All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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, 2021, 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, 2021.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
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. 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 and new variants, including the Omicron variant, the actions taken to contain or mitigate its impact, the impact on governmental programs and budgets, the development of treatments or vaccines, and the efficacy of mass vaccinations, and the resumption of widespread economic activity in certain sectors. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any certainty the likely impact of the COVID-19 pandemic on our future operations.
| 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, 2021 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 2021. 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.
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 consolidated 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.
The Company’s marketable securities are classified as available-for-sale and are carried at fair market value based on quoted market prices.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
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, 2021 and 2020.
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, 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 December 31, 2021, we had no contract liabilities as compared to $209,000 as of December 31, 2020, as a result of customer advance payments of orders in connection with the COVID-19 pandemic. 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 years ended December 31, 2021 and 2020 there were no stock options granted under the Company’s stock option plan. The Company recognized $185,000 and $375,000 in share-based compensation expense for the years ended December 31, 2021 and 2020, respectively, related to outstanding options. For the years ended December 31, 2021 and 2020, 15,140 and 8,912 restricted stock equity awards were granted under the 2020 Incentive Plan respectively and the compensation expense associated with these awards was $131,000 and $6,000 in 2021 and 2020 respectively.
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, 2021 and 2020.
| | | Years Ended December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Net income (numerator) | | $ | 6,756,000 | | | $ | 26,888,000 | |
| | | | | | | | | |
| Shares (denominator): | | | | | | | | |
| Basic weighted average common shares outstanding | | | 13,225,628 | | | | 13,449,987 | |
| Add: Dilutive effect of common stock options | | | 273,814 | | | | 522,158 | |
| | | | | | | | | |
| Diluted weighted average common shares outstanding | | | 13,499,442 | | | | 13,972,145 | |
| | | | | | | | | |
| Earnings per common share: | | | | | | | | |
| Basic | | $ | 0.51 | | | $ | 2.00 | |
| Diluted | | $ | 0.50 | | | $ | 1.92 | |
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, 2021 and 2020.
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, 2021 and 2020.
Advertising Costs
The Company expenses advertising and promotional costs as incurred. These costs are included in selling, general and administrative expenses and were $27,000 and $32,000 for the years ended December 31, 2021 and 2020, respectively.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
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.
attestation 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. There were no fair values of the Company’s financial assets as of December 31, 2021 and 2020.
Reclassifications
Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to current year presentation. Certain financial information is presented on a rounded basis, which may cause minor differences.
New Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
As of December 31, 2021 and 2020, no marketable securities investments were owned. No marketable securities were sold during the year ended December 31, 2021. Certain marketable securities were sold during the year ended December 31, 2020, for a net realized loss of $62,000.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
Inventories consisted of the following:
| | | December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Raw materials | | $ | 13,545,000 | | | $ | 9,729,000 | |
| Work in process | | | 3,890,000 | | | | 2,003,000 | |
| Finished goods | | | 7,534,000 | | | | 5,017,000 | |
| Total inventory | | $ | 24,969,000 | | | $ | 16,749,000 | |
| 5. | Property and Equipment |
Property and equipment consisted of the following:
| | | December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Buildings | | $ | 493,000 | | | $ | 493,000 | |
| Machinery and equipment | | | 15,273,000 | | | | 13,039,000 | |
| Office furniture and equipment | | | 2,177,000 | | | | 2,076,000 | |
| Leasehold improvements | | | 553,000 | | | | 517,000 | |
| Software | | | 3,000 | | | | 3,000 | |
| | | | | | | | | |
| | | | 18,499,000 | | | | 16,128,000 | |
| Less accumulated depreciation and amortization | | | (12,435,000 | ) | | | (11,775,000 | ) |
| | | | | | | | | |
| Total net property and equipment | | $ | 6,064,000 | | | $ | 4,353,000 | |
Depreciation and amortization expense for property and equipment was $813,000 and $725,000 for the years ended December 31, 2021 and 2020, 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, 2021 | | | December 31, 2020 | |
| | | 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 | | | 2.0 | | | $ | 474,000 | | | $ | (471,000 | ) | | $ | 3,000 | | | | 3.0 | | | $ | 474,000 | | | $ | (467,000 | ) | | $ | 7,000 | |
Amortization expense for intangible assets was $4,000 and $4,000 for the years ended December 31, 2021 and 2020, respectively.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
Estimated future amortization expense related to definite-lived intangible assets is as follows:
Years ending December 31,
| 2022 | | $ | 2,000 | |
| 2023 | ` | | | 1,000 | |
| Total | | $ | 3,000 | |
| 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, 2021 or December 31, 2020.
