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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**Quarterly Report pursuant toSection 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For theQuarterly Period Ended June 30, 2010**

 

**CommissionFile No. 01-15725**

 

**Alpha Pro Tech, Ltd.**

(exact name of registrant as specified in itscharter)

 

| **Delaware, U.S.A.**                           | ** ** | **63-1009183**                       |
|------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation) |       | (I.R.S. Employer Identification No.) |

 

| **Suite 112, 60 Centurian  Drive**  | ** ** | ** **  |
|------------------------------------------|------------|-------------|
| **Markham, Ontario, Canada**             | ** ** | **L3R 9R2** |
| (Address of principal executive offices) |       | (Zip Code)  |

 

Registrant’s telephonenumber, including area code: **(905) 479-0654**

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company (as defined in Rule 12b-2 of the Exchange Act).

 

| Large accelerated filer o |   | Accelerated filer o         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller Reporting Company x |

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.

 

| **Class**                     | ** ** | **Outstanding August 9, 2010** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock, $0.01 par value |       | 22,424,285 shares                             |

 

 

 

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Tableof Contents

 

**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| ** **                                                                                          | **Page No.** |
|-----------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                |              |
| PART I. FINANCIAL INFORMATION                                                                  |              |
|                                                                                                |              |   |
| ITEM 1. Financial Statements                                                                        |              |
|                                                                                                |              |   |
|                                                                                                | a)                | Consolidated  Balance Sheets (Unaudited) | 2 |
|                                                                                                |              |   |   |
|                                                                                                | b)                | Consolidated  Income Statements (Unaudited) | 3 |
|                                                                                                |              |   |   |
|                                                                                                | c)                | Consolidated  Statement of Shareholders’ Equity (Unaudited) | 4 |
|                                                                                                |              |   |   |
|                                                                                                | d)                | Consolidated  Statements of Cash Flows (Unaudited) | 5 |
|                                                                                                |              |   |   |
|                                                                                                | e)                | Notes to Consolidated  Financial Statements (Unaudited) | 6 |
|                                                                                                |              |   |
| ITEM 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 13                |
|                                                                                                |              |   |
| ITEM 3. Quantitative and Qualitative Disclosures About  Market Risk                                 | 22                |
|                                                                                                |              |   |
| ITEM 4. Controls and Procedures                                                                     | 22                |
|                                                                                                |              |   |
| PART II.  OTHER INFORMATION                                                                    |              |
|                                                                                                |              |   |
| ITEM  1A. Risk Factors                                                                              | 23                |
|                                                                                                |              |   |
| ITEM 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 23                |
|                                                                                                |              |   |
| ITEM 6.  Exhibits                                                                                   | 24                |
|                                                                                                |              |   |
| SIGNATURES                                                                                          |              | 25 |
|                                                                                                |              |   |
| EXHIBITS                                                                                            |              | 26 |

 

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Tableof Contents

 

**Alpha Pro Tech, Ltd.**

 

**PART I.  FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

Alpha Pro Tech, Ltd. (“Alpha Pro Tech” or the“Company”) prepared the following unaudited interim condensed consolidatedfinancial statements pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”). Certain information andfootnote disclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America(“GAAP”) have been omitted pursuant to these rules and regulations,although the Company believes that the disclosures made are adequate to makethe information not misleading.

 

You should read the following unaudited interimcondensed consolidated financial statements and the accompanying notes togetherwith the Company’s current year filings on Form 10-Q and Form 8-K, aswell as the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009 filed with the SEC. The Company’s 2009 Annual Report contains information that may behelpful in analyzing the financial information contained in this report and incomparing its results of operations for the three and six months ended June 30,2010 with the same periods in 2009.

 

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                     | ** ** | **June 30,****2010** | ** ** | **December 31,  2009 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                           |       |                      |       |                            |       |
| **Assets**                                                                                                                                                                     |       |                      |       |                            |       |
| Current assets:                                                                                                                                                                |       |                      |       |                            |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                         | 2,967,000  |                            | $          | 9,753,000 |   |
| Accounts receivable, net of  allowance for doubtful accounts of $92,000 at June 30, 2010 and $65,000  at December 31, 2009                                           |       | 6,450,000                 |       | 8,593,000                       |       |
| Inventories                                                                                                                                                                    |       | 17,862,000                |       | 13,094,000                      |       |
| Prepaid expenses and other  current assets                                                                                                                                     |       | 3,460,000                 |       | 2,792,000                       |       |
| Deferred income taxes                                                                                                                                                          |       | 457,000                   |       | 457,000                         |       |
| Total current assets                                                                                                                                                           |       | 31,196,000                |       | 34,689,000                      |       |
|                                                                                                                                                                           |       |                      |       |                            |       |
| Property and equipment, net                                                                                                                                                    |       | 3,896,000                 |       | 3,843,000                       |       |
| Goodwill                                                                                                                                                                       |       | 55,000                    |       | 55,000                          |       |
| Intangible assets, net                                                                                                                                                         |       | 171,000                   |       | 184,000                         |       |
| Equity investments in and  advances to unconsolidated affiliates                                                                                                               |       | 1,796,000                 |       | 1,701,000                       |       |
| Total assets                                                                                                                                                                   |       | $                         | 37,114,000 |                            | $          | 40,472,000 |   |
|                                                                                                                                                                           |       |                      |       |                            |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                 |       |                      |       |                            |       |
| Current liabilities:                                                                                                                                                           |       |                      |       |                            |       |
| Accounts payable                                                                                                                                                               |       | $                         | 448,000    |                            | $          | 2,963,000 |   |
| Accrued liabilities                                                                                                                                                            |       | 757,000                   |       | 2,732,000                       |       |
| Total current liabilities                                                                                                                                                      |       | 1,205,000                 |       | 5,695,000                       |       |
|                                                                                                                                                                           |       |                      |       |                            |       |
| Deferred income taxes                                                                                                                                                          |       | 906,000                   |       | 906,000                         |       |
| Total liabilities                                                                                                                                                              |       | 2,111,000                 |       | 6,601,000                       |       |
|                                                                                                                                                                           |       |                      |       |                            |       |
| Shareholders’ equity:                                                                                                                                                     |       |                      |       |                            |       |
| Common stock, $0.01 par  value, 50,000,000 shares authorized, 22,424,285 and 22,419,285 issued and  outstanding at June 30, 2010 and December 31, 2009, respectively |       | 224,000                   |       | 224,000                         |       |
| Additional paid-in capital                                                                                                                                                     |       | 23,238,000                |       | 23,164,000                      |       |
| Retained earnings                                                                                                                                                              |       | 11,541,000                |       | 10,483,000                      |       |
| Total shareholders’ equity                                                                                                                                                |       | 35,003,000                |       | 33,871,000                      |       |
| Total liabilities and  shareholders’ equity                                                                                                                               |       | $                         | 37,114,000 |                            | $          | 40,472,000 |   |

 

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(1)                                  The consolidated balance sheet as of December 31, 2009 has beenprepared using information from the audited financial statements at that date.

 

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

 

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Income Statements (Unaudited)**

 
| ** **                                                   | ** ** | **For the  Three Months Ended  June 30,** | ** ** | **For the  Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                       | ** ** | **2009**                                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Net  sales                                                   |       | $                                              | 11,221,000 |                                         | $          | 14,547,000 |   | $ | 22,850,000 |   | $ | 23,874,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Cost  of goods sold, excluding depreciation and amortization |       | 7,000,000                                      |       | 7,676,000                                    |       | 13,640,000 |   | 12,884,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Gross  profit                                                |       | 4,221,000                                      |       | 6,871,000                                    |       | 9,210,000 |   | 10,990,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Expenses:                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Selling,  general and administrative                         |       | 3,518,000                                      |       | 3,399,000                                    |       | 7,302,000 |   | 6,639,000 |   |
| Depreciation  and amortization                               |       | 218,000                                        |       | 162,000                                      |       | 426,000 |   | 322,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Income  from operations                                      |       | 485,000                                        |       | 3,310,000                                    |       | 1,482,000 |   | 4,029,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Other  income:                                               |       |                                           |       |                                         |       |   |   |   |   |
| Equity  in income of unconsolidated affiliates               |       | 99,000                                         |       | 72,000                                       |       | 172,000 |   | 170,000 |   |
| Interest,  net                                               |       | 5,000                                          |       | —                                       |       | 15,000 |   | 1,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Income  before provision for income taxes                    |       | 589,000                                        |       | 3,382,000                                    |       | 1,669,000 |   | 4,200,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Provision  for income taxes                                  |       | 217,000                                        |       | 1,214,000                                    |       | 611,000 |   | 1,517,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Net  income                                                  |       | $                                              | 372,000    |                                         | $          | 2,168,000 |   | $ | 1,058,000 |   | $ | 2,683,000 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Basic  net income per share                                  |       | $                                              | 0.02       |                                         | $          | 0.10 |   | $ | 0.05 |   | $ | 0.12 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Diluted  net income per share                                |       | $                                              | 0.02       |                                         | $          | 0.10 |   | $ | 0.05 |   | $ | 0.12 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Basic  weighted average shares outstanding                   |       | 22,424,285                                     |       | 22,795,003                                   |       | 22,423,788 |   | 23,245,300 |   |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Diluted  weighted average shares outstanding                 |       | 22,869,037                                     |       | 22,820,145                                   |       | 23,019,380 |   | 23,245,300 |   |

