You should read the following discussion and analysis together with our
consolidated financial statements and the notes to our consolidated financial
statements, which appear elsewhere in this report.
Special Note Regarding Forward-Looking Statements
Certain information set forth in this Annual Report on Form 10-K 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 relating to potential
acquisitions 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 caution readers that
these forward-looking statements speak only as of the date hereof. The Company
hereby expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any such statements to reflect any change in the
Company's expectations or any change in events, conditions or circumstances on
which such statements are based. All forward-looking statements, whether written
or oral and whether made by us or on our behalf, are expressly qualified by this
special note.
Any expectations based on these forward-looking statements are subject to risks
and uncertainties. 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 Annual Report on Form 10-K as a "smaller reporting company"
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended)
based on our public float (the aggregate market value of our common equity held
by non-affiliates of the Company) as of the last business day of our second
fiscal quarter of 2019. 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 and necessary to aid in an understanding of the
current consolidated financial position, changes in financial position and
results of operations of the Company.
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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. 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.
Inventories: Inventories include freight-in, materials, labor and overhead costs
and are stated at the lower of cost or net realizable value. Allowances are
recorded for slow-moving, obsolete or unusable inventory. We assess our
inventory for estimated obsolescence or unmarketable inventory and write down
the difference between the cost of inventory and the estimated net realizable
value based upon assumptions about future sales and supply on-hand, if
necessary. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Leases: We determine if an arrangement is a lease at inception. Operating leases
are included as right-of-use ("ROU") assets and lease liabilities on our
condensed consolidated balance sheet. ROU assets and lease liabilities are
recognized based on the present value of the future minimum lease payments over
the lease term at the commencement date. Our leases do not provide an implicit
rate, and, therefore, we estimate our incremental borrowing rate based on the
information available at the commencement date in determining the present value
of future minimum lease payments. Our lease terms may include options to extend
or terminate the lease when it is reasonably certain that we will exercise such
options. We do not record leases on our condensed consolidated balance sheet
with a term of one year or less. We elected a package of transition practical
expedients, which included not reassessing whether any expired or existing
contracts are or contain leases, not reassessing the lease classification of
expired or existing leases, and not reassessing initial direct costs for
existing leases. We also elected a practical expedient to not separate lease and
non-lease components. We did not elect the practical expedient to use hindsight
in determining our lease terms or assessing impairment of our ROU assets.
Revenue Recognition: Net sales includes revenue from products and shipping and
handling charges, net of estimates for product returns and any related sales
incentives. Revenue is measured as the amount of consideration that we expect to
receive in exchange for transferring products. All revenue is recognized when we
satisfy our performance obligations under the applicable contract. We recognize
revenue in connection with transferring the promised products to the customer,
with revenue being recognized at the point in time at which the customer obtains
control of the products. This generally occurs when title passes to the customer
upon delivery, at which time a receivable is created for the invoice sent to the
customer. We recognize revenue for shipping and handling charges at the time at
which 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. Our contracts have
a single performance obligation. Sales taxes and value added taxes in domestic
and foreign jurisdictions that are collected from customers and remitted to
governmental authorities are accounted for on a net basis and, therefore, are
excluded from net sales. The Company manufactures certain private label goods
for customers and has determined that control does not pass to the customer at
the time of manufacture, based upon the nature of the private labelling. The
Company has determined that it has no material contract assets, and has
concluded that its contract liabilities (primarily rebates) have the right of
offset against customer receivables.
Sales Returns, Rebates and Allowances: Sales are reduced for any anticipated
sales returns, rebates and allowances based on historical experience. Since our
return policy is only 90 days and our products are not generally susceptible to
external factors such as technological obsolescence or significant changes in
demand, we are able to make a reasonable estimate for returns. We offer end-user
product specific and sales volume rebates to select distributors. Our rebates
are based on actual sales and are accrued monthly.
Stock-Based Compensation: The Company accounts for stock-based awards using
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") 718, Stock Compensation. ASC 718 requires companies to record
compensation expense for the value of all outstanding and unvested share-based
payments, including employee stock options and similar awards.
