Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**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 the Quarterly Period Ended September 30,2009**

 

**Commission File No. 01-15725**

 

**Alpha Pro Tech, Ltd.**

(exact name ofregistrant as specified in its charter)

 

| **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’stelephone number, including area code:  **(905) 479-0654**

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes xNo o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation 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 large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany (as defined in Rule 12b-2 of the Exchange Act).

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.) Yes oNo x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date. 

 

| **Class**                      | ** ** | **Outstanding October 27, 2009** |
|--------------------------------|------------|-------------------------------------------------|
| Common Stock,  $0.01 par value |       | 22,370,950  shares                              |

 

 

 

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**Alpha Pro Tech, Ltd.**

 

Table of Contents

 
| ** **                                                                                          | **Page No.**                                       |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------|
|                                                                                                |                                                    |
| PART I. FINANCIAL INFORMATION                                                                  |                                                    |
|                                                                                                |                                                    |
| ITEM 1. Consolidated Financial Statements (Unaudited)                                               |                                                    |
|                                                                                                |                                                    |
| a)                                                                                                  | Consolidated  Balance Sheets                            | 2 |
|                                                                                                |                                                    |   |
| b)                                                                                                  | Consolidated  Income Statements                         | 3 |
|                                                                                                |                                                    |   |
| c)                                                                                                  | Consolidated  Statement of Shareholders’ Equity    | 4 |
|                                                                                                |                                                    |   |
| d)                                                                                                  | Consolidated  Statements of Cash Flows                  | 5 |
|                                                                                                |                                                    |   |
| e)                                                                                                  | Notes  to Consolidated Financial Statements (Unaudited) | 6 |
|                                                                                                |                                                    |
| ITEM 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 14                                                      |
|                                                                                                |                                                    |   |
| Cautionary Statements Regarding Forward-Looking  Information                                        | 14                                                      |
|                                                                                                |                                                    |   |
| New  Accounting Standards                                                                           | 21                                                      |
|                                                                                                |                                                    |   |
| ITEM 3. Quantitative and Qualitative Disclosures About  Market Risk                                 | 23                                                      |
|                                                                                                |                                                    |
| ITEM 4. Controls and Procedures                                                                     | 23                                                      |
|                                                                                                |                                                    |
| PART II. OTHER INFORMATION                                                                     |                                                    |
|                                                                                                |                                                    |
| ITEM 1. Legal Proceedings                                                                           | 24                                                      |
|                                                                                                |                                                    |
| ITEM 1A. Risk Factors                                                                               | 24                                                      |
|                                                                                                |                                                    |
| ITEM 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                | 24                                                      |
|                                                                                                |                                                    |
| ITEM 3. Defaults upon Senior Securities                                                             | 24                                                      |
|                                                                                                |                                                    |
| ITEM 4. Submission of Matters to a Vote of Security  Holders                                        | 25                                                      |
|                                                                                                |                                                    |
| ITEM 5. Other Information                                                                           | 25                                                      |
|                                                                                                |                                                    |
| ITEM 6. Exhibits                                                                                    |                                                    |
|                                                                                                |                                                    |
| SIGNATURES                                                                                          | 26                                                      |
|                                                                                                |                                                    |
| EXHIBITS                                                                                            | 27                                                      |

 

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##### ***PART I. FINANCIAL INFORMATION***

##### *** ***

#### **ITEM1. FINANCIAL STATEMENTS**

#### ** **

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

 

You should read thefollowing unaudited interim consolidated financial statements and theaccompanying notes together with the Company’s current year filings on Form 10-Qand Form 8-K, as well as the Company’s Annual Report on Form 10-K forthe year ended December 31, 2008 filed with the SEC.  The Company’s 2008 Annual Report containsinformation that may be helpful in analyzing the financial informationcontained in this report and in comparing its results of operations for thethree and nine months ended September 30, 2009 with the same period in2008.

 

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### **Consolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                                           | ** ** | **September 30,  2009** | ** ** | **December 31,  2008 (1)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                                                                                                                                                                                 |       |                         |       |                            |       |
| **Assets**                                                                                                                                                                           |       |                         |       |                            |       |
| Current  assets:                                                                                                                                                                     |       |                         |       |                            |       |
| Cash  and cash equivalents                                                                                                                                                           |       | $                            | 9,084,000  |                            | $          | 4,578,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $85,000 at  September 30, 2009 and $71,000 at December 31, 2008                                            |       | 9,693,000                    |       | 5,091,000                       |       |
| Inventories,  net                                                                                                                                                                    |       | 9,440,000                    |       | 12,057,000                      |       |
| Prepaid  expenses and other current assets                                                                                                                                           |       | 2,046,000                    |       | 1,340,000                       |       |
| Deferred  income taxes                                                                                                                                                               |       | 593,000                      |       | 510,000                         |       |
| Total  current assets                                                                                                                                                                |       | 30,856,000                   |       | 23,576,000                      |       |
|                                                                                                                                                                                 |       |                         |       |                            |       |
| Property  and equipment, net                                                                                                                                                         |       | 3,762,000                    |       | 3,942,000                       |       |
| Goodwill,  net                                                                                                                                                                       |       | 55,000                       |       | 55,000                          |       |
| Intangible  assets, net                                                                                                                                                              |       | 191,000                      |       | 202,000                         |       |
| Equity  investments in and advances to unconsolidated affiliates                                                                                                                     |       | 1,610,000                    |       | 1,393,000                       |       |
| Total  assets                                                                                                                                                                        |       | $                            | 36,474,000 |                            | $          | 29,168,000 |   |
|                                                                                                                                                                                 |       |                         |       |                            |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                        |       |                         |       |                            |       |
| Current  liabilities:                                                                                                                                                                |       |                         |       |                            |       |
| Accounts  payable                                                                                                                                                                    |       | $                            | 2,346,000  |                            | $          | 620,000 |   |
| Accrued  liabilities                                                                                                                                                                 |       | 3,115,000                    |       | 1,263,000                       |       |
| Total  current liabilities                                                                                                                                                           |       | 5,461,000                    |       | 1,883,000                       |       |
|                                                                                                                                                                                 |       |                         |       |                            |       |
| Deferred  income taxes                                                                                                                                                               |       | 880,000                      |       | 819,000                         |       |
| Total  liabilities                                                                                                                                                                   |       | 6,341,000                    |       | 2,702,000                       |       |
|                                                                                                                                                                                 |       |                         |       |                            |       |
| Shareholders’  equity:                                                                                                                                                          |       |                         |       |                            |       |
| Common  stock, $.01 par value, 50,000,000 shares authorized, 22,360,954 and  23,850,855 issued and outstanding at September  30, 2009 and  December 31, 2008, respectively |       | 224,000                      |       | 239,000                         |       |
| Additional  paid-in capital                                                                                                                                                          |       | 22,962,000                   |       | 24,785,000                      |       |
| Retained  earnings                                                                                                                                                                   |       | 6,947,000                    |       | 1,442,000                       |       |
| Total  shareholders’ equity                                                                                                                                                     |       | 30,133,000                   |       | 26,466,000                      |       |
| Total  liabilities and shareholders’ equity                                                                                                                                     |       | $                            | 36,474,000 |                            | $          | 29,168,000 |   |

 

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| (1) | The consolidated  balance sheet as of December 31, 2008 has been prepared using  information from the audited financial statements at that date. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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### **Consolidated IncomeStatements (Unaudited)**

 
| ** **                                                   | ** ** | **For  the Three Months Ended  September 30,** | ** ** | **For  the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                            | ** ** | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Net sales                                                    |       | $                                                   | 16,889,000 |                                               | $          | 10,217,000 |   | $ | 40,763,000 |   | $ | 26,654,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Cost of goods sold,  excluding depreciation and amortization |       | 8,680,000                                           |       | 5,862,000                                          |       | 21,564,000 |   | 14,931,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Gross margin                                                 |       | 8,209,000                                           |       | 4,355,000                                          |       | 19,199,000 |   | 11,723,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Expenses:                                                    |       |                                                |       |                                               |       |   |   |   |   |
| Selling, general and  administrative                         |       | 3,659,000                                           |       | 3,078,000                                          |       | 10,299,000 |   | 9,413,000 |   |
| Depreciation and  amortization                               |       | 165,000                                             |       | 151,000                                            |       | 487,000 |   | 433,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Income from operations                                       |       | 4,385,000                                           |       | 1,126,000                                          |       | 8,413,000 |   | 1,877,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Other income:                                                |       |                                                |       |                                               |       |   |   |   |   |
| Equity in income of  unconsolidated affiliates               |       | 47,000                                              |       | 85,000                                             |       | 217,000 |   | 123,000 |   |
| Interest, net                                                |       | 5,000                                               |       | 7,000                                              |       | 7,000 |   | 59,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Income before provision  for income taxes                    |       | 4,437,000                                           |       | 1,218,000                                          |       | 8,637,000 |   | 2,059,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Provision for income  taxes                                  |       | 1,615,000                                           |       | 473,000                                            |       | 3,132,000 |   | 790,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Net income                                                   |       | $                                                   | 2,822,000  |                                               | $          | 745,000 |   | $ | 5,505,000 |   | $ | 1,269,000 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Basic net income per  share                                  |       | $                                                   | 0.13       |                                               | $          | 0.03 |   | $ | 0.24 |   | $ | 0.05 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Diluted net income per  share                                |       | $                                                   | 0.12       |                                               | $          | 0.03 |   | $ | 0.24 |   | $ | 0.05 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Basic weighted average  shares outstanding                   |       | 23,359,902                                          |       | 24,720,617                                         |       | 22,946,924 |   | 24,979,837 |   |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Diluted weighted  average shares outstanding                 |       | 23,113,155                                          |       | 24,720,617                                         |       | 23,337,644 |   | 24,979,837 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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### **Consolidated Statement ofShareholders’ Equity (Unaudited)**

