Quarterly Report for Quarter Ending September 30, 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, ongoing trade disputes and related litigation, including related to tariff refunds could increase our costs and disrupt our global supply chain, which could negatively impact the results of our operations and cash flows.

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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 continue to introduce 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 United States. Changes in tariffs, quotas, embargoes, or other trade barriers affecting countries from which the Company sources products, or affecting its global network of third-party suppliers, could impact the Company's supply chain and cost structure. In addition, retaliatory measures by affected countries could further disrupt our operations or reduce our competitiveness in international markets. The Company continues to monitor evolving trade policies and tariff developments. Future changes in tariffs or other trade restrictions could require the Company to adjust pricing, increase inventory levels, or seek alternative suppliers, any of which could materially affect revenue, gross margins, and results of operations.

On February 20, 2026, the U.S. Supreme Court ruled in Learning Resources, Inc. v. Trump that the President lacked authority under the International Emergency Economic Powers Act ("IEEPA") to impose certain tariffs. During the nine months ended September 30, 2026, the Company received a recovery of approximately $3,500,000 of previously paid IEEPA tariffs. The related refunds, including applicable statutory interest, were received from U.S. Customs and Border Protection (the "CBP"). The U.S. government has appealed the court's decision, and the litigation remains ongoing. The Company will continue to monitor developments related to the litigation and U.S. trade policy.

Management reviews and analyzes several key performance measures which are non-GAAP financial measures when shown excluding the impact of the IEEPA tariff refund, including gross profit; selling, general and administrative expense; income from operations; income before provision for taxes; provision for taxes; net income; basic earnings per share; and diluted earnings per share. These measures are reviewed and analyzed in order to evaluate our business performance, identify trends affecting our business, allocate capital, and make strategic decisions, including those discussed below. See "Results of Operations" below for further discussion on these key performance measures, which are indicated by an asterisk (*).

The non-GAAP financial measures should be considered along with the most directly comparable U.S. GAAP financial measures. Definitions of these non-GAAP financial measures, a discussion of why we believe they are useful to management and investors as well as certain of their limitations, and reconciliations to their most directly comparable U.S. GAAP financial measures are provided below under "Non-GAAP Financial Measures."

RESULTS OF OPERATIONS

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

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2026				2025				2026				2025
Net sales			100	%			100	%			100	%			100	%
Gross profit			41.8	%			39.7	%			39.0	%			38.4	%
Selling, general and administrative expenses			28.6	%			30.9	%			28.3	%			30.5	%
Income from operations			11.9	%			7.4	%			9.1	%			6.4	%
Income before provision for income taxes			15.2	%			8.7	%			11.6	%			8.1	%
Net income			11.6	%			6.6	%			8.9	%			6.3	%

For the Three and Nine months ended September 30, 2026 compared to the Three and Nine months ended September 30, 2025

Sales. Consolidated sales for the three months ended September 30, 2026, increased to $16,604,000, from $14,785,000 for the three months ended September 30, 2025, representing an increase of $1,819,000, or 12.3%. This increase consisted of increased sales in the Building Supply segment of $157,000 and increased sales in the Disposable Protective Apparel segment of $1,662,000.

Building Supply segment sales for the three months ended September 30, 2026, increased by $157,000, or 1.7%, to $9,431,000, compared to $9,274,000 for the three months ended September 30, 2025.

The Building Supply segment sales increase during the three months ended September 30, 2026, was primarily due to a 13.1% increase in sales of housewrap, partially offset by a 6.3% decrease in sales of synthetic roof underlayment, and a 22.0% decrease 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 September 30, 2026, was approximately 35% for synthetic roof underlayment, 50% for housewrap and 15% for other woven material, which was the same for the three months ended September 30, 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.

The housing market continued to show weakness in the third quarter of 2026, as single-family housing starts declined by 1.6% compared to the corresponding period of 2025. However, this market decline in the third quarter of 2026 represents an improvement from the decline in the prior quarter. Single-family housing starts in the U.S. remained constrained by mortgage rates, increased land, labor and construction costs, affordability pressures, macroeconomic uncertainty, and geopolitical volatility, which has led builders to moderate new construction activity.