 

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

 

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** **

**Alpha Pro Tech, Ltd.**

 

**Consolidated Statement of Shareholders’ Equity (Unaudited)**

 
| ** **                         | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                         | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balance at December 31,  2009 |       | 22,419,285       |       | $           | 224,000    |           | $          | 23,164,000   |       | $          | 10,483,000 |   | $ | 33,871,000 |   |
| Share-based compensation  expense  |       | —           |       | —      |       | 68,000         |       | —       |       | 68,000     |       |
| Stock options exercised            |       | 5,000            |       | —      |       | 6,000          |       | —       |       | 6,000      |       |
| Net income                         |       | —           |       | —      |       | —         |       | 1,058,000    |       | 1,058,000  |       |
| Balance at June 30,  2010     |       | 22,424,285       |       | $           | 224,000    |           | $          | 23,238,000   |       | $          | 11,541,000 |   | $ | 35,003,000 |   |

 

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

 

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                     | ** ** | **For the Six Months Ended****June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Cash  Flows From Operating Activities:**                                     |       |                                          |       |   |   |
| Net income                                                                     |       | $                                             | 1,058,000  |   | $ | 2,683,000 |   |
| Adjustments to reconcile net  income to net cash used in operating activities: |       |                                          |       |   |   |
| Share-based compensation  expense                                              |       | 68,000                                        |       | 119,000 |   |
| Depreciation and  amortization                                                 |       | 426,000                                       |       | 322,000 |   |
| Deferred income taxes                                                          |       | —                                        |       | 38,000 |   |
| Equity in income of  unconsolidated affiliates                                 |       | (172,000                                      | )          | (170,000 | ) |
| Changes in assets and  liabilities:                                            |       |                                          |       |   |   |
| Accounts receivable, net                                                       |       | 2,143,000                                     |       | (3,041,000 | ) |
| Inventories                                                                    |       | (4,768,000                                    | )          | 2,698,000 |   |
| Prepaid expenses and other  current assets                                     |       | (668,000                                      | )          | (554,000 | ) |
| Accounts payable and accrued  liabilities                                      |       | (4,490,000                                    | )          | 1,779,000 |   |
|                                                                           |       |                                          |       |   |   |
| Net cash (used in) provided  by operating activities                           |       | (6,403,000                                    | )          | 3,874,000 |   |
|                                                                           |       |                                          |       |   |   |
| **Cash  Flows From Investing Activities:**                                     |       |                                          |       |   |   |
| Purchase of property and  equipment                                            |       | (462,000                                      | )          | (194,000 | ) |
| Proceeds from dividends from  equity investments in unconsolidated affiliates  |       | 77,000                                        |       | — |   |
| Purchase of intangible  assets                                                 |       | (4,000                                        | )          | (8,000 | ) |
|                                                                           |       |                                          |       |   |   |
| Net cash used in investing  activities                                         |       | (389,000                                      | )          | (202,000 | ) |
|                                                                           |       |                                          |       |   |   |
| **Cash  Flows From Financing Activities:**                                     |       |                                          |       |   |   |
| Payments for the repurchase  and retirement of common stock                    |       | —                                        |       | (1,795,000 | ) |
| Proceeds from the exercise  of stock options                                   |       | 6,000                                         |       | — |   |
|                                                                           |       |                                          |       |   |   |
| Net cash provided by (used  in) financing activities                           |       | 6,000                                         |       | (1,795,000 | ) |
|                                                                           |       |                                          |       |   |   |
| (Decrease) Increase in cash  during the period                                 |       | (6,786,000                                    | )          | 1,877,000 |   |
|                                                                           |       |                                          |       |   |   |
| Cash and cash equivalents,  beginning of period                                |       | 9,753,000                                     |       | 4,578,000 |   |
| Cash and cash equivalents,  end of period                                      |       | $                                             | 2,967,000  |   | $ | 6,455,000 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

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**Alpha Pro Tech, Ltd.**

 

**Notes to Consolidated Financial Statements (Unaudited)**

 

**1.****                                     ****The Company**

 

Alpha Pro Tech, Ltd.(“Alpha Pro Tech” or the “Company”) is in the business of protecting people,products and environments.  The Companyaccomplishes this by developing, manufacturing and marketing a line ofdisposable protective apparel for the cleanroom, industrial and pharmaceuticalmarkets, a line of building supply products for the new home and re-roofingmarkets and a line of infection control products for the medical and dentalmarkets.

 

The DisposableProtective Apparel segment consists of a complete line of shoecovers, bouffantcaps, coveralls, gowns, frocks and lab coats.

 

The Building Supplysegment consists of construction weatherization products such as housewrap andsynthetic roof underlayment.

 

The Infection Controlsegment consists of a line of face masks, eye shields and medical bed pads, aswell as a line of pet beds.

 

The Company’s productsare sold both under the “Alpha Pro Tech” brand name, as well as under privatelabel, and are predominantly sold in the United States of America (“U.S.”).

 

**2.****                                     ****Basis of Presentation**

 

The interim financial information included herein isunaudited; however, the information reflects all adjustments (consisting ofnormal recurring adjustments) that are, in the opinion of management, necessaryfor the fair presentation of the consolidated financial position, results ofoperations and cash flows for the interim periods. These condensed consolidatedfinancial statements have been prepared in accordance with the rules andregulations of the Securities and Exchange Commission (the “SEC”) and, therefore,omit certain information and footnote disclosures necessary to present thestatements in accordance with U.S. Generally Accepted Accounting Principles(“GAAP”).  The condensed consolidatedfinancial statements should be read in conjunction with the Company’s currentyear filings on Form 10-Q and Form 8-K filed with the SEC, as well asthe consolidated financial statements for the year ended December 31,2009, which are included in the Company’s Annual Report on Form 10-K (the“2009 10-K”), which was filed with the SEC on March 10, 2010. The resultsof operations for the three and six months ended June 30, 2010 are notnecessarily indicative of the results to be expected for the full year. Theconsolidated balance sheet at December 31, 2009 was extracted from theaudited consolidated financial statements contained in the 2009 10-K and doesnot include all disclosures required by GAAP for annual consolidated financialstatements.

 

**3.****                                     ****Stock Based Compensation**

 

The Company maintains a stock option plan under whichthe Company may grant incentive stock options and non-qualified stock optionsto employees and non-employee directors. Stock options have been granted with exercise prices at or above thefair market value of the underlying shares of common stock on the date ofgrant.  Options vest and expire accordingto terms established at the grant date.

 

The Company adopted the Financial Accounting StandardsBoard (“FASB”) *Accounting StandardsCodification* (the “FASB ASC”, the “ASC” or the “Codification”) 718, *Stock Compensation*(“ASC 718” and formerly referred to as SFAS No.123(R)),effective January 1, 2006, using the modified prospective applicationmethod.  ASC 718 requires companies torecord compensation expense for the value of all outstanding and unvestedshare-based payments, including employee stock options and similar awards.  During the first six months of 2010 and 2009,there were no stock options granted under the stock option plan.  The Company recognized $68,000 and $119,000in share-based compensation expense in its consolidated financial statementsfor the six months ended June 30, 2010 and 2009, respectively, related topreviously issued options.

 

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**Alpha Pro Tech, Ltd.**

 

**Notesto Consolidated Financial Statements (Unaudited)**

 

Stock options to purchase 1,567,000 and 1,695,000shares of common stock were outstanding at June 30, 2010 and 2009,respectively.  As of June 30, 2010,444,752 incremental shares were included in the computation of diluted earningsper share because the exercise prices of all of the stock options were lessthan the average share price of the Company’s common stock for the 2010 secondquarter, and, therefore, the effect was dilutive.  As of June 30, 2009, 25,142 incrementalshares were included in the computation of diluted earnings per share becausethe exercise prices of those stock options were less than the average shareprice of the Company’s common stock for the quarter and, therefore, the effectwas dilutive.   The remaining 1,669,858were not included in the computation of the diluted earnings per share becausethe exercise prices of these stock options were greater than the average shareprice of the Company’s common stock at June 30, 2010 and 2009 and,therefore, there was no dilutive effect.

 

The Company used the Black-Scholes-Merton optionpricing model to value the options.  Priorto 2008, the Company used the simplified method as discussed in the SEC’s StaffAccounting Bulletin  No. 107, *Share-Based Payment,* for estimating the expected life of theoptions.  For options granted during aquarter or fiscal period, the Company would use historical data to estimate theexpected life of the options.  Therisk-free interest rate for periods within the contractual life of the award isbased on the U.S. Treasury yield curve in effect at the time of grant. Theexpected volatility is based on historical volatility of the expected life inyears.  The Company uses an estimateddividend payout ratio of zero, as the Company has not paid dividends in thepast and, at this time, does not expect to do so in the future.

