ALPHA PRO TECH LTD 10-Q

ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets (Unaudited) March 31, December 31, 2021 2020 (1) Assets Current assets: Cash and cash equivalents $ 17,884,000 $ 23,292,000 Accounts receivable, net of allowance for doubtful accounts of $76,000 as of March 31, 2021 and $71,000 as of December 31, 2020 6,748,000 8,132,000 Accounts receivable, related party 1,275,000 905,000 Inventories, net 18,778,000 16,749,000 Prepaid expenses 10,235,000 6,225,000 Total current assets 54,920,000 55,303,000 Property and equipment, net 4,287,000 4,353,000 Goodwill 55,000 55,000 Definite-lived intangible assets, net 6,000 7,000 Right-of-use assets 3,315,000 3,535,000 Equity investment in unconsolidated affiliate 5,871,000 5,549,000 Total assets $ 68,454,000 $ 68,802,000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 1,219,000 $ 1,983,000 Accrued liabilities 1,762,000 2,793,000 Customer advance payments of orders 113,000 209,000 Lease liabilities 871,000 867,000 Total current liabilities 3,965,000 5,852,000 Lease liabilities, net of current portion 2,496,000 2,719,000 Deferred income tax liabilities, net 211,000 211,000 Total liabilities 6,672,000 8,782,000 Commitments Shareholders' equity: Common stock, $.01 par value: 50,000,000 shares authorized; 13,323,341 and 13,419,847 shares outstanding as of March 31, 2021 and December 31, 2020, respectively 134,000 135,000 Additional paid-in capital - 409,000 Retained earnings 61,648,000 59,476,000 Total shareholders' equity 61,782,000 60,020,000 Total liabilities and shareholders' equity $ 68,454,000 $ 68,802,000 (1) The condensed consolidated balance sheet as of December 31, 2020 has been prepared using information from the audited consolidated balance sheet as of that date. See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). 1 Alpha Pro Tech, Ltd. Condensed Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2021 2020 Net sales $ 23,161,000 $ 18,154,000 Cost of goods sold, excluding depreciation and amortization 13,982,000 9,600,000 Gross profit 9,179,000 8,554,000 Operating expenses: Selling, general and administrative 4,578,000 4,102,000 Depreciation and amortization 198,000 182,000 Total operating expenses 4,776,000 4,284,000 Income from operations 4,403,000 4,270,000 Other income: Equity in income of unconsolidated affiliate 322,000 87,000 Loss on marketable securities - (59,000 ) Interest income, net 1,000 16,000 Total other income 323,000 44,000 Income before provision for income taxes 4,726,000 4,314,000 Provision (benefit) for income taxes 1,007,000 (1,028,000 ) Net income $ 3,719,000 $ 5,342,000 Basic earnings per common share $ 0.28 $ 0.41 Diluted earnings per common share $ 0.27 $ 0.39 Basic weighted average common shares outstanding 13,342,398 13,121,867 Diluted weighted average common shares outstanding 13,717,404 13,664,710 See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). 2 Alpha Pro Tech, Ltd. Condensed Consolidated Statements of Shareholders ’ Equity (Unaudited) For the Three Months Ended March 31, 2021 Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total Balance as of December 31, 2020 13,419,847 $ 135,000 $ 409,000 $ 59,476,000 $ 60,020,000 Net income - - - 3,719,000 3,719,000 Common stock repurchased and retired (186,000 ) (2,000 ) (817,000 ) (1,547,000 ) (2,366,000 ) Stock-based compensation expense - - 101,000 - 101,000 Options exercised 89,494 1,000 307,000 - 308,000 Balance as of March 31, 2021 13,323,341 $ 134,000 $ - $ 61,648,000 $ 61,782,000 For the Three Months Ended March 31, 2020 Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total Balance as of December 31, 2019 12,885,273 $ 129,000 $ 708,000 $ 32,390,000 $ 33,227,000 Net income - - - 5,342,000 5,342,000 Common stock repurchased and retired (35,100 ) - (125,000 ) - (125,000 ) Stock-based compensation expense - - 91,000 - 91,000 Options exercised 712,839 7,000 1,834,000 - 1,841,000 Balance as of March 31, 2020 13,563,012 $ 136,000 $ 2,508,000 $ 37,732,000 $ 40,376,000 See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). 3 Alpha Pro Tech, Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 30, 2021 2020 Cash Flows From Operating Activities: Net income $ 3,719,000 $ 5,342,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation 101,000 91,000 Depreciation and amortization 198,000 182,000 Loss on marketable equity securities - 59,000 Equity in income of unconsolidated affiliate (322,000 ) (87,000 ) Operating lease expense, net of accretion 220,000 224,000 Changes in assets and liabilities: Accounts receivable, net 1,384,000 (3,794,000 ) Accounts receivable, related party (370,000 ) (192,000 ) Inventories (2,029,000 ) 155,000 Prepaid expenses (4,011,000 ) (650,000 ) Accounts payable and accrued liabilities (1,795,000 ) 1,072,000 Customer advance payments of orders (96,000 ) 7,161,000 