ALPHA PRO TECH LTD 10-K

Item 8. Financial Statements and Supplementary Data. Page Management’s Annual Report on Internal Control over Financial Reporting 23 Report of Independent Registered Public Accounting Firm 24 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2020 and 2019 25 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 and 2019 26 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020 and 2019 27 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 28 Notes to Consolidated Financial Statements 29 All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 22 Alpha Pro Tech, Ltd. Management ’ s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we assessed, as of December 31, 2020, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in accordance with the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2020. 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Alpha Pro Tech, Ltd.: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Alpha Pro Tech, Ltd. and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, shareholders’ equity, and cash flows for each of the years in the two year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the years in the two year period ended December 31, 2020 in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The Communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates. Evaluation of Sufficiency of Audit Evidence over Revenue During the year ended December 31, 2020, the Company’s net sales increased from approximately $47 million to approximately $103 million as the result of increased sales driven by the COVID-19 pandemic. This large increase in sales included large sales to new customers and a significant change in product mix due to the increase in sales of disposable protective apparel. As a result of the significant increases in sales volume that occurred during 2020, we identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter as it required especially subjective auditor judgment in determining the appropriate level of audit evidence to address the change in volume and nature of revenue transactions. Our audit procedures over the Company’s revenue included, among others, sending confirmations to certain customers as third-party evidence regarding the existence of sales, detail testing of a sample of transactions and reconciliation to underlying documents as well as performance of analytics over sales volume and gross margins. /s/Tanner LLC We have served as the Company’s auditor since 2011. Salt Lake City, Utah March 10, 2021 24 Alpha Pro Tech, Ltd. Consolidated Balance Sheets December 31, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 23,292,000 $ 6,548,000 Investments - 335,000 Accounts receivable, net of allowance for doubtful accounts of $71,000 as of December 31, 2020 and $53,000 as of December 31, 2019 8,132,000 3,568,000 Accounts receivable, related party 905,000 724,000 Inventories 16,749,000 11,303,000 Prepaid expenses 6,225,000 3,587,000 Total current assets 55,303,000 26,065,000 Property and equipment, net 4,353,000 3,943,000 Goodwill 55,000 55,000 Definite-lived intangible assets, net 7,000 11,000 Right-of-use assets 3,535,000 3,178,000 Equity investment in unconsolidated affiliate 5,549,000 4,839,000 Total assets $ 68,802,000 $ 38,091,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,983,000 $ 501,000 Accrued liabilities 2,793,000 920,000 Customer advance payments of orders 209,000 - Lease liabilities 867,000 882,000 Total current liabilities 5,852,000 2,303,000 Lease liabilities, net of current portion 2,719,000 2,337,000 Deferred income tax liabilities, net 211,000 224,000 Total liabilities 8,782,000 4,864,000 Commitments Shareholders' equity: Common stock, $.01 par value: 50,000,000 shares authorized; 13,419,847 and 12,885,273 shares outstanding as of December 31, 2020 and December 31, 2019, respectively 135,000 129,000 Additional paid-in capital 409,000 708,000 Retained earnings 59,476,000 32,390,000 Total shareholders' equity 60,020,000 33,227,000 Total liabilities and shareholders' equity $ 68,802,000 $ 38,091,000 The accompanying notes are an integral part of these consolidated financial statements. 25 Alpha Pro Tech, Ltd. Consolidated Statements of Comprehensive Income Years Ended December 31, 2020 2019 Net sales $ 102,700,000 $ 46,665,000 Cost of goods sold, excluding depreciation and amortization 52,218,000 29,693,000 Gross profit 50,482,000 16,972,000 Operating expenses: Selling, general and administrative 18,171,000 13,348,000 Depreciation and amortization 729,000 602,000 Total operating expenses 18,900,000 13,950,000 Income from operations 31,582,000 3,022,000 Other income (expense): Equity in income of unconsolidated affiliate 710,000 359,000 Gain (loss) on marketable securities (62,000 ) 231,000 Interest income, net 18,000 68,000 Total other income 666,000 658,000 Income before provision for income taxes 32,248,000 3,680,000 Provision for income taxes 5,162,000 680,000 Net income $ 27,086,000 $ 3,000,000 Basic earnings per common share $ 2.01 $ 0.23 Diluted earnings per common share $ 1.94 $ 0.23 Basic weighted average common shares outstanding 13,449,987 13,142,872 Diluted weighted average common shares outstanding 13,972,145 13,168,725 The accompanying notes are an integral part of these consolidated financial statements. 26 Alpha Pro Tech, Ltd. Consolidated Statements of Shareholders ’ Equity Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total Balance as of December 31, 2018 13,502,684 135,000 2,669,000 29,390,000 32,194,000 Common stock repurchased and retired (683,910 ) (6,000 ) (2,542,000 ) - (2,548,000 ) Share-based compensation expense - - 451,000 - 451,000 Options exercised 66,499 - 130,000 - 130,000 Net income - - - 3,000,000 3,000,000 Balance as of December 31, 2019 12,885,273 129,000 708,000 32,390,000 33,227,000 Common stock repurchased and retired (223,100 ) (2,000 ) (2,664,000 ) - (2,666,000 ) Share-based compensation expense - - 375,000 - 375,000 Options exercised 757,674 8,000 1,990,000 - 1,998,000 Net income - - - 27,086,000 27,086,000 Balance as of December 31, 2020 13,419,847 $ 135,000 $ 409,000 $ 59,476,000 $ 60,020,000 The accompanying notes are an integral part of these consolidated financial statements. 