Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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, 2025, filed with the SEC on March 11, 2026 (the "2025 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 2026 and 2027, 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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We are exposed to foreign currency exchange risks related to our unconsolidated affiliate operations in India.

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We are subject to risks associated with our joint venture.

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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 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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Tariff policies and potential countermeasures could increase our costs and disrupt our global supply chain, which could negatively impact the results of our operations.

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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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Environmental laws and regulations may subject us to significant liabilities.

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

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We are subject to risks related to climate change and natural disasters or other events beyond our control.

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Uncertainties with respect to the development, deployment, and use of artificial intelligence.

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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.

The foregoing list of risks is not exhaustive. 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 2025 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, 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. 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 2025 Form 10-K. Since December 31, 2025, there have been no material changes to our critical accounting policies and estimates as described in the 2025 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, housewrap accessories, synthetic roof underlayment and synthetic roof underlayment accessories, 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 construction companies and building supply and roofing distributors; companies in pharmaceutical manufacturing, bio-pharmaceutical manufacturing, medical device manufacturing, lab animal research, and high technology electronics manufacturing (which includes the semi-conductor market); and medical and dental 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.

Recent developments in U.S. trade policy have introduced uncertainty regarding the future of global trade relations. Following the inauguration of the second Trump administration, there have been numerous announcements and actions related to tariff increases and other trade restrictions on imports into the U.S. Changes in tariffs, quotas, embargoes, or other trade barriers affecting countries from which we source supplies, or our global network of third-party suppliers, could impact our supply chain and cost structure. Additionally, retaliatory measures by affected countries could further disrupt our operations or reduce our competitiveness in international markets. We continue to monitor these evolving tariffs and trade restrictions. If new tariffs or trade restrictions are imposed, we may need to adjust pricing, increase inventory levels, or seek alternative suppliers, any of which could materially affect our revenue, gross margins, and overall financial performance.

On February 20, 2026, the U.S. Supreme Court ruled in Learning Resources, Inc. v. Trump that the President lacks authority under the International Emergency Economic Powers Act (IEEPA) to impose tariffs. The Company paid tariffs in 2025 under IEEPA and has filed for refunds of these tariffs, but the ultimate receipt and timing of such refunds remain subject to review by U.S. Customs and Border Protection (CBP). There is no guarantee the Company will receive a refund.

RESULTS OF OPERATIONS

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

		For the Three Months Ended March 31,
		2026				2025
Net sales			100.0	%			100.0	%
Gross profit			37.8	%			39.0	%
Selling, general and administrative expenses			32.1	%			34.0	%
Income from operations			4.0	%			3.3	%
Income before provision for income taxes			6.1	%			5.6	%
Net income			4.8	%			4.4	%

For the three months ended March 31, 2026 compared to the three months ended March 31, 2025

Sales. Consolidated sales for the three months ended March 31, 2026, increased to $14,585,000, from $13,822,000 for the three months ended March 31, 2025, representing an increase of $763,000, or 5.5%. This increase consisted of increased sales in the Disposable Protective Apparel segment of $1,276,000, partially offset by decreased sales in the Building Supply segment of $513,000.

BUILDING SUPPLY SEGMENT

Building Supply segment sales for the three months ended March 31, 2026, decreased by $513,000, or 6.1%, to $7,859,000 compared to $8,372,000 for the three months ended March 31, 2025.

The Building Supply segment sales decrease during the three months ended March 31, 2026, was primarily due to a 27.4% decrease in sales of synthetic roof underlayment, partially offset by a 13.1% increase in sales of housewrap and a 32.0% increase in sales of other woven material as compared to the same period of 2025.

The sales mix of the Building Supply segment for the three months ended March 31, 2026, was approximately 37% for synthetic roof underlayment, 53% for housewrap and 10% for other woven material. This compared to approximately 48% for synthetic roof underlayment, 45% for housewrap and 7% for other woven material for the three months ended March 31, 2025. Our synthetic roof underlayment product line primarily includes REX SynFelt®, REX TECHNOply® and TECHNO SB and our synthetic roof underlayment accessories consist of our new self-adhered TECHNOplus Ice & Water and REX Hi Temp. Our housewrap product line primarily consists of REX Wrap®, REX Wrap Plus® and REX™ Wrap Fortis. Housewrap accessories consist of REXTREME Window and Door Flashing and REX™ Premium Seam Tape.

Challenges in the housing market continued during the first quarter of 2026, as single-family housing starts declined compared to the corresponding period in 2025. According to the U.S. Census Bureau, single-family housing starts decreased by 5.5% for the quarter. Housing starts for January and February 2026 declined by 14.0% compared to the same period in 2025; however, housing activity increased in March 2026, partially mitigating the overall quarterly decline.

