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 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 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.
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 a [limited] impact on the Company's results of operations and ability to deliver products and services to its customers. However, 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.
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. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company's manufacturing facilities, and we expect this to continue for some time. While this remains a fluid situation, all of our U.S. manufacturing sites are currently operating at or above normal production rates.
COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers' ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers. Additionally, we expect that demand for our Building Supply segment products could be negatively impacted if we experience a decrease in 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 2021 and 2022 financial results. The extent of the pandemic's effect on our future operational and financial performance will depend in large part on future developments, including the duration, scope and severity of the pandemic and new variants, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the efficacy of mass vaccinations, and the resumption of widespread economic activity in certain sectors. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any certainty the likely impact of the COVID-19 pandemic on our future operations.
Management will continue to carefully monitor the current dynamic market conditions and work to respond to them swiftly and effectively.
The following table sets forth certain operational data as a percentage of net sales for the periods indicated:
Three months ended March 31, 2022 compared to three months ended March 31, 2021
Sales. Consolidated sales for the three months ended March 31, 2022 decreased to $17,661,000, from $23,161,000 for the three months ended March 31, 2021, representing a decrease of $5,500,000, or 23.7%. This decrease consisted of decreased sales in the Disposable Protective Apparel segment of $7,397,000, partially offset by increased sales in the Building Supply segment of $1,897,000.
Sales for the Disposable Protective Apparel segment for the three months ended March 31, 2022 decreased by $7,397,000, or 49.9%, to $7,424,000, compared to $14,821,000 for the same period of 2021. This segment decrease was due to a 59.4% decrease in sales of face masks, a 52.2% decrease in face shields and a 41.2% decrease in sales of disposable protective garments, all primarily due to reduced customer demand in the first quarter of 2022 compared to demand in the first quarter of 2021 associated with the COVID-19 pandemic.
The sales mix of the Disposable Protective Apparel segment for the three months ended March 31, 2022 was approximately 53% for disposable protective garments, 31% for face masks and 16% for face shields. This sales mix is compared to approximately 45% for disposable protective garments, 38% for face masks and 17% for face shields for the three months ended March 31, 2021.
The decrease in face mask sales in the first quarter of 2022, primarily our proprietary N-95 Particulate Respirator face mask, resulted from very significant customer demand associated with the COVID-19 pandemic in the same period of 2021. Face mask sales in the first quarter of 2022, which were aided by the Omicron variant of COVID-19, were significantly higher than all quarterly sales since the first quarter of 2021. Excluding the first quarter of 2021, face mask sales in the first quarter of 2022 were higher than any other quarter on record with the exception of quarters of past pandemics in 2020 (COVID-19) and 2009 (H1N1) and the outbreak in 2003 (SARS).
The decrease in face shield sales in the first quarter of 2022 was also due to the decline in demand compared to the same period in 2021 associated with the COVID-19 pandemic. As with face mask sales, face shield sales in the first quarter of 2022 were significantly higher than all quarterly sales since the first quarter of 2021 and higher than all other quarters on record except for quarters in 2020 (COVID-19) and a quarter in the early nineties.
Due to COVID-19 variants and other challenges related to efforts to reduce the duration, scope and severity of the pandemic, sales of face masks and face shields are expected to remain higher than pre-pandemic levels in the short term, but it is uncertain how long this will continue.
Sales for the disposable protective garments decreased in the first quarter of 2022, primarily due to record sales in the first and second quarters of 2021 resulting from strong orders received from our major international channel partner in 2020 in response to COVID-19. Sales in the first quarter of 2022, as with sales in the second half of 2021, were negatively affected as inventory levels in the supply chain, primarily with our partner mentioned above, were higher than historical. Open orders from this partner have recently improved, indicating that their inventory levels have likely normalized. Although our sales were down during the first quarter of 2022 and more in line with pre-pandemic levels, this partner's sales to its end users for the same period were significantly higher than pre-pandemic levels. We are working closely with all of our channel partners to uncover new end-customer sales opportunities.
Building Supply segment sales for the three months ended March 31, 2022 increased by $1,897,000, or 22.7%, to the highest quarter on record of $10,237,000, compared to $8,340,000 for the three months ended March 31, 2021. The Building Supply segment increase during the three months ended March 31, 2022 was primarily due to a 13.9% increase in sales of synthetic roof underlayment, an 18.4% increase in sales of housewrap and a 116.2% increase in sales of other woven material compared to the same period of 2021.
The sales mix of the Building Supply segment for the three months ended March 31, 2022 was approximately 48% for synthetic roof underlayment, 40% for housewrap and 12% for other woven material. This compared to approximately 52% for synthetic roof underlayment, 41% for housewrap and 7% for other woven material for the three months ended March 31, 2021. Our synthetic roof underlayment product line includes REX SynFelt®, REX TECHNOply® and TECHNO SB®, and our housewrap product line consists of REX Wrap®, REX Wrap® Plus and REX Wrap Fortis®.