 
| ** **                            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|---------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                            | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Balance  at December 31, 2008    |       | 23,850,855       |       | $           | 239,000    |           | $          | 24,785,000   |       | $          | 1,442,000  |   | $ | 26,466,000 |   |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Share-based  compensation expense     |       | —           |       | —      |       | 175,000        |       | —       |       | 175,000    |       |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Stock  options exercised              |       | 64,999           |       | 1,000       |       | 95,000         |       | —       |       | 96,000     |       |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Common  stock repurchased and retired |       | (1,554,900       | )          | (16,000     | )          | (2,093,000     | )          | —       |       | (2,109,000 | )          |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Net  income                           |       | —           |       | —      |       | —         |       | 5,505,000    |       | 5,505,000  |       |
|                                  |       |             |       |        |       |           |       |         |       |       |       |
| Balance  at September  30, 2009  |       | 22,360,954       |       | $           | 224,000    |           | $          | 22,962,000   |       | $          | 6,947,000  |   | $ | 30,133,000 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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

 
| ** **                                                                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                      |       |                                              |       |   |   |
| Net  income                                                                    |       | $                                                 | 5,505,000  |   | $ | 1,269,000 |   |
| Adjustments  to reconcile net income to net cash used in operating activities: |       |                                              |       |   |   |
| Share-based  compensation expense                                              |       | 175,000                                           |       | 153,000 |   |
| Depreciation  and amortization                                                 |       | 487,000                                           |       | 433,000 |   |
| Deferred  income taxes                                                         |       | (22,000                                           | )          | (86,000 | ) |
| Equity  in income of unconsolidated affiliates                                 |       | (217,000                                          | )          | (123,000 | ) |
| Changes  in assets and liabilities:                                            |       |                                              |       |   |   |
| Accounts  receivable, net                                                      |       | (4,602,000                                        | )          | (691,000 | ) |
| Inventories,  net                                                              |       | 2,617,000                                         |       | 1,456,000 |   |
| Prepaid  expenses and other current assets                                     |       | (706,000                                          | )          | 264,000 |   |
| Accounts  payable and accrued liabilities                                      |       | 3,578,000                                         |       | (488,000 | ) |
|                                                                           |       |                                              |       |   |   |
| Net  cash provided by operating activities                                     |       | 6,815,000                                         |       | 2,187,000 |   |
|                                                                           |       |                                              |       |   |   |
| **Cash Flows From Investing Activities:**                                      |       |                                              |       |   |   |
| Purchase  of property and equipment                                            |       | (285,000                                          | )          | (56,000 | ) |
| Purchase  of intangible assets                                                 |       | (11,000                                           | )          | (43,000 | ) |
|                                                                           |       |                                              |       |   |   |
| Net  cash used in investing activities                                         |       | (296,000                                          | )          | (99,000 | ) |
|                                                                           |       |                                              |       |   |   |
| **Cash Flows From Financing Activities:**                                      |       |                                              |       |   |   |
| Payments  for the repurchase and retirement of common stock                    |       | (2,109,000                                        | )          | (1,335,000 | ) |
|                                                                           |       |                                              |       |   |   |
| Proceeds  from the exercise of stock options                                   |       | 96,000                                            |       | — |   |
|                                                                           |       |                                              |       |   |   |
| Net  cash used in financing activities                                         |       | (2,013,000                                        | )          | (1,335,000 | ) |
|                                                                           |       |                                              |       |   |   |
| Increase  in cash during the period                                            |       | 4,506,000                                         |       | 753,000 |   |
|                                                                           |       |                                              |       |   |   |
| Cash  and cash equivalents, beginning of period                                |       | 4,578,000                                         |       | 4,064,000 |   |
| Cash  and cash equivalents, end of period                                      |       | $                                                 | 9,084,000  |   | $ | 4,817,000 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**Notes toConsolidated Financial Statements (Unaudited)**

 

**1.****                                      TheCompany**

 

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 consists of a complete line of shoecovers, bouffant caps,coveralls, gowns, frocks and lab coats. The line of building supply products(formerly known as Engineered Products) consists of construction weatherizationproducts such as house wrap and synthetic roof underlayment.   The infection control line of productsincludes a line of face masks, eye shields and medical bed pads, as well as aline of pet beds. Previously, the line of medical bed pads and pet beds werereported as a separate segment under the name Extended Care. Because managementis now looking at the Extended Care segment in conjunction with the Infection Controlsegment, and since the majority of the Extended Care segment revenue is nowgenerated from the medical bed pads, it is now appropriate for these segmentsto be consolidated in the Infection Control segment.  All numbers have been updated to reflect theupdated segmentation.

 

The Company’sproducts are sold both under the “Alpha Pro Tech” brand name, as well as underprivate label, and are predominantly sold in the United States of America.

 

**2.****                                      Basisof Presentation**

 

The interim financialinformation included herein is unaudited; however, the information reflects alladjustments (consisting of normal recurring adjustments) that are, in theopinion of management, necessary for the fair presentation of the consolidatedfinancial position, results of operations and cash flows for the interimperiods. These consolidated financial statements have been prepared inaccordance with the rules and regulations of the Securities and ExchangeCommission (the “SEC”) and, therefore, omit certain information and footnotedisclosure necessary to present the statements in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  The consolidated financial statements shouldbe read in conjunction with the Company’s current year filings on Form 10-Qand Form 8-K filed with the SEC, as well as the consolidated financialstatements for the year ended December 31, 2008, which are included in theCompany’s Annual Report on Form 10-K (the” 2008 10-K”), which was filedwith the SEC on March 11, 2009. The results of operations for the threeand nine months ended September 30, 2009 are not necessarily indicative ofthe results to be expected for the full year. The consolidated balance sheet atDecember 31, 2008 was extracted from the audited consolidated financialstatements contained in the 2008 10-K and does not include all disclosuresrequired by GAAP for annual consolidated financial statements.

 

Also, management hasreviewed and evaluated material subsequent events from the balance sheet dateof September 30, 2009 through the financial statements issue date of October 28,2009.  All appropriate subsequent eventdisclosures, if any, have been made in the notes to the unaudited consolidatedfinancial statements.

 

**3.****                                      StockBased Compensation**

 

The Company maintains astock option plan under which the Company may grant incentive stock options andnon-qualified stock options to employees and non-employee directors.  Stock options have been granted with exerciseprices at or above the fair market value of the underlying shares of commonstock on the date of grant.  Options vestand expire according to terms established at the grant date.

 

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** **

**Notes to Consolidated FinancialStatements (Unaudited)**

 

The Company adopted theFinancial Accounting Standards Board (“FASB”) *AccountingStandards Codification* (the “FASB ASC”, the “ASC” or the “Codification”)Topic 718, *Stock Compensation*,effective January 1, 2006, using the modified prospective applicationmethod.  Topic 718 requires companies torecord compensation expense for the value of all outstanding and unvestedshare-based payments, including employee stock options and similar awards.  During the first nine months of 2009, therewere no stock options granted under the stock option plan; 550,000 stock options were granted under the stockoption plan during the first nine months of 2008.  The Company recognized $56,000 and $55,000 inshare-based compensation expense in its consolidated financial statements forthe three months ended September 30, 2009 and 2008, respectively, relatedto previously issued options.  TheCompany recognized $175,000 and $153,000 in share-based compensation expense inits consolidated financial statements for the nine months ended September 30,2009 and 2008, respectively, related to previously issued options.

 

Stock options topurchase 1,630,000 and 1,870,000 shares of common stock were outstanding at September 30,2009 and 2008, respectively.  As of September 30,2009, 753,253 incremental shares were included in the computation of dilutedearnings per share because the exercise prices of all of the stock options wereless than the average share price of the Company’s common stock for the 2009third quarter, and, therefore the effect was dilutive.   As of September 30, 2008, none of the1,870,000 outstanding stock options were included in the computation of dilutedearnings per share because the exercise prices of these options were greaterthan the average share price of the Company’s common stock for the 2008 thirdquarter, and, therefore, there was no dilutive effect.

 

The Company usedthe Black-Scholes-Merton option pricing model to value the options.  Prior to 2008, the Company used thesimplified method as discussed in Staff Accounting Bulletin No. 107, *Share-Based Payment*, for estimating theexpected life of the options.  Foroptions granted during a quarter, or fiscal period, the Company would usehistorical data to estimate the expected life of the options.  The risk-free interest rate for periodswithin the contractual life of the award is based on the U.S. Treasury yieldcurve in effect at the time of grant. The expected volatility is based onhistorical 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 does notexpect to in the future.