27 Alpha Pro Tech, Ltd. Consolidated Statements of Cash Flows Years Ended December 31, 2020 2019 Cash Flows From Operating Activities: Net income $ 27,086,000 $ 3,000,000 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation 375,000 451,000 Depreciation and amortization 729,000 602,000 (Gain) Loss on marketable securities 62,000 (231,000 ) Equity in income of unconsolidated affiliate (710,000 ) (359,000 ) Operating lease expense, net of accretion (357,000 ) 704,000 Deferred income taxes (13,000 ) 83,000 Changes in assets and liabilities: Accounts receivable, net (4,564,000 ) 1,367,000 Accounts receivable, related party (181,000 ) (341,000 ) Inventories (5,446,000 ) (1,425,000 ) Prepaid expenses (2,638,000 ) 412,000 Accounts payable and accrued liabilities 3,355,000 (500,000 ) Customer advance payments of orders 209,000 - Lease liabilities 367,000 (662,000 ) Net cash provided by operating activities 18,274,000 3,101,000 Cash Flows From Investing Activities: Purchase of property and equipment (1,135,000 ) (1,296,000 ) Proceeds from sales of marketable securities 273,000 154,000 Net cash used in investing activities (862,000 ) (1,142,000 ) Cash Flows From Financing Activities: Proceeds from exercise of stock options 1,998,000 130,000 Repurchase of common stock (2,666,000 ) (2,548,000 ) Net cash used in financing activities (668,000 ) (2,418,000 ) Increase (decrease) in cash and cash equivalents 16,744,000 (459,000 ) Cash and cash equivalents, beginning of the year 6,548,000 7,007,000 Cash and cash equivalents, end of the year $ 23,292,000 $ 6,548,000 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 4,136,000 $ 633,000 The accompanying notes are an integral part of these consolidated financial statements. 28 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements 1. The Company Alpha Pro Tech, Ltd. (“Alpha Pro Tech,” the “Company,” “we”, “us” or “our”) is in the business of protecting people, products and environments. The Company accomplishes this by developing, manufacturing and marketing a line of building supply products for the new home and re-roofing markets and a line of disposable protective apparel for the cleanroom, industrial, pharmaceutical, medical and dental markets. The Building Supply segment consists of construction weatherization products, such as housewrap, housewrap accessories, namely tape and flashing, and synthetic roof underlayment, as well as other woven material. The Disposable Protective Apparel segment consists of a complete line of disposable protective garments (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. Previously, face masks and face shields were included in a separate business segment called Infection Control. All of our disposable protective apparel products, 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 Food and Drug Administration (“FDA”) approved facilities, regardless of the market served. Based on these similarities, the Infection Control segment was combined with the Disposable Protective Apparel segment during the first quarter of 2019. The disclosures in these Notes to Consolidated Financial Statements reflect this current segmentation. The Company’s products are sold under the "Alpha Pro Tech" brand name as well as under private label, and are predominantly sold in the United States of America (“US”). The ongoing novel coronavirus (COVID-19) pandemic has adversely affected global economies, financial markets and the overall environment in which we do business. The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our Disposable Protective Apparel segment products resulting from the pandemic has had a positive impact on our 2020 year end results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments, which cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, including the severity and transmission rate of COVID-19 variants the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines and mass vaccinations efforts, 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. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries, Alpha Pro Tech, Inc. and Alpha ProTech Engineered Products, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Events that occurred after December 31, 2020 through the date on which these financial statements were filed with the Securities and Exchange Commission (“SEC”) were considered in the preparation of these financial statements. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates. Periods Presented All amounts have been rounded to the nearest thousand with the exception of the per share data. The Company qualified as a smaller reporting company at the measurement date for determining such qualification during 2020. According to the disclosure requirements for smaller reporting companies, the Company has included balance sheets as of the end of the two most recent years and statements of income, comprehensive income, shareholders’ equity and cash flows for each of the two most recent years. 29 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Investments Investments are classified as available-for-sale in accordance with U.S. GAAP. The Company does not have any investments in securities that are classified as held-to-maturity or trading. Available-for-sale investments are carried at their fair values using quoted prices in active markets for identical securities, with realized and unrealized gains and losses reported in net income. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than one year are classified as long-term investments in the accompanying balance sheets. Accounts Receivable Accounts receivable are recorded at the invoice amount and do not bear interest. 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 its customers’ current ability to pay. Account balances are charged against the allowance when management determines that the probability for collection is 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 inventories. The Company assesses inventories for estimated obsolescence or unmarketable products and writes down the difference between the cost of the inventories and the estimated net realizable values based upon assumptions about future sales and supplies on-hand. