PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports and filings of the Company (as defined below) filed with the Securities and Exchange Commission (“SEC”). Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions, including, without limitation, our expected orders, production levels and sales in 2020 and 2021, the expected effects of the COVID-19 pandemic, and other information that is not historical information. All statements, other than statements of historical facts that address the Company’s expectations of sources of capital or that express the Company’s expectations for the future with respect to financial performance or operating strategies or results can be identified as forward-looking statements. As a result, there can be no assurance that the Company’s future results will not be materially different from those described herein as “expected,” “anticipated,” “estimated,” “believed,” “predicted,” “intended,” “planned,” “potential,” “may,” “continue” or “should,” or using variations of such words or similar expressions, which reflect the current views of the Company with respect to future events. We caution readers that these forward-looking statements speak only as of the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which such statements are based.

Any expectations based on these forward-looking statements are subject to risks and uncertainties.uncertainties. These risks and other factors include, but are not limited to, those listed in this report under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report. These and many other factors could affect the Company’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.

SPECIAL NOTE REGARDING SMALLER REPORTING COMPANY STATUS

We are filing this Annual Report on Form 10-K as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) based on our public float (the aggregate market value of our common stock equity held by non-affiliates of the Company) as of the last business day of our second fiscal quarter of 2017.2020. As a result of being a smaller reporting company, we are not required to provide certain disclosure in this Annual Report on Form 10-K. Where information is being omitted or reduced in this Annual Report on Form 10-K based on our smaller reporting company status, we have made a special notation herein.

Item 1. 1.    Business.

GENERALGENERAL

ALPHA PRO TECH, LTD. (“Alpha Pro Tech,” the “Company,” “we,” “our” or “us”) is the parent company of Alpha Pro Tech, Inc. and Alpha ProTech Engineered Products, Inc. The Company was incorporated in the State of Delaware on July 1, 1994 as a successor to a business that was organized in 1983. Our executive offices are located at 60 Centurian Drive, Suite 112, Markham, Ontario, Canada L3R 9R2, and our telephone number is (905) 479-0654. Our website is located at www.alphaprotech.com.

The Company continued to qualify as a smaller reporting company at the measurement date for determining such qualification during 2017.2020. According to the disclosure requirements for smaller reporting companies, the Company has included consolidated balance sheets as of December 31, 20172020 and 20162019 and consolidated statements of income, comprehensive income, (loss), shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2017.2020.

BUSINESS

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets through our wholly owned subsidiary, Alpha Pro Tech, Inc. We also manufacture a line of building supply construction weatherization products through our wholly owned subsidiary, Alpha ProTech Engineered Products, Inc. Our products are sold under the Alpha Pro Tech brand name, as well as under private label.

Our products are grouped into threetwo business segments: (1) the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and (2) the Disposable Protective Apparel segment, consisting of disposable protective apparel, such asgarments (including shoecovers, bouffant caps, gowns, coveralls, lab coats,gowns, frocks and other miscellaneous products; and (3) the Infection Control segment, consisting oflab coats), face masks and eyeface shields. All financial information presented hereinin this report reflects the current segmentation.

Until the first quarter of 2019, face masks and face shields were included in a separate business segment called Infection Control.

STRATEGY

Our principalprincipal strategy focuses on developing, producing and marketing differentiated, innovative high value products that protect people, products and environments. Our key sales growth strategies are based on communicating directly with end users and developing innovative products to suit individual end users’ needs.

Our products are used primarily in cleanrooms, industrial safetysafety manufacturing environments and health care facilities, such as hospitals, laboratories and dental offices, as well as building and re-roofing sites. Our products are distributed principally in the United States of America (“United States” or “U.S.”) through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives, and our own sales and marketing force.

PPRODUCTSRODUCTS

Our principal products are grouped into threetwo business segments:

Building Supply:Supply:

●    Housewrap

●    Housewrap accessories: flashing and tape

●    Synthetic roof underlayment

●    Other woven material

Disposable Protective Apparel:

●    Shoecovers

●    Bouffant caps

●    Gowns

●    Coveralls

●    Lab coats

●    Frocks

Infection Control:●    Face masks

●    Face masks

●   Eyeshields

Building Supply

The Building Supply segment consists of a line of construction supply weatherization products, namely housewrap and synthetic roof underlayment, as well as other woven material. This line of products is a natural extension of our core capabilities: creating proprietary products designed to protect people and environments.

The usage of these construction supply weatherization products offers great advantages in decreasing the time that it takes to construct a home, as well as reducing costs. The housewrap, under the trademark REX™, offers a weather resistant barrier and, to the homeowner, years of lower energy consumption. REX™ Wrap and REX™ Wrap Plus are woven and coated polypropylene micro perforated weather resistant barriers, and REX™ Wrap Fortis with JX ALTA 360° Drainage Technology™ is a one-of-a-kind breathable product that uniquely enables the drainage of water in every direction to protect buildings from the elements exponentially better, we believe, than a traditional housewrap, while decreasing job site material waste, simplifying installation to reduce labor and allowing fewer products to be carried onto the job site.

The proprietary synthetic roof underlayment, REX™REX™ SynFelt, has the ability to resist the environment, as opposed to conventional organic roofing underlayment that is prone to rapid degradation and mold growth. We also manufacture and distribute TECHNOply™ and TECHNO™ SB, economy versions of our synthetic roof underlayment, to capture market share in the lower end of the market.

These products are manufactured in our manufacturing facility in Valdosta, Georgia and through our joint venture in India, as described in more detail below under “Manufacturing.”

Disposable Protective Apparel

The Disposable Protective Apparel segment includes many different stylesconsists of a complete line of disposable protective garments (shoecovers, bouffant caps, coveralls, gowns, frocks and lab coats), as well as face masks and face shields.

Our goal in the design and manufacture of all our disposable protective garments is to keep the wearer cool, clean, comfortable and to provide the right level of protection for the wearer and the wearer’s environment. To achieve this, we offer a comprehensive selection of materials and garment designs to meet a wide range of application requirements. Our materials are clean, durable and offer the wearer a great comfort level. Our products, are offered under proprietary materials such as shoecovers, bouffant caps, gowns, coveralls, lab coats, frocksChemTech®, BarrierTech®, ComforTech®, AlphaGuard® and other miscellaneous products. GenPro®, UltraGrip™, SafeStep®, MaxGrip®, AquaTrak®, SureGrip™ and NaviTrak®.

The vast majority of these productsthe disposable protective garments are manufactured through our joint venture in India, as well as by other subcontractors in Asia and, to a much lesser extent, a subcontractorby other contract manufacturers in Asia and Mexico, as described in more detail below under “Manufacturing.” Certain proprietary products are made using materials supplied by us.

Infection Control

The Infection Control segment includes face masks and eye shields. Our face masks come in a wide variety of filtration efficiencies and styles. Our patented Positive Facial Lock® feature provides a custom fit to the face to prevent blow-by for better protection. The term "blow-by" is used to describe the potential for infectious material to enter or escape a facemaskface mask without going through the filter as a result of gaps or openings in the face mask. Our Magic Arch® feature holds the mask away from the nose and mouth, creating a comfortable breathing chamber. One of our masks that

Our N-95 Particulate Respirator National Institute for Occupational Safety and Health (“NIOSH”) approved face mask, which incorporates both the Positive Facial Lock® feature and the Magic Arch® feature, is the N-95 Particulate Respirator face mask, which was recommended by the Centers for Disease Controlhas historically experienced increased demand during outbreaks of infectious disease, such as SARS in 2003, Bird Flu in 2006, H1N1 in 2009 and Prevention (“CDC”)COVID-19 in 2020 to combat the spread of the H1N1 Influenza A pandemic in 2009.these diseases.

All eye shields are made from an optical-grade polyester film and have a permanent anti-fog feature. This provides the wearer with extremely lightweight, distortion-free protection that can be worn for hours, and the eye shields will not fog up from humidity and/or perspiration. An important feature of all face masks and eye and face shields is that they are disposable, which eliminates the possibility of cross infection between patients and saves users,consumers, such as hospitals, the expense of sterilization after every use.

This segment could experience increased demand during outbreaks of infectious disease, such as H1N1 in 2009 and the Ebola crisis in 2014.

As described in more detail below under “Manufacturing,,” our face masks are primarily manufactured in our facility in Salt Lake City, Utah. Our eye shields are produced in our facility in Nogales, Arizona and assembled by a subcontractor in Mexico.

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 beginning with the first quarter of 2019. The disclosures in this Annual Report reflect this current segmentation.

The Company’s products are sold under the “Alpha Pro Tech” brand name and under private label, and they are predominantly sold in the U.S.

Financial information related to the threetwo segments can be found in Activity of Business Segments (Note 14)15) of the Notes to Consolidated Financial Statements.

MARKETSMARKETS

Our products are sold to the following markets: (i) construction weatherization products (building supply products) are sold to construction supply and roofing distributors, and (ii) disposable protective apparel and infection control products are sold to the industrial, cleanroom, medical and dental markets.

Our target customers are construction building supply and roofing distributors, pharmaceutical manufacturing, bio-pharmaceutical manufacturing, medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), and medical and dental distributors.

DISTRIBUTIONDISTRIBUTION

We rely primarily on a network of independent distributors for the sale of our products.

