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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 to Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

**For theQuarterly Period Ended September 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 telephone number, including areacode:  **(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 November 5, 2010** |
|-------------------------------|------------|-------------------------------------------------|
| Common Stock, $0.01 par value |       | 22,424,285 shares                               |

 

 

 

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Table ofContents

 

**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                                                                                            |                                                             | 1                 |

 

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Table of 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 consolidated financialstatements pursuant to the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)have been omitted pursuant to these rules and regulations, although theCompany believes that the disclosures made are adequate to make the informationnot 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 ended December 31,2009 filed with the SEC.  The Company’s2009 Annual Report contains information that may be helpful in analyzing thefinancial information contained in this report and in comparing its results ofoperations for the three and nine months ended September 30, 2010 with thesame periods in 2009.

 

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**Alpha Pro Tech, Ltd.**

 

**Consolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                           | ** ** | **September 30,****2010** | ** ** | **December 31,  2009 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                                 |       |                           |       |                                 |       |
| **Assets**                                                                                                                                                                           |       |                           |       |                                 |       |
| Current assets:                                                                                                                                                                      |       |                           |       |                                 |       |
| Cash and cash equivalents                                                                                                                                                            |       | $                              | 4,751,000  |                                 | $          | 9,753,000 |   |
| Accounts receivable, net of  allowance for doubtful accounts of $77,000 at September 30, 2010 and  $65,000 at December 31, 2009                                            |       | 4,774,000                      |       | 8,593,000                            |       |
| Inventories                                                                                                                                                                          |       | 17,657,000                     |       | 13,094,000                           |       |
| Prepaid expenses and other  current assets                                                                                                                                           |       | 2,947,000                      |       | 2,792,000                            |       |
| Deferred income taxes                                                                                                                                                                |       | 452,000                        |       | 457,000                              |       |
| Total current assets                                                                                                                                                                 |       | 30,581,000                     |       | 34,689,000                           |       |
|                                                                                                                                                                                 |       |                           |       |                                 |       |
| Property and equipment, net                                                                                                                                                          |       | 4,264,000                      |       | 3,843,000                            |       |
| Goodwill                                                                                                                                                                             |       | 55,000                         |       | 55,000                               |       |
| Intangible assets, net                                                                                                                                                               |       | 164,000                        |       | 184,000                              |       |
| Equity investments in and  advances to unconsolidated affiliates                                                                                                                     |       | 1,886,000                      |       | 1,701,000                            |       |
| Total assets                                                                                                                                                                         |       | $                              | 36,950,000 |                                 | $          | 40,472,000 |   |
|                                                                                                                                                                                 |       |                           |       |                                 |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                       |       |                           |       |                                 |       |
| Current liabilities:                                                                                                                                                                 |       |                           |       |                                 |       |
| Accounts payable                                                                                                                                                                     |       | $                              | 255,000    |                                 | $          | 2,963,000 |   |
| Accrued liabilities                                                                                                                                                                  |       | 553,000                        |       | 2,732,000                            |       |
| Total current liabilities                                                                                                                                                            |       | 808,000                        |       | 5,695,000                            |       |
|                                                                                                                                                                                 |       |                           |       |                                 |       |
| Deferred income taxes                                                                                                                                                                |       | 899,000                        |       | 906,000                              |       |
| Total liabilities                                                                                                                                                                    |       | 1,707,000                      |       | 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 September 30, 2010 and December 31, 2009,  respectively |       | 224,000                        |       | 224,000                              |       |
| Additional paid-in capital                                                                                                                                                           |       | 23,284,000                     |       | 23,164,000                           |       |
| Retained earnings                                                                                                                                                                    |       | 11,735,000                     |       | 10,483,000                           |       |
| Total shareholders’ equity                                                                                                                                                      |       | 35,243,000                     |       | 33,871,000                           |       |
| Total liabilities and  shareholders’ equity                                                                                                                                     |       | $                              | 36,950,000 |                                 | $          | 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  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net  sales                                     |       | $                                                                      | 10,325,000 |                                                                  | $          | 16,889,000 |   | $ | 33,175,000 |   | $ | 40,763,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Cost  of goods sold                            |       | 6,537,000                                                              |       | 8,680,000                                                             |       | 20,177,000 |   | 21,564,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross  profit                                  |       | 3,788,000                                                              |       | 8,209,000                                                             |       | 12,998,000 |   | 19,199,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Expenses:                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling,  general and administrative           |       | 3,361,000                                                              |       | 3,659,000                                                             |       | 10,663,000 |   | 10,299,000 |   |
| Depreciation  and amortization                 |       | 201,000                                                                |       | 165,000                                                               |       | 627,000 |   | 487,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income  from operations                        |       | 226,000                                                                |       | 4,385,000                                                             |       | 1,708,000 |   | 8,413,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other  income:                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Equity  in income of unconsolidated affiliates |       | 90,000                                                                 |       | 47,000                                                                |       | 262,000 |   | 217,000 |   |
| Interest,  net                                 |       | 5,000                                                                  |       | 5,000                                                                 |       | 20,000 |   | 7,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income  before provision for income taxes      |       | 321,000                                                                |       | 4,437,000                                                             |       | 1,990,000 |   | 8,637,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Provision  for income taxes                    |       | 127,000                                                                |       | 1,615,000                                                             |       | 738,000 |   | 3,132,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net  income                                    |       | $                                                                      | 194,000    |                                                                  | $          | 2,822,000 |   | $ | 1,252,000 |   | $ | 5,505,000 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic  net income per share                    |       | $                                                                      | 0.01       |                                                                  | $          | 0.13 |   | $ | 0.06 |   | $ | 0.24 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted  net income per share                  |       | $                                                                      | 0.01       |                                                                  | $          | 0.12 |   | $ | 0.06 |   | $ | 0.24 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic  weighted average shares outstanding     |       | 22,424,285                                                             |       | 22,359,902                                                            |       | 22,423,955 |   | 22,946,924 |   |
|                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Diluted  weighted average shares outstanding   |       | 22,424,285                                                             |       | 23,113,155                                                            |       | 22,724,272 |   | 23,337,644 |   |