For the years ended December 31, 2021 and 2020, the Company purchased $26,252,000 and $18,623,000 of inventories, respectively, from Harmony. For the years ended December 31, 2021 and 2020, the Company recorded equity in income of unconsolidated affiliate of $571,000 and $710,000, respectively. For the years ended December 31, 2021 and 2020, the Company sold $1,931,000 and $1,087,000 of inventories, respectively, to Harmony.
As of December 31, 2021, the Company’s investment in Harmony was $6,120,000, which consisted of its original $1,450,000 investment and cumulative equity in income of unconsolidated affiliate of $5,689,000, less $942,000 in repayments of an advance and payments of $77,000 in dividends.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
Accrued liabilities consisted of the following:
| | | December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Payroll expenses and tax payable | | $ | 187,000 | | | $ | 123,000 | |
| Commission and bonuses payable and general accrued liabilities | | | 1,063,000 | | | | 2,670,000 | |
| Total accrued liabilities | | $ | 1,250,000 | | | $ | 2,793,000 | |
Contract liabilities were $2,238,000 and $2,263,000 as of December 31, 2021 and 2020, respectively, which are netted against the related accounts receivable due to the legal right of offset.
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. As of December 31, 2021 and 2020, the Company had no outstanding borrowings and no other debt.
Repurchase Program
During the year ended December 31, 2021, the Company repurchased and retired 439,000 shares of its common stock for $4,408,000. During the year ended December 31, 2020, the Company repurchased and retired 223,100 shares of its common stock for $2,666,000. As of December 31, 2021, the Company had $2,078,000 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, 2020. 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, 2021, 24,052 restricted stock equity awards had been granted under the 2020 Incentive Plan, the total for 2021 compensation expense of these awards is $131,000. As of December 31, 2021, $79,000 of total unrecognized compensation cost related to the restricted stock grants was expected to be recognized over a weighted-average remainder period of 0.73 years.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
The following table summarizes option activity for the years ended December 31, 2021 and 2020:
| | | | | | | Weighted | |
| | | | | | | Average | |
| | | | | | | Exercise Price | |
| | | Shares | | | Per Option | |
| | | | | | | | | |
| 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 | | | | 3.42 | |
| Granted to employees and directors | | | - | | | | - | |
| Exercised | | | (134,494 | ) | | | 3.17 | |
| Canceled/expired/forfeited | | | (6,666 | ) | | | 3.62 | |
| Options outstanding, December 31, 2021 | | | 427,580 | | | | 3.50 | |
| Options exercisable, December 31, 2021 | | | 315,583 | | | | 3.47 | |
Stock options to purchase 427,580 and 568,740 shares of common stock were outstanding as of December 31, 2021 and 2020, 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, 2021. 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, 2021.
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.
The following table summarizes information about stock options as of December 31, 2021:
| | | | | 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 | |
| $3.42 | - | $3.90 | | | 427,580 | | | $ | 3.50 | | | | 1.91 | | | $ | 1,056,000 | | | | 315,583 | | | $ | 3.47 | | | | 1.77 | | | $ | 790,000 | |
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, 2021 and 2020 was $806,000 and $10,772,000, respectively.
As of December 31, 2021, $37,000 of total unrecognized compensation cost related to stock options was expected to be recognized over a weighted-average remaining period of 0.42 years. Cash received from 134,494 options exercised for the year ended December 31, 2021 was $427,000.