Building Supply segment sales have had record quarters in each of the past six quarters, with the highest quarters on record in the second and then third quarters of 2021 and now in the first quarter of 2022. In addition, the fourth quarter of 2020 and the first and fourth quarters of 2021 were quarterly records, at that time, compared to any prior year comparative quarter.
Building Supply segment sales during the first quarter of 2022 experienced continued significant growth due to strong demand for both our synthetic roof underlayment and housewrap products. Synthetic roof underlayment sales increased by 13.9% compared to the first quarter of 2021, which was primarily due to robust sales of our TECHNO SB®25 product line. The housewrap family of products continued to grow with an 18.4% first quarter increase over the prior-year quarter due to growth in new market share as well as high demand for new home construction. Other woven material sales increased in the first quarter of 2022 compared to the same period of 2021 by a significant 116.2% due to increased sales to our major customer.
The Company has committed to increasing production capacity in our Building Supply segment by investing approximately $4.0 million in new equipment, a part of which became operational in the latter part of the third quarter of 2021. This equipment, which is expected to increase our production capacity, has been delayed as a result of supply chain issues, and is now expected in the latter part of the second quarter of 2022 and is expected to be operational in the following quarter.
Management is encouraged by the current demand for the Company's Building Supply products and anticipates continued growth in 2022. The Company has continued to enjoy increased sales, and being vertically integrated and having control of our manufacturing, unlike most of our competitors, aides in minimizing the effects of worldwide supply chain issues. The synthetic roofing market was strong in 2021 and into early 2022, although the Company has recently seen some retraction in new home starts and re-roofing expenditures. By adding dealers, distribution channels and products in the roofing sector, we remain optimistic with respect to achieving sales growth in 2022. Assuming new home construction remains high, we expect our housewrap sales will continue to grow despite the aforementioned retraction, as our distribution channels continue to expand and we introduce new products for this market.
Gross Profit. Gross profit decreased by $2,737,000, or 29.8%, to $6,442,000 for the three months ended March 31, 2022, from $9,179,000 for the three months ended March 31, 2021. The gross profit margin was 36.5% for the three months ended March 31, 2022, compared to 39.6% for the three months ended March 31, 2021.
Management believes that gross profit margin likely will continue to be negatively affected by significant increases in ocean freight and other transportation costs. 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 could continue to decrease gross profit.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $272,000, or 5.9%, to $4,306,000 for the three months ended March 31, 2022, from $4,578,000 for the three months ended March 31, 2021. However, as a percentage of net sales, selling, general and administrative expenses increased to 24.4% for the three months ended March 31, 2022, up from 19.8% for the same period of 2021, primarily as a result of lower net sales.
The change in expenses by segment for the three months ended March 31, 2022 was as follows: Disposable Protective Apparel was down $453,000, or 27.0%; Building Supply was up $363,000, or 26.9%; and corporate unallocated expenses were down $182,000, or 11.8%. The decrease in the Disposable Protective Apparel segment expenses was primarily related to decreased employee compensation, marketing and commission expenses. The increase in the Building Supply segment expenses was primarily related to increased employee compensation, marketing and travel expenses. The decrease in corporate unallocated expenses was primarily due to lower accrued bonuses and lower public company 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 $104,000 was accrued for the three months ended March 31, 2022, compared to $249,000 for the three months ended March 31, 2021.
Depreciation and Amortization. Depreciation and amortization expense increased by $14,000, or 7.1%, to $212,000 for the three months ended March 31, 2022, from $198,000 for the three months ended March 31, 2021. The increase was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment.
Income from Operations. Income from operations decreased by $2,479,000, or 56.3%, to $1,924,000 for the three months ended March 31, 2022, compared to $4,403,000 for the three months ended March 31, 2021. The decreased income from operations was primarily due to a decrease in gross profit of $2,737,000 and an increase in depreciation and amortization expense of $14,000, partially offset by a decrease in selling, general and administrative expenses of $272,000. Income from operations as a percentage of net sales for the three months ended March 31, 2022 was 10.9%, compared to 19.0% for the same period of 2021.
Other Income. Other income decreased by $273,000, or 84.5%, to $50,000 for the three months ended March 31, 2022, from $323,000 for the three months ended March 31, 2021. The decrease was due to a decrease in equity in income of unconsolidated affiliate of $273,000.
Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended March 31, 2022 was $1,974,000, compared to income before provision for income taxes of $4,726,000 for the same period of 2021, representing a decrease of $2,752,000, or 58.2%. This decrease in income before provision for income taxes was due to a decrease in income from operations of $2,479,000 and a decrease in other income of $273,000.