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Costs to develop internal use software are charged to expense as incurred until the preliminary project stage has been completed and application development begins. The Company discontinues capitalization upon entering the post-implementation stage and expenses ongoing maintenance and support costs. Property and equipment are depreciated or amortized using the straight-line method over the shorter of the respective useful lives of the assets or the related lease terms as follows: Buildings (in years) 25 Machinery and equipment (in years) 5 - 15 Office furniture and equipment (in years) 2 - 7 Leasehold improvements (in years) 4 - 5 Software (in years) 5 Expenditures for renewals and betterments are capitalized, whereas costs of maintenance and repairs are charged to operations in the period incurred. Goodwill and Intangible Assets The Company accounts for goodwill and definite-lived intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other. Goodwill is not amortized, but rather is tested annually for impairment. Intangible assets with finite lives are amortized over their useful lives (see Note 6). The Company’s patents and trademarks are recorded at cost and are amortized using the straight-line method over their estimated useful lives of 5-17 years. Fair Value of Financial Instruments The estimated fair values of financial instruments are determined based on relevant market information and cannot be determined with precision. The Company’s financial instruments consist primarily of cash, cash equivalents and marketable securities. 30 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The Company’s marketable securities are classified as available-for-sale and are carried at fair market value based on quoted market prices. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in its business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If it is determined that the undiscounted future net cash flows are not sufficient to recover the carrying values of the assets, an impairment loss is recognized for the excess of the carrying values over the fair values of the assets. The Company believes that the future undiscounted net cash flows to be received from its long-lived assets exceed the assets’ carrying values and, accordingly, the Company has not recognized any impairment losses for the years ended December 31, 2020 and 2019. Revenue Recognition Net sales includes revenue from products and shipping and handling charges, net of estimates for product returns and any related sales incentives. Our customer contracts have a single performance obligation: transfer control of products to customers. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring control of products. All revenue is recognized when we satisfy our performance obligations under the applicable contract. We recognize revenue in connection with transferring control of the promised products to the customer, with revenue being recognized at the point in time when the customer obtains control of the products, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements, at which time a receivable is created for the invoice sent to the customer. Shipping and handling activities are performed prior to the customer obtaining control of the goods, and are accounted for as fulfillment activities and are not a promised good or service. Shipping and handling charges billed to customers are included in revenue. Shipping and handling costs, associated with the distribution of the Company’s product to the customers, are recorded in cost of goods sold and are recognized when control of the product is transferred to the customer, which is generally when title passes to the customer upon delivery to a third party carrier for FOB shipping point arrangements and to the customer for FOB destination arrangements. We estimate product returns based on historical return rates and estimate rebates based on contractual agreements. Using probability assessments, we estimate sales incentives expected to be paid over the term of the contract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and, therefore, are excluded from net sales. The Company manufactures certain private label goods for customers and has determined that control does not pass to the customer at the time of manufacture, based upon the nature of the private labelling. The Company has determined as of December 31, 2020 that it had no material contract assets, and concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of December 31, 2020, we had contract liabilities of $209,000 as a result of customer advance payments of orders in connection with the COVID-19 pandemic. No such contract liabilities existed as of December 31, 2019. See Note 15 and Note 16 of these Notes to Consolidated Financial Statements for information on revenue disaggregated by type and by geographic region. Shipping and Handling Costs The costs of shipping products to distributors are recorded in cost of goods sold. Stock-Based Compensation The Company maintains a stock option plan under which the Company may grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant date. The Company accounts for share-based awards in accordance with ASC 718, Stock Compensation. ASC 718 requires companies to record compensation expense for the value of all outstanding and unvested share-based awards, including employee stock options. For the year ended December 31, 2020 there were no stock options granted under the Company’s stock option plan. For the year ended 2019, there were 370,000 stock options granted under the Company’s option plan. The Company recognized $375,000 and $451,000 in share-based compensation expense for the years ended December 31, 2020 and 2019, respectively, related to outstanding options. For the year ended December 31, 2020, 8,912 restricted stock equity awards had been granted under the 2020 Incentive Plan, the compensation expense associated with the one year vest of these awards is $6,000. 