 

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)**

 
| ** **                          | ** ** | **Common Stock** | ** ** | **Additional  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   |       | —                |       | —                  |       | 114,000      |       | —       |       | 114,000 |   |
|                                |       |                  |       |                    |       |         |       |         |       |   |   |
| Stock options exercised             |       | 5,000                 |       | —                  |       | 6,000        |       | —       |       | 6,000 |   |
|                                |       |                  |       |                    |       |         |       |         |       |   |   |
| Net income                          |       | —                |       | —                  |       | —       |       | 1,252,000    |       | 1,252,000 |   |
|                                |       |                  |       |                    |       |         |       |         |       |   |   |
| Balance at  September 30, 2010 |       | 22,424,285            |       | $                       | 224,000    |         | $          | 23,284,000   |       | $ | 11,735,000 |   | $ | 35,243,000 |   |

 

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 Nine Months Ended****September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2010**                                                                | ** ** | **2009** | ** ** |
| **Cash Flows  From Operating Activities:**                                                   |       |                                                                    |       |   |   |
| Net income                                                                                   |       | $                                                                       | 1,252,000  |   | $ | 5,505,000 |   |
| Adjustments to reconcile net  income to net cash (used in) provided by operating activities: |       |                                                                    |       |   |   |
| Share-based compensation  expense                                                            |       | 114,000                                                                 |       | 175,000 |   |
| Proceeds from dividends from  equity investments in unconsolidated affiliates                |       | 77,000                                                                  |       | — |   |
| Depreciation and  amortization                                                               |       | 627,000                                                                 |       | 487,000 |   |
| Deferred income taxes                                                                        |       | (2,000                                                                  | )          | (22,000 | ) |
| Equity in income of  unconsolidated affiliates                                               |       | (262,000                                                                | )          | (217,000 | ) |
| Changes in assets and  liabilities:                                                          |       |                                                                    |       |   |   |
| Accounts receivable, net                                                                     |       | 3,819,000                                                               |       | (4,602,000 | ) |
| Inventories                                                                                  |       | (4,563,000                                                              | )          | 2,617,000 |   |
| Prepaid expenses and other  current assets                                                   |       | (155,000                                                                | )          | (706,000 | ) |
| Accounts payable and accrued  liabilities                                                    |       | (4,887,000                                                              | )          | 3,578,000 |   |
|                                                                                         |       |                                                                    |       |   |   |
| Net cash (used in) provided  by operating activities                                         |       | (3,980,000                                                              | )          | 6,815,000 |   |
|                                                                                         |       |                                                                    |       |   |   |
| **Cash  Flows From Investing Activities:**                                                   |       |                                                                    |       |   |   |
| Purchase of property and  equipment                                                          |       | (1,024,000                                                              | )          | (285,000 | ) |
| Purchase of intangible  assets                                                               |       | (4,000                                                                  | )          | (11,000 | ) |
|                                                                                         |       |                                                                    |       |   |   |
| Net cash used in investing activities                                                        |       | (1,028,000                                                              | )          | (296,000 | ) |
|                                                                                         |       |                                                                    |       |   |   |
| **Cash  Flows From Financing Activities:**                                                   |       |                                                                    |       |   |   |
| Payments for the repurchase  and retirement of common stock                                  |       | —                                                                  |       | (2,109,000 | ) |
| Proceeds from the exercise  of stock options                                                 |       | 6,000                                                                   |       | 96,000 |   |
|                                                                                         |       |                                                                    |       |   |   |
| Net cash provided by (used  in) financing activities                                         |       | 6,000                                                                   |       | (2,013,000 | ) |
|                                                                                         |       |                                                                    |       |   |   |
| (Decrease) increase in cash  and cash equivalents during the period                          |       | (5,002,000                                                              | )          | 4,506,000 |   |
|                                                                                         |       |                                                                    |       |   |   |
| Cash and cash equivalents,  beginning of period                                              |       | 9,753,000                                                               |       | 4,578,000 |   |
| Cash and cash equivalents, end  of period                                                    |       | $                                                                       | 4,751,000  |   | $ | 9,084,000 |   |

 

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 topresent the statements in accordance with U.S. Generally Accepted AccountingPrinciples (“GAAP”).  The condensedconsolidated financial statements should be read in conjunction with theCompany’s current year filings on Form 10-Q and Form 8-K filed withthe SEC, as well as the consolidated financial statements for the year ended December 31,2009, which are included in the Company’s Annual Report on Form 10-K (the “200910-K”), which was filed with the SEC on March 10, 2010. The results ofoperations for the three and nine months ended September 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 key employees and non-employee directors. Stock options have been granted with exercise prices at or above thecurrent market price 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 Standards Codification (the “FASB ASC”, the “ASC” orthe “Codification”) 718, *Stock Compensation*(“ASC 718”), 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.  During the first nine months of 2010, therewere 970,000 stock options granted under the stock option plan.  During the first nine months of 2009, therewere no stock options granted under the stock option plan.  The Company recognized $114,000 and $175,000in share-based compensation expense in its consolidated financial statementsfor the nine months ended September 30, 2010 and 2009, respectively,related to previously issued options.

 

Stock options to purchase 2,536,670 and 1,630,000shares of common stock were outstanding at September 30, 2010 and 2009,respectively.  As of September 30,2010, 300,317 incremental shares were included in the computation of dilutedearnings per share because the exercise prices of those stock options were lessthan the average share price of the Company’s common 

 

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**Alpha Pro Tech, Ltd.**

 

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

 

stock for the quarter and, therefore, the effectwas dilutive.  As of September 30,2009, 753,253 incremental shares were included in the computation of dilutedearnings per share because the exercise prices of those stock options were lessthan the average share price of the Company’s common stock for the quarter and,therefore, the effect was dilutive.