In the first quarter of 2026, our housewrap sales increased by 13.1%, significantly outperforming the broader market and reflecting market share gains. Management expects continued growth in the housewrap category over the coming year, particularly if broader economic and housing market uncertainty eases. Our synthetic roof underlayment sales declined in the first quarter of 2026, and the Asphalt Roofing Manufacturers Association ("ARMA") reported a 9.9% decline in industry shipments compared to the first quarter of 2025 as well. We are pursuing opportunities to expand our product portfolio within the roofing market by identifying and developing additional complementary product offerings that align with customer needs, enhance our competitive position, and support long-term growth.

Sales of other woven material sales increased by $215,000, or 32.0%, for the three months ended March 31, 2026 compared to the same period of 2025, primarily due to increased sales to our largest customer for this product line. The Company continues to pursue new opportunities for other woven material.

Single-family housing starts in the U.S. have remained constrained by affordability pressures, macroeconomic uncertainty, and more recently by geopolitical volatility. Elevated mortgage rates and persistently high home prices relative to income have reduced affordability and softened demand, while tighter lending standards have further limited activity. Geopolitical tensions have also contributed to input cost volatility and ongoing supply chain disruptions, increasing construction cost pressures. In combination with elevated land, labor, and material costs, these factors have led builders to moderate new construction activity, resulting in continued softness in single-family housing starts.

The building industry outlook for 2026 remains mixed, with expectations for gradual improvement in the latter part of the year. Management remains focused on developing and producing industry-leading products and anticipates growth in the Building Supply segment; however, uncertainty related to the factors described above could adversely impact results.

DISPOSABLE PROTECTIVE APPAREL SEGMENT

Sales for the Disposable Protective Apparel segment for the three months ended March 31, 2026, increased by $1,276,000, or 23.4%, to $6,726,000, compared to $5,450,000 for the same period of 2025. This segment sales increase was due to a 23.8% increase in sales of disposable protective garments, a 28.8% increase in sales of face masks and an 8.0% increase in sales of face shields.

The sales mix of the Disposable Protective Apparel segment for the three months ended March 31, 2026 was approximately 91% for disposable protective garments, 6% for face masks and 3% for face shields. This sales mix is compared to approximately 90% for disposable protective garments, 6% for face masks and 4% for face shields for the three months ended March 31, 2025.

Sales of disposable protective garments, which comprised 91% of the segment sales, were up by $1,172,000 or 23.8% in the first quarter of 2026. The sales increase was primarily due to improved sales to our largest international channel partner. A considerable portion of the increase was attributable to higher selling prices, primarily driven by the impact of U.S. tariffs. Sales of shoe covers, coveralls, lab coats, frocks, gowns and caps all grew in the first quarter of 2026 compared to the same period of 2025.

Sales of our face mask and face shield products in the first quarter of 2026, which comprise the remaining 9% of the segment sales, were up 28.8% and 8.0%, respectively and for the most part did not benefit from tariff related price increases. We will continue to pursue initiatives aimed at increasing sales of our face mask and face shield products, including the implementation of targeted promotions and strategic pricing incentives.

Gross Profit. Gross profit increased by $124,000, or 2.3%, to $5,516,000 for the three months ended March 31, 2026, from $5,392,000 for the three months ended March 31, 2025. The gross profit margin was 37.8% for the three months ended March 31, 2026, compared to 39.0% for the three months ended March 31, 2025.

The decrease in gross profit margin was primarily driven by U.S. tariffs, implemented under the International Emergency Economic Powers Act ("IEEPA"), in early 2025. During 2025, the Company experienced three tariff increases on most products as a result of U.S. trade policy actions and reciprocal tariffs. We implemented price increases in mid-2025 as well as later in the year to partially offset the impact of these tariff increases; however higher tariffed inventory on hand continued to negatively impact gross margin in the first quarter of 2026. We expect gross margin improvement after higher-cost tariffed inventory flows through the system.These IEEPA tariffs were subsequently rescinded on February 24, 2026, following a Supreme Court decision invalidating the use of IEEPA to authorize such tariffs. On the same date, the U.S. government announced plans to implement a new 15% tariff under Section 122 of the Trade Act of 1974. Although announced at 15%, the tariff is currently at 10%.

We have filed claims with U.S. Customs and Border Protection (CBP) seeking refunds of all the IEEPA tariffs. CBP officially launched the refund system on April 20, 2026. The ultimate receipt and timing of such refunds remain subject to review by CBP and other administrative processes. Any approved refunds are expected to be received in cash and would favorably impact the statement of income.