 

The following tablesummarizes stock option activity during the nine months ended September 30,2009:

 
| ** **                                      | ** ** | **Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual   Term (in  years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------------|------------|-------------|------------|-----------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|
| Options  outstanding at December 31, 2008  |       | 1,870,000   |       | $                                       | 1.56       |                                                              | 4.22       |                            | —     |   |
| Exercised                                       |       | (65,000     | )          | $                                       | 1.47       |                                                              | —     |                            | —     |   |
| Granted                                         |       | —      |       | —                                  |       | —                                                            |       | —                          |       |
| Forfeited  or expired                           |       | (175,000    | )          | $                                       | 1.62       |                                                              | —     |                            | —     |   |
|                                            |       |        |       |                                    |       |                                                              |       |                            |       |
| Options  outstanding at September 30, 2009 |       | 1,630,000   |       | $                                       | 1.56       |                                                              | 3.46       |                            | $          | 6,584,000 |   |
|                                            |       |        |       |                                    |       |                                                              |       |                            |       |
| Options  exercisable at September 30, 2009 |       | 1,159,000   |       | $                                       | 1.67       |                                                              | 3.38       |                            | $          | 4,557,000 |   |

 

As of September 30, 2009, $207,000 of totalunrecognized compensation cost related to stock options is expected to berecognized over a weighted average period of 1.68 years.

 

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**Notes to Consolidated FinancialStatements (Unaudited)**

 

**4.****                                     ****New Accounting Standards**

 

In the third quarter of2009, the Company adopted the FASB ASC. The ASC is the single official source of authoritative, nongovernmentalgenerally accepted accounting principles (“GAAP”), other than guidance issuedby the SEC.  The adoption of the ASC didnot have any impact on the consolidated financial statements includedherein.  For further discussion of theCodification, see the Critical Accounting Policies in Management’s Discussionand Analysis of Financial Condition and Results of Operations elsewhere in thisreport.

 

FASB ASC 820, *Fair Value Measurements and Disclosures*, (“ASC820” and formerly referred to as SFAS No. 157), establishes a frameworkfor measuring fair value in GAAP, clarifies the definition of fair value withinthat framework, and expands disclosures about the use of fair valuemeasurements.  ASC 820 is effective forfiscal years beginning after November 15, 2007.  ASC 820-10-65, *Transition and Open Effective Date Information*, deferred theeffective date of ASC 820, for non-financial assets and liabilities that arenot on a recurring basis recognized or disclosed at fair value in the financialstatements, to fiscal years, and interim periods, beginning after November 15,2008.  The Company has adopted theguidance within ASC 820 for non-financial assets and liabilities measured atfair value on a nonrecurring basis at January 1, 2009 and will continue toapply its provisions prospectively from January 1, 2009.  The application of ASC 820 for non-financialassets and liabilities did not have a significant impact on the consolidatedearnings nor the consolidated financial position for the periods presented.

 

FASB ASC 805, *Business Combinations*, (“ASC 805” andformerly referred to as SFAS No. 141(R)), requires the acquisition methodto be applied to all transactions and other events in which an entity obtainscontrol over one or more other businesses, requires the acquirer to recognizethe fair value of all assets and liabilities acquired, even if less than onehundred percent ownership is acquired, and establishes the acquisition datefair value as measurement date for all assets and liabilities assumed.  The guidance within ASC 805 is effectiveprospectively for any acquisitions made after fiscal years beginning after December 15,2008.

 

FASB ASC 810, *Consolidation*, (“ASC 810”), ASC 810-10-65,*Transition and Open Effective DateInformation,* (“ASC 810-10-65” and formerly referred to as SFAS No. 160),establishes accounting and reporting standards for the non-controlling interestin a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a non-controlling interestin a subsidiary is an ownership interest in the consolidated financialstatements. ASC 810-10-65 is effective for fiscal years beginning after December 15,2008.  The application of ASC 810-10-65did not have a significant impact on consolidated earnings nor the consolidatedfinancial position as the Company does not consolidate its partially ownedaffiliate.

 

FASB ASC 825, *Financial Instruments*, (“ASC 825”), ASC825-10-65, *Transition and Open EffectiveDate Information,* (“ASC 825-10-65” and formerly referred to as FSPFAS No. 107-1 and APB Opinion No. 28-1), requires disclosures aboutfair value of financial instruments for interim reporting periods as well as inannual financial statements.  Thisguidance also requires those disclosures in summarized financial information atinterim reporting periods.  ASC 825-10-65is effective prospectively for interim reporting periods ending after June 15,2009.  The application of ASC 825-10-65expanded the Company’s disclosures regarding the use of fair value in interimperiods.

 

FASB ASC 855, *Subsequent Events,* (“ASC 855” and formerlyreferred to as SFAS No. 165), modified the subsequent event guidance.  The three modifications to the subsequentevents guidance are: 1) *To* namethe two types of subsequent events either as recognized or non-recognizedsubsequent events, 2) To modify the definition of subsequent events to refer toevents or transactions that occur after the balance sheet date, but before thefinancial statement are issued or available to be issued and 3) To requireentities to disclose the date through which an 

 

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**Notes to Consolidated FinancialStatements (Unaudited)**

 

entity has evaluatedsubsequent events and the basis for that date, i.e. whether that daterepresents the date the financial statements were issued or were available tobe issued.  This guidance is effectivefor interim or annual financial periods ending after June 15, 2009, andshould be applied prospectively.

 

FASBASC 810,*Consolidation,*(“ASC 810”**and formerly referred to as SFAS No. 167)*,* eliminates a requiredquantitative approach to determine whether a variable interest gives an entitya controlling financial interest in a variable interest entity in favor of aqualitatively focused analysis.  Thisguidance is effective for the Company beginning in the first quarter of fiscalyear 2010.  The Company is currently evaluatingthe impact that the adoption of ASC 810 will have on its consolidated financialstatements.

 

FASB ASC 105, *Generally Accepted Accounting Principles*,(“ASC 105” and formerly referred to as SFAS No. 168), establishes the FASBAccounting Standards Codification as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim andannual periods ending after September 15, 2009.

 

In August 2009, theFASB issued Accounting Standards Update No. 2009-05 (“ASC Update 2009-05”),an update to FASB ASC 820, *Fair ValueMeasurements and Disclosures.* This update provides amendments to reduce potential ambiguity infinancial reporting when measuring the fair value of liabilities.  Among other provisions, this update providesclarification that in circumstances, in which a quoted price in an activemarket for the identical liability is not available, a reporting entity isrequired to measure fair value using one or more of the valuation techniquesdescribed in ASC Update 2009-05.  ASCUpdate 2009-05 will become effective for the Company’s annual consolidatedfinancial statements for the year ended December 31, 2009.  The Company has not determined the impactthat this update may have on its consolidated financial statements.

 

In October 2009, theFASB issued Accounting Standards Update No. 2009-13, Topic 605, *Revenue Recognition*: *MultipleDeliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues TaskForce. *This update providesapplication guidance on whether multiple deliverables exist, how thedeliverables should be separated and how the consideration should be allocatedto one or more units of accounting.  Thisupdate establishes a selling price hierarchy for determining the selling priceof a deliverable.  The selling price usedfor each deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is not available,or estimated selling price if neither vendor-specific or third-party evidenceis available.  The Company will berequired to apply this guidance prospectively for revenue arrangements enteredinto or materially modified after January 1, 2011; however, earlierapplication is permitted. The Company has not determined the impact that thisupdate may have on its consolidated financial statements.

 

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**Notes to Consolidated FinancialStatements (Unaudited)**

 

**5.****                                      Inventories**

 

Inventories consist of the following:

 
| ** **                                                     | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw  materials                                                 |       | $                            | 6,932,000  |                        | $          | 7,760,000 |   |
| Work  in process                                               |       | 287,000                      |       | 797,000                     |       |
| Finished  goods                                                |       | 2,609,000                    |       | 3,915,000                   |       |
|                                                           |       | 9,828,000                    |       | 12,472,000                  |       |
| Less:  reserve for slow-moving, obsolete or unusable inventory |       | (388,000                     | )          | (415,000                    | )          |
|                                                           |       | $                            | 9,440,000  |                        | $          | 12,057,000 |   |

 

**6.****                                      Investmentin and Advances to Unconsolidated Affiliates**

 

On June 14, 2005,Alpha ProTech Engineered Products, Inc., a subsidiary of the Company,entered into a joint venture with a manufacturer in India for the production ofbuilding products.  Under terms of thejoint venture agreement, a private company, Harmony Plastics Private Limited (“Harmony”),was created with 41.66% ownership, by Alpha ProTech Engineered Products, Inc.and 58.34% ownership, by Maple Industries and Associates.  Alpha ProTech Engineered Products, Inc.contributed $508,000 for share capital, and Maple Industries and Associates contributed$708,000.