 

The following table summarizes stock option activityduring the six months ended June 30, 2010:

 
| ** **                                     | ** ** | **Options** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Weighted-  Average   Remaining   Contractual   Life (in years)** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| Options outstanding at  December 31, 2009 |       | 1,572,000   |       | $                                         | 1.56       |                                                               | 3.24       |                              | —     |   |
|                                           |       |        |       |                                      |       |                                                               |       |                              |       |
| Exercised                                      |       | (5,000      | )          | $                                         | 1.23       |                                                               | —     |                              | —     |   |
|                                           |       |        |       |                                      |       |                                                               |       |                              |       |
| Granted                                        |       | —      |       | —                                    |       | —                                                             |       | —                            |       |
|                                           |       |        |       |                                      |       |                                                               |       |                              |       |
| Forfeited or expired                           |       | —      |       | —                                    |       | —                                                             |       | —                            |       |
|                                           |       |        |       |                                      |       |                                                               |       |                              |       |
| Options outstanding at  June 30, 2010     |       | 1,567,000   |       | $                                         | 1.56       |                                                               | 2.74       |                              | $          | 458,000 |   |
|                                           |       |        |       |                                      |       |                                                               |       |                              |       |
| Options exercisable at  June 30, 2010     |       | 1,088,000   |       | $                                         | 1.67       |                                                               | 2.66       |                              | $          | 194,000 |   |

 

As of June 30,2010, $104,000 of total unrecognized compensation cost related to stock optionsis expected to be recognized over a weighted average period of 1.10 years.

 

**4.****                                     ****New****AccountingStandards**

 

In the third quarter of 2009, the Company adoptedthe FASB ASC.  The ASC is the singleofficial source of authoritative, nongovernmental GAAP, other than guidanceissued by the SEC.  The adoption of theASC did not have any impact on the consolidated financial statements includedherein.  For further discussion of theCodification, see the discussion of Critical Accounting Policies in Management’sDiscussion and Analysis of Financial Condition and Results of Operationselsewhere in this report.

 

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**Alpha Pro Tech, Ltd.**

 

**Notesto Consolidated Financial Statements (Unaudited)**

 

FASB ASC 810,*Consolidation,*(“ASC 810”**and formerly referred to as SFASNo. 167)*,* eliminates a required quantitative approach to determine whether avariable interest gives an entity a controlling financial interest in avariable interest entity in favor of a qualitatively focused analysis.  This guidance was effective for the Companybeginning in the first quarter of fiscal year 2010. The application of ASC 810did not have a significant impact on either the consolidated earnings or theconsolidated financial position for the periods presented.

 

In October 2009, the FASB issued AccountingStandards Update No. 2009-13, *Revenue Recognition (Topic605)*: *Multiple-DeliverableRevenue Arrangements — a consensus of the FASB Emerging Issues Task Force. *This update provides applicationguidance on whether multiple deliverables exist, how the deliverables should beseparated and how the consideration should be allocated to one or more units ofaccounting.  This update establishes aselling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverablewill be based on vendor-specific objective evidence, if available, third-partyevidence, if vendor-specific objective evidence is not available, or estimatedselling price ,if neither vendor-specific nor third-party evidence isavailable.  The Company will be requiredto apply this guidance prospectively for revenue arrangements entered into ormaterially modified after January 1, 2011; however, earlier application ispermitted. The Company has not determined the impact that this update may haveon its consolidated financial statements.

 

In December 2009, the FASB issued AccountingStandards Update No. 2009-17 (“ASU No. 2009-17”), *Consolidations (Topic 810): Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities*.  The amendments in ASU No. 2009-17replace the quantitative-based risks and rewards calculation for determiningwhich reporting entity, if any, has a controlling financial interest in avariable interest entity with an approach focused on identifying whichreporting entity has the power to direct the activities of a variable interestentity that most significantly impact the entity’s economic performance and (1) theobligation to absorb losses of the entity or (2) the right to receivebenefits from the entity.  An approachthat is expected to be primarily qualitative will be more effective foridentifying which reporting entity has a controlling financial interest in avariable interest entity.  The amendmentsin ASU No. 2009-17 also require additional disclosures about a reportingentity’s involvement in variable interest entities, which will enhance theinformation provided to users of financial statements.  The application of ASU No. 2009-17 didnot have a significant impact on either the consolidated earnings or theconsolidated financial position for the periods presented.

 

In April 2010, the FASB issued AccountingStandards Update No. 2010-13 (“ASU No. 2010-13”), *Compensation (Topic 718): Effect of Denominating the Exercise Price ofa Share-Based Payment Award in the Currency of the Market in Which theUnderlying Equity Security Trades — a consensus of the FASB Emerging IssuesTask Force*.  The amendments inASU No. 2010-13 address the classification of a share-based payment awardwith an exercise price denominated in the currency of a market in which theunderlying equity security trades.  Topic718 is amended to clarify that a share-based payment award with an exercise pricedenominated in the currency of a market in which a substantial portion of theentity’s equity securities trades shall not be considered to contain a market,performance, or service condition. Therefore, such an award is not to be classified as a liability if itotherwise qualifies as equity classification. The application of ASU No. 2010-13 did not have a significantimpact on either the consolidated earnings or the consolidated financialposition for the periods presented.

 

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**Alpha Pro Tech, Ltd.**

 

**Notes to Consolidated Financial Statements (Unaudited)**

 

**5.****                                     ****Inventories**

 

Inventoriesconsist of the following:

 
| ** **      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 8,155,000  |                        | $          | 9,663,000 |   |
| Work in process |       | 2,610,000               |       | 586,000                     |       |
| Finished goods  |       | 7,097,000               |       | 2,845,000                   |       |
|            |       | $                       | 17,862,000 |                        | $          | 13,094,000 |   |

 

**6.****                               ****Investment in and Advances to Unconsolidated Affiliates**

 

In 2005, Alpha ProTech Engineered Products, Inc.(a subsidiary of Alpha Pro Tech, Ltd.) entered into a joint venture with amanufacturer in India for the production of building products.  Under terms of the joint venture agreement, aprivate company, Harmony Plastics Private Limited (“Harmony”) was created withownership interests of 41.66% by Alpha ProTech Engineered Products, Inc.and 58.34% by Maple Industries and Associates. Alpha ProTech Engineered Products, Inc. contributed $508,000 forshare capital, and Maple Industries and Associates contributed $708,000.

 

This joint venture positions Alpha ProTechEngineered Products, Inc. to respond to current and expected increasedproduct demand for housewrap and synthetic roofing underlayment and providesfuture capacity for sales of specialty roofing component products and customproducts for industrial applications requiring high quality extrusion coatedfabrics.  In addition, the joint venturenow supplies products for the Disposable Protective Apparel segment.

 

The capital from the initial funding, along with abank loan, which is guaranteed exclusively by Maple Industries and Associatesand collateralized by the assets of Harmony, were utilized to purchase anexisting 33,000 square foot manufacturing facility in India.  This facility includes manufacturing equipmentnecessary to produce coated material and sewing of proprietary disposableprotective apparel.  This facility had a38,500 square foot addition in mid 2010, bringing it to a total of 71,500square feet.  Also in 2005, Harmony builta 60,000 square foot facility in India for the manufacturing of housewrap andsynthetic roof underlayment.  Twoadditions have been made to this building; one was a 20,000 square footaddition in late 2009 as well as a 22,000 square foot addition in mid 2010, fora total of 102,000 square feet.  Alladditions have been financed by Harmony with no guarantees from Alpha Pro Tech.

 

The Company is subject to the provisions of FASBASC 810, *Consolidation*, (“ASC 810” and formerlyreferred to as SFAS No.167), which defines the criteria by which the Companydetermines the proper accounting for its investments in related entities.  Specifically, ASC 810 requires the Company toassess whether or not related entities are variable interest entities (“VIEs”),as defined.  For those related entitiesthat qualify as VIEs, ASC 810 requires the Company to determine whether or notthe Company is the primary beneficiary of the VIE, and, if so, to consolidatethe VIE.

 

The Company has determined that Harmony is not aVIE and is, therefore, considered to be an unconsolidated affiliate.

 

The Company records its investment in Harmony as “Equityinvestments in and advances to unconsolidated affiliates” on the accompanyingConsolidated Balance Sheets.  The Companyrecords its equity interest in Harmony’s results of operations as “Equity inincome of unconsolidated affiliates” on the accompanying Consolidated IncomeStatements.

 

The Company reviews annually its investment inHarmony for impairment in accordance with FASB ASC 323, *Investments — Equity Method and Joint Ventures*, (“ASC 323”and formerly 

 

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**Alpha Pro Tech, Ltd.**

 

**Notesto Consolidated Financial Statements (Unaudited)**

 

referred to as APB No. 18). ASC 323 requiresrecognition of a loss when the decline in an investment isother-than-temporary.  In determiningwhether the decline is other-than-temporary, the Company considers the natureof the industry in which Harmony operates, its historical performance, itsperformance in relation to its peers and the current economic environment.  The Company has concluded that no impairmentwas required during the first six months of 2010.

 

Alpha ProTech Engineered Products, Inc.initially invested $1,450,000 in the joint venture; $508,000 for share capitaland $942,000 as a long term advance for materials.  Fifty percent of the $942,000 long termadvance for materials is to be repaid over a six year term that commenced in July 2006,and the balance is to be paid in the seventh year.  As of June 30, 2010, Harmony has repaida total of $525,000, leaving a balance of $417,000.  Interest of 3.5% is to be paid annually onthis advance, and the Company has an interest receivable of $7,000 as of June 30,2010 and $15,000 as of December 31, 2009 related to the agreement.