31 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Income Taxes The Company accounts for income taxes using the asset and liability method. A valuation allowance is recorded to reduce the carrying amounts of deferred income tax assets unless it is more likely than not that such assets will be realized. The Company’s policy is to record any interest and penalties assessed by the Internal Revenue Service as a component of the provision for income taxes. The Company provides allowances for uncertain income tax positions when it is more likely than not that the position will not be sustained upon examination by the tax authority. Alpha Pro Tech, Ltd. and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Earnings Per Common Share The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per common share (“EPS”), which utilizes the weighted average number of common shares outstanding without regard to potential common shares, and “diluted” EPS, which includes all potential common shares which are dilutive for the years ended December 31, 2020 and 2019. Years Ended December 31, 2020 2019 Net income (numerator) $ 27,086,000 $ 3,000,000 Shares (denominator): Basic weighted average common shares outstanding 13,449,987 13,142,872 Add: Dilutive effect of common stock options 522,158 25,853 Diluted weighted average common shares outstanding 13,972,145 13,168,725 Earnings per common share: Basic $ 2.01 $ 0.23 Diluted $ 1.94 $ 0.23 Translation of Foreign Currencies Transactions in foreign currencies are translated into U.S. dollars at the exchange rate prevailing at the transaction date. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date. Transaction gains or losses on foreign currencies are reflected in selling, general and administrative expenses and were not material for the years ended December 31, 2020 and 2019. The Company does not have a material foreign currency exposure due to the fact that all purchase agreements with companies in Asia and Mexico are in U.S. dollars. In addition, all sales transactions are in U.S. dollars. The Company’s only foreign currency exposure is with its Canadian branch office. The foreign currency exposure is not material due to the fact that the Company does not manufacture products in Canada. The exposure primarily relates to payroll expenses in the Company’s administrative branch office in Canada. Research and Development Costs Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. Such costs were not material for the years ended December 31, 2020 and 2019. 32 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Advertising Costs The Company expenses advertising and promotional costs as incurred. These costs are included in selling, general and administrative expenses and were $32,000 and $16,000 for the years ended December 31, 2020 and 2019, respectively. Loss Contingencies The outcomes of legal proceedings and claims brought against the Company are subject to uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value in accordance with U.S. GAAP, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements. On a quarterly basis, the Company measures at fair value certain financial assets using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. The following fair value hierarchy prioritizes the inputs into three broad levels. This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair values of the Company’s financial assets as of December 31, 2020 and 2019 were determined using the following levels of inputs: • Level 1—Quoted prices for identical instruments in active markets; • Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and • Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Fair Value Measurements as of December 31, Total Level 1 Level 2 Level 3 Assets: Marketable securities 2020 $ - $ - $ - $ - Marketable securities 2019 335,000 335,000 - - The fair values for the marketable securities, classified as Level 1, were obtained from quoted market prices. New Accounting Standards 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 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 the lease terms or assessing impairment of the ROU assets. See also Note 12 of these Notes to Consolidated Financial Statements for more information. 33 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for public entities for the annual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements. 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 adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606 - Revenue form Contracts with Customers. 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. 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. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time. 3. Investments As of December 31, 2020 and 2019, investments totaled $0 and $335,000, respectively, which consisted of marketable securities. Certain marketable securities were sold during the years ended December 31, 2020 and 2019. The total loss on marketable securities during the year ended December 31, 2020 was $62,000 and the total gain on marketable securities during the year ended December 31, 2019 was $231,000. The loss for the year ended December 31, 2020 was due to an unrealized gain of $98,000 and a realized loss of $160,000. The gain for the year ended December 31, 2019 was due to an unrealized gain of $170,000 and a realized gain of $61,000. 4. Inventories Inventories consisted of the following: December 31, 2020 2019 Raw materials $ 9,729,000 $ 4,284,000 Work in process 2,003,000 2,559,000 Finished goods 5,017,000 4,460,000 Total inventory $ 16,749,000 $ 11,303,000 34 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements 5. Property and Equipment Property and equipment consisted of the following: December 31, 2020 2019 Buildings $ 493,000 $ 493,000 Machinery and equipment 13,039,000 12,227,000 Office furniture and equipment 2,076,000 1,390,000 Leasehold improvements 517,000 508,000 Software 3,000 438,000 16,128,000 15,056,000 Less accumulated depreciation and amortization (11,775,000 ) (11,113,000 ) Total net property and equipment $ 4,353,000 $ 3,943,000 Depreciation and amortization expense for property and equipment was $725,000 and $597,000 for the years ended December 31, 2020 and 2019, respectively. 