 

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 StaffAccounting Bulletin No. 107, *Share-Based Payment,*for estimating the expected life of the options.  For options granted during a quarter orfiscal period, the Company uses historical data to estimate the expected lifeof the options.  The risk-free interestrate for periods within the contractual life of the award is based on the U.S.Treasury yield curve in effect at the time of grant. The expected volatility isbased on historical volatility of the expected life in years.  The Company uses an estimated dividend payoutratio of zero, as the Company has not paid dividends in the past and, at thistime, does not expect to do so in the future.

 

The following table summarizes stock option activityduring the nine months ended September 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                                         |       | 970,000     |       | $                                       | 1.60       |                                                                      | —     |                            | —     |   |
|                                            |       |        |       |                                    |       |                                                                      |       |                            |       |
| Forfeited or expired                            |       | —      |       | —                                  |       | —                                                                    |       | —                          |       |
|                                            |       |        |       |                                    |       |                                                                      |       |                            |       |
| Options outstanding at  September 30, 2010      |       | 2,537,000   |       | $                                       | 1.57       |                                                                      | 3.41       |                            | $          | 67,000 |   |
|                                            |       |        |       |                                    |       |                                                                      |       |                            |       |
| Options exercisable at  September 30, 2010 |       | 1,392,000   |       | $                                       | 1.60       |                                                                      | 2.43       |                            | $          | 1,000 |   |

 

As of September 30,2010, $708,000 of total unrecognized compensation cost related to stock optionsis expected to be recognized over a weighted average period of 2.61 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.

 

FASB ASC 810,*Consolidation,*(“ASC 810”)*,*eliminates a required quantitative approach to determine whether a variableinterest gives an entity a controlling financial interest in a variableinterest 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.

 

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**Alpha Pro Tech, Ltd.**

 

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

 

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 exerciseprice denominated in the currency of a market in which a substantial portion ofthe entity’s equity securities trades shall not be considered to contain amarket, 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.

** **

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

 

Inventoriesconsist of the following:

 
| ** **      | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                            | 8,363,000  |                        | $          | 9,663,000 |   |
| Work in process |       | 1,605,000                    |       | 586,000                     |       |
| Finished goods  |       | 7,689,000                    |       | 2,845,000                   |       |
|            |       | $                            | 17,657,000 |                        | $          | 13,094,000 |   |

 

**6.****                                     ****Equity Investments 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 coated fabrics.  In addition, the joint venture now suppliesproducts for the Disposable Protective Apparel segment.

 

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**Alpha Pro Tech, Ltd.**

 

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

 

The capital from the initial funding, along witha bank 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 manufacturingequipment necessary to produce coated material and sewing of proprietarydisposable protective apparel.  Thisfacility experienced a 38,500 square foot addition in mid-2010, bringing it toa total of 71,500 square feet.  Also in2005, Harmony built a 60,000 square foot facility in India for themanufacturing of housewrap and synthetic roof underlayment.  Two additions have been made to thisbuilding; one was a 20,000 square foot addition in late 2009,and the other wasa 22,000 square foot addition in mid-2010, for a total of 102,000 squarefeet.  All additions have been financedby Harmony with no guarantees from Alpha Pro Tech.

 

The Company is subject to the provisions of FASBASC 810, *Consolidation*, (“ASC 810”), whichdefines the criteria by which the Company determines the proper accounting forits investments in related entities. Specifically, ASC 810 requires the Company to assess whether or notrelated entities are variable interest entities (“VIEs”), as defined.  For those related entities that qualify asVIEs, ASC 810 requires the Company to determine whether or not the Company isthe primary beneficiary of the VIE, and, if so, to consolidate the 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”).ASC 323 requires recognition 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 for the first nine 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 September 30, 2010, Harmony hasrepaid a 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 $11,000 as of September 30,2010 and $15,000 as of December 31, 2009 related to the agreement.

 

For the three months ended September 30,2010 and 2009, Alpha Pro Tech purchased $3,196,000 and $1,866,000 of inventory,respectively, from Harmony.  For the ninemonths ended September 30, 2010 and 2009, the Company purchased $9,703,000and $3,209,000 of inventory, respectively, from Harmony.

 

For the three months ended September 30,2010 and 2009, the Company recorded equity in income of unconsolidatedaffiliates of $90,000 and $47,000, respectively.  For the nine months ended September 30,2010 and 2009, the Company recorded equity in income of unconsolidated affiliatesof $262,000 and $217,000, respectively. As of September 30, 2010, the Company’s investment in Harmony is$1,886,000, which consists of its original $1,450,000 investment and cumulativeequity in income of unconsolidated affiliates of $1,038,000, less $525,000 inrepayments of the advance and payment of $77,000 in dividends.

 

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**Alpha Pro Tech, Ltd.**

 

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

 

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

 

Accrued liabilities consist of the following:

 
| ** **                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Payroll                      |       | $                            | 199,000    |                        | $          | 131,000 |   |
| Commission and bonus accrual |       | 216,000                      |       | 2,178,000                   |       |
| Accrued professional fees    |       | 136,000                      |       | 150,000                     |       |
| Accrued rebates and other    |       | 2,000                        |       | 273,000                     |       |
|                         |       | $                            | 553,000    |                        | $          | 2,732,000 |   |

 

TheChief Executive Officer and President are each entitled to a bonus equal to 5%of the pre-tax profits of the Company, excluding bonus expense.  The Chief Executive Officer and Presidenthave voluntarily decided to forgo their bonuses for 2010.  Therefore, no executive bonuses were accruedfor the three months ended September 30, 2010.  Also, the $186,000 that was accrued for thesix months ended June 30, 2010 has been reversed resulting in $0 inaccrued executive bonuses for the nine months ended September 30, 2010.