 

For the three months ended June 30, 2010 and2009, Alpha Pro Tech purchased $3,801,000 and $1,119,000 of inventory,respectively, from Harmony.  For the sixmonths ended June 30, 2010 and 2009, the Company purchased $6,507,000 and$1,343,000 of inventory, respectively, from Harmony.

 

For the three months ended June 30, 2010 and2009, the Company recorded equity in income of unconsolidated affiliates of$99,000 and $72,000, respectively.  Forthe six months ended June 30, 2010 and 2009, the Company recorded equityin income of unconsolidated affiliates of $172,000 and $170,000,respectively.  As of June 30, 2010,the Company’s investment in Harmony is $1,796,000, which consists of itsoriginal $1,450,000 investment and cumulative equity in income ofunconsolidated affiliates of $948,000, less $525,000 in repayments of theadvance and payment of $77,000 in dividends.

 

**7.****                                     ****Accrued Liabilities**

 

Accrued liabilities consist of the following:

 
| ** **                   | ** ** | **June 30,  2010** | ** ** | **December 31,   2009** | ** ** |
|------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Payroll                      |       | $                       | 291,000    |                         | $          | 131,000 |   |
| Commission and bonus accrual |       | 338,000                 |       | 2,178,000                    |       |
| Accrued professional fees    |       | 78,000                  |       | 150,000                      |       |
| Accrued rebates and other    |       | 50,000                  |       | 273,000                      |       |
|                         |       | $                       | 757,000    |                         | $          | 2,732,000 |   |

 

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**Alpha Pro Tech, Ltd.**

 

**Notes to Consolidated Financial Statements (Unaudited)**

 

**8.****                                     ****Basic and Diluted Net Income Per Share**

 

The following table provides a reconciliation ofboth net income and the number of shares used in the computation of “basic”earnings per share (“EPS”), which utilizes the weighted average number ofshares outstanding without regard to potential shares, and “diluted” EPS, whichincludes all such dilutive shares for the three and six months ended June 30,2010 and 2009, respectively:

 
| ** **                                         | ** ** | **For the Three Months Ended  June 30** | ** ** | **For the Six Months Ended   June 30** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                     | ** ** | **2009**                                    | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (Numerator)                             |       | $                                            | 372,000    |                                        | $          | 2,168,000 |   | $ | 1,058,000 |   | $ | 2,683,000 |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Shares (Denominator):                              |       |                                         |       |                                        |       |   |   |   |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |
| Basic weighted average  shares outstanding         |       | 22,424,285                                   |       | 22,795,003                                  |       | 22,423,788 |   | 23,245,300 |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |
| Add: Dilutive effect of  outstanding stock options |       | 444,752                                      |       | 25,142                                      |       | 595,592 |   | — |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |
| Diluted weighted average  shares outstanding       |       | 22,869,037                                   |       | 22,820,145                                  |       | 23,019,380 |   | 23,245,300 |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |
| Net income per share:                              |       |                                         |       |                                        |       |   |   |   |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |
| Basic                                              |       | $                                            | 0.02       |                                        | $          | 0.10 |   | $ | 0.05 |   | $ | 0.12 |   |
|                                               |       |                                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Diluted                                            |       | $                                            | 0.02       |                                        | $          | 0.10 |   | $ | 0.05 |   | $ | 0.12 |   |

 

**9.****                                     ****Activity of Business Segments**

 

The Company operates in three business segments:

 

**Disposable Protective Apparel:** consisting of a complete line of disposable protective clothing, such asshoecovers (including the Aqua Trak® and spunbond shoecovers), bouffant caps,coveralls, frocks, lab coats, gowns and hoods for the pharmaceutical,cleanroom, industrial and medical markets.

 

**Building Supply:** consisting of a line of construction supply weatherizationproducts.  The construction supplyweatherization products consist of housewrap and synthetic roofunderlayment.  The Company’s equity inincome of unconsolidated affiliates (Harmony) is included in the total segmentincome for Building Supply in the table below.

 

**Infection Control:** consisting of a line of face masks and eye shields principally for themedical, dental and industrial markets, as well as medical bed pads and a lineof pet beds.

 

Segment data excludes charges allocated to headoffice and corporate sales/marketing departments and income taxes.  The Company evaluates the performance of itssegments and allocates resources to them based primarily on net sales.

 

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**Alpha Pro Tech, Ltd.**

 

**Notes to Consolidated Financial Statements (Unaudited)**

 

The following table shows consolidated net salesfor each segment for the three and six months ended June 30, 2010 and2009, respectively:

 
| ** **                     | ** ** | **For the Three Months Ended  June 30** | ** ** | **For the Six Months Ended  June 30** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                     | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                     | ** ** | ** **                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable Protective  Apparel |       | $                                            | 4,845,000  |                                       | $          | 6,077,000 |   | $ | 9,929,000 |   | $ | 10,911,000 |   |
| Building Supply                |       | 4,863,000                                    |       | 3,758,000                                  |       | 9,585,000 |   | 6,015,000 |   |
| Infection Control              |       | 1,513,000                                    |       | 4,712,000                                  |       | 3,336,000 |   | 6,948,000 |   |
|                           |       |                                         |       |                                       |       |   |   |   |   |
| Consolidated total net sales   |       | $                                            | 11,221,000 |                                       | $          | 14,547,000 |   | $ | 22,850,000 |   | $ | 23,874,000 |   |

 

The following table shows the reconciliation of totalsegment income to total consolidated net income for the three and six monthsended June 30, 2010 and 2009, respectively:

 
| ** **                               | ** ** | **For the Three Months Ended  June 30** | ** ** | **For the Six Months Ended  June 30** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                     | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| Disposable Protective  Apparel           |       | $                                            | 933,000    |                                       | $          | 1,674,000 |   | $ | 2,134,000 |   | $ | 2,884,000 |   |
| Building Supply                          |       | 746,000                                      |       | 642,000                                    |       | 1,408,000 |   | 734,000 |   |
| Infection Control                        |       | 319,000                                      |       | 2,510,000                                  |       | 840,000 |   | 3,314,000 |   |
|                                     |       |                                         |       |                                       |       |   |   |   |   |
| Total segment income                     |       | 1,998,000                                    |       | 4,826,000                                  |       | 4,382,000 |   | 6,932,000 |   |
| Unallocated corporate  overhead expenses |       | (1,409,000                                   | )          | (1,444,000                                 | )          | (2,713,000 | ) | (2,732,000 | ) |
| Provision for income taxes               |       | (217,000                                     | )          | (1,214,000                                 | )          | (611,000 | ) | (1,517,000 | ) |
|                                     |       |                                         |       |                                       |       |   |   |   |   |
| Consolidated net income                  |       | $                                            | 372,000    |                                       | $          | 2,168,000 |   | $ | 1,058,000 |   | $ | 2,683,000 |   |

 

**10.****                              ****Subsequent Events**

 

There were no subsequent events since June 30,2010.

 

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**Alpha ProTech, Ltd.**

 

**ITEM 2.****    ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

You should read the following discussion and analysistogether with our consolidated financial statements (unaudited) and the notesto our consolidated financial statements (unaudited), which are includedelsewhere in this report, and our audited financial statements and the notesthereto, which appear in our Form 10-K for the year ended December 31,2009.

 

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain information set forth in this Form 10-Qcontains “forward-looking statements” within the meaning of federal securitieslaws.  Forward-looking statements includestatements concerning our plans, objectives, goals, strategies, future events,future revenues or performance, capital expenditures, financing needs, plans orintentions relating to potential acquisitions, and other information that isnot historical information. When used in this report, the words “estimates”, “expects”,“anticipates”, “forecasts”, “plans”, “intends”, “believes” and variations ofsuch words or similar expressions are intended to identify forward-lookingstatements. We may make additional forward-looking statements from time totime.  All forward-looking statements,whether written or oral and whether made by us or on our behalf, also areexpressly qualified by this special note.

 

Our forward-looking statements are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith,and we believe that there is a reasonable basis for them, including, withoutlimitation, management’s examination of historical operating trends, datacontained in our records and other data available from third parties.  However, we cannot assure you that management’sexpectations, beliefs and projections will result or be achieved oraccomplished.  Our forward-lookingstatements apply only as of the date made. Except as required by law, we undertake no obligation to publicly updateor revise forward-looking statements that may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

Any expectations based on these forward-lookingstatements are subject to risks and uncertainties and other important factors,including those discussed in the section entitled “Item 1A.  Risk Factors”, which appear in our Form 10-Kfor the year ended December 31, 2009. These and many other factors could affect Alpha Pro Tech Ltd.’s (“AlphaPro Tech” or the “Company”) future operating results and financial conditionand could cause actual results to differ materially from expectations based onforward-looking statements made in this document or elsewhere by Alpha ProTech, or on its behalf.

 

**Where to find more information about us.** We makeavailable, free of charge, on our Internet website(http://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-Kfurnished or filed since our most recent Annual Report on Form 10-K andany amendments to such reports as soon as reasonably practicable following theelectronic filing of such report with the Securities and Exchange Commission(the “SEC”). In addition, in accordance with SEC rules we provideelectronic or paper copies of our filings free of charge upon request.

