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 and production levels in 2020 and 2021, and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.
The following are some of the risks that could affect our financial performance or that could cause actual results to differ materially from those expressed or implied in our forward-looking statements:
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Global economic conditions could adversely affect the Company’s business and financial results.
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The effects of the COVID-19 pandemic could have a material adverse effect on our business, financial results and results of operations.
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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.
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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.
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Risks associated with international manufacturing could have a significant effect on our business.
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Our joint venture may present risks that are only present when third parties are involved.
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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.
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Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales.
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The Company’s results are affected by competitive conditions and customer preferences.
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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.
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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.
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The Company’s future results may be affected by various legal and regulatory proceedings and legal compliance risks.
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Our common stock price is volatile, which could result in substantial losses for individual shareholders.
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We invest in a publicly traded entity with a common stock price that is volatile, which could result in substantial losses for the Company.
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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.
Alpha Pro Tech, Ltd.
Special Note Regarding Smaller Reporting Company Status
We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended). As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.
Where to find more information about us. We make available, free of charge, on our 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 electronic or 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.
Alpha Pro Tech, Ltd.
Leases: We determine if an arrangement is a lease at inception. Operating leases are included as right-of-use (“ROU”) assets and lease liabilities on our condensed consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate, and, therefore, we estimate our incremental borrowing rate based on the information available at the commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our condensed consolidated balance sheet with a term of one year or less. We elected a package of transition practical expedients, which included not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.
Revenue Recognition: 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, are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the distribution of the Company’s product to the customers, are recorded in cost of goods sold and are recognized when control of the product is transferred to the customer, which is at the time the products are delivered to or picked up by the customer. We estimate product returns based on historical return rates and estimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon the nature of the private labelling. The Company has determined as of June 30, 2020 that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of June 30, 2020, we had contract liabilities of $6,475,000 as a result of customer advance payments of orders 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 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.
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, face shield products and other personal protective equipment (“PPE”) products as a result of COVID-19. We experienced a dramatic increase in revenue from sales of these products during the first six months and expect additional increases for the remainder of 2020, and even beyond. We have seen significant increases not only in near-term demand, but also in longer-term ongoing purchase orders that have request dates that extend into the first half of 2021.
In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company began ramping up production during the first quarter of 2020 of our N-95 face mask, which is manufactured by the Company in the United States. As of August 1, 2020, the Company had booked approximately $66 million in orders for the Company’s N-95 face mask since January 27, 2020, of which approximately 10% have request dates in 2021. The Company fulfilled approximately $12 million of the orders through the first six months of 2020. At this time, the Company expects approximately $43 million of booked N-95 face mask orders with request dates in 2020 to be fulfilled by the end of the year, and approximately $23 million of the orders will be fulfilled in 2021.
Alpha Pro Tech, Ltd.
During the second quarter of 2020, the Company brought all available phase 1 N-95 production lines into service and secured raw material to support the fulfillment of our anticipated 2020 orders. In the second quarter, one of the raw materials did have availability constraints; however,; the Company has now added additional supply sources, which the Company expects to remove any further bottlenecks and allow full production capacity of phase 1 in the latter part of the third quarter of 2020. Based on increased production capacity and current order demand, the Company expects N-95 face mask sales in the third quarter of 2020 to be significantly higher than the second quarter. The Company continues to expect the phase 2 expansion of additional N-95 face mask manufacturing lines to be initially operational by the latter part of the third quarter of 2020. Once phase 2 is operational, the Company will ramp up production throughout the remainder of 2020 and expects that for fiscal 2021 the production capacity for the N-95 face mask will be over $100 million.
The Company has also seen a significant increase in orders of the Company’s face shield products since January 27, 2020, with approximately $6 million of face shield orders fulfilled in the first six months of 2020. At this time, the Company expects face shield sales in the second half of 2020 to exceed the $6 million in sales through the first six months of the year.
The Company’s other disposable protective garment product line, which include coveralls, gowns, lab coats, shoecovers and bouffant caps, has also seen a significant increase in demand, which primarily began in early March and continued throughout the second quarter. For the remainder of 2020, the Company expects increased demand for these products to continue. During the second quarter of 2020, the Company’s India joint venture ceased production due to a government-mandated COVID-19 shutdown, which impacted inventory levels. With the reopening of the joint venture in June, subsequent to the end of the shutdown, shipping of inventory has recommenced, but the temporary shutdown will impact production and sales of disposable protective garments in the third quarter, and production and sales could be further impacted by subsequent shutdowns. Even with these actual and potential delays, however, the Company expects disposable protective garment sales for the second half of 2020 to show continued top line growth.