 

This joint venturepositions Alpha ProTech Engineered Products, Inc. to respond to currentand expected increased product demand for house wrap and synthetic roofingunderlayment and provides future capacity for sales of specialty roofingcomponent products and custom products for industrial applications requiringhigh quality extrusion coated fabrics.

 

The capital fromthe initial funding, along with a bank loan to Harmony, which is guaranteedexclusively by Maple Industries and Associates and secured by the assets ofHarmony, was utilized to purchase an existing 33,000 square-foot manufacturingfacility in India.  The manufacturingfacility includes manufacturing equipment necessary to produce synthetic roofunderlayment.  Harmony has also built inIndia a 60,000 square-foot facility for the manufacturing of house wrap andother building products.

 

The Company issubject to the provisions of FASB ASC Topic 810, *Consolidation*,which defines the criteria by which the Company determines the properaccounting for its investments in related entities.  Specifically, Topic 810 requires the Companyto assess whether or not related entities are variable interest entities (“VIEs”),as defined.  For those related entitiesthat qualify as VIEs, Topic 810 requires the Company to determine whether ornot the Company is the primary beneficiary of the VIE, and, if so, toconsolidate the VIE.

 

The Company hasdetermined that Harmony is not a VIE and is, therefore, considered to be anunconsolidated affiliate.

 

The Companyrecords its investment in Harmony as “Equity investments in and advances tounconsolidated affiliates” on the accompanying Consolidated Balance Sheets(Unaudited).  The Company records itsequity interest in Harmony’s results of operations as “Equity in income ofunconsolidated affiliates” on the accompanying Consolidated Income Statements(Unaudited).

 

The Companyreviews annually its investment in Harmony for impairment in accordance withFASB ASC Topic 323, *Investments — EquityMethod and Joint Ventures*. Topic 323 requires recognition of a losswhen the decline in an investment is other-than-temporary.  In determining 

 

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**Notes to Consolidated FinancialStatements (Unaudited)**

 

whether thedecline is other-than-temporary, the Company considers the nature of theindustry in which Harmony operates, its historical performance, its performancein relation to its peers and the current economic environment.  The Company has concluded that no impairmentwas required.

 

Alpha ProTechEngineered Products, Inc. initially invested $1,450,000 in the jointventure; $508,000 for share capital and $942,000 as a long term advance formaterials.  Fifty percent of the $942,000long term advance was to be repaid over a six-year term commencing in July 2006,and the balance is to be paid in the seventh year.  During 2006, Harmony repaid $39,000 inscheduled payments and $461,000 in additional payments, for a total of$500,000, leaving a balance of $442,000. Harmony has not made any further payments to date and, except for annualinterest payments, is not required to make and further payments until 2013,when the balance the advance is due in full. Interest of 3.5% is to be paid annually on this advance, and the Companyhas an interest receivable of $12,000 as of September 30, 2009 related tothis agreement.  The interest payment for2009 is due in the first quarter of 2010.

 

For the threemonths ended September 30, 2009 and 2008, the Company purchased $1,866,000and $198,000, respectively, from Harmony. For the nine months ended September 30, 2009 and 2008, the Companypurchased $3,209,000 and $1,805,000, respectively, from Harmony.  For the nine months ended September 30,2009 and 2008, the Company recorded equity income in unconsolidated affiliatesof $217,000 and $123,000, respectively. As of September 30, 2009, the Company’s investment in Harmony is$1,610,000, which comprises its original $1,450,000 investment and cumulativeequity in income of unconsolidated affiliates of $660,000, of which the Companyhas received $0 in dividends, less $500,000 in repayments of the advance.

 

**7.****                                      AccruedLiabilities**

 

Accrued liabilitiesconsist of the following:

 
| ** **                    | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Payroll                       |       | $                            | 211,000    |                        | $          | 280,000 |   |
| Income  tax                   |       | 1,082,000                    |       | —                      |       |
| Commission  and bonus accrual |       | 1,344,000                    |       | 545,000                     |       |
| Accrued  professional fees    |       | 113,000                      |       | 240,000                     |       |
| Accrued  rebates and other    |       | 365,000                      |       | 198,000                     |       |
|                          |       | $                            | 3,115,000  |                        | $          | 1,263,000 |   |

 

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**Notes to Consolidated FinancialStatements (Unaudited)**

 

**8.****            Basicand Diluted Net Income Per Share**

 

The followingtable provides a reconciliation of both net income and the number of sharesused in the computation of “basic” earnings per share (“EPS”), which utilizesthe weighted average number of shares outstanding without regard to potentialshares, and “diluted” EPS, which includes all such dilutive shares for thethree and nine months ended September 30, 2009 and 2008, respectively:

 
| ** **                                         | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                           | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Net  income (Numerator)                            |       | $                                                  | 2,822,000  |                                              | $          | 745,000 |   | $ | 5,505,000 |   | $ | 1,269,000 |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Shares  (Denominator):                             |       |                                               |       |                                              |       |   |   |   |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Basic  weighted average shares outstanding         |       | 22,359,902                                         |       | 24,720,617                                        |       | 22,946,924 |   | 24,979,837 |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Add:  Dilutive effect of outstanding stock options |       | 753,253                                            |       | —                                            |       | 390,720 |   | — |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Diluted  weighted average shares outstanding       |       | 23,113,155                                         |       | 24,720,617                                        |       | 23,337,644 |   | 24,979,837 |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Net  income per share:                             |       |                                               |       |                                              |       |   |   |   |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                              |       | $                                                  | 0.13       |                                              | $          | 0.03 |   | $ | 0.24 |   | $ | 0.05 |   |
|                                               |       |                                               |       |                                              |       |   |   |   |   |
| Diluted                                            |       | $                                                  | 0.12       |                                              | $          | 0.03 |   | $ | 0.24 |   | $ | 0.05 |   |

 

**9.********                                   Activityof Business Segments**

 

The Companyoperates through three product segments:

 

**DisposableProtective Apparel:** consisting of a complete line ofdisposable protective clothing such as shoecovers (including the Aqua Trak® andspunbond shoecovers), bouffant caps, coveralls, frocks, lab coats and hoods forthe pharmaceutical, cleanroom, industrial and medical markets.

 

**BuildingSupply (formerly known as Engineered Products):** consisting ofa line of construction weatherization products, such as house wrap and syntheticroof underlayment, for the building and re-roofing markets.  The Company’s equity in income ofunconsolidated affiliates (Harmony) is included in the total segment income forBuilding Supply in the table below.

 

**InfectionControl:** consisting of a line of face masks and eye shieldsprincipally for the medical, dental and industrial markets.  It also consists of a line of medical bedpads as well as a line of pet beds. Previously, the line of medical bed pads andpet beds were reported as a separate segment under the name of Extended Care.Because management is now looking at the Extended Care segment in conjunctionwith the Infection Control segment, and since the majority of the Extended Carerevenue is now generated from the sale of medical bed pads, it is now 

 

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**Notes toConsolidated Financial Statements (Unaudited)**

 

appropriate forthese segments be consolidated in the Infection Control segment.  All numbers reflect the updated segmentation.

 

The accountingpolicies of the segments exclude charges allocated to corporate officeexpenses, professional fees, public company expenses, executive and managementbonuses and income taxes.  The Companyevaluates the performance of its segments and allocates resources to them basedprimarily on net sales.

 

The followingtable shows net sales for each segment for the three and nine months ended September 30,2009 and 2008, respectively:

 
| ** **                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **2009**                                           | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|                           | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Disposable  Protective Apparel |       | $                                                  | 5,265,000  |                                              | $          | 5,439,000 |   | $ | 16,176,000 |   | $ | 15,226,000 |   |
| Building  Supply               |       | 5,292,000                                          |       | 3,155,000                                         |       | 11,307,000 |   | 6,439,000 |   |
| Infection  Control             |       | 6,332,000                                          |       | 1,623,000                                         |       | 13,280,000 |   | 4,989,000 |   |
|                           |       |                                               |       |                                              |       |   |   |   |   |
| Consolidated  total net sales  |       | $                                                  | 16,889,000 |                                              | $          | 10,217,000 |   | $ | 40,763,000 |   | $ | 26,654,000 |   |

 

The following table showsthe reconciliation of total segment income to total consolidated net income forthe three and nine months ended September 30, 2009 and 2008, respectively:

 
| ** **                      | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                           | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Disposable  Protective Apparel  |       | $                                                  | 1,715,000  |                                              | $          | 1,378,000 |   | $ | 4,599,000 |   | $ | 3,691,000 |   |
| Building  Supply                |       | 1,041,000                                          |       | 535,000                                           |       | 1,776,000 |   | 343,000 |   |
| Infection  Control              |       | 3,317,000                                          |       | 532,000                                           |       | 6,631,000 |   | 1,571,000 |   |
|                            |       |                                               |       |                                              |       |   |   |   |   |
| Total  segment income           |       | 6,073,000                                          |       | 2,445,000                                         |       | 13,006,000 |   | 5,605,000 |   |
| Unallocated  corporate expenses |       | (1,636,000                                         | )          | (1,227,000                                        | )          | (4,369,000 | ) | (3,546,000 | ) |
| Provision  for income taxes     |       | (1,615,000                                         | )          | (473,000                                          | )          | (3,132,000 | ) | (790,000 | ) |
|                            |       |                                               |       |                                              |       |   |   |   |   |
| Consolidated  net income        |       | $                                                  | 2,822,000  |                                              | $          | 745,000 |   | $ | 5,505,000 |   | $ | 1,269,000 |   |

 

**10.****           SubsequentEvents**

 

There were nosubsequent events.