 

**Critical Accounting Policies**

 

The Financial Accounting Standards Board (“FASB”)recognized the complexity of its standard-setting process and embarked on arevised process in 2004 that culminated in the release on July 1, 2009 ofthe FASB Accounting Standards CodificationTM (the “FASB ASC”), which is also sometimesreferred to as the “Codification” or the “ASC”. The Codification does not change how the Company accounts for itstransactions or the nature of related disclosures made.  To the Company, this means instead offollowing the rules in Statement of Financial Accounting Standard No. 123(R) (“SFASNo. 123(R)”), *Share-Based Payment*,we will follow the guidance in ASC 718, *Stock Compensation*.  References to generally accepted accountingprinciples generally accepted in the United States of America (“GAAP”) issuedby the FASB, within Management’s Discussion and Analysis of Financial Conditionand Results of Operations and in the Notes to Consolidated Financial Statements(Unaudited) included elsewhere in this report are to the Codification.  The FASB finalized the Codification effectivefor periods ending 

 

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on or afterSeptember 15, 2009.  Prior FASBstandards like SFAS No. 123(R), *Share-Based Payment*,are no longer being issued by the FASB.

 

The preparation of our financial statements inconformity with GAAP requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the dates of the financial statements and thereported amounts of net sales and expenses during the reported periods.  We base estimates on past experience and onvarious other assumptions that are believed to be reasonable under thecircumstances.  The application of thesecritical accounting policies on a consistent basis enables us to provide timelyand reliable financial information.  Ourcritical accounting polices include the following:

 

**I****nventories:**  Inventoriesinclude freight-in, materials, labor and overhead costs and are stated at thelower of cost (computed on a standard cost basis, which approximates averagecost) or market.  We assess our inventoryfor estimated obsolescence or unmarketable inventory and write down thedifference between the cost of inventory and the estimated market value basedupon assumptions about future sales and supply on-hand, if necessary.  If actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required.

 

**Property and equipment:**Property and equipment is stated at cost less accumulated depreciationand  amortization and is depreciated oramortized using the straight-line method over the shorter of the respectiveuseful lives of the assets or the related lease terms plus any expected renewalperiods as follows:

 
| Buildings                       |   | 25 years   |   |
|---------------------------------|--------|------------|--------|
|                            |   |       |   |
| Machinery and equipment         |   | 5-15 years |   |
|                            |   |       |   |
| Office furniture and  equipment |   | 2-7 years  |   |
|                            |   |       |   |
| Leasehold improvements          |   | 4-5 years  |   |

 

Expenditures for renewals and betterments arecapitalized, whereas costs of maintenance and repairs are charged to operationsin the period incurred.

 

**Revenue Recognition:**  Forsales transactions, we comply with the provisions of SEC Staff AccountingBulletin (“SAB”) No. 104, *RevenueRecognition*,which states that revenue should be recognized when the following revenuerecognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) title transfers, and the customer assumes the risk of loss; (3) theselling price is fixed or determinable; and (4) collection of theresulting receivable is reasonably assured. These criteria are satisfied upon shipment of product, and revenues arerecognized accordingly.

 

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

 

**Leases:**  The Company enters into real estate leases, primarily for manufacturingand distribution and these operating leases are recognized on a straight-linebasis over the base term of the lease plus any expected renewal periods.

 

**Stock Based Compensation:**  Alpha Pro Tech adopted FASB ASC 718, *Stock Compensation*,(“ASC 718” and formerly referred to as SFAS No. 123(R)), effective January 1,2006, using the modified prospective application method.  ASC 718 requires companies to recordcompensation expense for the value of all outstanding and unvested share-basedpayments, including employee stock options and similar awards.

 

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The Company used the Black-Scholes-Merton option pricingmodel to value the options.  Prior to2008, the Company used the simplified method as discussed in the SEC’s SAB No. 107,*Share-Based Payment,* for estimating theexpected life of the options.  Foroptions granted during a quarter or fiscal period, the Company would usehistorical data to estimate the expected life of the options.  The risk-free interest rate for periodswithin the contractual life of the award is based on the U.S. Treasury yieldcurve in effect at the time of grant. The expected volatility is based on historical volatility of theexpected life in years.  The Company usesan estimated dividend payout ratio of zero, as the Company has not paiddividends in the past and, at this time, does not expect to do so in thefuture.

 

**OVERVIEW**

 

Alpha Pro Tech is in the business of protecting people,products and environments. We accomplish this by developing, manufacturing andmarketing a line of high-value, disposable protective apparel and infectioncontrol products for the cleanroom, industrial, pharmaceutical, medical anddental markets. We also manufacture a line of building supply constructionweatherization products.  Our productsare sold both under the “Alpha Pro Tech” brand name, as well as under privatelabel.

 

Our products are grouped into three businesssegments:  the Disposable ProtectiveApparel segment, consisting of disposable protective apparel; the BuildingSupply segment consisting of construction weatherization products, such ashousewrap and synthetic roof underlayment; and the Infection Control segment,consisting of face masks, eye shields and medical bed pads, as well as a lineof pet beds.  Our target markets includepharmaceutical manufacturing, bio-pharmaceutical manufacturing and medicaldevice manufacturing, lab animal research, high technology electronicsmanufacturing (which includes the semi-conductor market), medical and dentaldistributors, pet distributors and construction, building supply and roofingdistributors.

 

Our products are used primarily in cleanrooms,industrial safety manufacturing environments and health care facilities, suchas hospitals, laboratories and dental offices, as well as building andre-roofing sites.  Our products aredistributed principally in the United States of America (“U.S.”) through anetwork consisting of purchasing groups, national distributors, localdistributors, independent sales representatives and our own sales and marketingforce.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth certain operational dataas a percentage of sales for the periods indicated:

 
| ** **                                | ** ** | **For the Three Months Ended   June 30,** | ** ** | **For the Six Months Ended   June 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                       | ** ** | **2009**                                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                 |       | 100.0                                          | %          | 100.0                                        | %          | 100.0 | % | 100.0 | % |
|                                      |       |                                           |       |                                         |       |   |   |   |   |
| Gross profit                              |       | 37.6                                           | %          | 47.2                                         | %          | 40.3 | % | 46.0 | % |
|                                      |       |                                           |       |                                         |       |   |   |   |   |
| Selling, general and  administrative      |       | 31.4                                           | %          | 23.4                                         | %          | 32.0 | % | 27.8 | % |
|                                      |       |                                           |       |                                         |       |   |   |   |   |
| Income from operations                    |       | 4.3                                            | %          | 22.8                                         | %          | 6.5 | % | 16.9 | % |
|                                      |       |                                           |       |                                         |       |   |   |   |   |
| Income before provision for  income taxes |       | 5.2                                            | %          | 23.2                                         | %          | 7.3 | % | 17.6 | % |
|                                      |       |                                           |       |                                         |       |   |   |   |   |
| Net income                                |       | 3.3                                            | %          | 14.9                                         | %          | 4.6 | % | 11.2 | % |

 

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**Three and Six Months ended June 30,2010 compared to Three and Six Months ended June 30, 2009**

** **

**Sales.**  Consolidated sales for the threemonths ended June 30, 2010 decreased to $11,221,000 from $14,547,000 forthe three months ended June 30, 2009, representing a decrease of$3,326,000, or 22.9%.  This decreaseconsisted of decreased sales in the Infection Control segment of $3,199,000 anddecreased sales in the Disposable Protective Apparel segment of $1,232,000,offset primarily by increased sales in the Building Supply segment of$1,105,000.

 

Sales for the Disposable Protective Apparel segment forthe three months ended June 30, 2010 decreased by $1,232,000, or 20.3%, to$4,845,000, compared to $6,077,000 for the same period of 2009.

 

The decrease is primarily due to a decline in sales ofdisposable shoecovers, due to a decrease of 65.0% or $2,826,000 in sales to ourformer largest distributor.  We have andcontinue to expect to sell our apparel line to this distributor, excludingshoecovers and boot covers.  Thisdecrease was partially offset by increased sales to a broad base of ourdistribution network and in particular to a major national distributor withwhom we have preferred vendor status and from whom we received the OutstandingPerformance Controlled Environments vendor award for 2009.  Sales with this national distributorincreased over two and a half times in the second quarter of 2010 as comparedto the same period of 2009.

 

The Critical Cover® disposable protective apparel brandand its associated trade names, SureGripTM, AquaTrak®, ComforTech® andMicrobreatheTM, are trademarks owned by Alpha Pro Tech and have beenmanufactured by Alpha Pro Tech exclusively for our former largest distributorsince the early 1990s.  Alpha Pro Techwas informed in the first quarter of 2010 that this distributor had decided tolaunch their own, potentially competing, private label line of disposableprotective apparel, and has made a business decision to transition away fromselling Alpha Pro Tech’s disposable garments to their own brand ofapparel.  Accordingly, we have decided toshift away from our former largest distributor as the sole distributor of ourCritical Cover® protective apparel product line and to utilize a morediversified, broader, global distribution strategy. The change in ourrelationship with our former largest disposable protective apparel distributorcould adversely affect sales in the short term but, could be beneficial in thelong term as we develop a broader base of distribution.

 

Building Supply segment sales for the three months endedJune 30, 2010 increased by $1,105,000, or 29.4%, to $4,863,000, ascompared to $3,758,000 for the same period of 2009.  The segment increase of 29.4% was primarilydue to a 24.0% increase in sales of REXTM SynFelt synthetic roof underlaymentand a 45.9% increase in sales of REXTM Wrap housewrap.  The sales mix of the Building Supply segmentfor the three months ended June 30, 2010 was 68% for synthetic roofunderlayment and 32% for housewrap.  Thiscompared to 71% for synthetic roof underlayment and 29% for housewrap for thesecond quarter of 2009.