The majority of the products that we manufacture are deemed essential by the various jurisdictions in which we operate. We have implemented significant protective measures throughout our facilities, including travel and visitor restrictions, work from home policies, employee screenings, social distancing and use of face coverings as we continue to service our customers. While this remains a fluid situation, all of our U.S. manufacturing sites are currently operating, with the majority of them at or above normal production rates.
Alpha Pro Tech, Ltd.
With the increase in demand has come a number of challenges. Although we remain committed to allocating the necessary resources and procuring the necessary raw materials in an effort to meet the unprecedented demand for our PPE products, we have experienced issues with raw material shortages and supply chain delays due, in large part, to government regulation and mandated closures around the world. For example, our joint venture in India that manufacturers the Company’s PPE lines that include coveralls, gowns, lab coats, shoecovers and bouffant caps was under a country-wide, government mandated closure beginning in late March and lasting through May, 2020. Although we believe that we have back-up options for raw material sourcing and manufacturing, those may be limited, and we expect some continued supply chain disruptions to impact sales in these and other product lines. Government regulation may impact our ability to supply and ship our products to certain customers, which could lead to cancellation of some orders. Further, we expect the prices of raw materials to rise more rapidly than our sales prices, therefore decreasing the gross profit per item that we expect to receive.
We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees. We have enacted enhanced operating protocols to assure the safety and well-being of our employees, placed restrictions on non-essential travel and otherwise adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing and complying with shelter-in-place orders. We believe that we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state or local authorities. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time.
COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. And, despite the tremendous surge in demand for our PPE products in recent months, we expect that demand for our Building Supply segment products could be negatively impacted by decreased housing starts and increased uncertainty in the housing market and the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment. .
The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our PPE products resulting from the pandemic had a positive impact on our first and second quarter results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations.
Alpha Pro Tech, Ltd.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of net sales for the periods indicated:
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For the Three Months
Ended June 30,
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For the Six Months
Ended June 30,
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2020
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2019
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2020
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2019
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Gross profit
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49.5
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%
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36.0
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%
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48.5
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%
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37.6
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%
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Selling, general and administrative expenses
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17.9
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%
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28.6
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%
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19.8
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%
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29.2
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%
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Income from operations
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30.9
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%
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6.2
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%
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27.8
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%
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7.2
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%
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Income before provision for income taxes
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31.5
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%
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10.9
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%
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28.3
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%
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11.4
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%
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Net income
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24.4
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%
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8.8
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%
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26.5
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%
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9.4
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%
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Three and Six months ended June 30, 2020, compared to Three and Six months ended June 30, 2019
Sales. Consolidated sales for the three months ended June 30, 2020 increased to $25,500,000 from $11,415,000 for the three months ended June 30, 2019, representing an increase of $14,085,000, or 123.4%. This increase consisted of increased sales in the Disposable Protective Apparel segment of $13,343,000 and increased sales in the Building Supply segment of $742,000.
Building Supply segment sales for the three months ended June 30, 2020 increased by $742,000, or 11.1%, to $7,452,000, compared to $6,710,000 for the three months ended June 30, 2019. The Building Supply segment increase was primarily due to an 11.7% increase in sales of our core building products, including an increase in sales of housewrap of 13.1% and an increase in sales of synthetic roof underlayment of 9.9%. Sales of other woven material increased by 8.5% compared to the same period of 2019. The sales mix of the Building Supply segment for the three months ended June 30, 2020 was approximately 46% for synthetic roof underlayment, 44% for housewrap and 10% for other woven material. This compared to approximately 47% for synthetic roof underlayment, 43% for housewrap and 10% for other woven material for the three months ended June 30, 2019. Our synthetic roof underlayment product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of REX™ Wrap, REX™ Wrap Plus and REX™ Wrap Fortis.
The increase in our housewrap sales is attributable to our increases in sales of our “system warranty” with housewrap, window flashings and seam tape products on our higher-end housewrap products. Even though the pandemic has slowed our ability to be in the field, we have been able to effectively convey the system warranty program to all market segments. As we continue to attract more builders and have expanded our distribution network to capture increased demand for our housewrap, window flashing and seam tape. In addition to benefitting from cash flow that has enabled us to build a strong inventory position, we have managed to avoid many of the challenges faced by competitors that rely heavily on third-party imported products from countries hit hard by the pandemic by relying on our U.S.-based manufacturing and our joint venture partner. This ultimately has brought us new distribution outlets, as we are able to offer products to the market at a reduced lead time. Sales of other woven material increased as a result of our largest customer in this category increasing its order volume with us. We expect continued growth in this market segment, though given the uncertainty of the economy as a result of the COVID-19 pandemic, short-term growth could be affected.