We do not generallyusually have backlog orders, as orders are usually placed for shipment and shipped within 30 days.days, although at December 31, 2020, as a result of the COVID-19 pandemic and expansion in the construction sector we did have a backlog of unfulfilled orders for our personal protective equipment (“PPE”) products and certain of our building supply products.  Appropriate levels of inventories are maintained to supply distributors on a timely basis.  From time to time, we will stockpile inventory for periods of unusually high demand. Disruptions in the supply chain as well unpredictable changes in the response to the COVID-19 pandemic have created uncertainty in the timing of deliveries and fulfillment of backlogged orders. Some orders may ultimately be cancelled due to unavoidable delays and changing circumstances.

PaymentStandard payment terms are normally net 30 days from the date of shipment. All pricing and payment for our products are in U.S. dollars. Authorized returns must be unopened, in good condition and in the original carton and may be returned within 90 days of the original date of shipment. All authorized returns are subject to a restocking fee of 20% of the original invoice.

FINANCIAL

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

The following table summarizessummarizes the Company’s net sales by geographic region for the Company’s last two years. All amounts have been rounded to the nearest thousand.

Net sales by geographic region are based on the countries in which our customers are located. For the yearsyear ended December 31, 2017 and 2016,2020, the Company generated sales of approximately $8,090,000 from Australia. During that year, no other single country (other than the United States) had sales that were 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(other than the United States,States) that were significant to the Company’s consolidated net sales.

The following table summarizes the locationslocations of the Company’s long-lived assets by geographic region as of December 31, 20172020 and 2016.2019.

MANUFACTURINGMANUFACTURING

Our wholly owned subsidiary, Alpha ProTech Engineered Products, Inc., which manufactures and distributes a line of construction weatherization products for the Building Supply segment, comprised primarily of housewrap and synthetic roof underlayment,underlayment. Alpha ProTech Engineered Products, Inc. operates in a 165,400 square foot facility located at 301 South Blanchard Street,in Valdosta, Georgia.

Alpha ProTech Engineered Products, Inc. has a 41.66% ownership interest in a joint venture with Maple Industries and associates, a manufacturer in India, for the production of Building Supply segment products, such as housewrap and synthetic roof underlayment products, in a semi-finished state, and the production of Disposable Protective Apparel segment products. The name of the joint venture is Harmony Plastics Private Limited (“Harmony”). Harmony has four facilities in India, three owned and one rented. One owned facility is a 113,000 square foot building for use in the manufacturing of building products. There is a 73,000 square foot owned facility for use in the manufacturing of coated material and the sewing of proprietary disposable protective apparel. There is also a 16,000 square foot owned facility for use in the sewing of proprietary disposable protective apparel. The rented building is a 93,000 square foot facility for use in the manufacturing of Building Supply segment products.

We cut, warehouse and ship disposable protective apparel products in a 60,000 square foot facility located at 1287 West Fairway Drive,in Nogales, Arizona. The majority of these products are manufactured by subcontractorscontract manufacturers in Asia and, to a much lesser extent, by a subcontractorcontract manufacturer in Mexico. These goods are manufactured pursuant to our specifications and quality assurance guidelines. Certain proprietary products are being made in Asia using materials supplied by us.

Our mask production facility is located in a 34,500 square foot building located at 236 North 2200 West,in Salt Lake City, Utah.

Certain proprietary products are made using materials suppliedWe have encountered over the last year a number of constraints within our supply chain due to government-mandated shutdowns, raw materials shortages and shipping delays. Although we continue to work to alleviate these supply chain issues by us. We do not anticipate any problems with respect tosecuring additional supply sources, in the sourcesevent of subsequent shutdowns, shortages or delays, our production and availability of these proprietary materials needed to produce our products.sales could be further impacted. Our business is not subject to significant seasonal considerations, although it is necessary for us to have adequate raw materials and finished inventory in stock.

COMPETITIONCOMPETITION

We face substantial competition from numerous companies, including many companies with greater marketing and financial resources. Our major competitors in the construction supply weatherization market are DuPont for housewrap and Interwrap Inc. for synthetic roof underlayment. Our major competitor in the medical and dental markets is Kimberly-Clark Corporation of Fort Worth, Texas. Other large competitors include 3M Company, Johnson & Johnson, White Knight Engineered Products (Precept Medical Products, Inc.), Cardinal Health, Inc. and Medline Industries Inc. Our major competitors in the industrial and cleanroom market are our former largest distributor, VWR International, LLC, Kimberly-Clark Corporation, 3M Company, Kappler, Inc., DuPont and Allegiance Healthcare Corporation.

VWR International, LLC, Cardinal Health, Inc. and Medline Industries Inc. are also distributors of our products.

The principal methods and elements of competition include brand recognition and loyalty, product innovation, quality and performance, price, and marketing and distribution capabilities. For additional discussion of the competitive environment in which we conduct our business, see Part I, Item 1A, “Risk Factors.”

REGULATORY REQUIREMENTS

We are not required to obtain regulatory approval from the U.S. Food and Drug Administration (“FDA”)FDA with respect to the sale of our products. Our products are, however, subject to prescribed good manufacturing practices as defined by the FDA, and our manufacturing facilities are inspected by the FDA every two years to ensure compliance with such good manufacturing practices. We are marketing a N-95 Particulate Respirator face mask that meets the Occupational Safety and Health Administration (OSHA) respirator guidelines and has been approved by the National Institute for Occupational Safety and Health (NIOSH). This product is designed to help prevent the inhalation of the tuberculosis bacteria.

Our operations are subject to federal, state and local laws, regulations and ordinances relating to various environmental, health and safety matters. We believe that our operations are in compliance with, or we are taking actions designed to ensure compliance with, these laws, regulations, and ordinances. However, the nature of our operations exposes us to the risk of claims concerning non-compliance with environmental, health, and safety laws or standards, and there can be no assurance that material costs or liabilities will not be incurred in connection with those claims. We are not currently named as a party in any judicial or administrative proceeding relating to environmental, health, and safety matters, and we currently have no anticipated capital expenditures for environmental projects that are expected to have a material effect on our financial condition, results of operations or liquidity.

PATENTSPATENTS AND TRADEMARKS

Patents

Our policy is to protect our intellectual property rights, products, designs and processes through the filing of patents in the United States and, where appropriate, in Canada and other countries. At present, we have 15ten United States patents relating to several of our products. In addition, we have a United States patent on a method to fold and put on sterile garments. We believe that our patents may offer a competitive advantage, but there can be no assurance that any patents, issued or in process, will not be circumvented or invalidated. We also rely on trade secrets and proprietary know-how to maintain and develop our commercial position.

The various United States patents issued have remaining durations of approximately 1 to 85 years before expiration.

Trademarks

Many of our products are sold under various trademarks and trade names, including Alpha Pro Tech. We believe that many of our trademarks and trade names have significant recognition in our principal markets, and we take customary steps to register or otherwise protect our rights in our trademarks and trade names.

EMPLOYEESHUMAN CAPITAL

As of March 1, 2018,February 26, 2021, we had 112115 full-time employees, including 1519 employees at our principal executive office in Markham, Ontario, Canada; 951 employees at our face mask production facility in Salt Lake City, Utah; 2836 employees at our Disposable Protective Apparel segment cutting, warehouse and shipping facility in Nogales, Arizona; 3835 employees at our Building Supply segment facility in Valdosta, Georgia; 1916 employees on our sales and marketing team, located in various areas throughout the United States; and 3 employees1 employee in China.

None of our employees are subject to collective bargaining agreements. We have had no labor-related work stoppages, and we believe that our relations with our employees are good.

AWorkplace Health and SafetyVAILABLE

The health, safety, and wellness of our employees is a priority in which we have always invested, and will continue to do so. These investments and the prioritization of employee health, safety, and wellness took on particular significance in 2020 in light of COVID-19. To that end, the Company maintains a variety of programs to reduce and eliminate injuries and promote safety and regularly measures progress against those programs. These programs promote personal responsibility for workplace safety and encourage associates to set a meaningful example as safety ambassadors.

In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, in compliance with government regulations. Through the efforts of a cross-functional COVID-19 response team, the Company has responded to numerous people-related challenges resulting from the pandemic. The Company addressed various country, state, and local restrictions, mandates and guidelines and provided compliance programs at all Company locations designed to operate facilities in a safe manner. To protect and support our essential team members, we have implemented health and safety measures that included maximizing personal workspaces, changing shift schedules, providing PPE, and instituting mandatory screening before accessing buildings.

Diversity and Inclusion

We strive to foster a culture where mutual respect, inclusive behavior, and dignity are core to our individual expectations. We remain committed to fostering an inclusive environment in which our differing backgrounds, life experiences, and perspectives join to positively impact the communities in which we live and serve. We do this by leading with inclusion and empowering everyone to do their best work as their most authentic selves—regardless of race, color, national origin, religion, sex, sexual orientation, gender identity and expression, age, disability, or military service status. We are united by our collective purpose and common set of organizational values that are core to our mission and culture.

AVAILABLE INFORMATION

We make available free of charge on our Internet website (http://www.alphaprotech.com)www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K and any amendments to such reports, as well as our most recent proxy statement, as soon as reasonably practicable following the electronic filing of such reports with the SEC. These reports are also available on the SEC’s website (http://www.sec.gov). You may read and copy reports that we file with the SEC at its Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549, on official business days during the hours of 10:00am to 3:00pm. Information on the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0330. The past three years of news releases also are made available on the Company’s website. In addition, we provide electronic or paper copies of our filings free of charge upon request.