During the third quarter of 2026, we again outperformed the market, as sales of our core building products (housewrap and synthetic roof underlayment) increased by 5.2% compared to the same period of 2025, driven primarily by a 13.1% increase in housewrap sales. In the third quarter of 2026, our synthetic roof underlayment sales decreased by 6.3% compared to the third quarter of 2025, outperforming the overall market, as the Asphalt Roofing Manufacturers Association ("ARMA") reported a steeper 13.0% decline in industry shipments.

Sales of other woven material were down 22.0% in the third quarter of 2026 compared to the same period of 2025, primarily due to timing of orders but year to date sales for the product line are basically flat compared to the prior year period.

The building industry outlook for the remainder of 2026 reflects a soft but generally stable market, rather than a meaningful rebound. A modest increase in single-family housing starts is expected in 2027, assuming economic and financing conditions improve. The Company plans on expanding our housewrap and synthetic roof underlayment market product offerings in 2027 to enhance our competitive position and support long-term growth. Management remains focused on growth in the Building Supply segment and has recently expanded its sales team; however, uncertainty related to the factors described above could adversely impact results.

Disposable Protective Apparel segment sales for the three months ended September 30, 2026, were $7,173,000, compared to $5,511,000 for the same period of 2025, reflecting an increase of $1,662,000, or 30.2%. The segment experienced strong underlying sales growth during the quarter.

The sales mix of the Disposable Protective Apparel segment for the three months ended September 30, 2026, was approximately 90% for disposable protective garments, 6% for face masks and 4% for face shields. This sales mix is compared to approximately 90% for disposable protective garments, 7% for face masks and 3% for face shields for the three months ended September 30, 2025.

Sales of disposable protective garments, which comprised 90% of the segment sales, increased by $1,521,000 or 30.6% in the third quarter of 2026, compared to the same period of 2025. The sales increase was primarily due to improved sales across our distribution network comprised of our large international channel partner and national and regional distributors. In addition, a considerable portion of the increase was attributable to higher selling prices compared to the third quarter of 2025. The disposable protective garments product line continues to demonstrate positive momentum, with most major categories performing well ahead of the third quarter of 2025. Sales of shoe covers, lab coats and frocks, gowns, and bouffant caps are all contributing to this improved performance. The breadth of growth across these product categories is encouraging and provides an opportunity to further expand customer relationships and capture incremental business. As we enter the final quarter of 2026, our focus is on building upon this broader-based improvement, deepening customer relationships, and identifying additional opportunities to expand sales across the portfolio in 2027.

Sales of our face mask and face shield products in the third quarter of 2026, which comprise the remaining 10% of the segment sales, were up by $141,000 or 25.9% compared to the same period in 2025. The face mask and face shield product lines are showing encouraging improvement, with both face mask and face shields posting solid gains over the prior year period. Management hopes to continue to build on this progress through focused customer engagement, targeted promotional programs, and the pursuit of new business opportunities to sustain growth and strengthen our position in these markets.

Consolidated sales for the nine months ended September 30, 2026 were $49,863,000, compared with $45,279,000 for the nine months ended September 30, 2025, an increase of $4,584,000, or 10.1%. The increase was attributable to higher sales in both operating segments, consisting of a $253,000 increase in the Building Supply segment and a $4,331,000 increase in the Disposable Protective Apparel segment.

Building Supply segment sales for the nine months ended September 30, 2026 increased by $253,000, or 0.9%, to $28,982,000, compared to $28,729,000 for the nine months ended September 30, 2025.

The Building Supply segment sales increase during the nine months ended September 30, 2026, was primarily due to a 8.3% increase in sales of housewrap, partially offset by a 9.9% decrease in sales of synthetic roof underlayment and a 0.8% decrease in sales of other woven material compared to the same period of 2025.