Alpha Pro Tech, Ltd.
Sales for the Disposable Protective Apparel segment for the three months ended June 30, 2020 increased by $13,343,000, or 283.6%, to $18,048,000, compared to $4,705,000 for the same period of 2019. This segment increase was due to a 991.3% increase in sales of face masks, a 973.2% increase in face shields and a 42.3% increase in sales of disposable protective garments. The increase in face mask sales was primarily attributed to increased sales of our N-95 face mask due to the COVID-19 pandemic. Although face mask sales increased very significantly during the quarter as a result of the COVID-19 pandemic, sales could have been even higher without a supply chain issue that we experienced. Management anticipates that this issue will be resolved in the third quarter of 2020 and that resolving this issue should bolster sales and inventory levels in the coming quarters. The increase in face shield sales was also due to the pandemic and having a strong inventory position. Disposable protective garments sales experienced a 42.3% increase in the quarter, as a result of the pandemic and having a strong inventory position. The Company’s joint venture in India, which manufacturers the disposable protective garment lines and has historically been the primary supply source for these products, was under a country-wide, government mandated closure that started in late March and ended in late May 2020. This two-month closure has adversely affected our supply chain. Although customer demand for disposable protective garments remains strong, the Company does expect some short-term third quarter impact on sales as a result of the India mandated closure. The sales mix of the Disposable Protective Apparel segment for the three months ended June 30, 2020 was approximately 28% for disposable protective garments, 47% for face masks and 25% for face shields. This compared to approximately 74% for disposable protective garments, 17% for face masks and 9% for face shields for the three months ended June 30, 2019.
Consolidated sales for the six months ended June 30, 2020 increased to $43,654,000 from $23,718,000 for the six months ended June 30, 2019, representing an increase of $19,936,000, or 84.1%. This increase consisted of increased sales in the Disposable Protective Apparel Segment of $18,136,000 and increased sales in the Building Supply segment of $1,800,000.
Building Supply segment sales for the six months ended June 30, 2020 increased by $1,800,000, or 13.6%, to $15,008,000, compared to $13,208,000 for the same period of 2019. Our synthetic roof underlayment product line includes REX™, TECHNOply™ and TECHNO SB®, and our housewrap line consists of REX™ Wrap, REX™ Wrap Plus and REX™ Wrap Fortis. The Building Supply segment increase was primarily due to an increase in sales of housewrap of 16.5%, an increase in sales of synthetic roof underlayment of 11.0% and an increase in sales of other woven material of 17.0% compared to the same period of 2019. Synthetic roof underlayment sales increased as a result of increased sales of the TECHNO family products. Housewrap sales in the first half of 2020 were positively affected by increased system warranty sales (as discussed above) and improved U.S. housing starts. Other woven material sales were up as a result of our largest customer in this category increasing its volume with us. The sales mix of the Building Supply segment for the six months ended June 30, 2020 was 45% for synthetic roof underlayment, 45% for housewrap and 10% for other woven material. This compared to 46% for synthetic roof underlayment, 44% for housewrap and 10% for other woven material for the six months ended June 30, 2019. As the impact of COVID-19 pandemic continues to unfold, there could be a negative impact in our Building Supply segment, as there could be increased uncertainty with the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment.
Sales for the Disposable Protective Apparel segment for the six months ended June 30, 2020 increased by $18,136,000, or 172.6%, to $28,646,000, compared to $10,510,000 for the same period of 2019. This segment increase was due to a 691.1% increase in sales of face masks, a 621.8% increase in face shields and a 21.3% increase in sales of disposable protective garments. The increase in sales in this business segment was primarily due to the COVID-19 pandemic. Open purchase orders for these product lines remain very strong (see “Impact of the Novel Coronavirus (COVID-19)” above. The sales mix of the Disposable Protective Apparel segment for the six months ended June 30, 2020 was 34% for disposable protective garments, 46% for masks and 20% for shields. This sales mix is compared to 76% for disposable protective garments, 16% for masks and 8% for shields for the six months ended June 30, 2019.