 

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**ITEM 2****  .****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

You should read thefollowing discussion and analysis together with our consolidated financialstatements (unaudited) and the notes to our consolidated financial statements(unaudited), included elsewhere in this report, and our audited financialstatements and the notes thereto, which appear in our  Form 10-K for the year ended December 31,2008.

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

This report on Form 10-Q contains “forward-lookingstatements” that are made pursuant to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Forward-looking statements includestatements concerning plans, objectives, goals, strategies, future events,future revenues or performance, capital expenditures and other information thatis not historical information. When used in this report, the words “estimates”,“expects”, “anticipates”, “forecasts”, “plans”, “intends”, “believes” andvariations of such words or similar expressions are intended to identifyforward-looking statements. Additional forward-looking statements may be madeby us from time to time. All such subsequent forward-looking statements,whether written or oral and whether made by or on behalf of us, are also expresslyqualified by these cautionary statements.

 

Our forward-looking statements are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs andprojections are expressed in good faith, and we believe that there is a reasonablebasis for them, including, without limitation, management’s examination ofhistorical operating trends, data contained in our records and other dataavailable from third parties. However, we cannot assure you that management’sexpectations, beliefs and projections will result or be achieved oraccomplished. Our forward-looking statements apply only as of the date made.Except as required by law, we undertake no obligation to publicly update orrevise forward-looking statements that may be made to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

**Whereto find more information about us.** We make 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, we provide electronic or paper copies of our filingsfree of charge upon request.

 

**Critical Accounting Policies**

 

The Financial AccountingStandards Board (“FASB”) recognized the complexity of its standard-settingprocess and embarked on a revised process in 2004 that culminated in therelease on July 1, 2009 of the *FASB Accounting StandardsCodification*TM (the “FASB ASC”), which is also sometimesreferred to as the “Codification” or the “ ASC”.  The Codification does not change how theCompany accounts for its transactions or the nature of related disclosuresmade.  To the Company, this means insteadof following the rules in Statement of Financial Accounting Standards No. 123R(“SFAS No. 123R”), *Share-Based Payment*,we will follow the guidance in Topic 718, *Stock Compensation*.  References to generally accepted accountingprinciples (“GAAP”) issued by the FASB, within Management’s Discussion andAnalysis of Financial Condition and Results of Operations and in the Notes toConsolidated Financial Statements (Unaudited) included elsewhere in this reportare to the Codification.  The FASBfinalized the Codification effective for periods ending on or after September 15,2009.  Prior FASB standards like SFAS No. 123R,are no longer being issued by the FASB.

 

The preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates of the financialstatements and the reported amounts of net sales and expenses during thereported periods.

 

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We base estimates on pastexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  The applicationof these accounting policies on a consistent basis enables us to provide timelyand reliable financial information.  Ourcritical accounting polices include the following:

 

**Inventories:**Inventories include freight-in, materials, labor and overhead costs and arestated at the lower of cost (computed on a standard cost basis, whichapproximates average cost) or market. Provision is made for slow-moving, obsolete or unusable inventory. We assessour inventory for estimated obsolescence or unmarketable inventory and, ifnecessary, write down the difference between the cost of inventory and theestimated market value, less cost to sell, based upon assumptions about futuresales and supply on-hand. If actual market conditions are less favorable thanthose projected by management, additional inventory write-downs may berequired.

 

**Revenue Recognition:**For sales transactions, we comply with the provisions of the SEC’s StaffAccounting Bulletin No. 104, *Revenue Recognition,*which states that revenue should be recognized when the following revenuerecognition criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured. These criteria are satisfied upon shipment of product and revenues arerecognized accordingly.

 

Sales are reduced for anyanticipated sales returns, rebates and allowances based on historicalexperience.  Since our return policy isonly 90 days and our products are not generally susceptible to externalfactors, such as technological obsolescence or significant changes in demand,we are able to make a reasonable estimate for returns. We offer end-userproduct specific and sales volume rebates to select distributors.  Our rebates are based on actual sales and areaccrued monthly.

 

**StockBased Compensation:** The Company adopted FASB ASC Topic 718, *StockCompensation*, effective January 1, 2006, using the modifiedprospective application method.  Topic718 requires companies to record compensation expense for the value of alloutstanding and unvested share-based payments, including employee stock optionsand similar awards.

 

The fair values of stockoption grants are determined using the Black-Scholes-Merton option pricingmodel and the following assumptions: expected stock price volatility based onhistorical volatility and management’s expectations of future volatility,risk-free interest rates from published sources, years to maturity based onhistorical data and no dividend yield, as management currently does not intendto pay dividends in the near future. The Black-Scholes-Merton option valuationmodel was developed for use in estimating the fair value of traded options thathave no vesting restrictions and that are fully transferable. In addition, theoption valuation model requires the input of highly subjective assumptions,including expected stock price volatility. Our stock options have characteristics significantly different fromthose of traded options and changes in the subjective input assumptions canmaterially affect their fair value.

 

**OVERVIEW**

 

Alpha Pro Tech is in thebusiness of protecting people, products and environments. We accomplish this bydeveloping, manufacturing and marketing a line of high-value, disposableprotective apparel and infection control products for the cleanroom,industrial, pharmaceutical, medical and dental markets. We also manufacture aline of building supply construction weatherization products.  Our products are sold both under the “AlphaPro Tech” brand name, as well as under private label.

 

Our products are groupedinto three business segments:  theDisposable Protective Apparel segment, consisting of disposable protectiveapparel; the Building Supply segment (formerly known as the Engineered Productssegment), consisting of construction weatherization products, such as housewrap and synthetic roof underlayment; and the Infection Control segment,consisting of face masks, eye shields and medical bed pads as well as a line ofpet beds.  Previously, the line ofmedical bed pads and pet beds were reported as a separate segment under the nameof Extended Care. Because 

 

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management is now lookingat the Extended Care segment in conjunction with the Infection Control segment,and since the majority of the Extended Care revenue is now generated from themedical bed pads, as of the first quarter of 2009, these products areconsolidated in the Infection Control segment. All numbers have been updated to reflect the updated segmentation.

 

Our target markets arepharmaceutical 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 usedprimarily in cleanrooms, industrial safety manufacturing environments, healthcare facilities, such as hospitals, laboratories and dental offices, as well asbuilding and re-roofing sites.  Ourproducts are distributed principally in the United States through a networkconsisting of purchasing groups, national distributors, local distributors,independent sales representatives and our own sales and marketing force.

 

# **RESULTS OF OPERATIONS**

# ** **

The following table setsforth certain operational data as a percentage of sales for the periodsindicated:

 
| ** **                                | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                           | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                     |       | 100.0                                              | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Gross  profit                             |       | 48.6                                               | %          | 42.6                                              | %          | 47.1 | % | 44.0 | % |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Selling,  general and administrative      |       | 21.7                                               | %          | 30.1                                              | %          | 25.3 | % | 35.3 | % |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Income  from operations                   |       | 26.0                                               | %          | 11.0                                              | %          | 20.6 | % | 7.0 | % |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Income  before provision for income taxes |       | 26.3                                               | %          | 11.9                                              | %          | 21.2 | % | 7.7 | % |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Net  income                               |       | 16.7                                               | %          | 7.3                                               | %          | 13.5 | % | 4.8 | % |

##  

## **Three and Nine Months ended September 30, 2009, compared to Threeand Nine Months ended September 30, 2008**

##  

**Sales:**  Consolidated sales for the three months endedSeptember 30, 2009 increased to $16,889,000 from $10,217,000 for the threemonths ended September 30, 2008, representing an increase of $6,672,000,or 65.3%.  This increase consisted ofincreased sales in the Infection Control segment of $4,709,000 and increasedBuilding Supply segment sales of $2,137,000, partially offset by decreasedDisposable Protective Apparel segment sales of $174,000.

 

The Building Supplysegment (formerly known as the Engineered Products segment) sales for the threemonths ended September 30, 2009 increased by $2,137,000, or 67.7%, to aquarterly record of $5,292,000, compared to $3,155,000 for the same period of2008.  This quarterly record follows onthe heels of a previous quarterly record of $3,758,000 in the second quarter of2009.  The segment increase was primarilydue to a 72.6% increase in sales of REXTM Synfelt synthetic roof underlaymentand a 52.0% increase in sales of REXTM Wrap house wrap.  The sales mix within the Building Supplysegment for the third quarter of 2009 and 2008 was 75% and 72%, respectively,for synthetic roof underlayment and 25% and 28%, respectively, for house wrap.