Provision for Income Taxes. The provision for income taxes for the three months ended March 31, 2022 was $452,000, compared to $1,007,000 for the same period of 2021. The estimated effective tax rate was 22.9% for the three months ended March 31, 2022, compared to 21.3% for the three months ended March 31, 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 March 31, 2022 was $1,522,000, compared to net income of $3,719,000 for the three months ended March 31, 2021, representing a decrease of $2,197,000, or 59.1%. The decrease in net income was largely associated with the surge in product demand due to the COVID-19 pandemic. The net income decrease comparing the 2022 and 2021 periods was due to a decrease in income before provision for income taxes of $2,752,000, partially offset by a decrease in provision for income taxes of $555,000. Net income as a percentage of net sales for the three months ended March 31, 2022 was 8.6%, and net income as a percentage of net sales for the same period of 2021 was 16.1%. Basic earnings per common share for the three months ended March 31, 2022, and 2021 were $0.12 and $0.28, respectively. Diluted earnings per common share for the three months ended March 31, 2022 and 2021 were $0.12 and $0.27, respectively.
As of March 31, 2022, the Company had cash and cash equivalents ("cash") of $14,239,000 and working capital of $51,186,000. As of March 31, 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 12.7%, or $2,068,000, to $14,239,000 as of March 31, 2022, compared to $16,307,000 as of December 31, 2021, and working capital increased by $855,000 from $50,331,000 as of December 31, 2021. The decrease in cash from December 31, 2021 was due to cash used in operating activities of $ 1,179,000, cash used in investing activities of $133,000 and cash used in financing activities of $756,000.
Net cash used in operating activities of $1,179,000 for the three months ended March 31, 2022 was due to net income of $1,522,000, impacted primarily by the following: stock-based compensation expense of $55,000, depreciation and amortization expense of $212,000, equity in income of unconsolidated affiliate of $49,000, operating lease expense net of accretion of $228,000, an increase in accounts receivable of $3,814,000, a decrease in prepaid expenses of $736,000, a decrease in inventory of $1,086,000, a decrease in accounts payable and accrued liabilities of $714,000, and a decrease in lease liabilities of $227,000, all compared to December 31, 2021.
Accounts receivable increased by $4,028,000, or 84.3%, to $8,808,000 as of March 31, 2022, from $4,780,000 as of December 31, 2021. The increase in accounts receivable was related to increased sales as compared to the fourth quarter of 2021. The number of days that sales remained outstanding as of March 31, 2022, calculated by using an average of accounts receivable outstanding and annual revenue, was 35 days, compared to 24 days as of December 31, 2021.
Inventory decreased by $1,086,000, or 4.3%, to $23,883,000 as of March 31, 2022, from $24,969,000 as of December 31, 2021. The decrease was due to a decrease in inventory for the Disposable Protective Apparel segment of $1,508,000, or 9.3%, to $14,728,000 offset by an increase in inventory for the Building Supply segment of $421,000 or 4.8%, to $9,155,000.
Prepaid expenses decreased by $736,000, or 10.6%, to $6,207,000 as of March 31, 2022, from $6,943,000 as of December 31, 2021. The decrease was primarily due to decrease in prepayments for tax payments and prepaid inventory.
Right-of-use assets as of March 31, 2022 decreased by $228,000 to $2,420,000 from $2,648,000 as of December 31, 2021 as a result of amortization of the balance.
Lease liabilities as of March 31, 2022 decreased by $227,000 to $2,473,000 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 March 31, 2022 decreased by $714,000, or 40.2%, to $1,064,000, from $1,778,000 as of December 31, 2021. The decrease was primarily due to a decrease in accrued bonuses and a decrease in trade accounts payable.
Net cash used in investing activities was $133,000 for the three months ended March 31, 2022, compared to net cash used in investing activities of $130,000 for the same period of 2021. Investing activities for the three months ended March 31, 2022 consisted of the purchase of property and equipment of $133,000. Investing activities for the three months ended March 31, 2021 consisted of the purchase of property and equipment of $130,000.
Net cash used in financing activities was $756,000 for the three months ended March 31, 2022, compared to net cash used in financing activities of $2,058 for the same period of 2021. Net cash used in financing activities for the three months ended March 31, 2022 resulted from the payment of $756,000 for the repurchase of common stock. Net cash used in financing activities for the three months ended March 31, 2021 resulted from the payment of $2,366,000 for the repurchase of common stock partially offset by the proceeds of $308,000 from the exercise of stock options.
As of March 31, 2022, we had $1,322,000 available for additional stock purchases under our stock repurchase program. During the three months ended March 31, 2022, we repurchased 170,000 shares of common stock at a cost of $756,000. As of March 31, 2022, we had repurchased a total of 18,719,917 shares of common stock at a cost of approximately $43,198,000 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 $1,000,000 balance remains outstanding, has had a further delay. This amount has not been prepaid and will be paid in full upon delivery of equipment. The equipment was originally anticipated to arrive in the latter part of the fourth quarter of 2021 and is now expected in the latter part of the second quarter of 2022 and is expected to be operational in the third quarter of 2022. The Company expects to fund the remaining balance from cash flow from operations.
We believe that our current cash balance and expected cash flow from operations will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Adoption of the new standard in January 2021 did not have a material impact on our consolidated financial statements.
Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time.
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