Gross Profit. Gross profit increased by $8,507,000, or 207.2%, to $12,613,000 for the three months ended June 30, 2020, from $4,106,000 for the same period of 2019. The gross profit margin was 49.5% for the three months ended June 30, 2020, compared to 36.0% for the three months ended June 30, 2019. Gross profit margin was positively affected by the significant change in product mix, with a surge in customer demand as a result of the COVID-19 pandemic for face masks, in particular our N-95 Particulate Respirator face mask, and face shields, which generally have a higher gross profit margin than our other products. The Company expects these higher gross profit margin products to be in high demand for at least the rest of 2020 due to the COVID-19 pandemic.
Gross profit increased by $12,258,000, or 137.6%, to $21,167,000 for the six months ended June 30, 2020, from $8,909,000 for the same period of 2019. The gross profit margin was 48.5% for the six months ended June 30, 2020, compared to 37.6% for the same period of 2019.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1,291,000, or 39.6%, to $4,553,000 for the three months ended June 30, 2020, from $3,262,000 for the three months ended June 30, 2019. However, as a percentage of net sales, selling, general and administrative expenses decreased to 17.9% for the three months ended June 30, 2020, from 28.6% for the same period of 2019. The increase in selling, general and administrative expenses was primarily the result of increased employee compensation, increased sales commission, increased accrued bonuses, increased insurance costs and increased factory-related expenses primarily due to the COVID-19 pandemic.
Alpha Pro Tech, Ltd.
The change in expenses by segment comparing the three months ended June 30, 2020 to the three months ended June 30, 2019 was as follows: Disposable Protective Apparel increased by $559,000, or 56.6%; corporate unallocated expenses increased by $706,000, or 72.2%; and Building Supply increased by $26,000, or 2.0%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased insurance costs, increased factory expenses and increased commission primarily as a result of increased sales. The increase in corporate unallocated expenses was a result of increased accrued bonuses as well as increased public company expenses and professional fees primarily due to the COVID-19 pandemic.
Selling, general and administrative expenses increased by $1,719,000, or 24.8%, to $8,656,000 for the six months ended June 30, 2020, from $6,937,000 for the six months ended June 30, 2019.However, as a percentage of net sales, selling, general and administrative expenses decreased to 19.8% for the six months ended June 30, 2020, down from 29.2% for the same period of 2019, primarily as a result of the growth in net sales.
The change in expenses by segment for the six months ended June 30, 2020 was as follows: Disposable Protective Apparel was up $619,000, or 28.3%; Building Supply was down $53,000, or 1.9%; and corporate unallocated expenses were up $1,153,000, or 57.1%. The increase in the Disposable Protective Apparel segment expenses was related to increased employee compensation, increased factory expenses and increased commission as a result of increased sales. The increase in corporate unallocated expenses was primarily due to increased accrued bonuses, increased public company expenses and increased professional fees. The increase in selling general and administrative expenses was a result of increased expenses in all selling general and administrative expense categories to support significant sales growth during 2020.
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 $423,000 was accrued for the three months ended June 30, 2020, compared to $58,000 for the three months ended June 30, 2019. A bonus amount of $650,000 was accrued for the six months ended June 30, 2020, as compared to $135,000 for the same period of 2019.
Depreciation and Amortization. Depreciation and amortization expense increased by $38,000, or 27.1%, to $178,000 for the three months ended June 30, 2020, from $140,000 for the three months ended June 30, 2019. Depreciation and amortization expense increased by $93,000, or 34.8%, to $360,000 for the six months ended June 30, 2020, from $267,000 for the same period of 2019. The increase for the quarter and six month period was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment and increased corporate depreciation related to computer technology.
Income from Operations. Income from operations increased by $7,178,000, or 1019.6%, to $7,882,000 for the three months ended June 30, 2020, compared to $704,000 for the same period of 2019. The increased income from operations was primarily due to an increase in gross profit of $8,507,000, partially offset by an increase in selling, general and administrative expenses of $1,291,000, and an increase in depreciation and amortization expense of $38,000. Income from operations as a percentage of net sales for the three months ended June 30, 2020 was 30.9%, compared to 6.2% for the same period of 2019.