 

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** **

Our REXTM Synfeltsynthetic roof underlayment is perceived as a superior product in the industryand as the market evolves from felt paper to sythethic roof underlayment, whichis a significant opportunity for us; we believe that we are in a very goodposition to pick up market share. Additionally, we believe that our high-quality, multi-color printedhouse wrap gives us a distinct competitive advantage in the marketplace andthat our market share is growing even during this weak building market andeconomic downturn.

 

Our Building Supplysegment distribution channel strategy continues to strengthen each and everyquarter and should continue to broaden our ability to take advantage of marketopportunities throughout this year and into the future.

 

Sales for the DisposableProtective Apparel segment for the three months ended September 30, 2009decreased by $174,000, or 3.2%, to $5,265,000, compared to $5,439,000 for thesame period of 2008, which were the highest quarterly sales of 2008.  Sales in the third quarter of this year wereadversely affected by a supply chain issue in which goods from Asia weredelayed due to the high demand for products relating to the global H1N1Influenza A pandemic.

 

Infection Control segmentsales for the three months ended September 30, 2009 increased by$4,709,000, or 290.1%, to a quarterly record of $6,332,000, compared to$1,623,000 for the same period of 2008. This quarterly record follows on the heels of a previous quarterlyrecord of $4,712,000 in the second quarter of 2009.  Mask sales were up by 378.9%, or $4,193,000,shield sales were up by 156.5%, or $547,000, and medical bed pad and pet bedswere down by 18.3%, or $31,000, compared to the three months ended September 30,2008.

 

N-95 respirator masksales were up significantly in the third quarter of 2009, compared to the samequarter last year and compared to the second quarter of 2009.  Our N-95 respirator mask sales are expectedto continue to grow significantly in the fourth quarter from current levels andare expected to be substantially stronger than normal for the foreseeablefuture amidst concerns relating to the global H1N1 Influenza A pandemic.  Shield sales also improved in the thirdquarter of 2009, primarily due to the H1N1 outbreak.

 

Consolidated sales for the nine months ended September 30,2009 increased to $40,763,000 from $26,654,000 for the nine months ended September 30,2008, representing an increase of $14,109,000, or 52.9%.  This increase consisted of increased sales inthe Infection Control segment of $8,291,000, increased Building Supply segmentsales of $4,868,000 and increased Disposable Protective Apparel segment salesof $950,000.

 

Building Supply segmentsales for the nine months ended September 30, 2009 increased by$4,868,000, or 75.6%, to $11,307,000, compared to $6,439,000 for the sameperiod of 2008.  The segment increase wasprimarily due to a 100.2% increase in sales of REXTM Synfelt synthetic roofunderlayment and a 32.7% increase in sales of REXTM Wrap house wrap.  The sales mix within the Building Supplysegment for the first nine months of 2009 and 2008 was 71% and 62%,respectively, for synthetic roof underlayment and 29% and 38%, respectively,for house wrap.

 

Sales for the DisposableProtective Apparel segment for the nine months ended September 30 2009increased by $950,000, or 6.2%, to $16,176,000, compared to $15,226,000 for thesame period of 2008.  The year-to-dateincrease was related primarily to increased sales to our largest distributor,as well as increased sales to a broad base of our distribution network.

 

Infection Control segmentsales for the nine months ended September 30, 2009 increased by$8,291,000, or 166.2%, to $13,280,000, compared to $4,989,000 for the sameperiod of 2008.  Mask sales were up by201.1%, or $6,632,000, shield sales were up by 173.8%, or $1,885,000, andmedical bed pad and pet beds were down 37.3%, or $226,000, compared to the ninemonths ended September 30, 2008.

 

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** **

The overall increase inmask sales for the first nine months of 2009 was primarily attributable to thesurge in N-95 respirator mask sales in the second and third quarters of 2009due to concerns relating to the H1N1 Influenza A pandemic.  Shield sales were up primarily due toapproximately $1.3 million in shields being shipped in 2009 from a $1.7 millionnon-recurring shield order received in the fourth quarter of 2008 and due tothe H1N1 Influenza A pandemic.

 

**Gross Profit:**  Gross profit increased by $3,854,000, or88.5%, to $8,209,000 for the three months ended September 30, 2009 from$4,355,000 for the same period of 2008. The gross profit margin was 48.6% for the three months ended September 30,2009, compared to 42.6% for the three months ended September 30, 2008.

 

Gross profit increased by$7,476,000, or 63.8%, to $19,199,000 for the nine months ended September 30,2009 from $11,723,000 for the same period of 2008.  The gross profit margin was 47.1% for thenine months ended September 30, 2009, compared to 44.0% for the ninemonths ended September 30, 2008.

 

Gross profit margin forthe three and nine months ended September 30, 2009 was positively affectedby the change in product mix in which Infection Control sales, which havehigher margins, increased as a percentage of total sales.

 

**Selling, General andAdministrative Expenses:** Selling, general and administrative expenses increased by $581,000, or18.9%, to $3,659,000 for the three months ended September 30, 2009 from$3,078,000 for the three months ended September 30, 2008.  As a percentage of net sales, selling,general and administrative expenses decreased to 21.7% for the three monthsended September 30, 2009 from 30.1% for the same period of 2008.  The $581,000 increase in expenses wasprimarily due to increased employee compensation of $119,000, increasedexecutive bonus of $356,000 (which is based on pre-tax income), increased salescommission of $96,000 and increased miscellaneous expenses of $10,000.

 

Selling, general andadministrative expenses increased by $886,000, or 9.4%, to $10,299,000 for thenine months ended September 30, 2009 from $9,413,000 for the nine monthsended September 30, 2008.  As apercentage of net sales, selling, general and administrative expenses decreasedto 25.3% for the nine months ended September 30, 2009 from 35.3% for thesame period of 2008.  The increase of$886,000 in expenses was primarily due to a $225,000 severance agreement forour previous Senior Vice President of Marketing, which was expensed during thefirst quarter of 2009, increased employee compensation of $159,000, increasedexecutive bonus of $730,000 and increased commissions of $233,000.  The increase was partially offset bydecreased travel expenses of $160,000, decreased marketing expenses of $91,000,decreased professional fees and public company expenses of $109,000 and adecreased foreign exchange loss of $101,000.

 

Selling, general andadministrative expenses as a percentage of net sales were significantly lowerfor the three and nine months ended September 30, 2009, compared to thesame periods of 2008.  We believe that wecan now effectively leverage the infrastructure that we have built tosubstantially grow the business while decreasing expenses as a percentage ofsales from historical levels.

 

The chief executiveofficer and president are each entitled to a bonus equal to 5% of the pre-taxprofits of the Company.  Bonuses of$492,000 were accrued for the three months ended September 30, 2009 ascompared to $136,000 in the same period of 2008.  Total bonuses of $959,000 were accrued forthe nine months ended September 30, 2009, compared to $229,000 in the sameperiod of 2008.

 

**Depreciation and Amortization:**  Depreciation and amortization expenseincreased by $14,000, or 9.3%, to $165,000 for the three months ended September 30,2009 from $151,000 for the same period of 2008. Depreciation and amortization expense increased by $54,000, or $12.5%,to $487,000 for the nine months ended September 30, 2009 from $433,000 forthe same period of 2008.  The increasewas primarily attributable to increased depreciation for the Building Supplysegment.

 

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**Income from Operations:**  Incomefrom operations increased by $3,259,000, or 289.4%, to $4,385,000 for the threemonths ended September 30, 2009, compared to income from operations of$1,126,000 for the three months ended September 30, 2008.  The increase in income from operations wasdue to an increase in gross profit of $3,854,000, partially offset by an increasein selling, general and administrative expenses of $581,000 and an increase indepreciation and amortization of $14,000.

 

Income from operationsincreased by $6,536,000, or 348.2%, to $8,413,000 for the nine months ended September 30,2009, compared to income from operations of $1,877,000 for the nine monthsended September 30, 2008.  Theincrease in income from operations was due to an increase in gross profit of$7,476,000, partially offset by an increase in selling, general andadministrative expenses of $886,000 and an increase in depreciation andamortization of $54,000.

 

**Equity in Income ofUnconsolidated Affiliates:** For the three months ended September 30, 2009, we recorded equityin income of unconsolidated affiliates (Harmony) of $47,000, compared to$85,000 for the same period of 2008.  Forthe nine months ended September 30, 2009, we recorded equity in income ofunconsolidated affiliates (Harmony) of $217,000, compared to $123,000 for thesame period of 2008.

 

**Net Interest Income:**  For the three months ended September 30,2009, net interest income was $5,000, compared to net interest income of $7,000for the same period of 2008.  For thenine months ended September 30, 2009, net interest income was $7,000,compared to net interest income of $59,000 for the same period of 2008.  The change in net interest income for thethree and nine months ended September 30, 2009 was primarily due to lowerinterest rates in 2009 compared to 2008.

 

**Income Before Provision forIncome Taxes:**  Incomebefore provision for income taxes for the three months ended September 30,2009 was $4,437,000, compared to $1,218,000 for the three months ended September 30,2008, representing an increase of $3,219,000, or 264.3%.  The increase in income before provision forincome taxes was due primarily to an increase in income from operations of$3,259,000, partially offset by a decrease of $38,000 in equity in income ofunconsolidated affiliates (Harmony) and a decrease in net interest income of$2,000.