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.
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OVERVIEW
Alpha Pro Tech is in the business of protecting people, products and
environments. We accomplish this by developing, manufacturing and marketing a
line of high-value, disposable protective apparel products for the cleanroom,
industrial, pharmaceutical, medical and dental markets. We also manufacture a
line of building supply construction weatherization products. Our products are
sold under the "Alpha Pro Tech" brand name, as well as under private label.
Our products are grouped into two business segments: (i) the Building Supply
segment, consisting of construction weatherization products, such as housewrap
and synthetic roof underlayment as well as other woven material; and (ii) the
Disposable Protective Apparel segment, consisting of disposable protective
garments (including shoecovers, bouffant caps, coveralls, gowns, frocks and lab
coats), face masks and face shields. 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 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 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.
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales
for the years indicated:
2019 2018
Net sales 100.0 % 100.0 %
Gross profit 36.4 % 38.0 %
Selling, general and administrative expenses 28.6 % 28.6 %
Income from operations
6.5 % 8.3 %
Income before provision for income taxes 7.9 % 9.5 %
Net income 6.4 % 7.8 %
Fiscal Year 2019 Compared to Fiscal Year 2018
Sales. Consolidated sales for the year ended December 31, 2019 increased
slightly to $46,665,000, from $46,624,000 for the year ended December 31, 2018,
representing an increase of $41,000, or 0.1%. This increase consisted of
increased sales in the Building Supply segment of $541,000, partially offset by
decreased sales in the Disposable Protective Apparel segment of $500,000.
Building Supply segment sales for the year ended December 31, 2019 increased by
$541,000, or 2.1%, to $26,576,000, compared to $26,035,000 for the year ended
December 31, 2018. The Building Supply segment increase was primarily due to a
6.2% increase in our core building products, including an increase in sales of
synthetic roof underlayment of 11.5% and an increase in sales of housewrap of
2.2%. Sales of other woven material decreased by 24.3% compared to the same
period of 2018. The sales mix of the Building Supply segment for the year ended
December 31, 2019 was 47% for synthetic roof underlayment, 44% for housewrap and
9% for other woven material. This compared to 44% for synthetic roof
underlayment, 44% for housewrap and 12% for other woven material for the year
ended December 31, 2018. 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.
During 2019, we expanded our TECHNO family of spunbond based (SB) synthetic roof
underlayment products, and we are encouraged by the success of our new TECHNO
SB® 25 product, which was instrumental in our 36.3% growth of the TECHNO family
and 11.5% overall growth in synthetic roof underlayment in 2019 compared to
2018. Management expects continued growth from the TECHNO family of products.
Although housewrap sales in the first half of 2019 were negatively affected by
softer U.S. housing starts due in part to unusually severe weather across many
parts of the country, housewrap sales were up 10.4% in the latter half of 2019
as a result of improved U.S. housing starts and our increased efforts to grow
market share. We expect continued growth as optimism continues in the market.
Sales of other woven material were down significantly in 2019 as a result of our
largest customer in this category having excess inventory and a slowdown in
orders from its customers. We anticipate sales to this customer to return to
previous levels in 2020.
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Sales for the Disposable Protective Apparel segment for the year ended December
31, 2019 decreased by $500,000, or 2.4%, to $20,089,000, compared to $20,589,000
for 2018. This segment decrease was due to a slight decrease in sales of
disposable protective garments and a decrease in sales of face masks and face
shields. The slight decrease in sales of disposable protective garments was
primarily due to decreased sales to our major international supply chain
partner; however, this partner's sales for the year to its end users were up,
demonstrating demand for our products. Mask sales were negatively affected by a
less severe flu season in 2019, and face shield sales decreased primary due to a
one-time sale in 2018 that did not recur in 2019. The sales mix of the
Disposable Protective Apparel segment for the year ended December 31, 2019 was
77% for disposable protective garments, 15% for face masks and 8% for face
shields. This compared to 76% for disposable protective garments, 16% for face
masks and 8% for face shields for the year ended December 31, 2018.