 

We believe that our REXTM SynFelt synthetic roofunderlayment is perceived as a superior product in the industry and as themarket evolves from felt paper to synthetic roof underlayment we believe thatwe are in a very good position to increase market share.  Additionally, we believe that ourhigh-quality, multi-color printed housewrap gives us a distinct competitiveadvantage in the marketplace and that our market share is growing even duringthis weak building market and economic downturn.  During the second quarter, we increased ourBuilding Supply segment sales team in anticipation of significant growth in thecoming periods.  Discussions withpotential and existing distributors have been very encouraging.  In addition to growth opportunities withexisting products, we are also excited about the planned launch of a newproduct in the third quarter of 2010 that should increase our potential marketshare.  We remain optimistic about thefuture of the Building Supply segment.

 

Infection Control segment sales for the three monthsended June 30, 2010 decreased by $3,199,000, or 67.9%, to $1,513,000,compared to $4,712,000 for the same period of 2009.  Mask sales were down by 69.5%, or $2,490,000,to $1,095,000, shield sales were down by 72.6%, or $737,000, to $278,000, andmedical bed pad and pet bed sales were up by 25.0%, or $28,000, to $140,000,compared to the three months ended June 30, 2009.

 

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The decrease in mask sales for the three months ended June 30,2010 was primarily attributable to a decrease in demand for our N-95 respiratormask sales relating to the global H1N1 Influenza A pandemic in 2009.  Shield sales were down in the second quarterof 2010 primarily due to the completion of shipments of a $1.7 millionnon-recurring shield order received in the fourth quarter of 2008.  That order was shipped out over a period ofthree quarters and commenced shipping in the fourth quarter of 2008.  General shield sales also decreased in thesecond quarter partially due to the H1N1 Influenza A pandemic.

 

Consolidated sales for the six months ended June 30,2010 decreased to $22,850,000 from $23,874,000 for the six months ended June 30,2009, representing a decrease of $1,024,000, or 4.3%.  This decrease consisted of decreased sales inthe Infection Control segment of $3,612,000 and decreased sales in theDisposable Protective Apparel segment of $982,000, offset primarily byincreased sales in the Building Supply segment of $3,570,000.

 

Sales for the Disposable Protective Apparel segment forthe six months ended June 30, 2010 decreased by $982,000, or 9.0%, to$9,929,000, compared to $10,911,000 for the same period of 2009.  The decrease is primarily due to decreasedsales of disposable shoecovers, primarily due to a significant decrease insales to our former largest distributor, partially offset by increased sales toa broad base of our distribution network and, in particular, to the majornational distributor mentioned above, with which we have preferred vendorstatus.

 

Building Supply segment sales for the six months ended June 30,2010 increased by $3,570,000, or 59.4%, to $9,585,000, as compared to$6,015,000 for the same period of 2009. The segment increase of 59.4% was primarily due to a 62.8% increase insales of REXTM SynFelt synthetic roof underlayment and a 58.1% increase in salesof REXTM Wrap housewrap.  The sales mix ofthe Building Supply segment for the six months ended June 30, 2010 was 69%for synthetic roof underlayment and 31% for housewrap.  This compared to 68% for synthetic roofunderlayment and 32% for housewrap for the six months ended June 2009.

 

Infection Control segment sales for the six months endedJune 30, 2010 decreased by $3,612,000, or 52.0%, to $3,336,000, comparedto $6,948,000 for the same period of 2009. Mask sales were down by 48.7%, or $2,257,000, to $2,375,000, shieldsales were down by 67.0%, or $1,389,000, to $684,000, and medical bed pad andpet bed sales were up by 14.0%, or $34,000, to $277,000, compared to the sixmonths ended June 30, 2009.

 

The overall mask sales decrease for the first six monthsof 2010 is primarily due to the surge in N-95 respirator mask sales in thesecond quarter of 2009 due to concerns regarding an outbreak of H1N1 InfluenzaA.  Shield sales were down primarily dueto approximately $1.3 million in shields being shipped in 2009 from the total$1.7 million non-recurring shield order received in the fourth quarter of 2008.

 

**Gross Profit.**  Gross profit decreased by $2,650,000, or38.6%, to $4,221,000 for the three months ended June 30, 2010 from $6,871,000for the same period in 2009.  The grossprofit margin was 37.6% for the three months ended June 30, 2010, comparedto 47.2% for the three months ended June 30, 2009.

 

Gross profit margin for the three months ended June 30,2010 was negatively affected by the change in product mix in which BuildingSupply segment sales, which have lower margins, increased as a percentage oftotal sales and Infection Control segment sales, which have higher margins,decreased as a percentage of total sales. Building Supply segment sales comprised 43.3% of total sales for thethree months ended June 30, 2010, compared to 25.8% for the same period of2009.  Building Supply segment sales areexpected to continue to grow as a percentage of total sales in the comingperiods.   Infection Control segmentsales comprised 13.5% of total sales for the three months ended June 30,2010, as compared to 32.4% for the same period of 2009, during which weexperienced significant sales of our N-95 respirator mask due to the H1N1Influenza A pandemic.

 

Gross profit margin in the Disposable Protective Apparelsegment is down in the second quarter of 2010, as compared to the same quarterof 2009.  As part of our strategy toincrease inventory levels to strengthen our position in the marketplace, ourgross profit in the second quarter was affected as we acquired some inventoryprimarily from alternative suppliers at a higher cost.  We do not expect to incur these higher costson a going forward basis.  Gross profitmargin for this segment is expected to be softer in 2010 as compared to 2009but should increase from the second quarter levels.

 

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Gross profit decreased by $1,780,000, or 16.2%, to$9,210,000 for the six months ended June 30, 2010 from $10,990,000 for thesame period in 2009.  The gross profitmargin was 40.3% for the six months ended June 30, 2010, compared to 46.0%for the six months ended June 30, 2009.

 

**Selling, General and Administrative Expenses.**  Selling, general andadministrative expenses increased by $119,000, or 3.5%, to $3,518,000 for thethree months ended June 30, 2010 from $3,399,000 for the three monthsended June 30, 2009.  As apercentage of net sales, selling, general and administrative expenses increasedto 31.4% for the three months ended June 30, 2010 from 23.4% for the sameperiod in 2009.  The increase of $119,000in expenses was primarily due to increased employee compensation of $186,000,increased professional fees and public company expenses of $149,000, increasedrent and utilities of $38,000 and increased general office, factory andmiscellaneous expenses of $98,000, offset primarily by a decrease of $310,000in executive bonuses as discussed below and a decrease in sales commissions of$42,000.

 

Selling, general and administrative expenses increasedby $663,000, or 10.0%, to $7,302,000 for the six months ended June 30,2010 from $6,639,000 for the six months ended June 30, 2009.  As a percentage of net sales, selling,general and administrative expenses increased to 32.0% for the six months endedJune 30, 2010 from 27.8% for the same period in 2009.  The increase of $663,000 in expenses wasprimarily due to increased employee compensation of $484,000, partially due toincreased employee compensation for the Building Supply Segment, to a increasedmarketing expenses of $130,000, increased professional fees and public companyexpenses of $163,000, increased travel expenses of $84,000, increased insuranceof $86,000, increased general office, factory and miscellaneous expenses of$163,000, increased sales commissions of $17,000 and increased rent andutilities of $42,000, offset primarily by a $225,000 severance agreement forour previous Senior Vice President of Marketing, which was expensed during thefirst quarter of 2009, and a decrease of $281,000 in executive bonuses, asdiscussed below.

 

The Chief Executive Officer and President are eachentitled to a bonus equal to 5% of the pre-tax profits of the Company,excluding bonus expense.  Bonuses of$66,000 were accrued for the three months ended June 30, 2010, as comparedto $376,000 in the same period of 2009. Bonuses of $186,000 were accrued for the six months ended June 30,2010, as compared to $467,000 in the same period of 2009.

 

**Depreciation and Amortization.**  Depreciation and amortization expenseincreased by $56,000, or 34.6%, to $218,000 for the three months ended June 30,2010 from $162,000 for the same period in 2009. Depreciation and amortization expense increased by $104,000, or 32.3%,to $426,000 for the six months ended June 30, 2010 from $322,000 for thesame period in 2009.

 

The increase for the three and six months of 2010 wasprimarily attributable to increased depreciation related to capitalexpenditures for the Building Supply segment.

 

**Income from Operations.**  Income from operations decreased by$2,825,000, or 85.3%, to $485,000 for the three months ended June 30,2010, as compared to income from operations of $3,310,000 for the three monthsended June 30, 2009.  The decreasein income from operations was due to a decrease in gross profit of $2,650,000,an increase in selling, general and administrative expenses of $119,000 and anincrease in depreciation and amortization of $56,000.

 

Income from operations decreased by $2,547,000, or63.2%, to $1,482,000 for the six months ended June 30, 2010, as comparedto income from operations of $4,029,000 for the six months ended June 30,2009.  The decrease in income fromoperations was due to a decrease in gross profit of $1,780,000, an increase inselling, general and administrative expenses of $663,000 and an increase indepreciation and amortization of $104,000.