 

Income before provision forincome taxes for the nine months ended September 30, 2009 was $8,637,000,compared to $2,059,000 for the nine months ended September 30, 2008,representing an increase of $6,578,000, or 319.5%.  The increase in income before provision forincome taxes was due primarily to an increase in income from operations of$6,536,000, an increase of $94,000 in equity in income of unconsolidatedaffiliates (Harmony) and a decrease in net interest income of $52,000.

 

**Provision for Income Taxes:**  The provision for income taxes for the threemonths ended September 30, 2009 was $1,615,000, compared to $473,000 forthe same period of 2008.  The effectivetax rate was 36.3% for the three months ended September 30, 2009, comparedto 38.8% for the same period of 2008.

 

The provision for incometaxes for the nine months ended September 30, 2009 was $3,132,000,compared to $790,000 for the same period of 2008.  The effective tax rate was 36.3% for the ninemonths ended September 30, 2009, compared to 38.4% for the same period of2008.

 

Management expects theeffective tax rate to be in the 36%-37% range for 2009.

 

**Net Income:**  Net income for the three months ended September 30,2009 was $2,822,000, compared to net income of $745,000 for the three monthsended September 30, 2008, an increase of $2,077,000, or 278.8%.  The net income increase was primarily due toan increase in income before provision for income taxes of $3,219,000,partially offset by an increase in income taxes of $1,142,000.  Net income as a percentage of sales for thethree months ended September 30, 2009 and 2008 was 16.7% and 7.3%,respectively.  Basic income per share forthe three months ended September 30, 2009 and 2008 was $0.13 and $0.03,respectively.  Diluted income per sharefor the three months ended September 30, 2009 and 2008 was $0.12 and$0.03, respectively.

 

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Net income for the ninemonths ended September 30, 2009 was $5,505,000, compared to net income of$1,269,000 for the nine months ended September 30, 2008, an increase of$4,236,000, or 333.8%.  The net incomeincrease was primarily due to an increase in income before provision for incometaxes of $6,578,000, partially offset by an increase in income taxes of$2,342,000.  Net income as a percentageof sales for the nine months ended September 30, 2009 and 2008 was 13.5%and 4.8%, respectively.  Basic income pershare for the nine months ended September 30, 2009 and 2008 was $0.24 and$0.05, respectively.  Diluted income pershare for the nine months ended September 30, 2009 and 2008 was $0.24 and$0.05, respectively.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

As of September 30,2009, we had cash and cash equivalents of $9,084,000 and working capital of$25,395,000, an increase in working capital of 17.1%, or $3,702,000, since December 31,2008.  As of September 30, 2009, ourcurrent ratio was 6:1, compared to 13:1 as of December 31, 2008.  Cash increased by 98.4%, or $4,506,000, to$9,084,000 as of September 30, 2009, compared to $4,578,000 as of December 31,2008.  The increase in cash was due tocash provided by operating activities of $6,815,000 and cash provided by theexercise of stock options of $96,000, offset by cash paid for the repurchase ofcommon stock of $2,109,000 and cash used in investing activities of $296,000for the aggregate purchase of property and equipment and intangible assets.

 

We have a $3,500,000credit facility with Wells Fargo, consisting of a line of credit with interestat prime plus 0.5%.  As of September 30,2009, the prime interest rate was 3.25%. This credit line 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, 2009. The available line of credit is based on a formula of eligible accountsreceivable and inventories.  As of September 30,2009, we did not have any borrowings under this credit facility.

 

Net cash provided byoperating activities was $6,815,000 for the nine months ended September 30,2009, compared to $2,187,000 net cash provided by operating activities for thenine months ended September 30, 2008. The net cash provided by operating activities of $6,815,000 for the ninemonths ended September 30, 2009 was due to net income of $5,505,000,adjusted by the following: an increase in amortization of share-basedcompensation expense of $175,000, depreciation and amortization of $487,000, adecrease in deferred income taxes of $22,000, an increase in equity in incomeof unconsolidated affiliates of $217,000, an increase in accounts receivable of$4,602,000, a decrease in inventory of $2,617,000, an increase in prepaidexpenses and other current assets of $706,000 and an increase in accountspayable and accrued liabilities of $3,578,000.

 

The net cash provided byoperating activities of $2,187,000 for the nine months ended September 30,2008 was due to net income of $1,269,000, adjusted by the following: anincrease in amortization of share-based compensation of $153,000, depreciationand amortization of $433,000, an increase in the net deferred tax asset of$86,000, an increase in equity in income of unconsolidated affiliates of$123,000, an increase in accounts receivable of $691,000, a decrease in inventoryof $1,456,000, a decrease in prepaid expenses and other current assets of$264,000 and a decrease in accounts payable and accrued liabilities of$488,000.

 

Accounts receivableincreased by $4,602,000, or 90.4%, to $9,693,000 as of September 30, 2009from $5,091,000 as of December 31, 2008. The increase in accounts receivable was primarily related to theincrease in sales.  The number of days ofsales outstanding as of September 30, 2009 was 49 days compared to 51 daysas of December 31, 2008.

 

Inventory decreased by$2,617,000, or 21.7%, to $9,440,000 as of September 30, 2009 from$12,057,000 as of December 31, 2008. The decrease was primarily due to a decrease in inventory for theBuilding Supply segment (formerly the Engineered Products segment) ofapproximately $3,071,000, or 51.7%, to $2,869,000 as of September 30,2009.  Inventory for the InfectionControl segment was up $587,000 due to the significant increase in sales.

 

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Prepaid expenses andother current assets increased by $706,000, or 52.7%, to $2,046,000 as of September 30,2009 from $1,340,000 as of December 31, 2008.  The increase was primarily due to an increasein prepaid inventory from Asia.

 

Accounts payable andaccrued liabilities as of September 30, 2009 increased by $3,578,000, or190.0%, to $5,461,000 from $1,883,000 as of December 31, 2008.  The change was primarily due to an increasein trade payables of $1,726,000 and an increase in accrued liabilities of$1,852,000.  Accrued liabilities for thenine months ended September 30, 2009 increased as follows: commission andbonus accrual increased by $799,000, accrued rebates and other increased by$167,000 and income tax payable increased by $1,082,000.  This was partially offset by decreases inaccrued payroll expenses of $69,000 and accrued professional fees of $127,000.  Trade payables have increased to meet theinventory stocking demands of our increased sales.

 

Net cash used ininvesting activities was $296,000 for the nine months ended September 30,2009, compared to net cash used in investing activities of $99,000 for the sameperiod of 2008.  Our investing activitiesfor the nine months ended September 30, 2009 consisted of expenditures forproperty and equipment of $285,000 and the purchase of intangible assets of$11,000, compared to $56,000 and $43,000, respectively, for the same period of2008.  The expenditures for property andequipment in 2009 were primarily for the Building Supply segment.

 

Net cash used infinancing activities was $2,013,000 for the nine months ended September 30,2009, compared to net cash used in financing activities of $1,335,000 for thesame period of 2008.  Our financingactivities for both periods were primarily due to the repurchase of commonstock.

 

As of September 30,2009, we had $862,000 available for additional stock purchases under ourrepurchase program.  During the ninemonths ended September 30, 2009, we repurchased 1,554,900 shares of commonstock at a cost of $2,109,000.   As of September 30,2009, 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 repurchases.Future repurchases are expected to be funded from cash on hand and cash flowfrom operations.

 

As shown below, at September 30,2009, our contractual cash obligations totaled approximately $520,000.

 
| ** **                         | ** ** | **Payment Due by Period** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| **Contractual Obligations**        | ** ** | **Total**                 | ** ** | **1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** |
|                               |       |                      |       |   |   |   |   |   |   |
| Operating lease obligations        |       | $                         | 520,000    |   | $ | 152,000 |   | $ | 360,000 |   | $ | 8,000 |   |
|                               |       |                      |       |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                         | 520,000    |   | $ | 152,000 |   | $ | 360,000 |   | $ | 8,000 |   |

 

We believe that cashgenerated from operations, our current cash balance and the funds availableunder our credit facility will be sufficient to satisfy our projected workingcapital and planned capital expenditures for the foreseeable future.

 

**NewAccounting Standards**

 

In the third quarter of2009, the Company adopted the Financial Accounting Standards Board (“FASB”) *Accounting Standards Codification* (“FASB ASC”, “ASC” or “TopicXXX-YY-ZZ-PP”, where XXX is the Topic, YY is the Subtopic, ZZ is the Section,and PP is the Paragraph.  In the case ofSEC content, an “S” precedes the Section number).  The ASC is the singleofficial source of authoritative, nongovernmental generally accepted accountingprinciples (“GAAP”), other than guidance issued by the 

 

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SEC.  The adoption of the ASC did not have anyimpact on the consolidated financial statements included herein.