The Company is not including the information contained on or available through its website as a part of, or incorporating such information into, this Annual Report on Form 10-K.

ItemItem 1A. RiskRisk Factors.

Making or continuing an investment in common stock issued by the Company involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company. Additional risks and uncertainties also could adversely affect our business and our results. If any of the following risks actually occur, our business, financial condition and results of operations could be negatively affected, the market price of our common stock could decline and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

Global economic conditionsRisks Related to the COVID-19 Pandemic

The effects of the COVID-19 pandemic could have a material adverse effect on our business, financial results and results of operations.

In December 2019, COVID-19 surfaced in Wuhan, China, and the World Health Organization characterized COVID-19 as a pandemic on March 11, 2020. The situation relating to the COVID-19 pandemic is complex and still evolving, with a broad number of governmental and commercial efforts to contain the spread of the virus globally. The duration and extent of the impact of the COVID-19 pandemic on our business, operations and financial results depends on factors that cannot be accurately predicted at this time, such as the severity and transmission rate of new variants of the COVID-19 virus, the extent and effectiveness of containment actions, the speed and efficacy of vaccination efforts, and the impact of these and other factors on our employees, customers, industry partners, suppliers and third-party dealers and distributors.

Federal, state and local governments, as well as foreign governments, have imposed numerous protocols and regulations in an effort to limit the spread of the COVID-19. We have implemented a number of measures in an effort to protect our employees’ health and well-being, including having certain office workers work remotely and suspending employee travel. The potential negative effects to our operations, including reductions in production levels, research and development activities and increased costs resulting from our efforts to mitigate the impact of COVID-19, may adversely affect our ability to provide our products. Furthermore, the implications of unsuccessfully implementing health and well-being measures, which could, for example, result in workers at our manufacturing facilities testing positive for COVID-19, would also adversely affect our business, including resulting in a product recall. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time.

Although we have experienced increased sales and significantly increased demand for our PPE products, the global COVID-19 pandemic has and may continue to have an adverse impact on our manufacturing and distribution capabilities. Disruptions relating to the COVID-19 pandemic, including shelter-in-place orders in the U.S., Mexico, India and other countries, have prevented and could again prevent employees, suppliers, distributors and others from accessing manufacturing facilities and from transporting our products or the components required to manufacture our products. For example, the government-mandated closure in India, which started in late March and ended in May 2020, impacted our order fulfillment and revenue growth related to our disposable protective garments. Any government regulation may also impact our ability to supply and ship our products to certain customers, which could lead to cancellation of some orders. Further, worldwide supply chain disruption relating to the COVID-19 pandemic has resulted in product shortages that have impacted and may continue to impact our ability to manufacture our products. We currently utilize third parties to, among other things, manufacture certain components and materials for our products, and to provide services such as sterilization services, and we purchase these materials and services from numerous suppliers worldwide. If either we or any third parties in the supply chain for materials used in the production of our products continue to be adversely impacted by the COVID-19 pandemic, including the restrictions resulting from the COVID-19 pandemic, our supply chain may continue to be disrupted, limiting our ability to manufacture our products. These disruptions may, among other things, continue to impact our ability to produce and supply products in quantities necessary to meet market demand.

Further, in connection with the COVID-19 pandemic and in an effort to increase the wider availability of needed medical and other supplies and products, we may elect to, or governments may require us to, allocate our products (for example, pursuant to the U.S. Defense Production Act (the “DPA”)) in a way that adversely affects our regular operations and financial results, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. Likewise, suppliers of our raw materials who are subject to requests under the DPA may be unable to fulfill our orders for those raw materials, or such fulfillment could be delayed. In addition, unpredictable increases in demand for certain of our products could, or in some cases may continue to, exceed our capacity to meet such demand, which could adversely affect the Company’s businessour financial results and financial results.customer relationships and result in negative publicity.

Unfavorable economicAs a result of the COVID-19 pandemic, we have experienced a significant increase in orders of our PPE products from both legacy and new customers. Because of the uncertainty associated with the pandemic, we may experience a decrease in sales from certain of these customers at the point at which conditions includingrelated to the virus change or improve and demand for these products subsides, which could impact our expectations of recessionsfuture orders and general economic downturnssales.

COVID-19 has resulted in a downturn in the United Statesglobal financial markets and throughouta slowdown in the world,global economy. This economic environment may negatively affectimpact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced and may continue to experience cost increases from some of our suppliers. Additionally, decreased housing starts and increased uncertainty in the Company’s business and financial results.  These economic conditionshousing market could negatively impact (i) demand for our products, (ii) the mix of our products’ sales, (iii) our ability to collect accounts receivable on a timely basis from certain customers and (iv) the ability of certain suppliers to fill our orders for raw materials or other goods and services. A prolonged recession could result in decreased revenue, margins and earnings.Building Supply segment products.

Moreover, the impacts of the COVID-19 pandemic may exacerbate other pre-existing risks, such as political, regulatory, social, financial, operational and cybersecurity risks, and those associated with global economic conditions, any of which could have a material adverse effect on our business.

Risks Related to Our Industry

The loss of any large customer or a reduction in orders from any large customer could reduce our net sales and harm our operating results.

Our operating results could be negatively affected by the loss of revenue from one or more large customers. Our customers are not contractually obligated to purchase any fixed quantities of products, and they may stop placing orders with us at any time. We are subject to the risk of losing large customers or incurring significant reductions in sales to these customers.

We rely on suppliers and contractors, and our business could be seriously harmed if these suppliers and contractors are not able to meet our requirements.

We rely on a limited number of suppliers and contractors for the manufacture of our Disposable Protective Apparel and Building Supply segments.products. If we lose the services of these key suppliers and contractors, or if they are not willing or able to satisfy our requirements, finding substitute suppliers or contractors may be time-consuming and would affect our results of operations in the near term.

There are risks associated with international manufacturing that could have a significant effect on our business.

We subcontract the manufacturing of some of our goods to Asia.Asia and Mexico. These goods are manufactured pursuant to our specifications and quality assurance guidelines. Certain proprietary products are being made in Asia using materials supplied by us.

We expect that a significant portion of our product sales will be derived from the sale of products for which we subcontract the manufacturing to Asia, but we cannot be certain that we will be able to maintain such subcontracting at current levels. If our ability to subcontract some of our manufacturing to Asia were to decline significantly, our business, results of operations and financial condition could be materially adversely affected. International manufacturing is subject to a number of risks, including the following:

In particular, if the current COVID-19 outbreak continues and results in a continued prolonged period of travel, commercial and other similar restrictions, we could experience global supply disruptions.  These restrictions have disrupted and could continue to disrupt our ability to receive manufactured products from China and may disrupt our suppliers located elsewhere who rely on products from China.  If we experience additional supply disruptions, we may not be able to develop alternate sourcing quickly.  Any disruption of our production schedule caused by an unexpected shortage of supplies even for a relatively short period of time could cause us to alter production schedules or suspend production entirely, which could cause a loss of revenues, which would adversely affect our operations

Our success depends in part on protection of our intellectual property, and our failure to protect our intellectual property could adversely affect our competitive advantage, our brand recognition and our business.

The success and competitiveness of our products depend in part upon our ability to protect our current and future technology, manufacturing processes and brand names, including Alpha Pro Tech, through a combination of patent, trademark, trade secret and unfair competition laws.

We enter into confidentiality and non-disclosure of intellectual property agreements with certain of our employees, consultants and vendors and generally control access to and distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar information independently.

Policing unauthorized use of intellectual property is difficult. The laws of other countries may afford little or no effective protection of our technology. We cannot assure you that the steps taken by us will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Litigation may result in substantial costs and diversion of resources, which could have a material adverse effect on our business, results of operations and financial condition.

Our industry is highly competitive, which may negatively affect our ability to grow our customer base and generate sales.

The markets for our products are intensely competitive. We currently experience competition from numerous companies in each of the markets in which we participate.

Many of our competitors are more established, benefit from greater market recognition and have substantially greater financial, development, manufacturing and marketing resources than we have.

If we do not compete successfully with respect to these or other companies, it could materially adversely affect our business, results of operations and financial condition.

The Company’s results are affected by competitive conditions and customer preferences.

Demand for the Company’s products, which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products; (ii) the Company’s response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases; and (iv) changes in customers’ preferences for our products, including the success of products offered by our competitors and changes in customer designs for our competitors’ products that can affect the demand for the Company’s products.

The Company’s growth objectives are largely dependent on the timing and market acceptance of our new product offerings, including our ability to continually renew our pipeline of new products and to bring those products to market.

Our ability to continually renew our pipeline of new products and to bring those products to market may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection or gain market acceptance of new products.  There are no guarantees that new products will prove to be commercially successful. In addition, our product development and distribution activities are subject to inherent risks related to natural disasters, including earthquakes such as the one that recently occurred near our facility in Utah, which could disrupt our supply chain and impair our ability to manufacture or sell our products.

General Risks

Global economic conditions could adversely affect the Company’s business and financial results.

Unfavorable economic conditions, including the impact of recessions and general economic downturns in the United States and throughout the world, may negatively affect the Company’s business and financial results.  These economic conditions could negatively impact (i) demand for our products, (ii) the number and types of products sold, (iii) our ability to collect accounts receivable on a timely basis from certain customers and (iv) the ability of certain suppliers to fill our orders for raw materials or other goods and services. A prolonged recession could result in decreased revenue, margins and earnings.

