Critical Audit Matters based off the information below

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Apollo Shoes, Inc.

1. Summary of Significant Accounting Policies

Business activity:The Company develops and markets technologically superior podiatric athletic products under various trademarks, including SIREN, SPOTLIGHT, and SPEAKERSHOE.

Marketable Securities:Investments are valued using the market value method for investments of less than 20%, and by the equity method for investments greater than 20% but less than 50%.

Cash equivalents:Cash equivalents are defined as highly liquid investments with original maturities of three months or less at date of purchase.

Inventory valuation:Inventories are stated at the lower of First-in, First-out (FIFO) or market.

Property & Equipment, Depreciation:Property and equipment are stated at cost.The Company uses the straight-line method of depreciation for all additions to property, plant, and equipment.

Net Sales:Sales for 2020 and 2019 are presented net of sales returns and allowances of $11.1 million, and $4.5 million, respectively, and net of warranty expenses of $1.2 million, and $1.1 million, respectively.

Net income per common share:Net income per common share is computed based on the weighted average number of common and common equivalent shares outstanding for the period.

Reclassification:Certain amounts have been reclassified to conform to the 2020 presentation.

2.Significant Customers

Approximately 53%, and 15% of sales are to one customer for years ended December 31, 2020 and 2019, respectively.See note 13.

3.Accounts Receivable

Accounts Receivable consists of the following at December 31:

in thousands2020

Trade Receivables$51,515

Less Allowance for Doubtful Accounts($108)

Net Accounts Receivable$51,407

There was no bad expense for the year ended December 31, 2020.There was one write off for the year in the amount of $23,810.

4.Inventories

Inventories consist of the following at December 31:

in thousands2020

Siren$16,037

Speaker$36,559

Spotlight$23562

$76,159

Less Reserve for Inventory Obsolescence($11,343)

Ending Inventory$64,816

5.Property and Equipment

In early 2020, the Company purchased equipment totaling $1,295,360 to facilitate internal production of Apollo products.As of January 2021, that equipment is not yet in operation.In mid-2020, the Company purchased a new computer system totaling $1,200,000, including related installation and consulting services.

Property is stated at cost net of accumulated depreciation.Property and Equipment at December 31 was as follows:

in thousands2020

Land$117

Buildings and Land Improvements$674

Machinery, Equipment, and Office Furniture$2,929

Total Land, Plant, and Equipment$3,720

Less Accumulated Depreciation($610)

Net Land, Plant, and Equipment$3,110

6.Investments and Other Assets

In 2015, the Company invested approximately $0.6 million in a stock for a 35% share in the SHOCK-PROOF SOCKS Company.SHOCK-PROOF SOCKS did not recognize any income and did not pay any dividends in 2015 or 2019.In 2020, SHOCK-PROOF SOCKS recognized $3,130,610 in income, but did not pay any dividends.Accordingly, Apollo recognized $1,096 thousand in equity earnings.In 2020, Apollo purchased 20,000 shares of Synergizer Battery Company totaling $330,375.In addition, the Company decided to write off the legal fees incurred to register the patent for the PHONESHOE.The asset was originally going to be amortized over 17 years, but the Company decided to write off the remaining $53,840 during 2020.Also included in other assets is (i) $1,250,000 in a note receivable from an employee due in 2054.

7.Debt

At December 31, 2020, the Company had $44,403,000 outstanding in short-term borrowings under a $50,000,000 unsecured revolving credit line with a local financial institution.The line of credit is secured with the Company's inventory.The interest rate as of year-end was 9.16%.The due date on this line of credit is 2021 (revolving).This line of credit is evaluated annually on June 30th by the lending institution.

At December 31, 2020, the Company had $12,000,000 debt due January 1, 2015.The interest rate is 8.15%.

Total debt outstanding at December 31, 2020 is $56,403,000.

8.Commitments

The Company's lease on a second facility and equipment terminated in June 2020.At that time, all operations were moved to the central headquarters.Rent expense charged to operations for the years ended December 31, 2020 and 2019 was $1.2 million and $2.6 million, respectively.

9.Income Taxes

The income taxes for 2020 were computed at an effective tax rate of 40.0%, 34.0% in federal income taxes, and 6.0% in state income taxes.

10.Litigation

On January 5, 2021, a class action lawsuit alleging gross negligence and violation of implied warranty of merchantability was filed against Apollo Shoes, Inc.for $12,000,000.According to Apollo's attorney, the plaintiff will have serious problems establishing Apollo's liability.However, if the plaintiff is successful, the damages awarded could be substantial.The Company plans to vigorously defend itself in this action, but it is reasonably possible that the loss could reach $10,000,000 after legal fees are considered.

On September 12, 2019, Apollo settled a lawsuit brought against the Company by a competitor for patent infringement.The Company denied any wrongdoing, but felt the settlement, in the amount of $11,695,000 ($19,172,000, net of tax benefit of $7,477,000), would be preferable to a long litigation process.

11.Related Party Transactions

Apollo purchased a new computer system for $1,000,000 in July 2020.The Company paid Josephine Mandeville, a member of the Board of Directors and the Audit Committee, $200,000 for system analysis consulting with regard to this purchase of computer equipment.

Apollo buys all of their shoes pre-made from the Anglonesia Rehabilitation and Reprogramming Institute in Anglonesia.Theodore Horstmann, a member of the Board of Directors and the Audit Committee, is the Minister of Commerce of Anglonesia.The Company purchased equipment totaling almost $1.3 million in early 2020 to facilitate internal production of Apollo shoes.Apollo received a large shipment of shoes totaling over $8.4 million from the Institute on December 31, 2020.As of January 2021, the production equipment had not yet been put into operation.

The company issued a $1,250,000 loan to Larry Lancaster's secretary with a 1% annual interest rate.The note and interest are due in full on June 30, 2054.

12.Employee Benefit Plans

The Company sponsors a defined-contribution retirement plan covering substantially all of its employees.Contributions are determined at the discretion of the Board of Directors.Aggregate contributions made by the Company to the plans and charged to operations in 2020, 2019, and 2015 were $3.3 million, $3 million, and $3 million, respectively.

13.Concentrations of Credit Risk

Financial instruments which potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing investments.The Company performs ongoing credit evaluations of all of its customers and generally does not require collateral.The Company places substantially all of its interest-bearing investments with several major financial institutions.Corporate policy limits the amount of credit exposure to any one financial institution.

The Company sells over half of its product to one retail distributor with sales operations located throughout North America, Europe, and Asia Pacific.That retail distributor filed for involuntary bankruptcy in November 2020.The distributor informed Apollo of the bankruptcy shortly thereafter.A shipment of shoes totaling over $5.7 million was sent to this distributor without a purchase order on December 28, 2020.The distributor denies ever ordering the shoes.However, Apollo's management feels that this distributor will come out of the bankruptcy and be able to pay Apollo the over $20 million in receivables it owes, including the late December shipment of $5.7 million.The $5.7 million sale has been included in revenues.

14.Insurance

As of December 31, 2020, the Company does not have vehicle liability insurance.The Company's previous policy for such coverage terminated on December 31, 2020.