 

FASB ASC 820, *Fair Value Measurements and Disclosures*, (“ASC820” and formerly referred to as SFAS No. 157), establishes a frameworkfor measuring fair value in GAAP, clarifies the definition of fair value withinthat framework, and expands disclosures about the use of fair valuemeasurements.  ASC 820 is effective forfiscal years beginning after November 15, 2007.  ASC 820-10-65, *Transition and Open Effective Date Information*, deferred theeffective date of ASC 820, for non-financial assets and liabilities that arenot on a recurring basis recognized or disclosed at fair value in the financialstatements, to fiscal years, and interim periods, beginning after November 15,2008.  The Company has adopted theguidance within ASC 820 for non-financial assets and liabilities measured atfair value on a nonrecurring basis at January 1, 2009 and will continue toapply its provisions prospectively from January 1, 2009.  The application of ASC 820 for non-financialassets and liabilities did not have a significant impact on the consolidatedearnings nor the consolidated financial position for the periods presented.

 

FASB ASC 805, *Business Combinations*, (“ASC 805” andformerly referred to as SFAS No. 141(R)), requires the acquisition methodto be applied to all transactions and other events in which an entity obtains controlover one or more other businesses, requires the acquirer to recognize the fairvalue of all assets and liabilities acquired, even if less than one hundredpercent ownership is acquired, and establishes the acquisition date fair valueas measurement date for all assets and liabilities assumed.  The guidance within ASC 805 is effectiveprospectively for any acquisitions made after fiscal years beginning after December 15,2008.

 

FASB ASC 810, *Consolidation*, (“ASC 810”), ASC 810-10-65,*Transition and Open Effective DateInformation,* (“ASC 810-10-65” and formerly referred to as SFAS No. 160),establishes accounting and reporting standards for the non-controlling interestin a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a non-controlling interestin a subsidiary is an ownership interest in the consolidated financialstatements. ASC 810-10-65 is effective for fiscal years beginning after December 15,2008.  The application of ASC 810-10-65did not have a significant impact on consolidated earnings nor the consolidatedfinancial position as the Company does not consolidate its partially ownedaffiliate.

 

FASB ASC 825, *Financial Instruments*, (“ASC 825”), ASC825-10-65, *Transition and Open EffectiveDate Information,* (“ASC 825-10-65” and formerly referred to as FSPFAS No. 107-1 and APB Opinion No. 28-1), requires disclosures aboutfair value of financial instruments for interim reporting periods as well as inannual financial statements.  Thisguidance also requires those disclosures in summarized financial information atinterim reporting periods.  ASC 825-10-65is effective prospectively for interim reporting periods ending after June 15,2009.  The application of ASC 825-10-65expanded the Company’s disclosures regarding the use of fair value in interimperiods.

 

FASB ASC 855, *Subsequent Events,* (“ASC 855” and formerlyreferred to as SFAS No. 165), modified the subsequent event guidance.  The three modifications to the subsequentevents guidance are: 1) To name the two types of subsequent events either asrecognized or non-recognized subsequent events, 2) To modify the definition ofsubsequent events to refer to events or transactions that occur after thebalance sheet date, but before the financial statement are issued or availableto be issued and 3) To require entities to disclose the date through which anentity has evaluated subsequent events and the basis for that date, i.e.whether that date represents the date the financial statements were issued orwere available to be issued.  Thisguidance is effective for interim or annual financial periods ending after June 15,2009, and should be applied prospectively.

 

FASBASC 810,*Consolidation,*(“ASC 810”**and formerly referred to as SFAS No. 167)*,* eliminates a requiredquantitative approach to determine whether a variable interest gives an entitya controlling financial interest in a variable interest entity in favor of aqualitatively focused analysis.  Thisguidance is effective for the Company beginning in the first quarter of fiscalyear 2010.  The Company is currentlyevaluating the impact that the adoption of ASC 810 will have on itsconsolidated financial statements.

 

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FASB ASC 105, *Generally Accepted Accounting Principles*,(“ASC 105” and formerly referred to as SFAS No. 168), establishes the FASBAccounting Standards Codification as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of theSEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim andannual periods ending after September 15, 2009.

 

In August 2009, theFASB issued Accounting Standards Update No. 2009-05 (“ASC Update 2009-05”),an update to FASB ASC 820, *Fair ValueMeasurements and Disclosures.* This update provides amendments to reduce potential ambiguity infinancial reporting when measuring the fair value of liabilities.  Among other provisions, this update providesclarification that in circumstances, in which a quoted price in an activemarket for the identical liability is not available, a reporting entity isrequired to measure fair value using one or more of the valuation techniquesdescribed in ASC Update 2009-05.  ASCUpdate 2009-05 will become effective for the Company’s annual consolidatedfinancial statements for the year ended December 31, 2009.  The Company has not determined the impactthat this update may have on its consolidated financial statements.

 

In October 2009, theFASB issued Accounting Standards Update No. 2009-13, Topic 605, *Revenue Recognition*: *MultipleDeliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues TaskForce. *This update providesapplication guidance on whether multiple deliverables exist, how thedeliverables should be separated and how the consideration should be allocatedto one or more units of accounting.  Thisupdate establishes a selling price hierarchy for determining the selling priceof a deliverable.  The selling price usedfor each deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor-specific or third-partyevidence is available.  The Company willbe required to apply this guidance prospectively for revenue arrangementsentered into or materially modified after January 1, 2011; however,earlier application is permitted. The Company has not determined the impactthat this update may have on its consolidated financial statements.

 

# **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

# ** **

We subcontract themanufacture of certain products in China and Mexico and have a joint venture inIndia.  Our results of operations couldbe negatively affected by factors such as changes in foreign currency exchangerates due to stronger economic conditions in those countries.

 

Changes in interest ratesmay result in changes in the fair market value of our cash and cash equivalentsand interest income. Due to the short duration and conservative nature of thecash equivalent investment portfolio, we do not expect any material loss withrespect to our cash equivalents. The book value for cash equivalents isconsidered to be representative of its fair value.

 

As of September 30,2009, we had no debt outstanding.

 

We do not expect anysignificant effect on our results of operations from inflationary or interestand currency rate fluctuations.  We donot hedge our interest rate or foreign exchange risks.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controlsand Procedures**.

 

Under the supervision andwith the participation of our management, including our Chief Executive Officer(principal executive officer) and Chief Financial Officer (principal financialofficer), we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as such term is defined in Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Disclosure controls and procedures are thecontrols and other procedures that we designed to 

 

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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 andevaluating our disclosure controls and procedures, we recognize that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and we arerequired to apply our judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

Based on the evaluation,our principal executive and financial officers concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

 

**Changes in Internal Controls**.

 

During the quarter towhich this report relates, there was no change in our internal control overfinancial reporting (as such term is defined in Rule 13a-15(f) and15d-15(f) under the Exchange Act) that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A.RISK FACTORS**

 

There have been nomaterial changes in our risk factors from those disclosed in our 2008 AnnualReport on Form 10-K.

 

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

 

**IssuerPurchases of Equity Securities**

 
| **Period**                | ** ** | **Total Number  of Shares  Purchased** | ** ** | **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, 2009      |       | 44,200                                           |       | $                                            | 2.08       |                                                                                                                   | 44,200     |                                                                                                                                     | $          | 1,082,000 |   |
| August 1-31, 2009    |       | 63,100                                           |       | $                                            | 3.48       |                                                                                                                   | 63,100     |                                                                                                                                     | $          | 862,000 |   |
| September 1-30, 2009 |       | —                                           |       | —                                       |       | —                                                                                                                 |       | $                                                                                                                                        | 862,000    |   |

 

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(1)          OnApril 8, 2009, our Board of Directors authorized the expansion of theCompany’s share repurchase program previously announced in December 1999.  Under the repurchase program, the Company isauthorized to repurchase up to a total of $8,520,000 of common stock.

 

We did not sell anyunregistered equity securities during the period covered by this Form 10-Q.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6.EXHIBITS**

 

31.1 CertificationPursuant to Rule 13a-14(a) and Rule 15d-14(a) of theExchange Act, signed by Chief Executive Officer (filed herewith)

 

31.2 CertificationPursuant to Rule 13a-14(a) and Rule 15d-14(a) of theExchange Act, signed by Chief Financial Officer (filed herewith)

 

32.1 CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of         the Sarbanes-Oxley Act of 2002, signedby Chief Executive Officer (filed herewith)

 

32.2 CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002, signed by Chief Financial Officer (filedherewith)

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

ALPHAPRO TECH, LTD.

 
| DATE:  | **October 28, 2009** | ** ** | BY:    | /s/**Sheldon Hoffman**                |
|--------|---------------------------|------------|--------|---------------------------------------|
|   |                      |       |   |                                  |
|   |                      |       |   | Sheldon Hoffman                       |
|   |                      |       |   | Chief Executive Officer  and Director |
|   |                      |       |   |                                  |
| DATE:  | **October 28, 2009** | ** ** | BY:    | /s/**Lloyd Hoffman**                  |
|   |                      |       |   |                                  |
|   |                      |       |   | Lloyd Hoffman                         |
|   |                      |       |   | Chief Financial Officer               |

 

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