The sales mix of the Building Supply segment for the nine months ended September 30, 2026 was 53% for housewrap, 36% for synthetic roof underlayment and 11% for other woven material. This compared to 49% for housewrap, 40% for synthetic roof underlayment and 11% for other woven material for the nine months ended September 30, 2025.

As per the US Census Bureau, single-family housing starts declined by 4.0% year to date compared to the same period of 2025. Accordingly, management is encouraged by the year-to-date increase in sales of housewrap of 8.3%.

Management expects growth in the Building Supply segment, however continued uncertainty in housing starts and the economy in general could negatively affect this segment.

Disposable Protective Apparel segment sales for the nine months ended September 30, 2026 increased by $4,331,000, or 26.2%, to $20,881,000, compared to $16,550,000 for the nine months ended September 30, 2025.

The increase in segment sales was primarily driven by strong demand across the Company's disposable protective product lines. Compared with the first nine months of 2025, sales of disposable protective garments increased by 27.8%, sales of face masks increased by 10.3%, and sales of face shields increased by 12.4%. These increases contributed to the segment's strong underlying year-over-year growth.

The sales mix of the Disposable Protective Apparel segment for the nine months ended September 30, 2026, was 92% for disposable protective garments, 5% for face masks and 3% for face shields. This sales mix is compared to 90% for disposable protective garments, 6% for face masks and 4% for face shields for the nine months ended September 30, 2025.

Gross Profit. Gross profit increased by $1,069,000, or 18.2%, to $6,937,000 for the three months ended September 30, 2026, from $5,868,000 for the three months ended September 30, 2025. The gross profit margin was 41.8% for the three months ended September 30, 2026, compared to 39.7% for the three months ended September 30, 2025.

Gross profit margin for the third quarter of 2026 improved compared to the prior year period, primarily reflecting the rescission in late February 2026 of the 50% IEEPA tariffs on goods from India, following a U.S. Supreme Court decision invalidating the use of IEEPA to authorize such tariffs. However, the U.S. Government subsequently announced a new 10% tariff under Section 122 of the Trade Act of 1974. Accordingly, the Company continues to incur tariff costs, although at a lower rate.

Beginning in the second quarter of 2026, the Company also experienced increased costs associated with global geopolitical instability, including 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 prices, particularly petroleum-based inputs. Many of the Company's products are manufactured using petroleum-based resin, which has experienced significant price increases since the conflict began. In response to these higher costs, the Company implemented a price increase in the third quarter of 2026. The combination of lower tariff rates and the Company's pricing actions contributed to the improvement in gross profit margin during the third quarter.

The Company will continue to monitor developments in U.S. trade policy and global geopolitical conditions. Ocean freight rates have also increased substantially over the past several months, partly as a result of the U.S.-Iran conflict and are expected to put additional pressure on gross profit margin in future periods. Changes in tariffs, energy markets, freight rates and international conflicts may continue to affect the Company's supply chain, cost structure and profitability.

The net change in gross profit for the three months September 30, 2026 due to the IEEPA tariff refund was $70,000, which was due to lower cost of goods sold. Excluding the IEEPA tariff refund, gross profit increased by $999,000, or 17.0%, to $6,867,000* for the three months ended September 30, 2026, from $5,868,000 for the three months ended September 30, 2025. Excluding the tariff refund, gross profit margin was 41.4%* for the three months ended September 30, 2026, compared to 39.7% for the three months ended September 30, 2025.

Gross profit increased by $2,040,000, or 11.7%, to $19,431,000 for the nine months ended September 30, 2026, from $17,391,000 for the nine months ended September 30, 2025. The gross profit margin was 39.0% for the nine months ended September 30, 2026, compared to 38.4% for the nine months ended September 30, 2025.