Our joint venture may present risks that are notonly present when third parties are not involved.

We currently participate in a joint venture in India and may in the future enter into joint ventures with other companies or enterprises in international markets, including joint ventures wherein which we may have a lesser degree of control over the business operations, which may expose us to additional operational, financial, legal or compliance risks. We may be dependent on a joint venture counterparty for product distribution, local market knowledge or other resources. If we are unable to effectively cooperate with joint venture partners, or any joint venture partner fails to meets its obligations under the joint venture arrangement, encounters financial difficulty, or elects to alter, modify or terminate the relationship, we may be unable to achieve our objectives and our results of operations may be negatively impacted thereby.

Our success depends in part on protection of our intellectual property, and our failure to do so could adversely affect our competitive advantage, our brand recognition and our business.

The success and competitiveness of our products depend in part upon our ability to protect our current and future technology, manufacturing processes and brand names, including Alpha Pro Tech, through a combination of patent, trademark, trade secret and unfair competition laws.

We enter into confidentiality and non-disclosure of intellectual property agreements with certain of our employees, consultants and vendors and generally control access to and distribution of our proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar information independently.

Policing unauthorized use of intellectual property is difficult. The laws of other countries may afford little or no effective protection of our technology. We cannot assure you that the steps taken by us will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Litigation may result in substantial costs and diversion of resources, either of which could have a material adverse effect on our business, results of operations and financial condition.

Our industry is highly competitive, which may affect our ability to grow our customer base and generate sales.

The markets for our products are intensely competitive. We currently experience competition from numerous companies in each of the markets in which we participate.

Many of our competitors are more established, benefit from greater market recognition and have substantially greater financial, development, manufacturing and marketing resources than we have.

If we do not compete successfully with respect to these or other companies, it could materially adversely affect our business, results of operations and financial condition.

The Company’s results are affected by competitive conditions and customer preferences.

Demand for the Company’s products, which impacts revenue and profit margins, is affected by (i) the development and timing of the introduction of competitive products; (ii) the Company’s response to downward pricing to stay competitive; (iii) changes in customer order patterns, such as changes in the levels of inventory maintained by customers and the timing of customer purchases; and (iv) changes in customers’ preferences for our products, including the success of products offered by our competitors and changes in customer designs for our competitors’ products that can affect the demand for the Company’s products.

The Company’s growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market.

This ability may be adversely affected by difficulties or delays in product development, such as the inability to identify viable new products, obtain adequate intellectual property protection or gain market acceptance of new products. There are no guarantees that new products will prove to be commercially successful.

Security breaches and other disruptions to the Company’s’s information technology infrastructure could interfere with the Company’sCompany’s operations, compromise information belonging to the Company and itsour customers and suppliers and expose the Company to liability, which could adversely impact the Company’sCompany’s business and reputation.

In the ordinary course of business, the Company relies on information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. Additionally, the Company collects and stores sensitive data, including proprietary business information. Despite security measures and business continuity plans, the Company’sCompany’s information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attack by hackers, breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. While we have not experienced any material losses related to cyber attackscyber-attacks or information security breaches to date, any and any such event could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations and damage to the Company’s reputation, which could adversely affect the Company’s business.

The Company’s’s future results may be affected by various legal and regulatory proceedings and legal compliance risks.

From time to time, the Company is subject to certain legal and regulatory proceedings in the ordinary course of business and otherwise. The outcome of these legal proceedings may differ from the Company’s expectations because the outcomes of litigation, including regulatory matters, are often difficult to reliably predict. Various factors or developments cancould lead the Company to change current estimates of liabilities and related insurance receivables where applicable, or make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, settlement, regulatory development or change in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could have a material adverse effect on the Company’s results of operations or cash flows in any particular period.

Our common stock price is volatile, which could result in substantial losses for individual shareholders.

The market price of our common stock has been volatile, and we expect that it will continue to be volatile. In particular, our common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to:including:

In addition, our common stock price has recently experienced significant fluctuations due to speculation surrounding the effects of the COVID-19 outbreak on our operations. Such fluctuations may create conditions in which the market price of our common stock does not reflect an accurate measure of the long-term value of our common stock.

Due to these factors, you may not be able to sell your stock at or above the price you paid for it, which could result in substantial losses.

Item 1B. Unresolved Staff Comments.

None.

We investItem 2. in a publicly traded entity with a common stock price Properties.that is volatile, which could result in substantial losses for the Company.

The market price of the entity’s common stock has been volatile, and we expect that it will continue to be volatile as it is a publicly traded stock. In particular, the entity’s common stock may be subject to significant fluctuations in response to a variety of factors, including, but not limited to:

Due to these factors, we may not be able to sell the investment in the publicly traded entity at or above the price we paid for it, which could result in substantial losses.

Item1B.  Unresolved Staff Comments.

None.

Item 2.   Properties.

The Company’sCompany’s principal executive office is located at 60 Centurian Drive, Suite 112, Markham, Ontario, Canada, L3R 9R2. The approximate monthly rent is $2,800$3,300 for 4,200 square feet under a lease expiring February 28, 2021.2022. Working out of the principal executive office are the President and Chief Executive Officer, Lloyd Hoffman, and the Chief Financial Officer, Colleen McDonald.

The Building Supply segment manufacturing facility is located at 301 South Blanchard Street, Valdosta, Georgia. The average monthly rent is $36,000$37,500 for 165,400 square feet. This lease expires on January 1, 2024.

The Disposable Protective Apparel segment has its cutting operation, warehousing and shipping facility at 1287 Fairway Drive, Nogales, Arizona. The approximate monthly rent is $25,000$28,000 for 60,000 square feet. This lease expires on December 31, 2018.2021.

The Company manufactures its surgical face masks at 236 North 2200 West, Salt Lake City, Utah. The monthly rent is $16,000$17,800 for 34,500 square feet. This lease expires on July 31, 2019.2024.

The Company believes that these arrangements are suitable and adequate for its present needs and that other premises, if required, are readily available.

Item 3. Legal Proceedings.

The Company is presently involved in protracted litigation against a competitor in an action styled Alpha Pro Tech, Inc. v. VWR International, LLC, pending in the U.S. District Court for the Eastern District of Pennsylvania, CV 12-1615, wherein the Company originally sought damages for unfair trade practices and false advertising against the competitor, and the competitor counterclaimed asserting similar claims against the Company.  In August of 2017, the court ruled against the Company on its claims against the competitor. The competitor, as the prevailing party with respect to those claims, subsequently filed a motion seeking to recover from the Company an amount in excess of $2 million in attorneys’ fees and costs, which motion was granted by the court. In November of 2017, the Company, in consultation with new litigation counsel, filed a motion to reconsider the attorneys’ fee award. The court heard arguments on the motion to reconsider at a hearing in February of 2018. At the hearing, the court encouraged the parties to attempt to resolve the matter in advance of a ruling on the motion to reconsider. The parties are currently working to schedule a mediation to occur during March of 2018. The Company has accrued in its financial statements an amount that management has determined to be reasonable in anticipation of a resolution of the matter, and management intends to participate in good faith in the mediation to attempt to reach a resolution of the matter that is as favorable to the Company as possible. Regardless of the outcome of the pending mediation or the motion to reconsider, the Company expects that the amount of any attorneys’ fee award will be significantly reduced from what is being requested. The Company is also in the process of evaluating, with current litigation counsel, possible avenues for recovery of any amount ultimately paid by the Company to resolve the matter, including possible claims against former litigation counsel. Any amount that might be recovered in connection with any such claims cannot be reasonably estimated at this time.

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, wethe 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 ourthe Company’s financial condition and results of operations.

Item 4. Mine Safety Disclosures.Disclosures.

N/A

PART II

Item 5. Market For Registrant’s’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

MARKETMARKET INFORMATION

The Company’sCompany’s common stock trades on the NYSE American (formerly the NYSE MKT, the NYSE Amex and the American Stock Exchange) (the “NYSE American”) under the symbol “APT.”

The following table sets forth the low and high sales prices of the Company’s common stock for the periods indicated, as reported by the NYSE American.

As of March 1, 2018,2, 2021, the Company’s common stock was held by 147114 shareholders of record and approximately 5,10025,000 beneficial owners.

DIVIDEND POLICYDividends

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.

ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth purchases made by or on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18 (a)(3) of the Securities Exchange Act of 1934, during the fourth quarter of 2017.2020.

UNREGISTERED

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not sell any unregistered equity securities during the periodsperiods covered by this Annual Report on Form 10-K.

Item 6. Selected Financial Data

As a smaller reporting company, we are not requiredThe Company has applied the amendment to provide the information required by this Item.Regulation S-K Item 301 which became effective on February 10, 2021.

Item 7. Management’ 7. Management’ss Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis together with our consolidated financial statements and the notes to our consolidated financial statements, which appear elsewhere in this report.

Special Note Regarding Forward-Looking Statements

Certain information set forth in this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to potential acquisitions and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. We caution readers that these forward-looking statements speak only as of the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which such statements are based. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.

Any expectations based on these forward-looking statements are subject to risks and uncertainties.uncertainties. These risks and other factors include, but are not limited to, those listed below and under “Risk Factors,” and elsewhere in this report. These and many other factors could affect the Company’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.