Gross Profit. Gross profit decreased by $739,000, or 4.2%, to $16,972,000 for
the year ended December 31, 2019, from $17,711,000 for 2018. The gross profit
margin was 36.4% for the year ended December 31, 2019, compared to 38.0% for the
year ended December 31, 2018. Gross profit margin was negatively affected as
certain products that were tariff free until June 4, 2019 under the U.S. Customs
and Borders Protection Generalized System of Preferences ("GSP") will no longer
be duty free, as the government program was terminated. This termination of
tariff free GSP products primarily affected gross profit of the Disposable
Protective Apparel segment and, to a much lesser extent, the Building Supply
segment. Gross profit margin was also affected by a change in product mix in the
Building Supply segment, with significant growth in the TECHNO family economy
line of synthetic roof underlayment, which has a lower gross margin. As stated
above, in the second quarter of 2019, we expanded our TECHNO family of spunbond
based (SB) products to include our new TECHNO SB® 25 product, which was marketed
with a lower introductory price. Pricing of the TECHNO SB® family was increased
during the latter part of the fourth quarter of 2019, which will improve gross
profit margin going forward. In addition, gross margin was negatively impacted
by increased rebates.
During the first quarter of 2020, the Company has experienced a significant
surge in customer demand for its N-95 Particulate Respirator face mask resulting
from the outbreak of the novel coronavirus. The Company expects an increase in
revenue from this product in the first quarter and potentially for the rest of
2020.
Management expects gross profit margin to be in the mid-to-high thirty percent
range for 2020, which excludes any gross margin improvement that may result from
increased sale of the N-95 face mask in connection with the Covid-19 outbreak.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses slightly increased by $36,000, or 0.3%, to $13,348,000
for the year ended December 31, 2019, from $13,312,000 for the year ended
December 31, 2018. As a percentage of net sales, selling, general and
administrative expenses were flat at 28.6% for the year ended December 31, 2019
and 2018.
The change in expenses by segment was as follows: Building Supply was up
$169,000, or 3.4%; Disposable Protective Apparel was down $119,000, or 2.7%; and
corporate unallocated expenses were down $14,000, or 0.3%. The increase in the
Building Supply segment expenses was primarily as a result of increased employee
compensation for the sales team, increased commission and increased trade show
and warehouse supply expenses. The decrease in the Disposable Protective Apparel
segment expenses was related to lower commissions.
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. A bonus amount
of $194,000 was accrued for the year ended December 31, 2019, compared to
$233,000 for the year ended December 31, 2018.
Depreciation and Amortization. Depreciation and amortization expense increased
by $77,000, or 14.7%, to $602,000 for the year ended December 31, 2019, from
$525,000 for the year ended December 31, 2018. The increase was primarily
attributable to increased depreciation for machinery and equipment in both the
Building Supply and Disposable Protective Apparel segments.
Income from Operations. Income from operations decreased by $852,000, or 22.0%,
to $3,022,000 for the year ended December 31, 2019, compared to $3,874,000 for
2018. The decreased income from operations was primarily due to a decrease in
gross profit of $739,000, an increase in selling, general and administrative
expenses of $36,000, and an increase in depreciation and amortization expense of
$77,000. Income from operations as a percentage of net sales for the year ended
December 31, 2019 was 6.5%, compared to 8.3% for the same period of 2018.
Other Income. Other income increased by $118,000, or 21.9%, to $658,000 for the
year ended December 31, 2019, from $540,000 for 2018. The increase was primarily
due to the gain on marketable securities for the year ended December 31, 2019
compared to a loss on marketable securities during the same period of 2018, for
a net change of $281,000, and an increase in interest income of $65,000,
partially offset by a decrease in equity in income of unconsolidated affiliate
of $228,000.