The net change in gross profit for the nine months September 30, 2026 due to the IEEPA tariff refund was $364,000, which was due to lower cost of goods sold. Excluding the IEEPA tariff refund, gross profit increased by $1,676,000, or 9.6%, to $19,067,000* for the nine months ended September 30, 2026, from $17,391,000 for the nine months ended September 30, 2025. Excluding the tariff refund, gross profit margin was 38.2%* for the nine months ended September 30, 2026, compared to 38.4% for the nine months ended September 30, 2025.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $173,000, or 3.8%, to $4,741,000 for the three months ended September 30, 2026, from $4,568,000 for the three months ended September 30, 2025. As a percentage of net sales, selling, general and administrative expenses decreased to 28.6% for the three months ended September 30, 2026, from 30.9% for the same period of 2025. The change in expenses by segment for the three months ended September 30, 2026, was as follows: Building Supply expenses were down by $25,000, or 1.4%; Disposable Protective Apparel expenses were down by $47,000, or 3.4%; and corporate unallocated expenses were up by $245,000, or 17.4%. The IEEPA refund effect did not have a material effect on selling, general and administrative expenses.

The decrease in the Building Supply segment expenses was primarily related to decreased employee compensation, marketing expenses and commission expenses, partially offset by increased sales-related travel expenses, insurance expenses and general office expenses. The decrease in the Disposable Protective Apparel segment expenses was primarily related to decreased general office expenses, partially offset by increased employee compensation, commission expenses, insurance expenses and rent and utilities expenses. The increase in corporate unallocated expenses was primarily due to increased employee bonuses and professional fees, partially offset by decreased general office expenses.

Selling, general and administrative expenses increased by $307,000, or 2.2%, to $14,125,000 for the nine months ended September 30, 2026, from $13,818,000 for the nine months ended September 30, 2025. As a percentage of net sales, selling, general and administrative expenses decreased to 28.3% for the nine months ended September 30, 2026, from 30.5% for the same period of 2025. Excluding the IEEPA tariff refund, selling, general and administrative expenses would have been $15,000 lower for the nine months ended September 30, 2026.

The change in expenses by segment for the nine months ended September 30, 2026, was as follows: Building Supply expenses were down by $204,000, or 3.8%; Disposable Protective Apparel expenses were up by $15,000, or 0.4%; and corporate unallocated expenses were up by $496,000, or 11.6%. The decrease in the Building Supply segment expenses was primarily related to decreased employee compensation, trade show expenses and commission expenses, partially offset by increased sales-related travel expenses, insurance expenses and general office expenses. The increase in the Disposable Protective Apparel segment expenses was primarily related to increased employee compensation, commission expenses and insurance expenses, partially offset by decreased sales-related travel expenses and general office and factory expenses. The increase in corporate unallocated expenses was primarily due to increased employee bonuses, professional fees, public company expenses and general office expenses in the nine months ended September 30, 2026 compared to the same period of 2025.

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 $133,000 was accrued for the three months ended September 30, 2026, compared to $69,000 for the three months ended September 30, 2025. A bonus amount of $305,000 was accrued for the nine months ended September 30, 2026, compared to $194,000 for the same period of 2025.

Depreciation and Amortization. Depreciation and amortization expense increased by $23,000, or 11.3%, to $226,000 for the three months ended September 30, 2026, from $203,000 for the three months ended September 30, 2025. Depreciation and amortization expense increased by $58,000, or 8.5%, to $744,000 for the nine months ended September 30, 2026, from $686,000 for the nine months ended September 30, 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 $873,000, or 79.6%, to $1,970,000 for the three months ended September 30, 2026, compared to $1,097,000 for the three months ended September 30, 2025. The increased income from operations was primarily due to an increase in gross profit of $1,069,000, partially offset by an increase in selling, general and administrative expenses of $173,000 and an increase in depreciation and amortization expenses of $23,000. Income from operations as a percentage of net sales for the three months ended September 30, 2026, was 11.9%, compared to 7.4% for the three months ended September 30, 2025.