Special Note Regarding Smaller Reporting Company Status

We are filing this Annual Report on Form 10-K as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) based on our public float (the aggregate market value of our common equity held by non-affiliates of the Company) as of the last business day of our second fiscal quarter of 2017.2020. As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate and necessary to aid in an understanding of the current consolidated financial position, changes in financial position and results of operations of the Company.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the periods reported. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our significant accounting policies and estimates are more fully described in “NoteNote 2 – Summary“Summary of Significant Accounting Policies” in the notes to our consolidated financial statements in Item 8. Our critical accounting policies and estimates include the following:

Accounts Receivable: Accounts receivable are recorded at the invoice amount and do not bear interest. The general terms for receivables is net 30 days.  The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.  The Company determines the allowance based upon historical write-off experience and known conditions about customers’ current ability to pay.  Account balances are charged against the allowance when the potential for recovery is considered remote. For new customers with no order history with the Company we may require advance payments to reduce our credit risk.

Inventories:Inventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and supply on-hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Leases: We determine if an arrangement is a lease at inception. Operating leases are included as right-of-use (“ROU”) assets and lease liabilities on our consolidated balance sheet. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate, and, therefore, we estimate our collateralized borrowing rate under similar terms based on the information available at the commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our consolidated balance sheet with a term of one year or less. We elected a package of transition practical expedients, which included not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.

Revenue Recognition:Recognition: ForNet sales transactions,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 compliedexpect 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 provisionsdistribution of the SecuritiesCompany’s product to the customers, are recorded in cost of goods sold and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should beare recognized when allcontrol of the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) title transfers andproduct is transferred to the customer, assumeswhich is at the risk of loss; (3)time products are delivered to the selling price is fixed or determinable;third party carrier for FOB shipping point arrangements and (4) collectionto 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 resulting receivable is reasonably assured. These criteriacontract. Sales taxes and value added taxes in foreign and domestic jurisdictions that are satisfiedcollected 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 shipmentthe nature of product,the private labelling. The Company has determined that, as of December 31, 2020, it had no material contract assets, and sales are recognized accordingly.concluded that its contract liabilities (primarily rebates) had the right of offset against customer receivables. As of December 31, 2020, the Company had contract liabilities of $209,000 as a result of customer advance payments of orders connected to the COVID-19 pandemic (see “Impact of the Novel Coronavirus (COVID-19)” below). No such contract liabilities existed as of December 31, 2019.

Sales Returns,, Rebates and Allowances:Allowances: Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user product specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly.

Stock-Based Compensation: The Company accounts for stock-based awards using Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation.(“ASC 718”). ASC 718 requires companies to record compensation expense for the value of all outstanding and unvested share-based payments, including employee stock options and similar awards.

The fair values of stock option grants are determined using the Black-Scholes option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management’s expectations of future volatility, risk-free interest rates from published sources, expected term based on historical data, and no dividend yield, as the Board of Directors currently has no plans to pay dividends in the foreseeable future. The Company accounts for option forfeitures as they occur. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, the option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value of such options.

OVERVIEW

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the Alpha“Alpha Pro TechTech” brand name, as well as under private label.

Our products are grouped into threetwo business segments: (i) the Building Supply segment, consisting of construction weatherization products, such as housewrap and synthetic roof underlayment as well as other woven material; and (ii) the Disposable Protective Apparel segment, consisting of disposable protective apparel, such asgarments (including shoecovers, bouffant caps, gowns, coveralls, lab coats,gowns, frocks and other miscellaneous products;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, 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 consistinginto the Disposable Protective Apparel segment beginning with the first quarter of face masks and eye shields.2019. All financial information presented hereinin this report reflects the current segmentation.

Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing and medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.

Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.

Impact of the Novel Coronavirus (COVID-19)

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. COVID-19 continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. COVID-19 has had, and we expect the virus to continue to have, a number of effects, both positive and negative, on our business operations and financial condition.

We have experienced a significant surge in customer demand for our proprietary N-95 Particulate Respirator face mask product and other personal protective equipment (“PPE”) products as a result of COVID-19. We experienced a dramatic increase in revenue from sales of PPE products during the year of 2020, especially with respect to face masks and disposable protective garments, including shoecovers, coveralls, gowns, lab coats and bouffant caps.

In an effort to meet the unprecedented demand, and to aid communities around the world in responding to the ongoing healthcare crisis, the Company began ramping up production during the first quarter of 2020 of our PPE products, in particular our N-95 face mask, which is manufactured by the Company in the United States. We have addressed the growing customer demand for PPE products by increasing and improving the human, mechanical, and supply chain components behind production. Even with these increases and improvements, customer demand for PPE products, face masks in particular, continues to exceed industry supply in many instances, and we believe that this may continue for some time.

We have encountered over the last several months a number of constraints within our supply chain due to government-mandated shutdowns, raw materials shortages and shipping delays. Although we continue to work to alleviate these supply chain issues (which have improved since the second quarter of 2020) by securing additional supply sources, in the event of subsequent shutdowns, shortages or delays, our production and sales could be further impacted. Further, we expect that prices of raw materials may rise more rapidly in the current environment than our sales prices, which could decrease our profits.

We are continuing to serve our customers while taking every precaution to provide a safe work environment for our employees. We have enacted enhanced operating protocols to assure the safety and well-being of our employees, placed restrictions on non-essential travel, and otherwise adjusted work schedules to maximize our capacity while adhering to recommended precautions such as social distancing. We believe that we may have to take further actions that we determine are in the best interests of our employees or as required by federal, state, or local authorities. Although we will continue to adhere to restrictions imposed by local governments in the jurisdictions in which we operate, government regulations have impacted workforce availability and expense in certain of the Company’s manufacturing facilities, and we expect this to continue for some time. While this remains a fluid situation, all of our U.S. manufacturing sites are currently operating at or above normal production rates. 

COVID-19 has resulted in a downturn in the global financial markets and a slowdown in the global economy. This economic environment may impact some of our customers’ ability to pay or lead them to request extended payment terms, and we have experienced cost increases from some of our suppliers.  And, despite the tremendous surge in demand for our PPE products in recent months, we expect that demand for our Building Supply segment products could be negatively impacted if we experience a decrease in housing starts and increased uncertainty in the housing market and the economy in general, although to date we have not experienced any material negative impact in our Building Supply segment.

The impact of the COVID-19 pandemic continues to unfold. Overall, the increase in sales of our PPE products resulting from the pandemic has had a positive impact on our 2020 financial results. The extent of the pandemic’s effect on our future operational and financial performance will depend in large part on future developments. Future developments include the duration, scope and severity of the pandemic and new variants, 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

OUTLOOK FOR 2021

In 2021, we expect the market for our products to normalize in some respects, although we believe that sales will remain strong as compared to historical levels.  More specifically:

Management will continue to carefully monitor the current dynamic market conditions and work to respond to them swiftly and effectively.

RESULTS OF OPERATIONS

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

Fiscal Year 20172020 Compared to Fiscal Year 20162019

Sales.Consolidated sales for the year ended December 31, 2017 decreased2020 increased to $44,025,000,a record $102,700,000, from $46,176,000$46,665,000 for the year ended December 31, 2016,2019, representing a decreasean increase of $2,151,000,$56,035,000, or 4.7%120.1%. This decreaseincrease consisted of decreased sales in the Building Supply segment of $2,702,000, partially offset by increased sales in the Infection Control segment of $520,000 and increased sales in the Disposable Protective Apparel segment of $31,000.$52,031,000 and increased sales in the Building Supply segment of $4,004,000.

Disposable Protective Apparel Segment

Sales for the Disposable Protective Apparel segment for the year ended December 31, 2020 increased by $52,031,000, or 259.0%, to a record $72,120,000, compared to $20,089,000 for 2019. This segment increase was due to a 1,262% increase in sales of face masks, a 631.2% increase in face shields and a 23.7% increase in sales of disposable protective garments. The sales mix of the Disposable Protective Apparel segment for the year ended December 31, 2020 was approximately 58% for face masks, 15% for face shields and 27% for disposable protective garments. This sales mix is compared to approximately 15% for face masks, 8% for face shields and 77% for disposable protective garments for the year ended December 31, 2019.

The increase in face mask sales was primarily attributable to increased sales of our proprietary N-95 Particulate Respirator face mask resulting from increased customer demand associated with the COVID-19 pandemic. Face masks had a record year in 2020, surpassing the prior Company sales record set in 2009 during the H1N1 pandemic, by a multiple of 2.4 times. Face mask sales grew during each quarter of 2020. Fourth quarter face mask sales were $15.4 million compared to $13.4 million in the third quarter of 2020, $8.5 million in the second quarter of 2020 and $4.5 million in the first quarter of 2020. Face shields also had a record year in 2020, with a very significant increase compared to the prior record set in 2009, by a multiple of 2.9 times. The disposable protective garments line sales increased an impressive 23.7% in 2020 and the Company’s joint venture, Harmony, has ramped up production capacity to facilitate our current higher than historical open orders. Although open orders are strong, revenue growth could be impacted by longer than normal shipping and port times which is occurring in early 2021 across all markets shipping from international production facilities.