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.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
The provision (benefit) for income taxes consisted of the following:
| | | For the Years Ended December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Current | | $ | 1,516,000 | | | $ | 5,313,000 | |
| Deferred | | | 228,000 | | | | 47,000 | |
| | | | | | | | | |
| Provision for income taxes | | $ | 1,744,000 | | | $ | 5,360,000 | |
Deferred income tax assets (liabilities) consisted of the following:
| | | December 31, | |
| | | 2021 | | | 2020 | |
| Temporary differences: | | | | | | | | |
| Property and equipment | | $ | (993,000 | ) | | $ | (706,000 | ) |
| Intangible assets | | | (10,000 | ) | | | (9,000 | ) |
| Inventory reserve | | | 79,000 | | | | 24,000 | |
| Accrued expenses and inventory | | | 216,000 | | | | 250,000 | |
| Basis difference in investments | | | 35,000 | | | | 35,000 | |
| Foreign exchange | | | 11,000 | | | | (40,000 | ) |
| AMT/Foreign tax credits | | | 42,000 | | | | - | |
| State income taxes | | | (171,000 | ) | | | (117,000 | ) |
| | | | | | | | | |
| Net deferred income tax liabilities | | $ | (791,000 | ) | | $ | (563,000 | ) |
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, | |
| | | 2021 | | | 2020 | |
| Income taxes based on U.S. statutory rate of 21% and 34%, respectively | | $ | 1,785,000 | | | $ | 6,772,000 | |
| Non-deductible meals and entertainment | | | - | | | | 5,000 | |
| FDII deduction | | | (49,000 | ) | | | (348,000 | ) |
| Foreign taxes | | | (120,000 | ) | | | (38,000 | ) |
| State taxes | | | 219,000 | | | | 747,000 | |
| Stock Compensation | | | (106,000 | ) | | | (2,171,000 | ) |
| Other | | | 15,000 | | | | 393,000 | |
| | | | | | | | | |
| Provision for income taxes | | $ | 1,744,000 | | | $ | 5,360,000 | |
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
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, 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 December 31, 2021, the Company had operating lease right-of-use assets of $2,648,000 and operating lease liabilities of $2,700,000. As of December 31, 2021, we did not have any finance leases recorded on the Company’s consolidated balance sheet. Operating lease expense was approximately $1,199,000 and $1,154,000 for the years ended December 31, 2021 and 2020, respectively.
The aggregate future minimum lease payments and reconciliation to lease liabilities as of December 31, 2021 were as follows:
| | | December 31, | |
| | | 2021 | |
| 2022 | | $ | 1,010,000 | |
| 2023 | | | 1,017,000 | |
| 2024 | | | 484,000 | |
| 2025 | | | 365,000 | |
| Total future minimum lease payments | | | 2,876,000 | |
| Less imputed interest | | | (176,000 | ) |
| Total lease liabilities | | $ | 2,700,000 | |
As of December 31, 2021, the weighted average remaining lease term of the Company’s operating leases was 3.08 years. During the year ended December 31, 2021, the weighted average discount rate with respect to these leases was 4.17%.
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 $53,000 and $45,000 for the years ended December 31, 2021 and 2020, 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 $447,000 for the year ended December 31, 2021, compared to $1,000,000 for 2020, 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.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
(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.