The net change in income from operations for the third quarter of 2026 due to the IEEPA tariff refund was $70,000. Excluding the impact of the IEEPA tariff refund, income from operations increased by $803,000, or 73.2%, to $1,900,000* for the three months ended September 30, 2026, compared to $1,097,000 for the three months ended September 30, 2025.The increased income from operations was primarily due to an increase in gross profit of $999,000, partially offset by an increase in selling, general and administrative expenses of $173,000 and an increase in depreciation and amortization expenses of $23,000. Income from operations as a percentage of net sales for the third quarter of 2026, was 11.4%, compared to 7.4% for the three months ended September 30, 2025.

Income from operations increased by $1,675,000, or 58.0%, to $4,562,000 for the nine months ended September 30, 2026, compared to $2,887,000 for the nine months ended September 30, 2025. The increased income from operations was primarily due to an increase in gross profit of $2,040,000 partially offset by an increase in selling, general and administrative expenses of $307,000 and an increase in depreciation and amortization expenses of $58,000. Income from operations as a percentage of net sales for the nine months ended September 30, 2026, was 9.1%, compared to 6.4% for the nine months ended September 30, 2025.

The net change in income from operations for the nine months September 30, 2026 due to the IEEPA tariff refund was $349,000. Excluding the impact of the IEEPA tariff refund, income from operations increased by $1,326,000, or 45.9%, to $4,213,000* for the nine months ended September 30, 2026, compared to $2,887,000 for the nine months ended September 30, 2025.The increased income from operations was primarily due to an increase in gross profit of $1,676,000, partially offset by an increase in selling, general and administrative expenses of $292,000 and an increase in depreciation and amortization expenses of $58,000. Income from operations as a percentage of net sales for the nine months ended September 30, 2026, was 8.4%, compared to 6.4% for the nine months ended September 30, 2025.

Other Income. Other income increased by $364,000 to income of $560,000 for the three months ended September 30, 2026, compared to $196,000 for the same period of 2025. The increase was primarily due to an increase in equity in income of unconsolidated affiliate of $227,000 and an increase in interest income of $137,000. The increase in interest income was primarily due to interest paid by the federal government on our IEEPA tariff refund of $97,000 and to interest earned in investments.

Other income increased by $448,000 to income of $1,237,000 for the nine months ended September 30, 2026, compared to $789,000 for the same period of 2025. The increase was primarily due to an increase in equity in income of unconsolidated affiliates of $313,000 and an increase in interest income of $135,000, of which $112,000 was interest paid by the federal government on our IEEPA tariff refund.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended September 30, 2026, was $2,530,000, compared to $1,293,000 for the same period of 2025, representing an increase of $1,237,000, or 95.7%. This increase in income before provision for income taxes was due to an increase in income from operations of $873,000 and an increase in other income of $364,000.

The net change in income before provision for income taxes for the third quarter of 2026 due to the IEEPA tariff refund was $167,000. Excluding the impact of the IEEPA tariff refund, income before provision for income taxes for the three months ended September 30, 2026, was $2,363,000*, compared to $1,293,000 for the same period of 2025, representing an increase of $1,070,000, or 82.8%.

Income before provision for income taxes for the nine months ended September 30, 2026, was $5,799,000, compared to $3,676,000 for the same period of 2025, representing an increase of $2,123,000, or 57.8%. This increase in income before provision for income taxes was due to an increase in income from operations of $1,675,000 and an increase in other income of $448,000.

The net change in income before provision for income taxes for the nine months ended September 30, 2026 due to the IEEPA tariff refund was $461,000. Excluding the impact of the IEEPA tariff refund, income before provision for income taxes for the nine months ended September 30, 2026, was $5,338,000*, compared to $3,676,000 for the same period of 2025, representing an increase of $1,662,000, or 45.2%.

Provision for Income Taxes.The provision for income taxes for the three months ended September 30, 2026, was $605,000, compared to $317,000 for the same period of 2025. The estimated effective tax rate was 23.9% for the three months ended September 30, 2026, compared to 24.5% for the three months ended September 30, 2025.