6. Goodwill and Intangible Assets Management evaluates goodwill for impairment on an annual basis (fourth quarter), and no impairment charge was identified for the years presented. Definite-lived intangible assets, consisting of patents and trademarks, are amortized over their useful lives. Intangible assets consisted of the following: December 31, 2020 December 31, 2019 Weighted Average Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Amortization Period (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents and Trademarks 3.0 $ 474,000 $ (467,000 ) $ 7,000 3.0 $ 474,000 $ (463,000 ) $ 11,000 Amortization expense for intangible assets was $4,000 and $5,000 for the years ended December 31, 2020 and 2019, respectively. Estimated future amortization expense related to definite-lived intangible assets is as follows: 35 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Years ending December 31, 2021 3,000 2022 2,000 2023 1,000 2024 1,000 Total $ 7,000 7. Equity Investments in Unconsolidated Affiliate In 2005, Alpha ProTech Engineered Products, Inc. (a subsidiary of Alpha Pro Tech, Ltd.) entered into a joint venture with a manufacturer in India, Maple Industries and associates, for the production of building products. Under the terms of the joint venture agreement, a private company, Harmony Plastics Private Limited (“Harmony”), was created with ownership interests of 41.66% owned by Alpha ProTech Engineered Products, Inc. and 58.34% owned by Maple Industries and associates. This joint venture positions Alpha ProTech Engineered Products, Inc. to respond to current and expected increased product demand for housewrap and synthetic roof underlayment and provides future capacity for sales of specialty roofing component products and custom products for industrial applications requiring high quality extrusion coated fabrics. In addition, the joint venture now supplies products for the Company’s Disposable Protective Apparel segment. The capital from the initial funding and a bank loan, which loan is guaranteed exclusively by the individual shareholders of Maple Industries and associates and collateralized by the assets of Harmony, were utilized to purchase the original manufacturing facility in India. Harmony currently has four facilities in India (three owned and one rented), consisting of: (1) a 113,000 square foot building for manufacturing building products; (2) a 73,000 square foot building for manufacturing coated material and sewing proprietary disposable protective apparel; (3) a 16,000 square foot facility for sewing proprietary disposable protective apparel; and (4) a 93,000 square foot facility (rented) for manufacturing Building Supply segment products. All additions have been financed by Harmony with no guarantees from the Company. In accordance with ASC 810, Consolidation, the Company assesses whether or not related entities are variable interest entities (“VIEs”). For those related entities that qualify as VIEs, ASC 810 requires the Company to determine whether or not the Company is the primary beneficiary of the VIE, and, if so, to consolidate the VIE. The Company has determined that Harmony is not a VIE and is, therefore, considered to be an unconsolidated affiliate. The Company records its investment in Harmony as “equity investment in unconsolidated affiliate” in the accompanying consolidated balance sheets. The Company records its equity interest in Harmony’s results of operations as “equity in income of unconsolidated affiliate” in the accompanying consolidated statements of income. The Company periodically reviews its investment in Harmony for impairment. Management has determined that no impairment was required as of December 31, 2020 or December 31, 2019. For the years ended December 31, 2020 and 2019, the Company purchased $18,623,000 and $19,312,000 of inventories, respectively, from Harmony. For the years ended December 31, 2020 and 2019, the Company recorded equity in income of unconsolidated affiliate of $710,000 and $359,000, respectively. For the years ended December 31, 2020 and 2019, the Company sold $1,087,000 and $1,332,000 of inventories, respectively, to Harmony. As of December 31, 2020, the Company’s investment in Harmony was $5,549,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $5,118,000, less $942,000 in repayments of an advance and payments of $77,000 in dividends. 36 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements 8. Accrued Liabilities Accrued liabilities consisted of the following: December 31, 2020 2019 Payroll expenses and tax payable $ 123,000 $ 299,000 Commission and bonuses payable and general accrued liabilities 2,670,000 621,000 Total accrued liabilities $ 2,793,000 $ 920,000 Contract liabilities were $2,263,000 and $1,511,000 as of December 31, 2020 and 2019, respectively, which are netted against the related accounts receivable due to the legal right of offset. 9. Notes Payable The Company previously maintained a $3,500,000 credit facility with Wells Fargo Bank, which expired in May 2020, and which the Company decided not to renew. The Company has continued its relationship with Wells Fargo, with the exception of the credit facility. The Company determined that the credit line is not necessary at this time, as it had not been used in several years, and the Company currently had sufficient funding from operations. Pursuant to the terms of the credit facility, the Company had a borrowing capacity up to $3,500,000 based on eligible accounts receivable and inventories and was collateralized by accounts receivable, inventories, trademarks, patents and property and equipment. Under the terms of the facility, the Company paid a 0.5% unused loan fee on a quarterly basis. As of December 31, 2020, the Company had no outstanding borrowings and no other debt. 10. Shareholders ’ Equity Repurchase Program During the year ended December 31, 2020, the Company repurchased and retired 223,100 shares of its common stock for $2,666,000. During the year ended December 31, 2019, the Company repurchased and retired 683,910 shares of its common stock for $2,548,000. As of December 31, 2020, the Company had $4,486,000 available to repurchase common shares under the repurchase program. Option Activity The 2004 Stock Option Plan (the “2004 Plan”) is an equity compensation plan that provides for grants of stock options to eligible individuals. The 2004 Plan is intended to recognize the contributions made to the Company by key employees of the Company, provide key employees with additional incentive to devote themselves to the future success of the Company and improve the ability of the Company to attract, retain and motivate individuals. The 2004 Plan also is