** **

**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 nine months ended September 30,2010 and 2009, respectively:

 
| ** **                                         | ** ** | **For the Three Months Ended  September 30** | ** ** | **For the Nine Months Ended  September 30** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                                              | ** ** | **2009**                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Net income (Numerator)                             |       | $                                                                     | 194,000    |                                                                 | $          | 2,822,000 |   | $ | 1,252,000 |   | $ | 5,505,000 |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Shares (Denominator):                              |       |                                                                  |       |                                                                 |       |   |   |   |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Basic weighted average  shares outstanding         |       | 22,424,285                                                            |       | 22,359,902                                                           |       | 22,423,955 |   | 22,946,924 |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Add: Dilutive effect of  outstanding stock options |       | —                                                                |       | 753,253                                                              |       | 300,317 |   | 390,720 |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Diluted weighted average  shares outstanding       |       | 22,424,285                                                            |       | 23,113,155                                                           |       | 22,724,272 |   | 23,337,644 |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Net income per share:                              |       |                                                                  |       |                                                                 |       |   |   |   |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Basic                                              |       | $                                                                     | 0.01       |                                                                 | $          | 0.13 |   | $ | 0.06 |   | $ | 0. 24 |   |
|                                               |       |                                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Diluted                                            |       | $                                                                     | 0.01       |                                                                 | $          | 0.12 |   | $ | 0.06 |   | $ | 0.24 |   |

 

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**Alpha Pro Tech, Ltd.**

 

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

 

**9.****                                     ****Activity ofBusiness 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.

 

The following table shows consolidated net salesfor each segment for the three and nine months ended September 30, 2010and 2009, respectively:

 
| ** **                     | ** ** | **For the Three Months Ended  September 30** | ** ** | **For the Nine Months Ended  September 30** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                                              | ** ** | **2009**                                                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                     | ** ** | ** **                                                            | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable Protective  Apparel |       | $                                                                     | 3,781,000  |                                                                 | $          | 5,265,000 |   | $ | 13,710,000 |   | $ | 16,176,000 |   |
| Building Supply                |       | 5,241,000                                                             |       | 5,292,000                                                            |       | 14,826,000 |   | 11,307,000 |   |
| Infection Control              |       | 1,303,000                                                             |       | 6,332,000                                                            |       | 4,639,000 |   | 13,280,000 |   |
|                           |       |                                                                  |       |                                                                 |       |   |   |   |   |
| Total consolidated net sales   |       | $                                                                     | 10,325,000 |                                                                 | $          | 16,889,000 |   | $ | 33,175,000 |   | $ | 40,763,000 |   |

 

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**Alpha Pro Tech, Ltd.**

 

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

 

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

 
| ** **                               | ** ** | **For the Three Months Ended  September 30** | ** ** | **For the Nine Months  Ended  September 30** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                              | ** ** | **2009**                                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Disposable Protective  Apparel           |       | $                                                                     | 268,000    |                                                             | $          | 1,715,000 |   | $ | 2,402,000 |   | $ | 4,599,000 |   |
| Building Supply                          |       | 786,000                                                               |       | 1,041,000                                                        |       | 2,194,000 |   | 1,776,000 |   |
| Infection Control                        |       | 248,000                                                               |       | 3,317,000                                                        |       | 1,088,000 |   | 6,631,000 |   |
|                                     |       |                                                                  |       |                                                             |       |   |   |   |   |
| Total segment income                     |       | 1,302,000                                                             |       | 6,073,000                                                        |       | 5,684,000 |   | 13,006,000 |   |
| Unallocated corporate  overhead expenses |       | (981,000                                                              | )          | (1,636,000                                                       | )          | (3,694,000 | ) | (4,369,000 | ) |
| Provision for income taxes               |       | (127,000                                                              | )          | (1,615,000                                                       | )          | (738,000 | ) | (3,132,000 | ) |
|                                     |       |                                                                  |       |                                                             |       |   |   |   |   |
| Total consolidated net  income           |       | $                                                                     | 194,000    |                                                             | $          | 2,822,000 |   | $ | 1,252,000 |   | $ | 5,505,000 |   |

 

The following table shows the consolidated net property,equipment, goodwill and intangible assets by segment:

 
| ** **                     | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2010**              | ** ** | **2009**             | ** ** |
| Disposable Protective  Apparel |       | $                     | 1,211,000  |                 | $          | 806,000 |   |
| Building Supply                |       | 1,928,000             |       | 2,052,000            |       |
| Infection Control              |       | 1,221,000             |       | 1,091,000            |       |
|                           |       |                  |       |                 |       |
| Total segment assets           |       | 4,360,000             |       | 3,949,000            |       |
| Unallocated corporate assets   |       | 123,000               |       | 133,000              |       |
| Total consolidated assets      |       | $                     | 4,483,000  |                 | $          | 4,082,000 |   |

 

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

 

There were no subsequent events since September 30,2010.

 

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**Alpha Pro Tech, Ltd.**

 

**ITEM 2 .  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF 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.** Wemake available, 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 in the United States of America (“GAAP”) issued by the FASB, withinManagement’s Discussion and Analysis of Financial Condition and Results ofOperations 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 on or after 

 

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September 15, 2009. Prior FASB standards like SFAS No. 123(R), *Share-BasedPayment*, 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 or amortized using the straight-line methodover the shorter of the respective useful lives of the assets or the relatedlease terms plus any expected renewal periods 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 Accounting Bulletin(“SAB”) No. 104, *Revenue Recognition*, which states that revenue should berecognized when the following revenue recognition criteria are met: (1) persuasiveevidence of an arrangement exists; (2) title transfers, and the customerassumes the risk of loss; (3) the selling price is fixed or determinable;and (4) collection of the resulting receivable is reasonably assured.  These criteria are satisfied upon shipment ofproduct, and revenues are recognized 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 uses historicaldata 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.

 

**Income Taxes**

 

The Company accounts for income taxes in accordance withFASB ASC 740, *Income Taxes*, (“ASC740”).  ASC 740 requires an asset andliability approach for accounting for income taxes.  A valuation allowance is recorded to reducethe carrying amounts of deferred tax assets unless it is more likely than notsuch assets will be realized.