Lease liabilities (219,000 ) (221,000 ) Net cash provided by (used in) operating activities (3,220,000 ) 9,342,000 Cash Flows From Investing Activities: Purchases of property and equipment (130,000 ) (288,000 ) Proceeds from sales of marketable securities - 47,000 Net cash used in investing activities (130,000 ) (241,000 ) Cash Flows From Financing Activities: Proceeds from exercise of stock options 308,000 1,841,000 Repurchase of common stock (2,366,000 ) (125,000 ) Net cash provided by (used in) financing activities (2,058,000 ) 1,716,000 Increase (decrease) in cash (5,408,000 ) 10,817,000 Cash, beginning of the period 23,292,000 6,548,000 Cash, end of the period $ 17,884,000 $ 17,365,000 See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited). 4 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 and synthetic roof underlayment, as well as other woven material. The Disposable Protective Apparel segment consists of a complete line of disposable protective clothing (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), face masks and face shields. 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. 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. Overall, the increase in sales of our Disposable Protective Apparel segment products resulting from the pandemic has had a positive impact on our year-to-date results, but the positive impact in 2021 is less than in 2020, as the effects of COVID-19 are normalizing. 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, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, 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. Basis of Presentation and Revenue Recognition Policy The interim financial information included in this report is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods reflected herein. These interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit certain information and note disclosures that would be necessary to present the statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The interim condensed consolidated financial statements should be read in conjunction with the Company’s current year SEC filings, as well as the Company’s consolidated financial statements for the year ended December 31, 2020, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”), filed with the SEC on March 10, 2021. The results of operations for the three months ended March 31, 2021 in this Quarterly Report on Form 10-Q are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of December 31, 2020 was prepared using information from the audited consolidated balance sheet contained in the 2020 Form 10-K; however, it does not include all disclosures required by U.S. GAAP for annual consolidated financial statements. 5 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 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 March 31, 2021 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 March 31, 2021, we had contract liabilities of $113,000 as a result of customer advance payments of orders in connection with the COVID-19 pandemic. See Note 10 and Note 11 of these Notes to Condensed Consolidated Financial Statements (Unaudited) for information on revenue disaggregated by type and by geographic region. 3. Stock-Based Compensation The Company maintains a stock option plan (the “2004 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. 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 March 31, 2021, 8,912 restricted stock equity awards had been granted under the 2020 Incentive Plan. The Company records compensation expense for the fair value of stock-based awards determined as of the grant date, including employee stock options and restricted stock awards over the determined requisite service period, which is generally ratably over the vesting term. For the three months ended March 31, 2021 and 2020, no stock options were granted under the Company’s 2004 Option Plan. The Company recognized $74,000 and $91,000 in stock-based compensation expense for the three months ended March 31, 2021 and 2020, respectively, related to outstanding options. For the three months ended March 31, 2021 and 2020 no restricted stock equity awards were granted under the 2020 Incentive Plan. The Company recognized $27,000 and $0 in compensation expense associated with restricted stock awards for the three months ended March 31, 2021 and 2020, respectively. 