intended as an incentive to certain members of the Board of Directors of the Company to continue to serve on the Board of Directors and to devote themselves to the future success of the Company. The 2004 Plan provides for a total of 5,000,000 common shares eligible for issuance. Under the 2004 Plan, approximately 5,009,750 options had been granted as of December 31, 2019. Under the 2004 Plan, option grants have a three-year vesting period and, since 2005, expire no later than the fifth anniversary from the date of grant. The exercise price of the options is determined based on the fair market value of the stock on the date of grant. At the Company’s 2020 Annual Meeting of Shareholders held on June 9, 2020, the Company’s shareholders approved the Alpha Pro Tech, Ltd. 2020 Omnibus Incentive Plan (the “2020 Incentive Plan”). The 2020 Incentive Plan provides for the grant of incentive and nonqualified stock options, stock appreciation rights, awards of restricted stock and restricted stock units, performance share awards, cash awards and other equity-based awards to employees (including officers), consultants and non-employee directors of the Company and its affiliates. A total of 1,800,000 shares of the Company’s common stock are reserved for issuance under the 2020 Incentive Plan, plus the number of shares underlying any award granted under the 2004 Option Plan that expires, terminates or is cancelled or forfeited under the terms of the 2004 Option Plan. As a result of the approval of the 2020 Incentive Plan, no future equity awards will be made pursuant to the 2004 Option Plan. Although no new awards may be granted under the 2004 Option Plan, all previously granted awards under the 2004 Option Plan will continue to be governed by the terms of the 2004 Option Plan. As of December 31, 2020, 8,912 restricted stock equity awards had been granted under the 2020 Incentive Plan, the compensation expense associated with the one year vest of these awards is $6,000. As of December 31, 2020, $102,000 of total unrecognized compensation cost related to the restricted stock grants was expected to be recognized over a weighted-average remainder period of .942 years. 37 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The following table summarizes option activity for the years ended December 31, 2020 and 2019: Weighted Average Exercise Price Shares Per Option Options outstanding, December 31, 2018 1,022,913 $ 2.69 Granted to employees and directors 370,000 3.59 Exercised (66,499 ) 1.96 Canceled/expired/forfeited - - Options outstanding, December 31, 2019 1,326,414 2.86 Granted to employees and directors - - Exercised (757,674 ) 2.64 Canceled/expired/forfeited - - Options outstanding, December 31, 2020 568,740 3.37 Options exercisable, December 31, 2020 200,500 3.48 Stock options to purchase 568,740 and 1,326,414 shares of common stock were outstanding as of December 31, 2020 and 2019, respectively. All of the stock options were included in the computation of the weighted-average number of dilutive common shares outstanding for the year ended December 31, 2020. All except 455,000 of the stock options, which were anti-dilutive, were included in the computation of the weighted-average number of dilutive common shares outstanding for the year ended December 31, 2019. The fair values of the share-based compensation awards granted were estimated using the Black-Scholes option-pricing model with the following assumptions and weighted average fair values: Stock Options For the Years Ended December 31, 2020 2019 Exercise price - $ 3.59 Risk-free interest rate - 2.23 % Expected volatility - 32.17 % Expected life in years - 4.25 Black-Scholes fair value - $ 1.06 The Company used the Black-Scholes option-pricing model to value the options. The Company uses historical data to estimate the expected term of the options. The risk-free interest rate for periods consistent with the expected term of the award is based on the U.S. Treasury rates in effect at the time of grant. The expected volatility is based on historical volatility. The Company uses an estimated dividend payout ratio of zero, as the Company has not paid dividends in the past and, at this time, does not expect to do so in the foreseeable future. The Company accounts for option forfeitures as they occur. 38 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The following table summarizes information about stock options as of December 31, 2020: Options Outstanding Options Exercisable Range of Exercise Prices Options Weighted Average Exercise Price Weighted Average Remaining Contract Life (in years) Aggregate Intrinsic Value Options Weighted Average Exercise Price Weighted Average Remaining Contract Life (in years) Aggregate Intrinsic Value $1.58 - $3.90 568,710 $ 3.37 2.84 $ 4,473,000 200,500 $ 3.48 2.63 $ 1,601,000 The intrinsic value is the amount by which the market value of the underlying common stock exceeds the exercise price of the respective stock options. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020 and 2019 was $10,772,000 and $121,000, respectively. As of December 31, 2020, $227,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted-average remaining period of 1.16 years. Cash received from 757,674 options exercised for the year ended December 31, 2020 was $1,998,000. Dividends The holders of the Company’s common stock are entitled to receive such dividends as may be declared by the Board of Directors of the Company from time to time to the extent that funds are legally available for payment thereof. The Company has never declared or paid any dividends on any of its outstanding shares of common stock. The Board of Directors’ current policy is not to pay dividends but rather to use available funds to repurchase common shares in accordance with the Company’s repurchase program and to fund the continued development and growth of the Company. Consequently, the Company currently has no plans to pay cash dividends in the foreseeable future. 