Other income consisted of equity in income of unconsolidated affiliate of
$359,000, a gain on marketable securities of $231,000 and interest income of
$68,000 for the year ended December 31, 2019. Other income consisted primarily
of equity in income of unconsolidated affiliate of $587,000, a loss on
marketable securities of $50,000 and interest income of $3,000 for the year
ended December 31, 2018. Equity in income of unconsolidated affiliate was lower
in 2019 primarily due to lower gross margin.
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Income before Provision for Income Taxes. Income before provision for income
taxes for the year ended December 31, 2019 was $3,680,000, compared to income
before provision for income taxes of $4,414,000 for 2018, representing a
decrease of $734,000, or 16.6%. This decrease in income before provision for
income taxes was primarily due to a decrease in income from operations of
$852,000, partially offset by an increase in other income of $118,000.
Provision for Income Taxes. The provision for income taxes for the year ended
December 31, 2019 was $680,000, compared to $789,000 for 2018. The estimated
effective tax rate was 18.5% for the year ended December 31, 2019, compared to
17.9% for the year ended December 31, 2018. 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 year ended December 31, 2019 was $3,000,000,
compared to net income of $3,625,000 for 2018, representing a decrease of
$625,000, or 17.2%. The net income decrease was due to a decrease in income
before provision for income taxes of $734,000, partially offset by a decrease in
provision for income taxes of $109,000. Net income as a percentage of net sales
for the year ended December 31, 2019 was 6.4%, and net income as a percentage of
net sales for the year ended December 31, 2018 was 7.8%. Basic and diluted
earnings per common share for the years ended December 31, 2019 and 2018 were
$0.23 and $0.26, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2019, the Company had cash of $6,548,000 and working capital
of $24,660,000, representing an increase in working capital of $120,000 from
$24,540,000 as of December 31, 2018. As of December 31, 2019, the Company's
current ratio (current assets/current liabilities) was 12:1, compared to a 14:1
current ratio as of December 31, 2018. Cash decreased by 6.6%, or $459,000, to
$6,548,000 as of December 31, 2019, compared to $7,007,000 as of December 31,
2018. The decrease in cash from December 31, 2019 was due to cash provided by
operating activities of $3,101,000, cash used in financing activities of
$2,418,000 and cash used in investing activities of $1,142,000.
We have a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line
of credit with interest at prime plus 0.5%. As of December 31, 2019, the prime
interest rate was 4.75%. This credit line will expire in May 2020. The available
line of credit is based on a formula of eligible accounts receivable and
inventories. Our borrowing capacity on the line of credit was $3,500,000 as of
December 31, 2019. As of December 31, 2019, we did not have any borrowings under
this credit facility and do not anticipate using it in the near future. The
credit facility includes customary financial and non-financial debt covenants.
As of December 31, 2019 we believe that we are in compliance with all such
covenants.
Net cash provided by operating activities of $3,101,000 for the year ended
December 31, 2019 was due to net income of $3,000,000, impacted primarily by the
following: stock-based compensation expense of $451,000, depreciation and
amortization expense of $602,000, gain on marketable securities of $231,000,
equity in income of unconsolidated affiliate of $359,000, operating lease
expense net of accretion of $704,000, a decrease in accounts receivable of
$1,026,000, a decrease in prepaid expenses of $412,000, an increase in inventory
of $1,425,000, a decrease in accounts payable and accrued liabilities of
$500,000 and a decrease in lease liabilities of $662,000.
Accounts receivable decreased by $1,026,000, or 19.3%, to $4,292,000 as of
December 31, 2019, from $5,318,000 as of December 31, 2018. The decrease in
accounts receivable was primarily related to increased rebates and decreased
sales in the latter half of the fourth quarter of 2019 compared to the fourth
quarter of 2018 in relation to other woven material customer mentioned above.
The number of days that sales remained outstanding as of December 31, 2019,
calculated by using an average of accounts receivable outstanding and annual
revenue, was 34 days, compared to 40 days as of December 31, 2018.