Building Supply Segment

Building Supply segment sales for the year ended December 31, 2017 decreased2020 increased by $2,702,000,$4,004,000, or 9.9%15.1%, to $24,641,000,a record $30,580,000, compared to $27,343,000$26,576,000 for 2016. Thisthe year ended December 31, 2019. The Building Supply segment decreaseincrease was primarily due to a 23.4% decreasean increase in sales of synthetic roof underlayment (including REX™of 16.4%, TECHNOply™ and our new TECHNO SB®), partially offset by an 8.2% increase in sales of housewrap of 12.5% and a 38.7%an increase in sales of other woven material. material of 20.2% compared to 2019.

The sales mix of the Building Supply segment for the year ended December 31, 20172020 was 50%approximately 48% for synthetic roof underlayment, 41%43% for housewrap and 9% for other woven material. This compared to 51%approximately 47% for synthetic roof underlayment, 41%44% for housewrap and 8%9% for other woven material for the year ended December 31, 2016.

Although2019. Our synthetic roof underlayment product line includes REX SynFelt®, REX TECHNOply® and TECHNO SB®, and our housewrap product line consists of REX Wrap®, REX Wrap® Plus and REX Wrap Fortis®.

Despite the challenges of 2020, our Building Supply segment experienced a record year with growth across all our product lines. Our TECHNO family of synthetic roof underlayment products showed continued growth as a result of strong sales were down,of our TECHNO SB®25 product line, which was instrumental in the 16.4% growth of this product family in 2020. Housewrap sales hit record levels in 2020. In 2020, we added housewrap accessories, namely flashing and tape products, to our portfolio of housewrap sales, remained strong,which opened up new market distribution and aided in the increase of housewrap sales of 12.5%. Sales of both synthetic roof underlayment and housewrap have benefitted from an increase in new home construction during 2020 and management’s determination to expand the Company’s distribution reach to cover the new home growth. Our sales of other woven materials increased in 2020, with increased sales in 2017an increase of 8.2%. 20.2% as our historically largest customer returned to its normal buying patterns.

At the end of the third quarter, we announced a new, innovative and exciting product line to2020, our housewrap family, REX™ Wrap Fortis with JX ALTA 360° Drainage Technology™. With its one-of-a-kind construction, this product uniquely enablesopen orders for both the drainage of water in every direction to protect buildings from the elements exponentially better, we believe than a traditional housewrap, while decreasing job site material waste, simplifying installation to reduce labor and allowing fewer products to be carried onto the job site. This new product offering is now competing in a segment of the housewrap market that has historically been is currently untapped for us, and we anticipate that it will provide us with significant growth opportunities going forward.

Synthetic roof underlayment sales were down in 2017, primarily due to lower sales to private label customers and competitive pricing pressure. In particular, sales to one of our largest private label distributors were down significantly in 2017, as they are struggling with a general decline in their overall building sales. In addition, sales to another smaller private label distributor were down due to a change in strategy during 2016. Those two distributors account for approximately 75% of the total Building Supply segment decline in 2017. Despite the decrease in sales in 2017, we believe that our line of synthetic roof underlayment willand housewrap product lines were at higher than historical levels and as a result, we anticipate growth into 2021. Given the uncertainty of the economy as a result of the COVID-19 pandemic, growth could be anegatively affected in 2021, however to date we have not experienced any material negative impact in our Building Supply segment. Management expects continued growth driver in the coming year.this segment and has committed to investing approximately $4.0 million in new equipment to increase production capacity of this segment.

Sales for the Disposable Protective Apparel segment for the year ended December 31, 2017 increased by $31,000, or 0.2%, to $14,250,000, compared to $14,219,000 for 2016. The increase was primarily due to increased sales to our major international supply chain partner, partially offset by a decrease in sales to our national and regional distributors.

Infection Control segment sales for the year ended December 31, 2017 increased by $520,000, or 11.3%, to $5,134,000, compared to $4,614,000 for 2016. Mask sales were up by 10.8%, or $347,000, to $3,558,000 and shield sales were up by 12.3%, or $173,000, to $1,576,000.

Gross Profit.  Gross profit increased by $468,000,$33,510,000, or 2.8%197.4%, to $17,452,000$50,482,000 for the year ended December 31, 2017,2020, from $16,984,000 for 2016. The gross profit margin was 39.6%$16,972,000 for the year ended December 31, 2017, compared to 36.8% for 2016. Certain Disposable Protective Apparel segment products that were duty free in 2017 under the U.S. Customs and Borders Protection Generalized System of Preferences (GSP) will no longer be duty free in 2018, as the government program was not renewed. As a result, management expects2019. The gross profit margin was 49.2% for the year ended December 31, 2020, compared to be reduced36.4% for the year ended December 31, 2019. The gross profit margin was positively affected by the significant change in 2018 but stillproduct mix, which was altered due to bea surge in customer demand as a result of the high thirty percent range.COVID-19 pandemic for face masks, in particular our N-95 Particulate Respirator face mask, and face shields, which generally have a higher gross profit margin than our other products.

The gross profit margin in 2020 was significantly higher than historical levels, but management believes that gross profit margin could be negatively affected in 2021 as a result of potential changes in product mix and changes in distribution channels associated with the pandemic, as well as expected increases in raw material costs, resin in particular, as well as ocean freight and other transportation costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1,187,000,$4,823,000, or 9.3%36.1%, to $13,955,000$18,171,000 for the year ended December 31, 20172020, from $12,768,000$13,348,000 for 2016. Asthe year ended December 31, 2019. The increase in expenses was largely due to the pandemic response. However, as a percentage of net sales, selling, general and administrative expenses increaseddecreased to 31.7%17.7% for the year ended December 31, 2017,2020, down from 27.7%28.6% for 2016. Approximately half2019, primarily as a result of the increase resulted from the accrual of $619,000 relatedgrowth in net sales due to the death benefit provided in the employment agreement of Alexander Millar, our former President and Chairman who passed away in December 2017. In addition, sales and marketing expenses increased by $399,000, as we expanded our sales team and enhanced our marketing programs to support future growth.

Excluding the accrual for the death benefit discussed above, selling, general and administrative expenses would have increased by $568,000, or 4.4%. While the exclusion of this item is not in accordance with U.S. GAAP, management believes that this information is useful in demonstrating the one-time impact of the accrual on the Company’s results for 2017.pandemic.

The change in expenses by segment for the year ended December 31, 2020 was as follows: Building Supply was up $532,000, or 12.5%; Disposable Protective Apparel was down $109,000,up $2,038,000, or 3.1%48.1%; Infection ControlBuilding Supply was down $1,000,up $155,000, or 0.3%3.0%; and corporate unallocated expenses were up $765,000,$2,630,000, or 17.3%, with $619,000 having been recorded67.6%. The increase in connectionthe Disposable Protective Apparel segment expenses was related to increased employee compensation, increased factory expenses and increased commissions as a result of increased sales, primarily due to the pandemic. The increase in the Building Supply segment expenses was related to increased employee compensation, increased commission and increased insurance costs, partially offset by decreased marketing and travel expenses. The increase in corporate unallocated expenses was primarily due to increased accrued bonuses, increased public company expenses and increased professional fees.

In accordance with the accrual forterms of his employment agreement, the death benefit as discussed above.

The Company’sCompany’s current President and Chief Executive Officer and former President and Chairman are eachis entitled to aan annual bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. The President and Chief Executive Officer and former President’s beneficiary voluntarily decidedexpense, up to reduce their bonuses for 2017. Executivea maximum of $1.0 million. A bonus amount of $118,000 were$1,000,000 was accrued for the year ended December 31, 2017, as2020, compared to $232,000 for the same period of 2016

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’s former President and Chairman, Al Millar, who passed away in December 2017, was entitled to a similar 5% of pre-tax profits bonus in accordance with his employment agreement. For 2017, Mr. Hoffman and Mr. Millar’s beneficiary voluntarily determined to accept reduced bonuses for 2017. The Company accrued $118,000 for these bonuses$194,000 for the year ended December 31, 2017, compared to $232,000 for 2016.2019.

Depreciation and Amortization. Depreciation and amortization expense increased by $27,000,$127,000, or 5.0%21.12%, to $571,000$729,000 for the year ended December 31, 2017,2020, from $544,000$602,000 for 2016.the year ended December 31, 2019. The increase was primarily attributable to increased depreciation for machinery and equipment in the Building Supply segment and to a lesser extent increased depreciation for machinery and equipment in the Disposable Protective Apparel segment, as well as increased corporate depreciation related to computer technology.

Income from Operations. Income from operations decreasedincreased by $746,000,$28,560,000, or 20.3%945.1%, to $2,926,000$31,582,000 for the year ended December 31, 2017,2020, compared to $3,672,000$3,022,000 for 2016.the year ended December 31, 2019. The decreasedincreased income from operations was primarily due to an increase in gross profit of $33,510,000, partially offset by an increase in selling, general and administrative expenses of $1,187,000$4,823,000 and an increase in depreciation and amortization expense of $27,000, partially offset by an increase in gross profit of $468,000. Excluding the former President and Chairman’s death benefit accrual of $619,000, income$127,000. Income from operations decreased by $127,000, or 3.5%. While the exclusionas a percentage of this item is not in accordance with U.S. GAAP, management believes that this information is useful in demonstrating the one-time impact of the accrual on the Company’s results for 2017.