11. Income Taxes The provision (benefit) for income taxes consisted of the following: For the Years Ended December 31, 2020 2019 Current $ 5,175,000 $ 596,000 Deferred (13,000 ) 84,000 Provision for income taxes $ 5,162,000 $ 680,000 39 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Deferred income tax assets (liabilities) consisted of the following: December 31, 2020 2019 Temporary differences: Property and equipment $ (706,000 ) $ (646,000 ) Intangible assets (9,000 ) (8,000 ) Marketable securities - - Inventory reserve 24,000 16,000 Accrued expenses and inventory 612,000 443,000 Basis difference in investments 35,000 19,000 Foreign exchange (40,000 ) (13,000 ) AMT/Foreign tax credits - 50,000 Other (83,000 ) (30,000 ) State income taxes (44,000 ) (55,000 ) Net deferred income tax assets (liabilities) $ (211,000 ) $ (224,000 ) The provision for income taxes differs from the amount that would be obtained by applying the U.S. statutory rate to income before income taxes as a result of the following: For the Years Ended December 31, 2020 2019 Income taxes based on U.S. statutory rate of 21% and 34%, respectively $ 6,772,000 $ 773,000 Non-deductible meals and entertainment 5,000 8,000 FDII deduction (348,000 ) (6,000 ) Foreign taxes (38,000 ) (75,000 ) State taxes 603,000 85,000 Other (1,832,000 ) (105,000 ) Provision for income taxes $ 5,162,000 $ 680,000 12. Leases Operating Lease Commitments: The Company leases its facilities under non-cancelable operating leases expiring on various dates through January 1, 2024. The Company has operating leases for the Company’s corporate office and manufacturing facilities, which expire at various dates through 2024.The Company’s primary operating lease commitments at December 31, 2020 related to the Company’s manufacturing facilities in Valdosta, Georgia, Nogales, Arizona and Salt Lake City, Utah, as well as the Company’s corporate headquarters in Markham, Ontario, Canada. As of December 31, 2020, the Company had operating lease right-of-use assets of $3,535,000 and operating lease liabilities of $3,586,000. As of December 31, 2020, we did not have any finance leases recorded on the Company’s consolidated balance sheet. Operating lease expense was approximately $1,154,000 and $1,109,000 for the years ended December 31, 2020 and 2019, respectively. 40 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The aggregate future minimum lease payments and reconciliation to lease liabilities as of December 31, 2020 were as follows: December 31, 2020 2021 $ 1,009,000 2022 1,010,000 2023 1,017,000 2024 484,000 2025 365,000 Total future minimum lease payments 3,885,000 Less imputed interest (299,000 ) Total lease liabilities $ 3,586,000 As of December 31, 2020, the weighted average remaining lease term of the Company’s operating leases was 4.00 years. During the year ended December 31, 2020, the weighted average discount rate with respect to these leases was 4.17%. 13. Legal Legal Proceedings: The Company is subject to various pending and threatened litigation actions in the ordinary course of business. Although it is not possible to determine with certainty at this point in time what liability, if any, the Company will have as a result of such litigation, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on the Company’s financial condition and results of operations. 14. Employee Benefit Plans The Company has certain benefit plans. Under the plans, employees may contribute up to 12% of their gross earnings subject to certain limitations. The Company contributes an additional 0.5% of gross earnings for those employees contributing 1% of their gross earnings and contributes 1% of gross earnings for those employees contributing 2% to 12% of their gross earnings. The amounts contributed to the plans by the Company were $45,000 and $42,000 for the years ended December 31, 2020 and 2019, respectively. The Company does not have any other significant pension, profit sharing or similar plans established for its employees. Pursuant to his employment agreement with the Company, Lloyd Hoffman, our President and Chief Executive Officer, is contractually entitled to receive from the Company at the conclusion of each fiscal year a cash bonus in an amount equal to 5% pre-tax profits of the Company, excluding bonus expense, as presented in the Company’s audited consolidated statements of income for such fiscal year, subject to a maximum payment of $1,000,000. The Company accrued $1,000,000 for the year ended December 31, 2020, compared to $194,000 for 2019, in connection with the bonus. 15. Activity of Business Segments The Company operates through two business segments: (1) Building Supply : consisting of a line of construction supply weatherization products. The construction supply weatherization products consist of housewrap and synthetic roof underlayment, as well as other woven material. The majority of the Company’s equity in income of unconsolidated affiliate (Harmony) is included in the total segment income for the Building Supply segment. (2) Disposable Protective Apparel : consisting of a complete line of disposable protective garments, including shoecovers (including the Aqua Trak® and spunbond shoecovers), bouffant caps, coveralls, frocks, lab coats, gowns and hoods, as well as face masks and face shields for the pharmaceutical, cleanroom, industrial, medical and dental markets. A portion of the Company’s equity in income of unconsolidated affiliate (Harmony) is included in the total segment income for the Disposable Protective Apparel segment. 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. The disclosures in these Notes to Consolidated Financial Statements reflect this current segmentation. 41 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements Segment data excludes charges allocated to the principal executive office and other unallocated corporate overhead expenses and income tax. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales. The accounting policies of the segments are the same as those described previously under Summary of Significant Accounting Policies (see Note 2). Segment data excludes charges allocated to the principal executive office and other corporate unallocated expenses and income taxes. The Company evaluates the performance of its segments and allocates resources to them based primarily on net sales. The following table presents net sales for each segment: Years Ended December 31, 2020 2019 Building Supply $ 30,580,000 $ 26,576,000 Disposable Protective Apparel 72,120,000 20,089,000 Consolidated net sales $ 102,700,000 $ 46,665,000 The following table presents the reconciliation of total segment income to total consolidated net income: Years Ended December 31, 2020 2019 Building Supply $ 5,396,000 $ 3,491,000 Disposable Protective Apparel 33,501,000 3,856,000 Total segment income 38,897,000 7,347,000 Unallocated corporate overhead expenses 6,649,000 3,667,000 Provision for income taxes 5,162,000 680,000 Consolidated net income $ 27,086,000 $ 3,000,000 42 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The following table presents net sales and long-lived asset information by geographic area: Years Ended December 31, 2020 2019 Net sales by geographic region United States $ 90,495,000 $ 45,748,000 International 12,205,000 917,000 Consolidated net sales $ 102,700,000 $ 46,665,000 As of December 31, 2020 2019 Long-lived assets by geographic region United States $ 2,787,000 $ 2,450,000 International 1,566,000 1,493,000 Consolidated total long-lived assets $ 4,353,000 $ 3,943,000 Net sales by geographic region are based on the countries in which our customers are located. For the year ended December 31, 2020 the Company generated sales of approximately $8,090,000 from Australia. No other single country other than the United States was significant to the Company’s consolidated net sales. For the year ended December 31, 2019, the Company did not generate sales from any single country, other than the United States, that were significant to the Company’s consolidated net sales. The following table presents the consolidated net property, equipment, goodwill and intangible assets by segment: As of December 31, 2020 2019 Building Supply $ 1,806,000 $ 1,867,000 Disposable Protective Apparel 1,432,000 1,087,000 Total segment assets 3,238,000 2,954,000 Unallocated corporate assets 1,177,000 1,055,000 Total consolidated assets $ 4,415,000 $ 4,009,000 16. Concentration of Risk The Company maintains its cash and cash equivalents in various bank accounts, the balances of which at times may exceed federally insured limits. The Company has not experienced any losses related to these accounts, and management does not believe that the Company is exposed to significant credit risk. The Company’s investments in marketable securities were held in one publicly traded entity. The Company recognized a gain on investment in common stock warrants in a prior period and during 2020 recognized a realized loss of $160,000 and an unrealized gain of $98,000 in the consolidated statement of comprehensive income. During 2019, the Company recognized realized gain of $61,000 and an unrealized loss of $170,000 in the consolidated statement of comprehensive income. The Company was exposed to the fluctuation in the stock price of this investment when it held these securities. As of December 31, 2020 the Company no longer holds any investments in marketable securities. Management believes that adequate provision has been made for risk of loss on all credit transactions. 43 Alpha Pro Tech, Ltd. Notes to Consolidated Financial Statements The Company buys a significant amount of its disposable protective apparel products from a limited number of contract manufacturers located in Asia and, to a much lesser extent, a contract manufacturer in Mexico. Management believes that other suppliers could provide similar products at comparable terms. A change in suppliers, however, could cause a delay in shipment and a possible loss of sales, which would affect operating results adversely. The Building Supply segment buys semi-finished housewrap and synthetic roof underlayment from its joint venture, Harmony, located in India. Although there are a limited number of manufacturers of the particular product, management believes that other suppliers could provide similar products at comparable terms. A change in suppliers, however, could cause a delay in shipment and a possible loss of sales, which would affect operating results adversely. The Company provides products to customers located primarily in the United States. Customers accounting for 10% or more of accounts receivable as of December 31, 2020 and 2019, and 10% or more of net sales for the years ended December 31, 2020 and 2019, were as follows: December 31, 2020 2019 Accounts Receivable: Customer A 11 % 18 % Customer B * * Customer C * 10 % Customer D 18 % * Net sales: Customer A 20 % 20 % Customer B 12 % 12 % Customer D 10 % * * Customer’s balance was below the 10% threshold for accounts receivable and/or net sales as of and for the year ended December 31, 2020 and December 31, 2019. 17. Employment Agreements The Company has entered into an employment agreement with its current President and Chief Executive Officer, which has a term of approximately five years and which renews in accordance with its terms. The agreement provides that, if the officer’s employment is terminated without cause, as defined in the agreements, the officer is entitled to receive certain severance payments. If termination occurs due to retirement, the officers will enter into a four-year consulting arrangement with the Company at a specified percentage of the officer’s then current salary. Upon death or disability, the Company will also make certain payments to the officer or the officer’s estate or beneficiary, as applicable. The Company had entered into an employment agreement with its former President and Chairman. During the fourth quarter of 2017, the Company’s former President and Chairman passed away, which resulted in a death benefit expense of $619,000, in accordance with his employment agreement. There was no expense for the years ended December 31, 2020 and 2019. The related accrued liability as of December 31, 2020 and 2019 was $0 and $207,000, respectively. 18. Related Party Transactions During 2021, the Company’s only material related party transactions were the Company’s transactions with its non-consolidated affiliate, Harmony. See Note 7. 19. Subsequent Events The Company has reviewed and evaluated whether any additional material subsequent events have occurred from December 31, 2020 through the filing date of the Company’s Annual Report on Form 10-K. All appropriate subsequent event disclosures have been made in the consolidated financial statements. 44 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.