 

The Company adopted FASB ASC 740-10-25-16, *Income Taxes*, (“ASC 740-10-25-16”) related to accounting foruncertain tax positions on January 1, 2007.  As a result, the Company recognized noadditional liability or reduction in deferred tax assets for uncertain taxbenefits.  The Company has evaluated thetax contingencies in accordance with ASC 740-10-25-16.  At September 30, 2010 and 2009, respectively,the Company did not have any uncertain tax positions.

** **

**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.

 

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**RESULTS OF OPERATIONS**

 

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

 
| ** **                                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                     |       | 100.0                                                                  | %          | 100.0                                                                 | %          | 100.0 | % | 100.0 | % |
|                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross profit                                  |       | 36.7                                                                   | %          | 48.6                                                                  | %          | 39.2 | % | 47.1 | % |
|                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling, general and  administrative expenses |       | 32.6                                                                   | %          | 21.7                                                                  | %          | 32.1 | % | 25.3 | % |
|                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income from operations                        |       | 2.2                                                                    | %          | 26.0                                                                  | %          | 5.1 | % | 20.6 | % |
|                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income before provision for  income taxes     |       | 3.1                                                                    | %          | 26.3                                                                  | %          | 6.0 | % | 21.2 | % |
|                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income                                    |       | 1.9                                                                    | %          | 16.7                                                                  | %          | 3.8 | % | 13.5 | % |

 

**Three and Nine Months ended September 30,2010 compared to Three and Nine Months ended September 30, 2009**

** **

**Sales.**  Consolidated sales for the three months endedSeptember 30, 2010 decreased to $10,325,000 from $16,889,000 for the threemonths ended September 30, 2009, representing a decrease of $6,564,000, or38.9%.  This decrease consisted ofdecreased sales in the Disposable Protective Apparel segment of $1,484,000,decreased sales in the Building Supply segment of $51,000 and decreased salesin the Infection Control segment of $5,029,000.

 

Sales for the Disposable Protective Apparel segment forthe three months ended September 30, 2010 decreased by $1,484,000, or28.2%, to $3,781,000, compared to $5,265,000 for the same period of 2009.  The decrease is primarily due to a decline insales of disposable protective apparel to our former largest distributor.  Alpha Pro Tech was informed in the firstquarter of 2010 that this distributor had decided to launch their own,potentially competing, private label line of disposable protective apparel, andhas made a business decision to transition away from selling Alpha Pro Tech’sdisposable garments to their own brand of apparel.  Accordingly, we have decided to shift awayfrom our former largest distributor as the sole distributor of our CriticalCover® protective apparel product line and to utilize a more diversified,broader, global distribution strategy. We have and continue to expect to sell our apparel line to our formerlargest distributor but at lower than current levels.  This quarter’s decrease was partially offsetby increased sales to a broad base of our distribution network and inparticular to a major national distributor with whom we have preferred vendorstatus and from whom we received the Outstanding Performance ControlledEnvironments vendor award for 2009. Sales to this national distributor doubled in the third quarter of 2010as compared to the same period of 2009. The change in our relationship with our former largest disposableprotective apparel distributor will adversely affect sales but, could bebeneficial in the long term as we develop a broader base of distribution.

 

Building Supply segment sales for the three months endedSeptember 30, 2010 decreased by $51,000, or 1.0%, to $5,241,000, ascompared to $5,292,000 for the same period of 2009.  The segment decrease of 1.0% was primarilydue to an 8.2% decrease in sales of REXTM SynFelt synthetic roof underlayment,partially offset by a 23.6% increase in sales of REXTM Wrap housewrap.  Even though sales are basically flat thisquarter as compared to the same quarter last year, sales have increased in eachof the last four quarters.  Althoughdown, sales of REXTM SynFelt synthetic roof underlayment in the third quarter of2010 were the second highest on record, next only to the third 

 

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quarter of last year. In addition, REXTM SynFelt synthetic roof underlayment sales were up 8.9%sequentially from the second quarter ended June 30, 2010.  The sales mix of the Building Supply segmentfor the three months ended September 30, 2010 was 68% for synthetic roofunderlayment and 32% for housewrap.  Thiscompared to 75% for synthetic roof underlayment and 25% for housewrap for thethird quarter of 2009.

 

Our REXTM SynFelt synthetic roof underlayment, webelieve, is perceived as an industry leader in terms of quality and as themarket evolves from felt paper to synthetic roof underlayment we are in astrong position to capitalize on significant growth opportunities.  REXTM Wrap housewrap, our high-quality,multi-color printed housewrap, we believe, gives us a distinct competitiveadvantage in the marketplace and that our market share is growing even duringthis weak building market and economic downturn.  Discussions with potential and existingdistributors have been very encouraging and we recently increased our BuildingSupply segment sales team in anticipation of significant growth in the comingperiods.

 

In addition to growth opportunities with existingproducts, we are also excited about the launch of REXTM Fortis housewrap ourICC-ES approved first non-perforated breathable housewrap.  The non-perforated breathable housewrapmarket accounts for the majority of the total housewrap market, so our REXTMFortis housewrap should increase our housewrap market share.  Revenue should commence in the fourth quarterof 2010 and should contribute to our growth in 2011.  We remain optimistic about the future of theBuilding Supply segment.

 

Infection Control segment sales for the three monthsended September 30, 2010 decreased by $5,029,000, or 79.4%, to $1,303,000,compared to $6,332,000 for the same period of 2009.  Mask sales were down by 84.6%, or $4,485,000,to $814,000, shield sales were down by 57.4%, or $515,000, to $382,000, andmedical bed pad and pet bed sales were down by 21.3%, or $29,000, to $107,000,compared to the three months ended September 30, 2009.

 

The decrease in mask sales for the three months ended September 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 also down in the thirdquarter of 2010 due to the H1N1 Influenza A pandemic.

 

Consolidated sales for the nine months ended September 30,2010 decreased to $33,175,000 from $40,763,000 for the nine months ended September 30,2009, representing a decrease of $7,588,000, or 18.6%.  This decrease consisted of decreased sales inthe Disposable Protective Apparel segment of $2,466,000 and decreased sales inthe Infection Control segment of $8,641,000, offset primarily by increasedsales in the Building Supply segment of $3,519,000.