Other Income. Other income increased by $241,000 to $744,000net sales for the year ended December 31, 2017, from $503,0002020 was 31.0%, compared to 6.5% for 2016.the same period of 2019.

Other Income. Other income consists ofincreased by $8,000, or 1.2%, to $666,000 for the year ended December 31, 2020, from $658,000 for the year ended December 31, 2019. The increase was primarily due to an increase in equity in income of unconsolidated affiliate gainof $351,000, partially offset by a loss on salemarketable securities for the year ended December 31, 2020 compared to a gains on marketable securities during the year ended December 31, 2019, for a net change of property$293,000, and a decrease in interest income. income of $50,000.

Other income consisted primarily of equity in income of unconsolidated affiliate of $355,000, gain$710,000, a loss on salemarketable securities of property of $385,000$62,000 and interest income of $4,000$18,000 for the year ended December 31, 2017.2020. Other income consisted primarily of equity in income of unconsolidated affiliate of $498,000$359,000, a gain on marketable securities of $231,000 and interest income of $5,000$68,000 for the year ended December 31, 2016. Equity in income of unconsolidated affiliate was significantly higher in 2016 due to higher gross margin and more income in relation to government incentive programs.2019.

Income before Provision for Income Taxes. Income before provision for income taxes for the year ended December 31, 20172020 was $3,670,000,$32,248,000, compared to income before provision for income taxes of $4,175,000$3,680,000 for 2016,2019, representing a decreasean increase of $505,000,$28,568,000, or 12.1%776.3%. This decreaseincrease in income before provision for income taxes was primarily due to a decreasean increase in income from operations of $746,000, partially offset by$28,560,000 and an increase in other income of $241,000. Excluding the former President and Chairman’s death benefit accrual of $619,000, income before provision for income taxes increased by $114,000, or 2.7%. While the exclusion of this item is not in accordance with U.S. GAAP, management believes that this information is useful in demonstrating the one-time impact of the accrual on the Company’s results for 2017.$8,000.

Provision for Income TaxeTaxess.. The provision for income taxes for the year ended December 31, 20172020 was $1,037,000,$5,162,000, compared to $1,007,000$680,000 for 2016.2019. The provision for income taxes included an estimated nonrecurring tax benefit of $2.0 million in the first quarter of 2020 as a result of the exercise of disqualified Incentive Stock Options and the exercise of Non-Qualified Stock Options. The estimated effective tax rate was 28.3%16.0% for the year ended December 31, 2017,2020, compared to 24.1% for 2016. In the fourth quarter of 2017, the Company recorded a one-time tax expense of $89,000 in repatriation taxes as a result of U.S. tax reform and a tax benefit of $53,000 from the federal tax rate reductions from 35% to 21%, for a net tax expense increase of $36,000. Excluding this tax increase, the effective tax rate would have been 27.3%18.5% for the year ended December 31, 2017. In2019. Excluding the fourth quarter of 2016, the Company recorded aestimated nonrecurring tax benefit of $194,000 from reversing an uncertain tax position that was accrued in 2012. Excluding this tax benefit,$2.0 million, the estimated effective tax rate would have been 28.8%was 22.2% for the year ended December 31, 2016. We believe these figures are useful2020. The Company does not record a tax provision on equity in comparingincome of unconsolidated affiliate, which reduces the results of the 2017 year with 2016. While the exclusion of the tax-related items discussed in this section are not in accordance with U.S. GAAP, management believes that this information is useful in demonstrating the one-time impact of these events.effective tax rate.

Net Income.Net income for the year ended December 31, 20172020 was $2,633,000,$27,086,000, compared to net income of $3,168,000$3,000,000 for 2016,the year ended December 31, 2019, representing a decreasean increase of $535,000,$24,086,000, or 16.9%8,028.7%. The increase in net income was largely associated with the COVID-19 pandemic. Net income for 2020 significantly exceeded the Company’s previous net income record of $9.0 million for the year ended December 31, 2009, which resulted primarily from increased sales due to the H1N1 pandemic. The net income decreaseincrease comparing the years ended December 31, 2020 and 2019 was due to a decreasean increase in income before provision for income taxes of $505,000 and$32,248,000, partially offset by an increase in provision for income taxes of $30,000.$4,482,000. As mentioned above, a tax benefit from stock options exercised positively impacted net income in the first quarter of 2020. Net income as a percentage of net sales for the year ended December 31, 20172020 was 6.0%26.4%, and net income as a percentage of net sales for 20162019 was 6.9%6.4%. Basic and diluted earnings per common share for the yearsyear ended December 31, 20172020, and 20162019 were $0.18$2.01 and $0.19,$0.23, respectively.

Net income for 2017, excluding the former President and Chairman’s death benefit accrual of $619,000, or $451,000 net of tax, and the net tax expense as a result of U.S. tax reform of $36,000, would have been $3,120,000. Net income for 2016, excluding the tax benefit of $194,000 from reversing an uncertain tax position from 2012, would have been $2,974,000. Excluding the above mentioned one-time adjustments, net income in 2017 and 2016, would have been $3,120,000 and $2,974,000, respectively, representing an increase of $146,000 or 4.9%. Basic and diluted Diluted earnings per common share for 2017 would have been $0.21, compared to $0.18 for 2016. We believe these figures are useful in comparing the results of the 2017 year with 2016. While the exclusion of the tax-related items discussed in this section are not in accordance with U.S. GAAP, management believes that this information is useful in demonstrating the one-time impact of these events.ended December 31, 2020 and 2019 were $1.94 and $0.23, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2017, we2020, the Company had cash of $8,763,000$23,292,000 and working capital of $24,177,000, representing a decrease in working capital of 11.1%, or $3,021,000, from December 31, 2016.$49,451,000. As of December 31, 2017, our2020, the Company’s current ratio (current assets/current liabilities) was 10:9:1, compared to a 12:1 current ratio of 11:1 as of December 31, 2016.2019. Cash decreasedincreased by 7.3%255.7%, or $693,000,$16,744,000, to $8,763,000$23,292,000 as of December 31, 2017,2020, compared to $9,456,000$6,548,000 as of December 31, 2016.2019, and working capital increased by $25,689,000 from $23,762,000 as of December 31, 2019. The decreaseincrease in cash from December 31, 2019 was due to cash provided by operating activities of $18,274,000, partially offset by cash used in investing activities of $862,000 and cash used in financing activities of $4,016,000 and cash used in investing activities of $685,000, offset by cash provided by operating activities of $4,008,000.$668,000.

We havepreviously had a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. As of December 31, 2017, the prime interest rate was 4.50%. This credit line was renewedexpired in May 20162020, and expires in May 2018.the Company decided not to renew. The available lineCompany has continued its relationship with Wells Fargo, with the exception of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit. The Company determined that the credit was $3,500,000line is not necessary at this time, as of December 31, 2017. As of December 31, 2017, we didit had not have any borrowings under this credit facilitybeen used in several years, and do not anticipate using it in the near future.Company currently has sufficient funding from operations.

Net cash provided by operating activities of $4,008,000$18,274,000 for the year ended December 31, 20172020 was due to net income of $2,633,000,$27,086,000, impacted primarily by the following: share-basedstock-based compensation expense of $296,000,$375,000, depreciation and amortization expense of $571,000,$729,000, loss on marketable securities of $62,000, equity in income of unconsolidated affiliate of $355,000, gain on sale$710,000, operating lease expense net of propertyaccretion of $385,000, a change in deferred income taxes of $378,000,$357,000, an increase in accounts receivable of $136,000, a decrease$4,745,000, an increase in prepaid expenses of $681,000, a decrease$2,638,000, an increase in inventory of $745,000, and$5,446,000, an increase in accounts payable and accrued liabilities of $336,000.

Net cash provided by operating activities of $6,833,000 for the year ended December 31, 2016 was due to net income of $3,168,000, impacted primarily by the following: share-based compensation expense of $190,000, depreciation and amortization expense of $544,000, equity in income of unconsolidated affiliate of $498,000, a change in deferred income taxes of $21,000, an increase in accounts receivable of $2,052,000, an increase in prepaid expenses of $254,000, a decrease in inventory of $5,404,000,$3,355,000 and an increase in accounts payable and accruedlease liabilities of $310,000.$367,000.

Accounts receivable increased by $136,000,$4,745,000, or 2.8%110.5%, to $4,958,000$9,037,000 as of December 31, 2017,2020, from $4,822,000$4,292,000 as of December 31, 2016.2019. The increase in accounts receivable was primarily related to higher sales in the fourth quarter of 2017 compared to 2016.increased sales. The number of days that sales remained outstanding as of December 31, 2017,2020, calculated by using an average of accounts receivable outstanding and annual revenue, was 4134 days, compared to 30 daysthe same as of December 31, 2016.2019.

Inventory decreasedincreased by $745,000,$5,446,000, or 6.8%48.2%, to $10,249,000$16,749,000 as of December 31, 2017,2020, from $10,994,000$11,303,000 as of December 31, 2016.2019. The decreaseincrease was primarily due to a decreasean increase in inventory for the Disposable Protective Apparel segment of $272,000,$5,890,000, or 7.3%105.0%, to $3,464,000,$11,498,000, partially offset by a decrease in inventory for the Building Supply segment of $340,000,$444,000, or 6.9%7.8%, to $4,569,000,$5,250,000.