6 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company uses the Black-Scholes option-pricing model to value the options. The Company uses historical data to estimate the expected life of the options. The risk-free interest rate for periods within the contractual life of an award is based on the US Treasury yield curve in effect at the time of grant. The estimated volatility is based on historical volatility and management’s expectations of future volatility. The Company uses an estimated dividend payout of zero, as the Company has not paid dividends in the past and, at this time, does not expect to do so in the future. The Company accounts for option forfeitures as they occur. The following table summarizes stock option activity for the three months ended March 31, 2021: Weighted Average Exercise Price Options Per Option Options outstanding, December 31, 2020 568,740 $ 3.42 Granted to employees and non-employee directors - - Exercised (89,494 ) 3.45 Canceled/expired/forfeited - - Options outstanding, March 31, 2021 479,246 3.42 Options exercisable, March 31, 2021 182,002 5.80 As of March 31, 2021, $152,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted average period of 1.04 years. 4. Investments As of March 31, 2021, we had no investments. As of March 31, 2020 investments totaled $228,000 which consisted of equity securities. These marketable securities were sold during the three months ended March 31, 2020. The total loss on marketable securities during the three months ended March 31, 2020 was $59,000. The loss for the three months ended March 31, 2020 was due to an unrealized loss of $76,000 and a realized gain of $17,000. 5. Recent Accounting Pronouncements 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 companies for the annual periods, including interim periods within those annual periods, beginning after December 15, 2019. This guidance was 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 December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Adoption of the new standard did not have a material impact on our consolidated financial statements. Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion at this time. 7 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Inventories As of March 31, 2021 and December 31, 2020, inventories net of reserves consisted of the following: March 31, December 31, 2021 2020 Raw materials $ 10,866,000 $ 9,729,000 Work in process 2,180,000 2,003,000 Finished goods 5,732,000 5,017,000 $ 18,778,000 $ 16,749,000 7. Equity Investment 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 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 condensed 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 condensed consolidated statements of income. The Company periodically reviews its investment in Harmony for impairment. Management has determined that no impairment was required as of March 31, 2021 or December 31, 2020. 8 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) For the three months ended March 31, 2021 and 2020, Alpha Pro Tech purchased $6,354,000 and $4,705,000 of inventories, respectively, from Harmony. For the three months ended March 31, 2021 and 2020, the Company recorded equity in income of unconsolidated affiliate of $322,000 and $87,000, respectively, related to Harmony. For the three months ended March 31, 2021 and 2020, the Company sold $370,000 and $182,000 of inventories, respectively, to Harmony. As of March 31, 2021, the Company’s investment in Harmony was $5,871,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $5,440,000, less $942,000 in repayments of the advance and $77,000 in dividends. 8. Accrued Liabilities As of March 31, 2021 and December 31, 2020, accrued liabilities consisted of the following: March 31, December 31, 2021 2020 Payroll expenses and taxes payable $ 1,415,000 $ 123,000 Commissions and bonuses payable and general accrued liabilities 347,000 2,670,000 Total accrued liabilities $ 1,762,000 $ 2,793,000 9. Basic and Diluted 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 dilutive shares, and “diluted” EPS, which includes all such dilutive shares, for the three months ended March 31, 2021 and 2020: For the Three Months Ended March 31, 2021 2020 Net income (numerator) $ 3,719,000 $ 5,342,000 Shares (denominator): Basic weighted average common shares outstanding 13,342,398 13,121,867 Add: dilutive effect of common stock options 375,006 542,843 Diluted weighted average common shares outstanding 13,717,404 13,664,710 Earnings per common share: Basic $ 0.28 $ 0.41 Diluted $ 0.27 $ 0.39 10. 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. 9 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Disposable Protective Apparel : consisting of a complete line of disposable protective clothing, 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. 