In addition, beginning in the latter part of the first quarter of 2026, the Company has experienced increased costs associated with global geopolitical instability, including related to the ongoing U.S.-Iran conflict. These conditions have contributed to higher energy, transportation and supply chain costs, as well as volatility in raw material costs, particularly petroleum-based inputs. Many of our products are made from a petroleum-based resin, which has seen significant price increases since the start of the conflict.

We will continue to monitor developments in U.S. trade policy and global geopolitical conditions. Changes in tariffs, energy markets, or international conflicts, including developments related to the U.S.-Iran conflict, may impact our supply chain, cost structure and profitability.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $8,000, or 0.2%, to $4,686,000 for the three months ended March 31, 2026, from $4,694,000 for the three months ended March 31, 2025. As a percentage of net sales, selling, general and administrative expenses decreased to 32.1% for the three months ended March 31, 2026, from 34.0% for the same period of 2025.

The change in expenses by segment for the three months ended March 31, 2026, was as follows: Building Supply expenses were down by $169,000, or 9.0%; Disposable Protective Apparel expenses were up by $14,000, or 1.0%; and corporate unallocated expenses were up by $147,000, or 10.8%.

The decrease in the Building Supply segment expenses was primarily related to decreased employee compensation and trade show expenses. The increase in the Disposable Protective Apparel segment expenses was primarily related to increased commission and professional fees, partially offset by lower travel and factory expenses. The increase in corporate unallocated expenses was primarily due to increased employee compensation and general office 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 $47,000 was accrued for the three months ended March 31, 2026, compared to $41,000 for the three months ended March 31, 2025.

Depreciation and Amortization. Depreciation and amortization expense increased by $7,000, or 2.9%, to $250,000 for the three months ended March 31, 2026, from $243,000 for the three months ended March 31, 2025. The increase was primarily due to an increase in depreciation in the Disposable Protective Apparel segment.

Income from Operations. Income from operations increased by $125,000, or 27.5%, to $580,000 for the three months ended March 31, 2026, compared to $455,000 for the three months ended March 31, 2025. The increased income from operations was primarily due to an increase in gross profit of $124,000 and a decrease in selling, general and administrative expenses of $8,000, partially offset by an increase in depreciation and amortization expenses of $7,000. Income from operations as a percentage of net sales for the three months ended March 31, 2026, was 4.0%, compared to 3.3% for the same period of 2025.

Other Income. Other income decreased by $12,000 to income of $305,000 for the three months ended March 31, 2026, compared to $317,000 for the same period of 2025. The decrease was primarily due to a decrease in interest income of $26,000, partially offset by an increase in equity in income of unconsolidated affiliate of $14,000.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended March 31, 2026, was $885,000, compared to income before provision for income taxes of $772,000 for the same period of 2025, representing an increase of $113,000, or 14.6%. This increase in income before provision for income taxes was due to an increase in income from operations of $125,000, partially offset by a decrease in other income of $12,000.

Provision for Income Taxes. The provision for income taxes for the three months ended March 31, 2026, was $183,000, compared to $159,000 for the same period of 2025. The estimated effective tax rate was 20.7% for the three months ended March 31, 2026, compared to 20.6% for the three months ended March 31, 2025.

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted, which includes permanent extensions of most expiring Tax Cuts and Jobs Act provisions and international tax changes. The Company is still evaluating the potential impacts of the OBBBA; however, the Company does not anticipate it will have a material impact on the Company's financial statements.

Net Income. Net income for the three months ended March 31, 2026, was $702,000 compared to net income of $613,000 for the same period of 2025, representing an increase of $89,000, or 14.5%. The net income increase was primarily due to an increase in income from operations of $125,000, partially offset by a decrease in other income of $12,000 and an increase in provision for income taxes of $24,000. Net income as a percentage of net sales was 4.8% for the three months ended March 31, 2026, compared to 4.4% for the same period of 2025. Basic earnings per common share for the three months ended March 31, 2026 and 2025, were $0.07 and $0.06, respectively. Diluted earnings per common share for the three months ended March 31, 2026 and 2025, were $0.07 and $0.06, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2026, the Company had cash and cash equivalents ("cash") of $16,883,000 and working capital of $49,275,000. As of March 31, 2026, the Company's current ratio (current assets/current liabilities) was 20:1, compared to a current ratio of 13:1 as of December 31, 2025. Cash decreased by 0.6%, or $105,000, to $16,883,000 as of March 31, 2026, compared to $16,988,000 as of December 31, 2025, and working capital increased by $813,000, to $49,275,000 from $48,462,000 as of December 31, 2025. The decrease in cash from December 31, 2025, was due to cash used in investing activities of $117,000, partially offset by cash provided by operating activities of $12,000.