The net change in provision for income taxes for the third quarter of 2026 due to the IEEPA tariff refund was $43,000. Excluding the impact of the IEEPA tariff refund, the provision for income taxes for the three months ended September 30, 2026, was $562,000*, compared to $317,000 for the same period of 2025. The estimated effective tax rate was 23.8% for the three months ended September 30, 2026, compared to 24.5% for the three months ended September 30, 2025.

The provision for income taxes for the nine months ended September 30, 2026, was $1,346,000, compared to $843,000 for the same period of 2025. The estimated effective tax rate was 23.2% for the nine months ended September 30, 2026, compared to 22.9% for the nine months ended September 30, 2025.

The net change in provision for income taxes for the nine months ended September 30, 2026 due to the IEEPA tariff refund was $118,000. Excluding the impact of the IEEPA tariff refund, the provision for income taxes for the nine months ended September 30, 2026, was $1,228,000*, compared to $843,000 for the same period of 2025. The estimated effective tax rate was 23.0% for the nine months ended September 30, 2026, compared to 22.9% for the nine months ended September 30, 2025.

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was enacted, which included permanent extensions of most expiring Tax Cuts and Jobs Act provisions and international tax changes. The Company recognized the income tax effects of the OBBBA in its third quarter 2025 financial statements.

The Company does not record a tax provision on equity in income of unconsolidated affiliate, which reduces the effective tax rate.

Net Income. Net income for the three months ended September 30, 2026, was $1,925,000, compared to net income of $976,000 for the same period of 2025, representing an increase of $949,000, or 97.2%. The net income increase between the three months ended September 30, 2026 and the same period of 2025 was due to an increase in income before provision for income taxes of $1,237,000, partially offset by an increase in provision for income taxes of $288,000. Net income as a percentage of net sales was 11.6% for the three months ended September 30, 2026, compared to 6.6% for the same period of 2025. Basic and diluted earnings per common share for the three months ended September 30, 2026 and 2025, were $0.19 and $0.09, respectively.

The net change in net income for the third quarter of 2026 due to the IEEPA tariff refund was $124,000. Excluding the impact of the IEEPA tariff refund, net income for the three months ended September 30, 2026, was $1,801,000*, compared to net income of $976,000 for the same period of 2025, representing an increase of $825,000, or 84.5%. Excluding the impact of the IEEPA refund, the net income increase between the three months ended September 30, 2026 and the same period of 2025 was due to an increase in income before provision for income taxes of $1,070,000, partially offset by an increase in provision for income taxes of $245,000. Net income as a percentage of net sales was 10.8% for the three months ended September 30, 2026, compared to 6.6% for the same period of 2025. Basic and diluted earnings per common share for the three months ended September 30, 2026 and 2025, were $0.18* and $0.09, respectively. This comparison reflects the Company's underlying operating performance before the effect of the IEEPA tariff refund.

Net income for the nine months ended September 30, 2026, was $4,453,000 compared to net income of $2,833,000 for the same period of 2025, representing an increase of $1,620,000, or 57.2%. The net income increase between the nine months ended September 30, 2026 and the same period of 2025 was due to an increase in income before provision for income taxes of $2,123,000, partially offset by an increase in provision for income taxes of $503,000. Net income as a percentage of net sales was 8.9% for the nine months ended September 30, 2026, compared to 6.3% for the same period of 2025. Basic earnings per common share for the nine months ended September 30, 2026 and 2025, were $0.44 and $0.27, respectively. Diluted earnings per common share for the nine months ended September 30, 2026 and 2025, were $0.43 and $0.27, respectively

