2.	Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, Alpha Pro Tech, Inc. and Alpha ProTech Engineered Products, Inc. All significant intercompany accounts and transactions have been eliminated.

Events that occurred after

December

31,

2016

through the date ton which these financial statements were filed with the Securities and Exchange Commission (“SEC”) were considered in the preparation of these financial statements.

Use of Estimates

The preparation of financial statements in conformity with US generally accepted accounting principles (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from these estimates.

Periods Presented

All amounts have been rounded to the nearest thousand with the exception of the share data. The Company qualified as a smaller reporting company at the measurement date for determining such qualification during

2016.

According to the disclosure requirements for smaller reporting companies, the Company has included balance sheets as of the end of the

two

most recent years and statements of income, comprehensive income (loss), shareholders’ equity and cash flows for each of the

two

most recent years.

Investments

The Company periodically invests a portion of its cash in excess of short-term operating needs in marketable debt and equity securities. These investments are classified as available-for-sale in accordance with US GAAP. The Company does not have any investments in securities that are classified as held-to-maturity or trading. Available-for-sale investments are carried at their fair values using quoted prices in active markets for identical securities, with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income (loss). Realized gains and losses, and declines in value deemed to be other-than-temporary on available-for-sale investments, are recognized in net income. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than

one

year are classified as long-term investments in the accompanying balance sheets.

The Company had an investment in non-trading warrants to purchase common stock in a publicly traded entity. These warrants were derivatives that were carried at fair value in the accompanying balance sheets. Gains or losses from changes in the fair value of the warrants are recognized in the accompanying statements of income in the period in which they occurred.

Accounts Receivable

Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable

may

result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about its customers’ current ability to pay. Account balances are charged against the allowance when management determines that the probability for collection is remote.

Inventories

Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or market. Allowances are recorded for slow-moving, obsolete or unusable inventories. The Company assesses inventories for estimated obsolescence or unmarketable products and writes down the difference between the cost of the inventories and the estimated market values based upon assumptions about future sales and supplies on-hand.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated or amortized using the straight-line method over the shorter of the respective useful lives of the assets or the related lease terms as follows:

Expenditures for renewals and betterments are capitalized, whereas costs of maintenance and repairs are charged to operations in the period incurred.

Goodwill and Intangible Assets

The Company accounts for goodwill and definite-lived intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)

350,

Intangibles – Goodwill and Other

. Goodwill is not amortized, but rather is tested annually for impairment. Intangible assets with finite lives are amortized over their useful lives (see Note

6).

The Company’s patents and trademarks are recorded at cost and are amortized using the straight-line method over their estimated useful lives of

years.

Fair Value of Financial Instruments

The estimated fair values of financial instruments are determined based on relevant market information and cannot be determined with precision. The Company’s financial instruments consist primarily of cash and marketable securities.

The Company’s marketable securities are classified as available-for-sale and are carried at fair market value based on quoted market prices.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in its business circumstances indicate that the carrying amounts of the assets

may

not be fully recoverable. If it is determined that the undiscounted future net cash flows are not sufficient to recover the carrying values of the assets, an impairment loss is recognized for the excess of the carrying values over the fair values of the assets. The Company believes that the future undiscounted net cash flows to be received from its long-lived assets exceed the assets’ carrying values and, accordingly, the Company has not recognized any impairment losses for the years ended

December

31,

2016

and

2015.

Revenue Recognition

Sales are recognized when the following criteria are met:

(1)

persuasive evidence of an arrangement exists;

(2)

title transfers and the customer assumes the risk of loss;

(3)

the selling price is fixed or determinable; and

(4)

collection of the resulting receivable is reasonably assured. These criteria are satisfied upon shipment of product.

Shipping costs paid by the customers are included in revenue.

Sales are reduced for any anticipated sales returns, rebates and allowances based on historical data.

Shipping and Handling Costs

The costs of shipping products to distributors are recorded in cost of goods sold.

Stock-Based Compensation

The Company maintains a stock option plan under which the Company

may

grant incentive stock options and non-qualified stock options to employees and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value of the underlying shares of common stock on the date of grant. Options vest and expire according to terms established at the grant date

The Company accounts for stock-based awards in accordance with ASC

718,

Stock Compensation

. ASC

718

requires companies to record compensation expense for the value of all outstanding and unvested share-based awards, including employee stock options.

For the years ended

December

31,

2016

and

2015,

there were

855,000

and

120,000

stock options granted, respectively, under the Company’s option plan. The Company recognized

$190,000

and

$24,000

in share-based compensation expense for the years ended

December

31,

2016

and

2015,

respectively, related to issued options.