 

**Equity in Income of Unconsolidated Affiliates.** For the three months ended June 30, 2010, we recorded equity inincome of unconsolidated affiliates of $99,000, as compared to $72,000 for thesame period of 2009.  For the six monthsended June 30, 2010, we recorded equity in income of unconsolidated affiliatesof $172,000, as compared to $170,000 for the same period of 2009.

 

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**Net Interest.**  For the three months ended June 30,2010, net interest income was $5,000, compared to net interest income of $0 forthe three months ended June 30, 2009. Interest income increased to $5,000 for the three months ended June 30,2010, compared to $4,000 for the same period of 2009.  Interest expense decreased to $0 for thethree months ended June 30, 2010, compared to $4,000 for the same periodof 2009.

 

For the six months ended June 30, 2010, netinterest income was $15,000, compared to net interest income of $1,000 for thesix months ended June 30, 2009. Interest income increased to $15,000 for the six months ended June 30,2010, compared to $7,000 for the same period of 2009.  Interest expense decreased to $0 for the sixmonths ended June 30, 2010, compared to $6,000 for the same period of2009.

 

**Income before Provision for Income Taxes.**  Income before provision forincome taxes for the three months ended June 30, 2010 was $589,000,compared to $3,382,000 for the three months ended June 30, 2009,representing a decrease of $2,793,000, or 82.6%.  The decrease in income before provision forincome taxes was due primarily to a decrease in income from operations of$2,825,000, partially offset by an increase in net interest income of $5,000and by an increase of $27,000 in equity in income of unconsolidated affiliates.

 

Income before provision for income taxes for the sixmonths ended June 30, 2010 was $1,669,000, compared to $4,200,000 for thesix months ended June 30, 2009, representing a decrease of $2,531,000, or60.3%.  The decrease in income beforeprovision for income taxes was due primarily to a decrease in income fromoperations of $2,547,000, partially offset by an increase in net interestincome of $14,000 and by an increase of $2,000 in equity in income ofunconsolidated affiliates.

 

**Provision for Income Taxes.**  The provision for income taxes for the threemonths ended June 30, 2010 was $217,000, compared to $1,214,000 for thesame period of 2009.  The estimatedeffective tax rate was 36.8% for the three months ended June 30, 2010,compared to 35.9% for the same period in 2009.

 

The provision for income taxes for the six months ended June 30,2010 was $611,000, compared to $1,517,000 for the same period of 2009.  The estimated effective tax rate was 36.6%for the six months ended June 30, 2010, compared to 36.1% for the sameperiod in 2009.

 

Management expects the effective tax rate to beapproximately 36% going forward.

 

**Net Income.**  Net income for the three months ended June 30,2010 was $372,000, compared to net income of $2,168,000 for the three monthsended June 30, 2009, a decrease of $1,796,000, or 82.8%.  The net income decrease was primarily due toa decrease in income before provision for income taxes of $2,793,000, partiallyoffset by a decrease in income taxes of $997,000.  Net income as a percentage of sales for thethree months ended June 30, 2010 and 2009 was 3.3% and 14.9%,respectively.  Basic and diluted incomeper share for the three months ended June 30, 2010 and 2009 was $0.02 and$0.10, respectively.

 

Net income for the six months ended June 30, 2010was $1,058,000, compared to net income of $2,683,000 for the six months ended June 30,2009, a decrease of $1,625,000, or 60.6%. The net income decrease was primarily due to a decrease in income beforeprovision for income taxes of $2,531,000, partially offset by a decrease inincome taxes of $906,000.  Net income asa percentage of sales for the six months ended June 30, 2010 and 2009 was4.6% and 11.2%, respectively.  Basic anddiluted income per share for the six months ended June 30, 2010 and 2009was $0.05 and $0.12, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2010, we had cash and cashequivalents of $2,967,000 and working capital of $29,991,000, representing anincrease in working capital of 3.4%, or $997,000, since December 31,2009.  As of June 30, 2010, ourcurrent ratio was 26:1, compared to 6:1 as of December 31, 2009.  Cash and cash equivalents decreased by 69.6%,or $6,786,000, to $2,967,000 as of June 30, 2010, 

 

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compared to $9,753,000 as of December 31,2009.  The decrease in cash and cashequivalents was due to cash used in operating activities of $6,403,000 and cashused in investing activities of $389,000 for the aggregate purchase of propertyand equipment and intangible assets, offset by proceeds from dividends fromequity investments in unconsolidated affiliates of $77,000 and cash proceedsfrom stock options exercised of $6,000.

 

The decrease in cash for the six month period ended June 30,2010 was primarily due to an increase in our inventory levels by $4,768,000 andour pay down of accrued liabilities of approximately $2,200,000 in the firstquarter of 2010.  Management expects thecash position to improve over the coming periods as we anticipate a decrease inour overall inventory levels, and the impact on cash in the first quarter of2010 resulting from the annual payment of 2009 accrued liabilities will notoccur in the latter half of 2010.

 

We have a $3,500,000 credit facility with Wells FargoBank, consisting of a line of credit with interest at prime plus 0.5%.  As of June 30, 2010, the prime interestrate was 3.25%.  This credit line wasrenewed in May 2009 and expires in May 2011.  Our borrowing capacity on the line of creditwas $3,500,000 as of June 30, 2010. The available line of credit is based on a formula of eligible accountsreceivable and inventories.  As of June 30,2010, we did not have any borrowings under this credit facility.

 

Net cash used in operating activities was $6,403,000 forthe three months ended June 30, 2010, compared to $3,874,000 net cashprovided by operating activities for the three months ended June 30,2009.  The net cash used in operatingactivities of $6,403,000 for the three months ended June 30, 2010 was dueto net income of $1,058,000, adjusted by the following: a decrease inamortization of share-based compensation expense to $68,000, an increase ofdepreciation and amortization to $426,000, an increase in equity in income ofunconsolidated affiliates to $172,000, a decrease in accounts receivable of$2,143,000, an increase in inventory of $4,768,000, an increase in prepaidexpenses and other current assets of $668,000 and a decrease in accountspayable and accrued liabilities of $4,490,000.

 

Accounts receivable decreased by $2,143,000, or 24.9%,to $6,450,000 as of June 30, 2010 from $8,593,000 as of December 31,2009.  The decrease in accountsreceivable was primarily related to the decrease in sales relative to thefourth quarter of 2009.  The number ofdays of sales outstanding as of June 30, 2010 was 52 days, compared to 53days as of December 31, 2009.

 

Inventory increased by $4,768,000, or 36.4%, to$17,862,000 as of June 30, 2010 from $13,094,000 as of December 31,2009.  The increase was primary due to anincrease in inventory for the Disposable Protective Apparel segment of$3,090,000, or 56.5%, to $8,558,000 as of June 30, 2010 due to ourstrategy of having a strong inventory position to compete in themarketplace.  Inventory for the InfectionControl segment increased by $973,000, or 23.8%, to $5,062,000 due to astockpiling of N-95 particulate respirator masks, but was down $611,000 from March 31,2010.  In addition, inventory for theBuilding Supply segment increased by $707,000, or 20.0%, to $4,242,000 as of June 30,2010 as a result of our increased current and expected future sales.

 

Prepaid expenses and other current assets increased by$668,000, or 23.9%, to $3,460,000 as of June 30, 2010 from $2,792,000 asof December 31, 2009.  The increasewas primarily due to the prepayment of new equipment and an increase in prepaidinsurance.

 

Accounts payable and accrued liabilities as of June 30,2010 decreased by $4,490,000, or 78.8%, to $1,205,000 from $5,695,000 as of December 31,2009.  The change was primarily due to adecrease in trade payables of $2,515,000 and a decrease in accrued liabilitiesof $1,975,000.  Accrued liabilities forthe six months ended June 30, 2010 decreased as follows: commission andbonus accrual decreased by $1,840,000, accrued rebates and other decreased by$223,000 and accrued professional fees decreased by $72,000, partially offsetby an increase in accrued payroll expenses of $160,000.

 

Net cash used in investing activities was $389,000 forthe three months ended June 30, 2010, compared to net cash used ininvesting activities of $202,000 for the same period of 2009.  Our

 

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investing activities for the three months ended June 30,2010 consisted primarily of expenditures for property and equipment of $462,000and the purchase of intangible assets of $4,000, compared to $194,000 and$8,000, respectively, for the same period of 2009.  Also in 2010, we received a payment ofdividends from our joint venture of $77,000. The expenditures for property and equipment in 2010 were primarily forthe Building Supply segment and to a lesser extent for the Infection Controlsegment.  We expect to purchase anadditional $750,000 to $1,000,000 of equipment during the remainder of 2010, ofwhich approximately $500,000 was prepaid as of June 30, 2010.

 

Net cash provided by financing activities was $6,000 forthe three months ended June 30, 2010, compared to net cash used infinancing activities of $1,795,000 for the same period of 2009.  Our financing activities for the three monthsended June 30, 2010 was due to the proceeds for the exercise of stockoptions and was due to the repurchase of common stock for the same period of2009.

 

In February 2010, the Company announced anexpansion of $2.0 million to its existing stock repurchase plan.  As of June 30, 2010, we had $2,862,000available for additional stock purchases under our repurchase program.  During the three and six months ended June 30,2010, we did not repurchase any shares of common stock.  As of June 30, 2010, we had repurchaseda total of 6,193,800 shares of common stock at a cost of $7,658,000 through ourrepurchase program. We retire all stock repurchases upon repurchase. Futurerepurchases are expected to be funded from cash on hand and cash flows fromoperations.