The net change in net income for the nine months ended September 30, 2026 due to the IEEPA tariff refund was $343,000. Excluding the impact of the IEEPA tariff refund, net income for the nine months ended September 30, 2026, was $4,110,000*, compared to net income of $2,833,000 for the same period of 2025, representing an increase of $1,277,000, or 45.1%. Excluding the impact of the IEEPA refund, the net income increase between the nine months ended September 30, 2026 and the same period of 2025 was due to an increase in income before provision for income taxes of $1,662,000, partially offset by an increase in provision for income taxes of $385,000. Net income as a percentage of net sales was 8.2% for the nine months ended September 30, 2026, compared to 6.3% for the same period of 2025. Basic earnings per common share for the nine months ended September 30, 2026 and 2025, were $0.41* and $0.27, respectively. Diluted earnings per common share for the nine months ended September 30, 2026 and 2025, were $0.40* and $0.27, respectively. This comparison reflects the Company's underlying operating performance before the effect of the IEEPA tariff refund.

NON-GAAP FINANCIAL MEASURES

The non-GAAP financial measures presented in this Quarterly Report on Form 10-Q are supplemental measures of our performance that we believe will help investors understand our operating results and assess our future prospects. When read in conjunction with our U.S. GAAP results, these non-GAAP financial measures provide a baseline for analyzing trends in our underlying businesses and can be used by management as one basis for making financial, operational, and planning decisions. For each financial measure we have excluded the impact of the tariff refunds due to their unusual nature which is not reflective of our ongoing operating results.

Management recognizes that these non-GAAP financial measures have limitations, including that they may be calculated differently by other companies or may be used under different circumstances or for different purposes. In order to compensate for the discussed limitations, management does not consider these measures in isolation from or as alternatives to the comparable financial measures determined in accordance with U.S. GAAP.

The detailed reconciliations of each non-GAAP financial measure to the most directly comparable U.S. GAAP financial measure are provided below, and no single financial measure should be relied on to evaluate our business.

		For the Three Months				For the Nine Months
		Ended September 30,				Ended September 30,
		2026				2026
Gross profit		$	6,937,000				19,431,000
Less impact of tariff refund			(70,000	)			(364,000	)
Gross profit excluding tariff refund			6,867,000				19,067,000
Income from operations			1,970,000				4,562,000
Less impact of tariff refund			(70,000	)			(349,000	)
Income from operations excluding tariff refund			1,900,000				4,213,000
Income before provision for income taxes			2,530,000				5,799,000
Less impact of tariff refund			(167,000	)			(461,000	)
Income before provision for income taxes excluding tariff refund			2,363,000				5,338,000
Provision for income taxes			605,000				1,346,000
Less impact of tariff refund			(43,000	)			(118,000	)
Provision for income taxes excluding tariff refund			562,000				1,228,000
Net income			1,925,000				4,453,000
Less impact of tariff refund			(124,000	)			(343,000	)
Net income excluding tariff refund			1,801,000				4,110,000
Basic earnings per share		$	0.19			$	0.44
Less impact of tariff refund		$	(0.01	)		$	(0.03	)
Basic earns per share excluding tariff refund		$	0.18			$	0.41
Diluted earnings per share		$	0.19			$	0.43
Less impact of tariff refund		$	(0.01	)		$	(0.03	)
Diluted earnings per share excluding tariff refund		$	0.18			$	0.40

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2026, the Company had cash and cash equivalents ("cash") of $25,546,000 and working capital of $52,066,000. As of September 30, 2026, the Company's current ratio (current assets/current liabilities) was 9:1, compared to a current ratio of 13:1 as of December 31, 2025. Cash increased by 50.4%, or $8,558,000, to $25,546,000 as of September 30, 2026, compared to $16,988,000 as of December 31, 2025, and working capital increased by $3,604,000, to $52,066,000 from $48,462,000 as of December 31, 2025. The increase in cash from December 31, 2025, was due to cash provided by operating activities of $9,337,000 partially offset by cash used in investing activities of $342,000 and cash used in financing activities of $437,000.