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 following table presents consolidated net sales for each segment for the three months ended March 31, 2021 and 2020: For the Three Months Ended March 31, 2021 2020 Building Supply $ 8,340,000 $ 7,557,000 Disposable Protective Apparel 14,821,000 10,597,000 Consolidated net sales $ 23,161,000 $ 18,154,000 The following table presents the reconciliation of consolidated segment income to consolidated net income for the three months ended March 31, 2021 and 2020: For the Three Months Ended March 30, 2021 2020 Building Supply $ 1,551,000 $ 1,410,000 Disposable Protective Apparel 4,750,000 4,453,000 Total segment income 6,301,000 5,863,000 Unallocated corporate overhead expenses 1,575,000 1,549,000 Provision (benefit) for income taxes 1,007,000 (1,028,000 ) Consolidated net income $ 3,719,000 $ 5,342,000 10 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents the consolidated net property and equipment, goodwill and definite-lived intangible assets (“consolidated assets”) by segment as of March 31, 2021 and December 31, 2020: March 30, December 31, 2021 2020 Building Supply $ 1,756,000 $ 1,806,000 Disposable Protective Apparel 1,428,000 1,432,000 Total segment assets 3,184,000 3,238,000 Unallocated corporate assets 1,164,000 1,177,000 Total consolidated assets $ 4,348,000 $ 4,415,000 11. Financial Information about Geographic Areas The following table summarizes the Company’s net sales by geographic region for the three months ended March 31, 2021 and 2020: For the Three Months Ended March 31, 2021 2020 Net sales by geographic region United States $ 20,898,000 $ 15,619,000 International 2,263,000 2,535,000 Consolidated net sales $ 23,161,000 $ 18,154,000 Net sales by geographic region are based on the countries in which our customers are located. For the three months ended March 31, 2021, the Company generated approximately $2,115,000, in sales from Canada. No other single country other than the United States was significant to consolidated net sales. During the three months ended March 31, 2020, 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 summarizes the locations of the Company’s long-lived assets by geographic region as of March 31, 2021 and December 31, 2020: March 31, December 31, 2021 2020 Long-lived assets by geographic region United States $ 2,747,000 $ 2,787,000 International 1,540,000 1,566,000 Consolidated total long-lived assets $ 4,287,000 $ 4,353,000 11 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 12. Related Party Transactions As of March 31, 2021, the Company had no related party transactions, other than the Company’s transactions with its unconsolidated affiliate, Harmony. See Note 7 of these Notes to Condensed Consolidated Financial Statements (Unaudited). 13. Leases 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 March 31, 2021 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 March 31, 2021, the Company had operating lease right-of-use assets of $3,315,000 and operating lease liabilities of $3,367,000. As of March 31, 2021, we did not have any finance leases recorded on the Company’s condensed consolidated balance sheet. Operating lease expense was approximately $204,000 during the three months ended March 31, 2021. The aggregate future minimum lease payments and reconciliation to lease liabilities as of March 31, 2021 were as follows: March 31, 2021 Remaining nine months of 2021 $ 747,000 2022 1,010,000 2023 1,017,000 2024 484,000 2025 365,000 Total future minimum lease payments 3,623,000 Less imputed interest (256,000 ) Total Lease liabilities $ 3,367,000 As of March 31, 2021, the weighted average remaining lease term of the Company’s operating leases was 3.97 years. During the three months ended March 31, 2021, the weighted average discount rate with respect to these leases was 4.07%. 14. 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. An employer generally does not claim a corporate income tax deduction (which would be in an amount equal to the amount of income recognized by the employee) upon the exercise of its employee's incentive stock options (“ISOs”) unless the employee does not meet the holding period requirements and sells early, making a disqualifying disposition, or if the options otherwise do not qualify as ISOs under applicable tax laws. With non-qualified stock options (“NQSOs”), on the other hand, the employer is typically eligible to claim a deduction upon its employee's exercise of the NQSOs. The Company had an estimated nonrecurring tax benefit of approximately $2.0 million in the first quarter of 2020 as a result of the exercise of disqualified ISOs and the exercise of NQSOs, partially offset by estimated tax expense of approximately $1.0 million. On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act currently has minimal impact on the Company. 12 Alpha Pro Tech, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) 15. Subsequent Events The Company has reviewed and evaluated whether subsequent events have occurred from the condensed consolidated balance sheet date of March 31, 2021 through the filing date of this Quarterly Report on Form 10-Q that would require accounting or disclosure and has concluded that there are no such subsequent events. 13 Alpha Pro Tech, Ltd.