2.	Summary of Significant Accounting Policies

Principles of

onsolidation

The consolidated

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

Events that occurred after

December 31,

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

Use of Estimates

The preparation of financial st

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

Periods

resented

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

2017.

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

two

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

two

most recent years.

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 U.S. GAAP. The Company does

not

have any investments in securities that are classified as held-to-maturity or trading. Available-for-sale investments are carried at their fair values using quoted prices in active markets for identical securities, and unrealized gains and losses, net of deferred income taxes, have been 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 ha

d 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

net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventories. The Company assesses inventories for estimated obsolescence or unmarketable products and writes down the difference between the cost of the inventories and the estimated net realizable values based upon assumptions about future sales and supplies on-hand.

Property and

quipment

Property and equipment

are stated at cost less accumulated depreciation and amortization. Costs to develop internal use software are capitalized once the preliminary planning for the software project is complete. 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

ssets

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

). 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

ong-

ived

ssets

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, 2017

and

2016.

Revenue

ecognition

Sales

were recognized when the following criteria were met: (

) persuasive evidence of an arrangement exists; (

) title transfers and the customer assumes the risk of loss; (

) the selling price is fixed or determinable; and (

) collection of the resulting receivable is reasonably assured. These criteria were 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 product

s to distributors are recorded in cost of goods sold.

Stock

Based Compensation

The Company maintains a stock option plan under which the Company

may

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

The Company accounts for

share-based awards in accordance with ASC

718,

Stock Compensation

. ASC

718

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

For the years ended

December 31,

and

2016,

there were

85,000

and

855,000

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

$296,000

and

$190,000

in share-based compensation expense for the years ended

December 31, 2017

and

2016,

respectively, related to outstanding 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 U.S. federal jurisdiction, and in various state and foreign jurisdictions.

The Tax Cuts and Jobs Act (the Tax Act) was enacted in

December 2017.

The Tax Act significantly changes U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system and imposing a

one

-time transition tax on deemed repatriated earnings of foreign subsidiaries. The Tax Act reduces the U.S. corporate income tax rate from

35%

21%,

effective

January 1, 2018.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from

35%

21%

under the Tax Act, we revalued our ending net deferred tax assets at

December 31, 2017

(see also Note

Earnings

Per

Common

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, 2017

and

2016.

	Years Ended December 31,
	2017		2016

Net income (numerator)	$	2,633,000	$	3,168,000

Shares (denominator):
Basic weighted average common shares outstanding		14,825,600		16,835,129
Add: Dilutive effect of common stock options		167,409		-

Diluted weighted average common shares outstanding		14,993,009		16,835,129

Earnings per common share:
Basic	$	0.18	$	0.19
Diluted	$	0.18	$	0.19

Translation of

oreign

urrencies

Transactions in foreign currencies are translated into U

.S. dollars at the exchange rate prevailing at the transaction date. Monetary assets and liabilities in foreign currencies at each period end are translated at the exchange rate in effect at that date. Transaction gains or losses on foreign currencies are reflected in selling, general and administrative expenses and were

not

material for the years ended

December 31, 2017

and

2016.

The Company does

not

have a material foreign currency exposure due to the fact that all purchase agreements with companies in Asia and Mexico are in U.S. dollars. In addition, all sales transactions are in U.S. dollars. The Company’s only foreign currency exposure is with its Canadian branch office. The foreign currency exposure is

not

material due to the fact that the Company does

not

manufacture 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,

and

2016.

Advertising

Costs

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

and were

$46,000

and

$39,000

for the years ended

December 31, 2017

and

2016,

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

alue

Measurements

ASC

820,

Fair Value Measurements and Disclosures

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

three

broad levels.

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

s of the Company’s financial assets as of

December

31,

2017

and

2016

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 2017	$	343,000	$	343,000	$	-	$	-
Marketable securities 2016		607,000		607,000		-		-

The fair value

s 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 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

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 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.

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.

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.

January 2016,

the FASB issued ASU

2016

01,

Financial Instruments - Overall (Subtopic

825

): 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.

February 2016,

the FASB issued ASU

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 were effective for annual reporting periods beginning after

December 15, 2016

and interim periods within those annual periods, 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

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.

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 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.

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.

Buildings (in years)

Machinery and equipment (in years)

Office furniture and equipment (in years)

Leasehold improvements (in years)

Software (in years)