Income Taxes

The Company accounts for income taxes using the asset and liability method. A valuation allowance is recorded to reduce the carrying amounts of deferred income tax assets unless it is more likely than not that such assets will be realized. The Company’s policy is to record any interest and penalties assessed by the Internal Revenue Service as a component of the provision for income taxes. The Company presents taxes assessed by governmental authorities on revenue-producing activities (i.e., sales tax) on a net basis in the accompanying statements of income. The Company provides allowances for uncertain income tax positions when it is more likely than not that the position will not be sustained upon examination by the tax authority.

Alpha Pro Tech, Ltd. and its subsidiaries file income tax returns in the US federal jurisdiction, and in various state and foreign jurisdictions.

Earnings Per Common Share

The following table provides a reconciliation of both net income and the number of shares used in the computation of “basic” earnings per common share (“EPS”), which utilizes the weighted average number of common shares outstanding without regard to potential common shares, and “diluted” EPS, which includes all potential common shares which are dilutive for the years ended

December

31,

2016

and

2015.

	Years Ended December 31,
	2016		2015

Net income (numerator)	$	3,168,000	$	1,041,000

Shares (denominator):
Basic weighted average common shares outstanding		16,835,129		18,197,109
Add: Dilutive effect of common stock options		-		41,255

Diluted weighted average common shares outstanding		16,835,129		18,238,364

Earnings per common share:
Basic	$	0.19	$	0.06
Diluted	$	0.19	$	0.06

Translation of Foreign Currencies

Transactions in foreign currencies are translated into US dollars at the exchange rate prevailing at the transaction date. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date. Transaction gains or losses on foreign currencies are reflected in selling, general and administrative expenses and were not material for the years ended

December

31,

2016

and

2015.

The Company does not have a material foreign currency exposure due to the fact that all purchase agreements with companies in Asia and Mexico are in US dollars. In addition, all sales transactions are in US dollars. The Company’s only foreign currency exposure is with its Canadian branch office. The foreign currency exposure is not material due to the fact that the Company does not manufacture in Canada. The exposure primarily relates to payroll expenses in the Company’s administrative branch office in Canada.

Research and Development Costs

Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. Such costs were not material for the years ended

December

31,

2016

and

2015.

Advertising Costs

The Company expenses advertising costs as incurred. These costs are included in selling, general and administrative expenses and were

$39,000

and

$37,000

for the years ended

December

31,

2016

and

2015,

respectively.

Loss Contingencies

The outcomes of legal proceedings and claims brought against the Company are subject to uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.

Fair Value Measurements

ASC

820,

Fair Value Measurements and Disclosures

, establishes a framework for measuring fair value in accordance with US GAAP, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements. On a quarterly basis, the Company measures at fair value certain financial assets using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions. The following fair value hierarchy prioritizes the inputs into

three

broad levels.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The fair values of the Company’s financial assets as of

December

31,

2016

and

2015

were determined using the following levels of inputs:

• Level

1—Quoted

prices for identical instruments in active markets;

• Level

2—Quoted

prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

• Level

3—Valuations

derived from valuation techniques in which

one

or more significant inputs or significant value drivers are unobservable.

	Fair Value Measurements as of December 31,
	Total		Level 1		Level 2		Level 3
Assets:
Marketable securities - 2016	$	607,000	$	607,000	$	-	$	-
Marketable securities - 2015		656,000		656,000		-		-

The fair values for the marketable securities, classified as Level

were obtained from quoted market prices.

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 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

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

during the

first

quarter of

2018.

Management is evaluating the provisions of this update and at this point in time has determined that its adoption will have limited to no impact on the Company’s financial position or results of operations.

ASU

2015

11,

Inventory (Topic

330):

Simplifying the Measurement of Inventory

(“ASU

2015

11”),

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. ASU

2015

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. Management is evaluating the provisions of this update and at this point in time has determined that its adoption will have limited to no impact on the Company’s financial position or results of operations.

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 is 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 has not adopted this guidance for the year ended

December

31,

2016.

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.

The Company has not yet adopted this guidance and has not yet determined the impact of adoption on the Company’s financial position or results of operations.

February

2016,

the FASB issued ASU No.

2016

02,

Leases

(Topic

842),

which requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after

December

15,

2018,

and interim periods within those years, with early adoption permitted. Management is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.

March

2016,

the FASB issued ASU

2016

09,

Compensation – Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting

, which simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option 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 this guidance are effective for annual reporting periods beginning after

December

15,

2016,

and interim periods within those annual periods with early adoption permitted. Management is evaluating the provisions of this update and has not determined the impact its adoption will have on the Company’s financial position or results of operations.

Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion.

Buildings (years)

Machinery and equipment
(years)

Office furniture and equipment
(years)

Leasehold improvements
(years)