 

Sales for the Disposable Protective Apparel segment forthe nine months ended September 30, 2010 decreased by $2,466,000, or15.2%, to $13,710,000, compared to $16,176,000 for the same period of2009.  The decrease is primarily due todecreased sales due to a significant decrease in sales to our former largestdistributor, partially offset by increased sales to a broad base of ourdistribution network and, in particular, to the major national distributormentioned above, with which we have preferred vendor status.

 

Building Supply segment sales for the nine months ended September 30,2010 increased by $3,519,000, or 31.1%, to $14,826,000, as compared to$11,307,000 for the same period of 2009. The segment increase of 31.1% was primarily due to a 28.0% increase insales of REXTM SynFelt synthetic roof underlayment and a 43.1% increase in salesof REXTM Wrap housewrap.  The sales mix ofthe Building Supply segment for the nine months ended September 30, 2010was 69% for synthetic roof underlayment and 31% for housewrap.  This compared to 71% for synthetic roofunderlayment and 29% for housewrap for the nine months ended September 2009.

 

Infection Control segment sales for the nine monthsended September 30, 2010 decreased by $8,641,000, or 65.1%, to $4,639,000,compared to $13,280,000 for the same period of 2009.  Mask sales were down by 67.9%, or $6,742,000,to $3,189,000, shield sales were down by 64.1%, or $1,903,000, to $1,066,000,and medical bed pad and pet bed sales were up by 1.3%, or $5,000, to $384,000,compared to the nine months ended September 30, 2009.

 

The overall mask sales decrease for the first ninemonths of 2010 is primarily due to the surge in N-95 respirator mask sales thatcommenced in the second quarter of 2009 due to concerns regarding an outbreakof H1N1 Influenza A.  Shield sales weredown primarily due to approximately $1.3 million in 

 

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shields being shipped in 2009 from the total $1.7million non-recurring shield order received in the fourth quarter of 2008 andalso due to the H1N1 Influenza A pandemic.

 

**Gross Profit.**  Gross profit decreased by $4,421,000, or53.9%, to $3,788,000 for the three months ended September 30, 2010 from$8,209,000 for the same period in 2009. The gross profit margin was 36.7% for the three months ended September 30,2010, compared to 48.6% for the three months ended September 30, 2009.

 

Gross profit margin for the three months ended September 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 50.8% of total sales for thethree months ended September 30, 2010, compared to 31.3% for the sameperiod of 2009.  Building Supply segmentsales are expected to continue to grow as a percentage of total sales in thecoming periods.   Infection Controlsegment sales comprised 12.6% of total sales for the three months ended September 30,2010, as compared to 37.5% 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 was down in the third quarter of 2010, as compared to the same quarterof 2009.  Our gross profit in the thirdquarter, as with the second quarter, continued to be affected by the highercost of inventory acquired from alternative suppliers due to our strategy ofincreasing inventory levels to strengthen our position in the marketplace.  We do not expect to incur these higheracquisition costs on a going forward basis, but it will take us into next yearto turn this inventory.

 

Gross profit decreased by $6,201,000, or 32.3%, to$12,998,000 for the nine months ended September 30, 2010 from $19,199,000for the same period in 2009.  The grossprofit margin was 39.2% for the nine months ended September 30, 2010,compared to 47.1% for the nine months ended September 30, 2009.

** **

**Selling, General and Administrative Expenses.**  Selling, general andadministrative expenses decreased by $298,000, or 8.1%, to $3,361,000 for thethree months ended September 30, 2010 from $3,659,000 for the three monthsended September 30, 2009.  As apercentage of net sales, selling, general and administrative expenses increasedto 32.6% for the three months ended September 30, 2010 from 21.7% for thesame period in 2009.  The decrease of$298,000 in expenses was primarily due to a decrease of $678,000 in executivebonuses and decrease in commission of $24,000, partially offset by increasedBuilding Supply segment expenses of $268,000, increased professional fees andpublic company expenses of $61,000 and increased rent and utilities and otherexpenses of $75,000.

 

Selling, general and administrative expenses increasedby $364,000, or 3.5%, to $10,663,000 for the nine months ended September 30,2010 from $10,299,000 for the nine months ended September 30, 2009.  As a percentage of net sales, selling,general and administrative expenses increased to 32.1% for the nine monthsended September 30, 2010 from 25.3% for the same period in 2009.  The increase of $364,000 in expenses wasprimarily due to increased Building Supply segment expenses of $784,000.  Although Building Supply segment expensesincreased, as a percentage of sales they remained flat compared to lastyear.  They other increases wereprimarily due to increased employee compensation of $295,000, increasedmarketing expenses of $52,000, increased professional fees and public companyexpenses of $229,000, increased general office, factory and miscellaneousexpenses of $170,000, and increased rent and utilities of $92,000, offsetprimarily by a $225,000 severance agreement for our previous Senior VicePresident of Marketing, which was expensed during the first quarter of 2009, adecrease in commissions of $74,000 and a decrease of $959,000 in executivebonuses, as discussed 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.  The ChiefExecutive Officer and President have voluntarily decided to forgo their bonusesfor 2010.  No bonuses were accrued forthe three months ended September 30, 2010, as compared to $492,000 in thesame period of 2009.  No bonuses wereaccrued for the nine months ended September 30, 2010, as compared to$959,000 in the same period of 2009, given that the $186,000 that was accruedfor the six months ended June 30, 2010 has been reversed in the currentquarter.

 

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**Depreciation and Amortization.**  Depreciation and amortization expenseincreased by $36,000, or 21.8%, to $201,000 for the three months ended September 30,2010 from $165,000 for the same period in 2009. Depreciation and amortization expense increased by $140,000, or 28.7%,to $627,000 for the nine months ended September 30, 2010 from $487,000 forthe same period in 2009.