Net cash provided by operating activities of $9,337,000 for the nine months ended September 30, 2026 was due to net income of $4,453,000, as adjusted primarily by the following: stock-based compensation expense of $385,000, depreciation and amortization expense of $744,000, equity in income of unconsolidated affiliate of $618,000, operating lease asset amortization of $768,000, an increase in accounts receivable of $1,303,000, an increase in prepaid expenses of $2,179,000, a decrease in inventory of $5,744,000, an increase in accounts payable and accrued liabilities of $2,092,000 and a decrease in lease liabilities of $749,000, all compared to December 31, 2025.

Accounts receivable increased by $1,303,000, or 16.0%, to $9,441,000 as of September 30, 2026, from $8,138,000 as of December 31, 2025. The increase in accounts receivable was primarily related to increased sales in the third quarter of 2026 compared to the fourth quarter of 2025. The number of days that sales remained outstanding as of September 30, 2026, calculated by using an average of accounts receivable outstanding and annual revenue, was 64 days, compared to 40 days as of December 31, 2025. The increase in days outstanding was primarily due to increased sales.

Inventory decreased by $5,744,000, or 24.3%, to $17,854,000 as of September 30, 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 $4,263,000, or 33.2%, to $8,566,000 and a decrease in inventory for the Disposable Protective Apparel segment of $1,481,000, or 13.8%, to $9,288,000. We purchased less inventory due to the high tariff rate.

Prepaid expenses increased by $2,179,000, or 57.4%, to $5,975,000 as of September 30, 2026, from $3,796,000 as of December 31, 2025. The increase was primarily due to increased prepayments for inventory.

Right-of-use assets as of September 30, 2026, decreased by $545,000 to $7,230,000 from $7,775,000 as of December 31, 2025, as a result of amortization of the right-of-use assets partially offset by renewed corporate office lease in Canada.

Lease liabilities as of September 30, 2026, decreased by $526,000 to $7,356,000 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 partially offset by the effect of the renewed lease for our corporate office being extended for three years.

Accounts payable and accrued liabilities as of September 30, 2026 increased by $2,603,000, or 84.2%, to $5,696,000, from $3,093,000 as of December 31, 2025. Excluding the accrued withholding taxes, which represent a non-cash financing activity, accounts payable and accrued liabilities increased by $2,092,000, as reflected in the condensed consolidated statement of cash flows. The increase was primarily due to advanced deposits of IEEPA tariffs.

Net cash used in investing activities was $342,000 for the nine months ended September 30, 2026, compared to net cash used in investing activities of $372,000 for the nine months ended September 30, 2025. Investing activities for the nine months ended September 30, 2026 and 2025 consisted of the purchase of property and equipment.

Net cash used in financing activities was $437,000 for the nine months ended September 30, 2026, compared to net cash used in financing activities of $2,658,000 for the same period of 2025. Net cash used in financing activities for the nine months ended September 30, 2026, resulted from the payment of $483,000 for the repurchase of common stock, partially offset by $46,000 from proceeds from stock options exercised. Net cash used in financing activities for the nine months ended September 30, 2025 resulted from the payment of $2,632,000 for the repurchase of common stock and $26,000 for treasury stock excise tax.

As of September 30, 2026, we had $914,000 available for stock purchases under our stock repurchase program. During the nine months ended September 30, 2026, we repurchased 97,982 shares of common stock at a cost of $483,000. As of September 30, 2026, we had repurchased a total of 22,025,922 shares of common stock at a cost of approximately $58,606,000 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 transfers 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 Company adopted this ASU effective January 1, 2026. The adoption of this pronouncement did not have a significant impact on the Company's consolidated financial statements and related disclosures.

In December 2025, the FASB issued ASU 2025-11, "Interim Reporting (Topic 270): Narrow Scope Improvements," which provides additional guidance on what disclosures should be provided in interim reporting periods including disclosure of events since the end of the last annual reporting period that have a material impact on the entity. The amendments in this ASU will be effective for interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The amendments in this ASU can be applied either prospectively or retrospectively to any or all prior periods presented in the financial statements. The Company is in the process of evaluating the impact of the new guidance and determining the transition method and the timing of adoption.

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.