Prepaid expenses increased by $2,638,000, or 73.5%, to $6,225,000 as of December 31, 2020, from $3,587,000 as of December 31, 2019. The increase was primarily due to prepayments for machinery and a decrease in inventoryequipment for the Infection ControlBuilding Supply segment and, to a lesser extent for the Disposable Protective Apparel segment, as well as prepaid inventory.

Right-of-use assets as of $133,000, or 5.7%,December 31, 2020 increased by $357,000 to $2,216,000. Inventory decreased across all segments$3,535,000 from $3,178,000 as of December 31, 2019 as a result of management’s strategic decision to carry less daysamortization of inventory.the balance.

Prepaid expenses and other current assets decreased by $681,000, or 20.4%, to $2,665,000Lease liabilities as of December 31, 2017,2020 increased by $367,000 to $3,586,000 from $3,346,000$3,219,000 as of December 31, 2016.2019. The decreaserecording of the lease liabilities was the result of adopting ASC 842, Leases. The increase in the lease liabilities was primarily duethe result of renewing our Nogales, Arizona lease in December 2020 and the assumption we will continue to a decrease in depositslease that facility for the purchase of inventory and prepaid tax payments.at least 5 years.

Accounts payable and accrued liabilities as of December 31, 20172020 increased by $336,000,$3,355,000, or 13.6%236.1%, to $2,801,000$4,776,000, from $2,465,000$1,421,000 as of December 31, 2016.2019. The changeincrease was primarily due to an increase in trade payablesaccounts payable as a result of increased raw material purchases, an increase in accrued liabilities, and an increase in accrued liabilities.bonuses.

Customer advance payment of orders as of December 31, 2020 was $209,000, which was the result of customer deposits for future dated PPE orders in response to the COVID-19 pandemic. There were no advance payments of this nature as of December 31, 2019.

Net cash used in investing activities was $685,000$862,000 for the year ended December 31, 2017,2020, compared to net cash used in investing activities of $308,000$1,142,000 for 2016.the same period of 2019. Investing activities for the year ended December 31, 20172020 consisted of the purchase of property and equipment of $1,222,000, offset by$1,135,000 for both the Building Supply segment and the Disposable Apparel Products segment and proceeds from the sale of propertymarketable securities of $537,000.$273,000. Investing activities for the year ended December 31, 20162019 consisted of the purchase of property and equipment of $267,000$1,296,000 and proceeds from the purchasesale of marketable securities of $41,000.$154,000.

Net cash used in financing activities was $4,016,000$668,000 for the year ended December 31, 2017,2020, compared to net cash used in financing activities of $6,750,000$2,418,000 for 2016.the same period of 2019. Net cash used in financing activities for the year ended December 31, 20172020 resulted from the payment of $4,226,000$2,666,000 for the repurchase of common stock, partiallymainly offset by proceeds of $210,000$1,998,000 from the exercise of stock options. Net cash used in financing activities for the year ended December 31, 20162019 resulted from the payment of $6,773,000$2,548,000 for the repurchase of common stock, partially offset by proceeds of $17,000$130,000 from the exercise of stock options and $6,000 from the excess tax benefit from stock options exercised.options.

As of December 31, 2017,2020, we had $2,279,000$4,486,000 available for additional stock purchases under our stock repurchase program. For the year ended December 31, 2017,2020, we repurchased 1,232,476223,100 shares of common stock at a cost of $4,226,000.$2,666,000. As of December 31, 2017,2020, we had repurchased a total of 16,204,00718,110,917 shares of common stock at a cost of $29,241,000$38,034,000 through our repurchase program. We retire all stock upon its repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.activities

We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future. We have made approximately $4,000,000 in commitments for capital investments to increase our production capacity in our Building supply segment, of which $1,191,000 has been made in deposits as of December 31, 2020.

Off- Balance Sheet Arrangements

None

Related Parties

During 2017, the2020, the Company used a law firm whose majority member was also a member ofhad no related party transactions, other than the Company’s Board of Directorstransactions with its non-consolidated affiliate, Harmony. See Note 7 – “Equity Investments in Unconsolidated Affiliate” in the notes to our consolidated financial statements in Item 8 for a portion of the year. The amounts charged by the law firm were billed at the law firm’s normal billing rates.more information on our relationship with our non-consolidated affiliated Harmony Plastics Private Limited.

New Accounting Standards

Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration that it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. ASU 2014-09 is effective for the first interim period within an annual reporting period beginning after December 15, 2017, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of 2018. Management has evaluated the provisions of this guidance and at this point in time has determined that its adoption will have limited impact on the Company’s financial position and results of operations.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, a company should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation, instead of at the lower of cost or market. This guidance is effective for annual and interim periods beginning after December 15, 2016, and is applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted this guidance in the first quarter of 2017.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires deferred income tax liabilities and assets to be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The guidance was effective for public entities for annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption being permitted. The Company adopted this guidance in the first quarter of 2017. Prior periods were not retrospectively adjusted.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation and disclosure of financial instruments. The new guidance revises the accounting requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.  The guidance also changes certain disclosure requirements associated with the fair value of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity and recognize the changes in fair value within net income. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Upon adoption of this guidance effective January 1, 2018, the Company will record a cumulative-effect adjustment to beginning retained earnings of $458,000, for the unrealized loss net of tax, on the Company’s marketable security investment. Unrealized gains and losses on the marketable security investment will be recorded within net income on a prospective basis.

In February 2016, the FASB issued ASU 2016-02, Leases, (Topic 842), which requiresintroduces 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 recognize most leasesASC 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. The provisionssheet with the recognition of thisnew 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 in Item 8 for more information.

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 areis 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 years,annual periods, with early adoption permitted. Managementpermitted but no earlier than an entity’s adoption date of ASC Topic 606, Revenue form Contracts with Customers. The new guidance is evaluatingrequired to be applied retrospectively with the requirementscumulative effect recognized at the date of initial application. We adopted the provisions of this guidance and has not yet determinedASU in the impactfirst quarter of 2019. Adoption of the adoptionnew standard did not have a material impact on the Company’sour consolidated financial position or results of operations.statements.

In March 2016,December 2019, the FASB issued ASU 2016-09, Compensation - Stock CompensationNo. 2019-12, Income Taxes (Topic 718)740): ImprovementsSimplifying the Accounting for Income Taxes, which is intended to Employee Share-Based Payment Accounting, which simplifies severalsimplify various aspects ofrelated to accounting for share-based payment transactions, includingincome taxes. ASU 2019-12 removes certain exceptions to the income tax consequences, classification of awards as either equity or liabilities, an optiongeneral principles in Topic 740 and also clarifies and amends existing guidance to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The provisions of thisimprove consistent application. This guidance wereis effective for annual reporting periods beginning after December 15, 2016fiscal years, and interim periods within those annual periods,fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance during the quarter ended March 31, 2017, and the Company recorded a one-time $866,000 cumulative-effect adjustment to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital. The adoption of this guidance also increased the number of dilutive shares because excess tax benefits are no longer included in the assumed proceeds when calculating the number of dilutive shares. In addition, the effective tax rate will be reduced in future periods when there are excess tax benefits from stock options exercised.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Topic 326, which requires entities to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within that year. Early adoption is permitted. Management iscurrently evaluating the requirements of this guidance and has not yet determined the impact of the adoptionthis standard on the Company’sits consolidated financial position or results of operations.   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.

Item 7A. Quantitative 7A. Quantitative and Qualitative Disclosures About Market Risk.

We subcontract the manufacturingmanufacturing of products in Sri Lanka, China and, to a lesser extent, in Mexico, and have a joint venture in India. In addition, our principal executive office, with 1519 employees, is located in Canada. We do not believe that we have a material foreign currency exposure due to the fact that our purchase agreements with companies in Sri Lanka, China, India and Mexico are settled in U.SU.S. dollars. In addition, all sales transactions are in U.S. dollars. In Canada, our foreign currency exposure is not material due to the fact that we do not conduct manufacturing operations in Canada. Our exposure is limited to payroll expenses in the Canadian branch office.

We do not expect any significant effect on our consolidated results of operations from inflation, interest or currency rate fluctuations. We do not hedge interest rates or foreign exchange risks.

Alpha Pro Tech, Ltd.

Item 8. Financial Statements and Supplementary Data.

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All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

Alpha Pro Tech, Ltd.

Management’s’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;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.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, 2017,2020, 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, 2017.2020.

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, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, shareholders’shareholders’ equity, and cash flows for each of the years thenin 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, 20172020 and 2016,2019, and the consolidated results of its operations and its cash flows for each of the years thenin 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’sCompany’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’sCompany’s auditor since 2011.

Salt Lake City, Utah

March 12, 201810, 2021

Alpha Pro Tech, Ltd.

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

Alpha Pro Tech, Ltd.

Consolidated Statements of Comprehensive Income

The accompanying notes are an integral part of these consolidated financial statements.

Alpha Pro Tech, Ltd.

Consolidated Statements of IncomeShareholders’ Equity

The accompanying notes are an integral part of these consolidated financial statements.

Alpha Pro Tech, Ltd.

Consolidated Statements of Comprehensive Income

The accompanying notes are an integral part of these consolidated financial statements.

Alpha Pro Tech, Ltd.

Consolidated Statements of Shareholders’ Equity

The accompanying notes are an integral part of these consolidated financial statements.

Alpha Pro Tech, Ltd.

Consolidated Statements of Cash Flows