 

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

** **

**Income from Operations.**  Income from operations decreased by$4,159,000, or 94.8%, to $226,000 for the three months ended September 30,2010, as compared to income from operations of $4,385,000 for the three monthsended September 30, 2009.  Thedecrease in income from operations was due to a decrease in gross profit of$4,421,000 and an increase in depreciation and amortization of $36,000,partially offset by a decrease in selling, general and administrative expensesof $298,000.

 

Income from operations decreased by $6,705,000, or 79.7%,to $1,708,000 for the nine months ended September 30, 2010, as compared toincome from operations of $8,413,000 for the nine months ended September 30,2009.  The decrease in income fromoperations was due to a decrease in gross profit of $6,201,000, an increase inselling, general and administrative expenses of $364,000 and an increase indepreciation and amortization of $140,000.

** **

**Equity in Income of Unconsolidated Affiliates.** For the three months ended September 30, 2010, we recorded equityin income of unconsolidated affiliates of $90,000, as compared to $47,000 forthe same period of 2009.  For the ninemonths ended September 30, 2010, we recorded equity in income ofunconsolidated affiliates of $262,000, as compared to $217,000 for the sameperiod of 2009.

** **

**Net Interest.**  For the three months ended September 30,2010, net interest income was $5,000, compared to net interest income of $5,000for the three months ended September 30, 2009.  Interest income decreased to $5,000 for thethree months ended September 30, 2010, compared to $6,000 for the sameperiod of 2009.  Interest expensedecreased to $0 for the three months ended September 30, 2010, compared to$1,000 for the same period of 2009.

 

For the nine months ended September 30, 2010, netinterest income was $20,000, compared to net interest income of $7,000 for thenine months ended September 30, 2009. Interest income increased to $20,000 for the nine months ended September 30,2010, compared to $13,000 for the same period of 2009.  Interest expense decreased to $0 for the ninemonths ended September 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 September 30, 2010 was $321,000,compared to $4,437,000 for the three months ended September 30, 2009,representing a decrease of $4,116,000, or 92.8%.  The decrease in income before provision forincome taxes was due primarily to a decrease in income from operations of$4,159,000, partially offset by an increase of $43,000 in equity in income ofunconsolidated affiliates.

 

Income before provision for income taxes for the ninemonths ended September 30, 2010 was $1,990,000, compared to $8,637,000 forthe nine months ended September 30, 2009, representing a decrease of$6,647,000, or 77.0%.  The decrease inincome before provision for income taxes was due primarily to a decrease inincome from operations of $6,705,000, partially offset by an increase in netinterest income of $13,000 and by an increase of $45,000 in equity in income ofunconsolidated affiliates.

** **

**Provision for Income Taxes.**  The provision for income taxes for the threemonths ended September 30, 2010 was $127,000, compared to $1,615,000 forthe same period of 2009.  The estimatedeffective tax rate was 39.6% for the three months ended September 30,2010, compared to 36.3% for the same period in 2009.

 

The provision for income taxes for the nine months endedSeptember 30, 2010 was $738,000, compared to $3,132,000 for the sameperiod of 2009.  The estimated effectivetax rate was 37.1% for the nine months ended September 30, 2010, comparedto 36.3% for the same period in 2009.

** **

**Net Income.**  Net income for the three months ended September 30,2010 was $194,000, compared to net income of $2,822,000 for the three monthsended September 30, 2009, a decrease of $2,628,000, or 93.1%.  The net income decrease was primarily due toa decrease in income before provision for income taxes of $4,116,000, partiallyoffset by a decrease in income taxes of $1,488,000.  

 

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Net income as a percentage of sales for the three monthsended September 30, 2010 and 2009 was 1.9% and 16.7%, respectively.  Basic income per share for the three monthsended September 30, 2010 and 2009 was $0.01 and $0.13, respectively.  Diluted income per share for the three monthsended September 30, 2010 and 2009 was $0.01 and $0.12, respectively.

 

Net income for the nine months ended September 30,2010 was $1,252,000, compared to net income of $5,505,000 for the nine monthsended September 30, 2009, a decrease of $4,253,000, or 77.3%.  The net income decrease was primarily due toa decrease in income before provision for income taxes of $6,647,000, partiallyoffset by a decrease in income taxes of $2,394,000.  Net income as a percentage of sales for thenine months ended September 30, 2010 and 2009 was 3.8% and 13.5%,respectively.  Basic and diluted incomeper share for the nine months ended September 30, 2010 and 2009 was $0.06and $0.24, respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of September 30, 2010, we had cash and cashequivalents of $4,751,000 and working capital of $29,773,000, representing anincrease in working capital of 2.7%, or $779,000, since December 31,2009.  As of September 30, 2010, ourcurrent ratio was 38:1, compared to 6:1 as of December 31, 2009.  Cash and cash equivalents decreased by 51.3%,or $5,002,000, to $4,751,000 as of September 30, 2010, compared to$9,753,000 as of December 31, 2009. The decrease in cash and cash equivalents was due to cash used inoperating activities of $3,980,000 and cash used in investing activities of$1,028,000 for the aggregate purchase of property and equipment and intangibleassets, offset by cash proceeds from stock options exercised of $6,000.

 

The decrease in cash and cash equivalents for the ninemonth period ended September 30, 2010 was primarily due to an increase inour inventory levels by $4,563,000, a decrease in accounts payable of$2,708,000 and our pay down of accrued liabilities of approximately $2,200,000in the first quarter of 2010, partially offset by a decrease in accountsreceivable of $3,819,000.  As of September 30,2010 cash and cash equivalents has increased by $1,784,000 or 60.1% to$4,751,000 from $2,967,000 as of the end of the previous quarter.  Management expects the cash position toimprove over the coming periods as we anticipate a decrease in our overallinventory levels.

 

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 September 30, 2010, the primeinterest rate was 3.25%.  This creditline was renewed in May 2009 and expires in May 2011.  Our borrowing capacity on the line of creditwas $3,500,000 as of September 30, 2010. The available line of credit is based on a formula of eligible accountsreceivable and inventories.  As of September 30,2010, we did not have any borrowings under this credit facility.