Inventory increased by $1,425,000, or 14.4%, to $11,303,000 as of December 31,
2019, from $9,878,000 as of December 31, 2018. The increase was primarily due to
an increase in inventory for the Building Supply segment of $1,393,000, or
32.4%, to $5,695,000 and an increase in inventory for the Disposable Protective
Apparel segment of $32,000, or 0.6%, to $5,608,000,
Prepaid expenses decreased by $412,000, or 10.3%, to $3,587,000 as of December
31, 2019, from $3,999,000 as of December 31, 2018. The decrease was primarily
due to a decrease in deposits for the purchase of inventory.
Right-of-use assets as of December 31, 2019 decreased by $277,000 to $3,178,000
from $3,455,000 as of January 1, 2019 when ASC 842 Leases was adopted.
Lease liabilities as of December 31, 2019 decreased by $236,000 to $3,219,000
from $3,455,000 as of January 1, 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 amortizing the balance over the life of the lease.
Accounts payable and accrued liabilities as of December 31, 2019 decreased by
$500,000, or 26.0%, to $1,421,000, from $1,920,000 as of December 31, 2018. The
change was primarily due to a decrease in accrued liabilities as a result of
payments of 2018 year-end commissions and bonuses.
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Net cash used in investing activities was $1,142,000 for the year ended December
31, 2019, compared to net cash used in investing activities of $570,000 for the
same period of 2018. Investing activities for the year ended December 31, 2019
consisted of the purchase of property and equipment of $1,296,000 for both the
Building Supply segment and the Disposable Apparel Products segment and proceeds
from the sale of marketable securities of $154,000. Investing activities for the
year ended December 31, 2018 consisted of the purchase of property and equipment
of $606,000 and proceeds from the sale of marketable securities of $36,000.
Net cash used in financing activities was $2,418,000 for the year ended December
31, 2019, compared to net cash used in financing activities of $3,186,000 for
the same period of 2018. Net cash used in financing activities for the year
ended December 31, 2019 resulted from the payment of $2,548,000 for the
repurchase of common stock, partially offset by proceeds of $130,000 from the
exercise of stock options. Net cash used in financing activities for the year
ended December 31, 2018 resulted from the payment of $3,580,000 for the
repurchase of common stock, partially offset by proceeds of $394,000 from the
exercise of stock options.
As of December 31, 2019, we had $2,152,000 available for additional stock
purchases under our stock repurchase program. For the year ended December 31,
2019, we repurchased 683,910 shares of common stock at a cost of $2,548,000. As
of December 31, 2019, we had repurchased a total of 17,887,817 shares of common
stock at a cost of $35,368,000 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 and the funds available under our
credit facility will be sufficient to satisfy our projected working capital and
planned capital expenditures for the foreseeable future.
Related Parties
During 2019, the Company had no related party transactions, other than the
Company's transactions with its non-consolidated affiliate, Harmony. See Note 7
- "Equity Investments in Unconsolidated Affiliate" in the notes to our
consolidated financial statements in Item 8 for more information on our
relationship with our non-consolidated affiliated Harmony Plastics Private
Limited.
New Accounting Standards
Effective January 1, 2018, we adopted Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date,
which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09
supersedes the revenue recognition requirements in ASC 605, Revenue Recognition,
and is based on the principle that revenue is recognized to depict the transfer
of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or
services. It also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue, cash flows arising from customer contracts,
including significant judgments and changes in judgments, and assets recognized
from costs incurred to obtain or fulfill a contract. The adoption of ASU
2014-09, using a full retrospective approach, had no significant impact on our
results of operations, cash flows or financial position. Revenue continues to be
recognized at a point in time for our product sales when products are delivered
to or picked up by the customer, and revenue for shipping and handling charges
continues to be recognized when products are delivered to or picked up by the
customer. We continue to reduce revenue for estimates of sales incentives based
on probability estimates and for product returns based on historical return
rates.
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 12 to the Consolidated Financial
Statements, which appear elsewhere in this report.
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. Management is
currently evaluating the requirements of this guidance and has not yet
determined the impact on the adoption of the Company's financial position or
results from operations.
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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 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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