Net cash provided by operating activities of $12,000 for the three months ended March 31, 2026 was due to net income of $702,000, as adjusted primarily by the following: stock-based compensation expense of $132,000, depreciation and amortization expense of $250,000, equity in income of unconsolidated affiliate of $155,000, operating lease asset amortization of $245,000, an increase in accounts receivable of $1,197,000, a decrease in prepaid expenses of $165,000, a decrease in inventory of $1,553,000, a decrease in accounts payable and accrued liabilities of $1,445,000, and a decrease in lease liabilities of $238,000, all compared to December 31, 2025.

Accounts receivable increased by $1,197,000, or 14.7%, to $9,335,000 as of March 31, 2026, from $8,138,000 as of December 31, 2025. The increase in accounts receivable was primarily related to increased sales in the first quarter of 2026 compared to the fourth quarter of 2025. The number of days that sales remained outstanding as of March 31, 2026, calculated by using an average of accounts receivable outstanding and annual revenue, was 55 days, compared to 40 days as of December 31, 2025.

Inventory decreased by $1,553,000, or 6.6%, to $22,045,000 as of March 31, 2026, from $23,598,000 as of December 31, 2025. The decrease was due to a decrease in inventory for the Building Supply segment of $1,450,000, or 11.3%, to $11,379,000 and a decrease in inventory for the Disposable Protective Apparel segment of $103,000, or 1.0%, to $10,666,000. We purchased less inventory due to the high tariff rate.

Prepaid expenses decreased by $165,000, or 4.3%, to $3,631,000 as of March 31, 2026, from $3,796,000 as of December 31, 2025. The decrease was primarily due to decreased prepayments for inventory and prepaid tax payments.

Right-of-use assets as of March 31, 2026, decreased by $245,000 to $7,530,000 from $7,775,000 as of December 31, 2025, as a result of amortization of the right-of-use assets.

Lease liabilities as of March 31, 2026, decreased by $238,000 to $7,644,000 from $7,882,000 as of December 31, 2025. The decrease in the lease liabilities was the result of lease payments made during the period.

Accounts payable and accrued liabilities as of March 31, 2026 decreased by $1,445,000, or 46.7%, to $1,648,000, from $3,093,000 as of December 31, 2025. The decrease was primarily due to decreases in trade payables and accrued bonuses.

Net cash used in investing activities was $117,000 for the three months ended March 31, 2026, compared to net cash used in investing activities of $135,000 for the three months ended March 31, 2025. Investing activities for the three months ended March 31, 2026 and 2025 consisted of the purchase of property and equipment.

Net cash used in financing activities was $0 for the three months ended March 31, 2026, compared to net cash used in financing activities of $1,190,000 for the same period of 2025. Net cash used in financing activities for the three months ended March 31, 2025, resulted from the payment of $1,178,000 for the repurchase of common stock and $12,000 for treasury stock excise tax.

As of March 31, 2026, we had $1,397,000 available for stock purchases under our stock repurchase program. During the three months ended March 31, 2026, we did not repurchase any shares of common stock. As of March 31, 2026, we had repurchased a total of 21,927,940 shares of common stock at a cost of approximately $58,123,000 through our repurchase program which commenced in 1999. We retire all stock upon repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.

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

Recent Accounting Pronouncements

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The amendments are expected to impact various disclosure areas, including the statement of cash flows, accounting changes and error corrections, earnings per share, debt, derivatives, and transfer of financial assets. The amendments will become effective on the date the related disclosures are removed from Regulation S-X or Regulation S-K by the SEC and will no longer be effective if the SEC has not removed the applicable disclosure requirement by June 30, 2027. Early adoption is prohibited. The Company is currently evaluating the impact of these amendments on the consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures ("Subtopic 220-40"): Disaggregation of Income Statement Expenses ("ASU 2024-03"), which requires disclosure about the types of costs and expenses included in certain expense captions presented on the income statement. The new disclosure requirements are effective for the Company's annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is evaluating the impact of this pronouncement on its related disclosures.

In July 2025, the FASB issued ASU 2025-05, Financial Instruments-Credit Losses ("Topic 326"): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which provides a practical expedient to assume that conditions as of the balance sheet date remain unchanged over the life of the asset when estimating expected credit losses for current accounts receivable and current contract assets arising from transactions accounted for under ASC Topic 606 (Revenue from Contracts with Customers). The amendment is effective for fiscal years beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. The amendment in this update should be applied on a prospective basis. The adoption of this pronouncement did not have a significant impact on the Company's 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.