Income from operations increased by $10,446,000, or 612.7%, to $12,151,000 for the six months ended June 30, 2020, compared to $1,705,000 for the six months ended June 30, 2019. The increased income from operations was primarily due to an increase in gross profit of $12,258,000, partially offset by an increase in selling, general and administrative expenses of $1,719,000, and an increase in depreciation and amortization expense of $93,000. Income from operations as a percentage of net sales for the six months ended June 30, 2020 was 27.8%, compared to 7.2% for the same period of 2019.
Other Income. Other income decreased by $384,000, or 70.6%, to $160,000 for the three months ended June 30, 2020, from $544,000 for the same period of 2019. The decrease was primarily due to a decrease of $398,000 of realized and unrealized gains on marketable securities for the three months ended June 30, 2020 compared to the same period of 2019, and a decrease in interest income of $21,000, partially offset by an increase in equity in income of unconsolidated affiliate of $35,000.
Alpha Pro Tech, Ltd.
Other income consisted of equity in income of unconsolidated affiliate of $119,000 and a gain on marketable securities of $41,000 for the three months ended June 30, 2020. Other income consisted of equity in income of unconsolidated affiliate of $84,000, a gain on marketable securities of $439,000 and interest income of $21,000 for the three months ended June 30, 2019.
Other income decreased by $800,000 to $204,000 for the six months ended June 30, 2020, from $1,004,000 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 $627,000, a decrease in equity in income of unconsolidated affiliate of $155,000 and a decrease in interest income of $18,000.
Other income consisted primarily of equity in income of unconsolidated affiliate of $206,000, a loss on marketable securities of $18,000 and interest income of $16,000 for the six months ended June 30, 2020. Other income consisted of equity in income of unconsolidated affiliate of $361,000, a gain on marketable securities of $609,000 and interest income of $34,000 for the six months ended June 30, 2019.
Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended June 30, 2020 was $8,042,000, compared to income before provision for income taxes of $1,248,000 for the same period of 2019, representing an increase of $6,794,000, or 544.4%. This increase in income before provision for income taxes was primarily due to an increase in income from operations of $7,178,000, partially offset by a decrease in other income of $384,000.
Income before provision for income taxes for the six months ended June 30, 2020 was $12,355,000, compared to income before provision for income taxes of $2,709,000 for the six months ended June 30, 2019, representing an increase of $9,646,000, or 356.1%. This increase in income before provision for income taxes was due to an increase in income from operations of $10,446,000, partially offset by a decrease in other income of $800,000.
Provision for Income Taxes. The provision for income taxes for the three months ended June 30, 2020 was $1,822,000, compared to $238,000 for the same period of 2019. The effective tax rate was 22.7% for the three months ended June 30, 2020, compared to 19.1% 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 six months ended June 30, 2020 was $794,000, compared to $481,000 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 6.4% for the six months ended June 30, 2020, compared to 17.8% for the six months ended June 30, 2019. Excluding the estimated nonrecurring tax benefit of $2.0 million, the estimated effective tax rate was 22.6% for the six months ended June 30, 2020. The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.
Net Income. Net income for the three months ended June 30, 2020 was $6,220,000, compared to net income of $1,010,000 for the same period of 2019, representing an increase of $5,210,000, or 515.8%. The net income increase was due to an increase in income before benefit for income taxes of $6,794,000, partially offset by an increase in provision for income taxes of $1,584,000. Net income as a percentage of net sales for the three months ended June 30, 2020 was 24.4%, and net income as a percentage of net sales for the three months ended June 30, 2019 was 8.8%. Basic earnings per common share for the three months ended June 30, 2020 and 2019 were $0.47 and $0.08, respectively. Diluted earnings per common share for the three months ended June 30, 2020 and 2019 were $0.46 and $0.08, respectively.
Alpha Pro Tech, Ltd.
Net income for the six months ended June 30, 2020 was $11,561,000, compared to net income of $2,228,000 for the same period of 2019, representing an increase of $9,333,000, or 418.9%. This six month period significantly exceeds even our highest annual net income that we experienced – annual net income of $9.0 million in 2009, resulting from the H1N1 pandemic. The net income increase was due to an increase in income before provision for income taxes of $9,646,000, partially offset by an increase in provision for income taxes of $313,000. As mentioned above, a tax benefit from stock options exercised positively impacted net income in the first quarter of 2020. Net income as a percentage of net sales for the six months ended June 30, 2020 was 26.5%, and net income as a percentage of net sales for the same period of 2019 was 9.4%. Basic earnings per common share for the six months ended June 30, 2020 and 2019 were $0.87 and $0.17, respectively. Diluted earnings per common share for the six months ended June 30, 2020 and 2019 were $0.84 and $0.17, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2020, the Company had cash of $24,735,000 and working capital of $37,051,000, representing an increase in working capital of $13,289,000 from $23,762,000 as of December 31, 2019. As of June 30, 2020, the Company’s current ratio (current assets/current liabilities) was 4:1, compared to a 12:1 current ratio as of December 31, 2019. The change in current ratio is as a result of customer advance payments for future dated PPE orders. Cash increased by 277.7%, or $18,187,000, to $24,735,000 as of June 30, 2020, compared to $6,548,000 as of December 31, 2019. Approximately $6.5 million of the increase in cash is attributable to prepayments on future PPE sales. The increase in cash from December 31, 2019 was due to cash provided by operating activities of $16,749,000, cash provided by financing activities of $1,810,000 and cash used in investing activities of $372,000.
