1%. Basic earnings per common share for the nine months ended September 30, 2022 and 2021 were $0.21 and $0.46, respectively. Diluted earnings per common share for the nine months ended September 30, 2022 and 2021 were $0.21 and $0.45, respectively.

### LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2022, the Company had cash and cash equivalents (“cash”) of $15,517,000 and working capital of $50,595,000. As of September 30, 2022, the Company’s current ratio (current assets/current liabilities) was 27:1, compared to a current ratio of 20:1 as of December 31, 2021. Cash decreased by 4.8%, or $790,000, to $15,517,000 as of September 30, 2022, compared to $16,307,000 as of December 31, 2021, and working capital increased by $257,000 from $50,338,000 as of December 31, 2021. The decrease in cash from December 31, 2021 was due to cash used in investing activities of $349,000 and cash used in financing activities of $2,772,000, partially offset by cash provided by operating activities of $ 2,331,000.

Net cash provided by operating activities of $2,331,000 for the nine months ended September 30, 2022 was due to net income of $2,718,000, impacted primarily by the following: stock-based compensation expense of $119,000, depreciation and amortization expense of $641,000, equity in income of unconsolidated affiliate of $87,000, operating lease expense net of accretion of $689,000, an increase in accounts receivable of $2,680,000, a decrease in prepaid expenses of $2,374,000, an increase in inventory of $155,000, a decrease in accounts payable and accrued liabilities of $759,000, and a decrease in lease liabilities of $690,000, all compared to December 31, 2021.

Accounts receivable increased by $2,519,000, or 52.7%, to $7,299,000 as of September 30, 2022, from $4,780,000 as of December 31, 2021. The increase in accounts receivable was primarily related to increased sales as compared to the fourth quarter of 2021, and partially due to increased terms to our major international channel partner. The number of days that sales remained outstanding as of September 30, 2022, calculated by using an average of accounts receivable outstanding and annual revenue, was 48 days, compared to 24 days as of December 31, 2021.

Inventory increased by $155,000, or 0.6%, to $25,124,000 as of September 30, 2022, from $24,969,000 as of December 31, 2021. The increase was due to an increase in inventory for the Building Supply segment of $1,504,000, or 17.2%, to $10,237,000, partially offset by a decrease in inventory for the Disposable Protective Apparel segment of $1,349,000, or 8.3%, to $14,887,000.

Prepaid expenses decreased by $2,374,000, or 37.4%, to $4,569,000 as of September 30, 2022, from $6,943,000 as of December 31, 2021. The decrease was primarily due to decreased prepaid inventory and equipment, partially offset by increased prepayments for insurance.

Right-of-use assets as of September 30, 2022 decreased by $689,000 to $1,959,000 from $2,648,000 as of December 31, 2021 as a result of amortization of the balance.

Lease liabilities as of September 30, 2022 decreased by $690,000 to $2,010,000 from $2,700,000 as of December 31, 2021. 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, 2022 decreased by $759,000, or 42.7%, to $1,019,000, from $1,778,000 as of December 31, 2021. The decrease was primarily due to a decrease in accrued bonuses and trade accounts payable.

Net cash used in investing activities was $349,000 for the nine months ended September 30, 2022, compared to net cash used in investing activities of $2,391,000 for the same period of 2021. Investing activities for the nine months ended September 30, 2022 consisted of the purchase of property and equipment of $349,000. Investing activities for the nine months ended September 30, 2021 consisted of the purchase of property and equipment of $2,391,000.

Net cash used in financing activities was $2,772,000 for the nine months ended September 30, 2022, compared to net cash used in financing activities of $3,686,000 for the same period of 2021. Net cash used in financing activities for the nine months ended September 30, 2022 resulted from the payment of $2,832,000 for the repurchase of common stock, partially offset by the proceeds of $60,000 from the exercise of stock options. Net cash used in financing activities for the nine months ended September 30, 2021 resulted from the payment of $4,077,000 for the repurchase of common stock partially offset by the proceeds of $391,000 from the exercise of stock options.

As of September 30, 2022, we had $1,246,000 available for additional stock purchases under our stock repurchase program. During the three months ended September 30, 2022, we repurchased 259,200 shares of common stock at a cost of $1,116,000. As of September 30, 2022, we had repurchased a total of 19,204,617 shares of common stock at a cost of approximately $45,274,000 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 have committed to increasing production capacity in our Building Supply segment by investing approximately $4.0 million in new equipment, a part of which became operational in the latter part of the third quarter of 2021. As a result of delays in the supply chain the most expensive piece of equipment, for which an approximately $900,000 balance remains outstanding, has been delayed. This amount has not been prepaid and will be paid in full upon delivery of equipment. The equipment was originally anticipated to arrive in the fourth quarter of 2021, and is now expected in the latter part of the fourth quarter of 2022. The Company expects to fund the remaining balance from cash flow from operations.

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

### Recent Accounting Pronouncements

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

## Controls and procedures

As filed, 2,230 characters.

**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, 2022, pursuant to the evaluation of these controls and procedures required by Rule 13a-15 of the Exchange Act. Disclosure controls and procedures are the controls and other procedures that we have designed to ensure that we record, process, summarize and report in a timely manner the information that we must disclose in reports that we file with or submit to the SEC under the Exchange Act, and such controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

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

Based on the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

### Changes in Internal Control Over Financial Reporting

During the quarter to which this report relates, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 307 characters.

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 2021 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 2021 Form 10-K.

Filed Nov 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-026285. Last ingested by Listed: Oct 30, 2026, 11:03 ET. No prices; not investment advice.