 

We believe that cash generated from operations, ourcurrent cash balance and the funds available under our credit facility will besufficient to satisfy our projected working capital and planned capitalexpenditures for the foreseeable future.

 

**New Accounting Standards**

 

In the third quarter of 2009, the Company adoptedthe FASB ASC.  The ASC is the singleofficial source of authoritative, nongovernmental GAAP, other than guidanceissued by the SEC.  The adoption of theASC did not have any impact on the consolidated financial statements includedelsewhere in this report.

 

FASB ASC 810,*Consolidation,*(“ASC 810”**and formerly referred to as SFASNo. 167)*,* eliminates a required quantitative approach to determine whether avariable interest gives an entity a controlling financial interest in avariable interest entity in favor of a qualitatively focused analysis.  This guidance was effective for the Companybeginning in the first quarter of fiscal year 2010. The application of ASC 810did not have a significant impact on the consolidated earnings nor theconsolidated financial position for the periods presented.

 

In October 2009, the FASB issued AccountingStandards Update No. 2009-13, *Revenue Recognition (Topic605)*: *Multiple-DeliverableRevenue Arrangements — a consensus of the FASB Emerging Issues Task Force. *This update provides applicationguidance on whether multiple deliverables exist, how the deliverables should beseparated and how the consideration should be allocated to one or more units ofaccounting.  This update establishes aselling price hierarchy for determining the selling price of adeliverable.  The selling price used foreach deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is not available,or estimated selling price if neither vendor-specific or third-party evidenceis available.  The Company will berequired to apply this guidance prospectively for revenue arrangements enteredinto or materially modified after January 1, 2011; however, earlierapplication is permitted. The Company has not determined the impact that thisupdate may have on its consolidated financial statements.

 

In December 2009, the FASB issued AccountingStandards Update No. 2009-17 (“ASU No. 2009-17”), *Consolidations (Topic 810): Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities*.  The amendments in ASU No. 2009-17replace the quantitative-based risks and rewards calculation for determiningwhich reporting entity, if any, has a controlling financial interest in avariable interest entity with an approach focused on identifying whichreporting entity has the power to direct the activities of a variable interestentity that most significantly impact the entity’s economic performance and (1) theobligation to absorb losses of the entity or (2) the right to receivebenefits 

 

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from the entity. An approach that is expected to be primarily qualitative will be moreeffective for identifying which reporting entity has a controlling financialinterest in a variable interest entity. The amendments in ASU No. 2009-17 also require additionaldisclosures about an reporting entity’s involvement in variable interestentities, which will enhance the information provided to users of financialstatements.  The application of ASU No. 2009-17did not have a significant impact on the consolidated earnings nor theconsolidated financial position for the periods presented.

 

In April 2010, the FASB issued Accounting StandardsUpdate No. 2010-13 (“ASU No. 2010-13”), *Compensation(Topic 718): Effect of Denominating the Exercise Price of a Share-Based PaymentAward in the Currency of the Market in Which the Underlying Equity SecurityTrades — a consensus of the FASB Emerging Issues Task Force*.  The amendments in ASU No. 2010-13address the classification of a share-based payment award with an exerciseprice denominated in the currency of a market in which the underlying equitysecurity trades.  Topic 718 is amended toclarify that a share-based payment award with an exercise price denominated inthe currency of a market in which a substantial portion of the entity’s equitysecurities trades shall not be considered to contain a market, performance, orservice condition.  Therefore, such anaward is not to be classified as a liability if it otherwise qualifies asequity classification.  The applicationof ASU No. 2010-13 did not have a significant impact on the consolidatedearnings nor the consolidated financial position for the periods presented.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We subcontract the manufactureof products in China and, to a lesser extent in Mexico, and have a jointventure in India.  In addition, ourprincipal executive office, with 21 employees, is located in Canada.  We do not believe that we have a materialforeign currency exposure due to the fact that our purchase agreements withcompanies in China, India and Mexico are settled in U.S. dollars.  In addition, all sales transactions are inU.S. dollars.  In Canada, our foreigncurrency exposure is not material due to the fact that we do not conductmanufacturing operations in Canada.  Anysuch exposure is limited to payroll expenses in the Canadian branch office.

 

We do not expect anysignificant effect on our consolidated results of operations from inflation orinterest or currency rate fluctuations. We do not hedge our interest rate orforeign exchange risks.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**.

 

Under the supervision and with the participation of ourmanagement, including our Chief Executive Officer (principal executive officer)and Chief Financial Officer (principal financial officer), we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30,2010 pursuant to the evaluation of these controls and procedures required by Rule 13a-15of the Exchange Act. Disclosure controls and procedures are the controls andother procedures that we have designed to ensure that we record, process,summarize and report in a timely manner the information that we must disclosein reports that we file with or submit to the SEC under the Exchange Act.

 

In designing and evaluating our disclosure controls andprocedures, we recognize that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives and that we are required to apply our judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

Based on the evaluation, our principal executive andfinancial officers concluded that our disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

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**Changes in Internal Controls**.

 

During the quarter to which this report relates, therewas no change in our internal control over financial reporting (as such term isdefined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS**

 

The Company has included in Part I, Item 1A ofits Annual Report on Form 10-K for the year ended December 31, 2009,a description of certain risks and uncertainties that could affect the Company’sbusiness, future performance or financial condition (the “Risk Factors”).  There are no material changes from thedisclosure provided in the Form 10-K for the year ended December 31,2009 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investmentdecision with respect to the Company’s stock.

 

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

**ISSUER PURCHASES OF EQUITYSECURITIES**

 

The following table sets forth purchases made by or onbehalf of the Company or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) ofthe Exchange Act.

 

**Issuer Purchases of EquitySecurities**

 
| **Period**            | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Weighted  Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Plan (1)** | ** ** |
|-----------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| April 1-30, 2010 |       | —                                 |       | —                                       |       | —                                                                              |       | $                                                                                           | 2,862,000  |   |
| May 1-31, 2010   |       | —                                 |       | —                                       |       | —                                                                              |       | $                                                                                           | 2,862,000  |   |
| June 1-30, 2010  |       | —                                 |       | —                                       |       | —                                                                              |       | $                                                                                           | 2,862,000  |   |
| Total                 |       | —                                 |       | —                                       |       | —                                                                              |       | $                                                                                           | 2,862,000  |   |

 

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(1)         On February 8,2010, the Company announced that the Board of Directors had authorized a $2.0million expansion of the Company’s existing share repurchase program.****Under the share repurchase program, theCompany is authorized to repurchase up to a total of $10,520,000 of commonstock.

 

**SECURITIES SOLD**

 

We did not sell any unregistered equity securitiesduring the period covered by this Form 10-Q.

 

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**ITEM 6. EXHIBITS**

 
| 3.1.1  |   | Certificate of Incorporation of Alpha Pro  Tech, Ltd., incorporated by reference to Exhibit 3(f) to  Form 10-K for the year ended December 31, 1994, filed on  March 31, 1995 (File No. 000-19893).                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                         |
| 3.1.2  |   | Certificate of Amendment of Certificate of  Incorporation of Alpha Pro Tech, Ltd., incorporated by reference to  Exhibit 3(j) to Form 10-K for the year ended December 31,  1994, filed on March 31, 1995 (File No. 000-19893).           |
|   |   |                                                                                                                                                                                                                                                                         |
| 3.1.3  |   | Certificate of Ownership and Merger (BFD  Industries, Inc. into Alpha Pro Tech, Ltd.), incorporated by  reference to Exhibit 3(l) to Form 10-K for the year ended  December 31, 1994, filed on March 31, 1995 (File  No. 000-19893). |
|   |   |                                                                                                                                                                                                                                                                         |
| 3.2    |   | Bylaws of Alpha Pro Tech, Ltd., incorporated by  reference to Exhibit 3(g) to Form 10-K for the year ended  December 31, 1994, filed on March 31, 1995 (File No. 000-19893).                                                              |
|   |   |                                                                                                                                                                                                                                                                         |
| 31.1   |   | Certification Pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Exchange Act, signed by Chief Executive  Officer (filed herewith)                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                         |
| 31.2   |   | Certification Pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Exchange Act, signed by Chief Financial  Officer (filed herewith)                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                         |
| 32.1   |   | Certification Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  signed by Chief Executive Officer (filed herewith)                                                                                       |
|   |   |                                                                                                                                                                                                                                                                         |
| 32.2   |   | Certification Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  signed by Chief Financial Officer (filed herewith)                                                                                       |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
| ALPHA PRO TECH, LTD. |                     |
|---------------------------|--------------------------|
|                      |                     |   |
| DATE:                     | **August 11, 2010** | ** ** | BY: | /s/ **Sheldon Hoffman** |
|                      |                     |   | Sheldon Hoffman |
|                      |                     |   | Chief Executive Officer and Director |
|                      |                     |   |   |
| DATE:                     | **August 11, 2010** | ** ** | BY: | /s/ **Lloyd Hoffman** |
|                      |                     |   | Lloyd Hoffman |
|                      |                     |   | Chief Financial Officer |

 

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