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 the credit line was 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 $16,749,000 for the six months ended June 30, 2020 was due to net income of $11,561,000, impacted primarily by the following: stock-based compensation expense of $183,000, depreciation and amortization expense of $360,000, loss on marketable securities of $18,000, equity in income of unconsolidated affiliate of $206,000, operating lease expense net of accretion of $450,000, an increase in accounts receivable of $3,321,000, an increase in prepaid expenses of $523,000, an increase in inventory of $677,000, an increase in accounts payable and accrued liabilities of $9,347,000 and a decrease in lease liabilities of $443,000.
Accounts receivable increased by $3,321,000, or 77.4%, to $7,613,000 as of June 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 June 30, 2020, calculated by using an average of accounts receivable outstanding and annual revenue, was 28 days, compared to 34 days as of December 31, 2019.
Inventory increased by $677,000, or 6.0%, to $11,980,000 as of June 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 $1,385,000, or 24.7%, to $6,993,000, partially offset by a decrease in inventory for the Building Supply segment of $708,000, or 12.4%, to $4,987,000.
Prepaid expenses increased by $523,000, or 14.6%, to $4,110,000 as of June 30, 2020, from $3,587,000 as of December 31, 2019. The increase was primarily due to prepayments for machinery and equipment.
Right-of-use assets as of June 30, 2020 decreased by $450,000 to $2,728,000 from $3,178,000 as of December 31, 2019, as a result of amortization of the balance.
Lease liabilities as of June 30, 2020 decreased by $443,000 to $2,776,000 from $3,219,000 as of December 31, 2019. The recording of the lease liabilities was the result of adopting ASC 842, Leases. The decrease in the lease liabilities was the result of lease payments made during the quarter.
Alpha Pro Tech, Ltd.
Accounts payable and accrued liabilities as of June 30, 2020 increased by $2,872,000, or 202.1%, to $4,293,000, 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, and an increased in accrued liabilities as of an increase in accrued bonuses.
Customer advance payment of orders as of June 30, 2020 was $6,475,000, which was the result of customer deposits for future-dated PPE orders in response to the COVID-19 pandemic. There were no advance payments of this nature as of December 31, 2019.
Net cash used in investing activities was $372,000 for the six months ended June 30, 2020, compared to net cash used in investing activities of $121,000 for the same period of 2019. Investing activities for the six months ended June 30, 2020 consisted of the purchase of property and equipment of $419,000, primarily for the Building Supply segment, and proceeds from the sale of marketable securities of $47,000. Investing activities for the six months ended June 30, 2019 consisted of the purchase of property and equipment of $254,000 and proceeds from the sale of marketable securities of $133,000.
Net cash provided by financing activities was $1,810,000 for the six months ended June 30, 2020, compared to net cash used in financing activities of $1,577,000 for the same period of 2019. Net cash provided by financing activities for the six months ended June 30, 2020 resulted from proceeds of $1,935,000 from the exercise of stock options, partially offset by the payment of $125,000 for the repurchase of common stock. Net cash used in financing activities for the six months ended June 30, 2019 resulted from the payment of $1,636,000 for the repurchase of common stock, partially offset by proceeds of $59,000 from the exercise of stock options.
As of June 30, 2020, we had $2,027,000 available for additional stock purchases under our stock repurchase program. For the six months ended June 30, 2020, we repurchased 35,100 shares of common stock at a cost of $125,000. As of June 30, 2020, we had repurchased a total of 17,922,917 shares of common stock at a cost of $35,493,000 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.
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 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 condensed consolidated financial statements.
Alpha Pro Tech, Ltd.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoptions permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), 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.