 

Net cash used in operating activities was $3,980,000 forthe nine months ended September 30, 2010, compared to $6,815,000 net cashprovided by operating activities for the nine months ended September 30, 2009.  The net cash used in operating activities of$3,980,000 for the nine months ended September 30, 2010 was due to netincome of $1,252,000, adjusted by the following: a decrease in amortization ofshare-based compensation expense to $114,000, proceeds from dividends fromequity investments in unconsolidated affiliates of $77,000, an increase ofdepreciation and amortization to $627,000, a decrease in deferred income taxesof $2,000, an increase in equity in income of unconsolidated affiliates to$262,000, a decrease in accounts receivable of $3,819,000, an increase ininventory of $4,563,000, an increase in prepaid expenses and other currentassets of $155,000 and a decrease in accounts payable and accrued liabilitiesof $4,887,000.

 

Accounts receivable decreased by $3,819,000, or 44.4%,to $4,774,000 as of September 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 of daysof sales outstanding as of September 30, 2010 was 43 days, compared to 53days as of December 31, 2009.

 

Inventory increased by $4,563,000, or 34.8%, to$17,657,000 as of September 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$2,936,000, or 53.7%, to $8,404,000 as of September 30, 2010 due to ourstrategy of having a strong inventory position to compete in themarketplace.  Inventory for the InfectionControl segment increased by $729,000, or 17.8%, to $4,819,000 due to a 

 

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stockpiling of N-95 particulate respirator masks.  Although up year to date, both DisposableProtective Apparel and Infection Control inventories were down from June 30,2010.  In addition, inventory for theBuilding Supply segment increased by $898,000, or 25.4%, to $4,434,000 as of September 30,2010 as a result of our increased year to date and expected future sales.

 

Prepaid expenses and other current assets increased by$155,000, or 5.6%, to $2,947,000 as of September 30, 2010 from $2,792,000as of December 31, 2009.  Theincrease was primarily due to an increase in prepaid insurance and taxprepayments, partially offset by a decrease in prepaid inventory.

 

Accounts payable and accrued liabilities as of September 30,2010 decreased by $4,887,000, or 85.8%, to $808,000 from $5,695,000 as of December 31,2009.  The change was primarily due to adecrease in trade payables of $2,708,000 and a decrease in accrued liabilitiesof $2,179,000.  Accrued liabilities forthe nine months ended September 30, 2010 decreased as follows: commissionand bonus accrual decreased by $1,962,000, accrued rebates and other decreasedby $270,000 and accrued professional fees decreased by $14,000, partiallyoffset by an increase in accrued payroll expenses of $67,000.

 

Net cash used in investing activities was $1,028,000 forthe three months ended September 30, 2010, compared to net cash used ininvesting activities of $296,000 for the same period of 2009.  Our investing activities for the nine monthsended September 30, 2010 consisted primarily of expenditures for propertyand equipment of $1,024,000 and the purchase of intangible assets of $4,000,compared to $285,000 and $11,000, respectively, for the same period of2009.  The expenditures for property andequipment in 2010 were primarily for equipment for the Disposable ProtectiveApparel and Infection Control segments and to a lesser extent the BuildingSupply segment.

 

Net cash provided by financing activities was $6,000 forthe nine months ended September 30, 2010, compared to net cash used infinancing activities of $2,013,000 for the same period of 2009.  Our cash provided by financing activities forthe nine months ended September 30, 2010 was due to the proceeds for theexercise of stock options.  Our net cashused in financing activities for the nine months ended September 30, 2009was primarily due to the repurchase of $2,109,000 of common stock, partiallyoffset by $96,000 in proceeds for the exercise of stock options.

 

In February 2010, the Company announced anexpansion of $2.0 million to its existing stock repurchase plan.  As of September 30, 2010, we had$2,862,000 available for additional stock purchases under our repurchaseprogram.  During the three and ninemonths ended September 30, 2010, we did not repurchase any shares ofcommon stock.  As of September 30,2010, we had repurchased a total of 6,193,800 shares of common stock at a costof $7,658,000 through our repurchase program. We retire all stock repurchasesupon repurchase. Future repurchases are expected to be funded from cash on handand cash flows from operations.

 

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 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 

 

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rewards calculation for determining whichreporting entity, if any, has a controlling financial interest in a variableinterest entity with an approach focused on identifying which reporting entityhas the power to direct the activities of a variable interest entity that mostsignificantly 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 an 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 the consolidated earnings nor the consolidatedfinancial 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 exerciseprice denominated in the currency of a market in which a substantial portion ofthe entity’s equity securities trades shall not be considered to contain amarket, 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 the consolidated earnings nor the consolidated financial position forthe 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 September 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)of the 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)** | ** ** |
|------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                   |       |                                         |       |                                                   |       |                                                                                                                   |       |                                                                                                                                     |       |
| July 1-31, 2010   |       | —                                       |       | —                                                 |       | —                                                                                                                 |       | $                                                                                                                                        | 2,862,000  |   |
|                   |       |                                         |       |                                                   |       |                                                                                                                   |       |                                                                                                                                     |       |
| August 1-31, 2010 |       | —                                       |       | —                                                 |       | —                                                                                                                 |       | $                                                                                                                                        | 2,862,000  |   |
|                   |       |                                         |       |                                                   |       |                                                                                                                   |       |                                                                                                                                     |       |
| September1-30, 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:                | **November 10, 2010** | ** ** | BY: | /s/**Sheldon Hoffman** |
|                 |                       |   | Sheldon Hoffman |
|                 |                       |   | Chief Executive Officer and Director |
|                 |                       |   |   |
| DATE:                | **November 10, 2010** | ** ** | BY: | /s/**Lloyd Hoffman** |
|                 |                       |   | Lloyd Hoffman |
|                 |                       |   | Chief Financial Officer |

 

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