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, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Building Supply | | $ | 36,889,000 | | | $ | 30,580,000 | |
| Disposable Protective Apparel | | | 31,748,000 | | | | 72,120,000 | |
| | | | | | | | | |
| Consolidated net sales | | $ | 68,637,000 | | | $ | 102,700,000 | |
The following table presents the reconciliation of total segment income to total consolidated net income:
| | | Years Ended December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Building Supply | | $ | 7,350,000 | | | $ | 5,396,000 | |
| Disposable Protective Apparel | | | 6,706,000 | | | | 33,501,000 | |
| Total segment income | | | 14,056,000 | | | | 38,897,000 | |
| | | | | | | | | |
| Unallocated corporate overhead expenses | | | 5,556,000 | | | | 6,649,000 | |
| Provision for income taxes | | | 1,744,000 | | | | 5,360,000 | |
| Consolidated net income | | $ | 6,756,000 | | | $ | 26,888,000 | |
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, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Net sales by geographic region | | | | | | | | |
| United States | | $ | 65,844,000 | | | $ | 90,495,000 | |
| International | | | 2,793,000 | | | | 12,205,000 | |
| | | | | | | | | |
| Consolidated net sales | | $ | 68,637,000 | | | $ | 102,700,000 | |
| | | | | | | | | |
| | | As of December 31, | |
| | | 2021 | | | 2020 | |
| Long-lived assets by geographic region | | | | | | | | |
| United States | | $ | 4,623,000 | | | $ | 2,787,000 | |
| International | | | 1,441,000 | | | | 1,566,000 | |
| | | | | | | | | |
| Consolidated total long-lived assets | | $ | 6,064,000 | | | $ | 4,353,000 | |
Net sales by geographic region are based on the countries in which our customers are located. For the years ended December 31, 2021, the Company did not generate sales from any single country, except the United States, that were significant to the Company’s consolidated net sales. For the year ended December 31, 2021 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.
The following table presents the consolidated net property, equipment, goodwill and intangible assets by segment:
| | | As of December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Building Supply | | $ | 3,600,000 | | | $ | 1,806,000 | |
| Disposable Protective Apparel | | | 1,419,000 | | | | 1,432,000 | |
| Total segment assets | | | 5,019,000 | | | | 3,238,000 | |
| | | | | | | | | |
| Unallocated corporate assets | | | 1,103,000 | | | | 1,177,000 | |
| Total consolidated assets | | $ | 6,122,000 | | | $ | 4,415,000 | |
| 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 net realized loss of $62,000 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, 2021 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.
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.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements
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, 2021 and 2020, and 10% or more of net sales for the years ended December 31, 2021 and 2020, were as follows:
| | | December 31, | |
| | | 2021 | | | 2020 | |
| | | | | | | | | |
| Accounts Receivable: | | | | | | | | |
| Customer A | | | 13 | % | | | 11 | % |
| Customer B | | | 19 | % | | | * | |
| Customer C | | | * | | | | 18 | % |
| | | | | | | | | |
| Net sales: | | | | | | | | |
| Customer A | | | 21 | % | | | 15 | % |
| Customer B | | | 13 | % | | * | |
| Customer C | | | * | | | | 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, 2021 and December 31, 2020.
| 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.
| 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. | Out-of-Period Adjustment |
During the financial close for the year ended December 31, 2021, the Company discovered certain immaterial errors in its income tax accounting related to state tax apportionments and deferred tax assets in relation to Incentive Stock Options (“ISO”). In periods prior to January 1, 2020, the Company should have recognized approximately $291,000 of additional tax expense, primarily related to stock compensation from ISOs’. As a result, the Company has increased its accrued liabilities by $12,000 and deferred income tax liabilities by $279,000 and decreased its retained earnings by $291,000 as of December 31, 2019. Furthermore, for the year ended December 31, 2020, the Company should have recognized $154,000 in additional state income tax expense and $44,000 in additional income tax expense for ISOs that were being treated as deferred tax asset instead of expense. The error was corrected by increasing the provision for income tax in 2020 by $198,000. Accrued liabilities were increased by $198,000, deferred income tax liabilities were increased by $279,000 and retained earnings was decreased by $489,000 as of December 31, 2020.
These revisions resulted in a decrease of earnings per share and diluted earnings per share of $.01 and $.02, respectively for the year ended December 31, 2020. Management has determined that this revision was not material on a quantitative or qualitative basis to the prior period financial statements based on our analysis performed in accordance with the guidance provided by SEC Staff Accounting Bulletins No. 99 – Materiality and No. 108 – Considering the Effects of Prior Year Misstatements
The Company has reviewed and evaluated whether any additional material subsequent events have occurred from December 31, 2021 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.
Alpha Pro Tech, Ltd.
Notes to Consolidated Financial Statements