body10_q.htm


 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 001-14257
 
Alpha Innotech Corp.
(Exact name of Registrant as specified in its charter)
 
   
Delaware
58-1729436
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
2401 Merced St., San Leandro, CA 94577
(510) 483-9620
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code )
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer ¨                                                                                                                                                       Accelerated filer ¨
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)                                                                                                                                          Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨    No  x
 
As of November 12, 2008, there were 10,922,136 shares of the issuer’s Common Stock, $.01 par value per share, outstanding.

 
 

 
 
 

Alpha Innotech Corp.
Quarter Ended September 30, 2008
Table of Contents
 
         
PART I.
FINANCIAL INFORMATION
     3  
         
Item 1. Financial Statements
     3  
Condensed Consolidated Balance Sheets (Unaudited)
     3  
Condensed Consolidated Statements of Operations (Unaudited)
     4  
Condensed Consolidated Statements of Cash Flows (Unaudited)
     5  
Notes to Condensed Consolidated Financial Statements (Unaudited)
     6  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     16  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     19  
Item 4. Controls and Procedures
     20  
           
PART II.
OTHER INFORMATION
        
         
Item 1. Legal Proceedings
     20  
Item 1A. Risk Factors
     20  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     21  
Item 3. Defaults Upon Senior Securities
     21  
Item 4. Submission of Matters to a Vote of Security Holders
     21  
Item 5. Other Information
     21  
Item 6. Exhibits
     21  
 

 
1
 


FORWARD LOOKING STATEMENTS
 
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
 
Information included in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company’s plans for sales growth, expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. In addition to the risks and uncertainties described in “Risk Factors” contained in the annual report on Form 10-KSB filed with the Securities and Exchange Commission on March 31, 2008, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. Forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 
2
 
PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
 
 
 
ALPHA INNOTECH CORP.
Condensed Consolidated Balance Sheets
 
   
September 30,
2008
    
    December 31,
2007
  
   
(Unaudited)
        
Assets
            
Current assets:
            
Cash and cash equivalents
   $ 503,183     $ 167,738  
Restricted cash
     50,000       50,113  
Accounts receivable, net
     3,343,194       2,229,698  
Inventory, net
     1,421,717       1,006,085  
Prepaid expenses and other current assets
     177,927       218,780  
Total current assets
     5,496,021       3,672,414  
Property and equipment, net
     900,686       914,383  
Loan fees, net
     148,282       —  
Other assets
     90,232       90,232  
Total assets
   $ 6,635,221     $ 4,677,029  
Liabilities and Shareholders’ Deficit
                
Current liabilities:
                
Accounts payable
   $ 1,755,578     $ 1,785,909  
Accrued liabilities
     976,492       1,329,860  
Current portion of debt
     2,099,813       1,406,968  
Deferred revenue
     1,031,236       1,027,006  
Other liabilities
     193,074       265,526  
Total current liabilities
     6,056,193       5,815,269    
    Debt, net of current portion
     930,076       307,938  
Commitments and contingencies
     —       —  
Shareholders’ deficit:
                
Common stock, $0.01 par value per share: 50,000,000 shares authorized, 10,922,136 and 10,462,576 shares issued and outstanding
     109,222       104,626  
Additional paid in capital
     18,540,195       17,492,662  
Accumulated deficit
     (18,992,397 )     (19,035,398 )
Treasury stock
     (8,068 )     (8,068 )
Total shareholders’ deficit
     (351,048 )     (1,446,178 )
Total liabilities and shareholders’ deficit
   $ 6,635,221     $ 4,677,029  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3
 

ALPHA INNOTECH CORP.
Condensed Consolidated Statements of Operations (Unaudited)

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Revenue
   $ 4,870,150     $ 3,680,160     $ 12,781,960     $ 10,838,916  
Cost of goods sold
     2,369,521       1,690,139       5,783,749       4,885,226  
Gross profit
     2,500,629       1,990,021       6,998,211       5,953,690  
Operating costs and expenses:
                                
Sales and marketing
     1,305,807       1,299,011       3,803,299       3,516,406  
Research and development
     348,602       298,820       996,679       946,310  
General and administrative
     677,529       604,475       1,847,954       1,889,770  
Total operating costs and expenses
     2,331,938       2,202,306       6,647,932       6,352,486  
Income (loss)  from operations
     168,691       (212,285 )     350,279       (398,796 )
Other income (expense):
                                
Interest expense
     (137,870 )     (71,811 )     (395,956 )     (220,956 )
Sale of patents
     —       —       100,000       —  
Other income (expense), net
     (8,962 )     (5,459 )     (11,322 )     (7,865 )
Total other income (expense)
     (146,832 )     (77,270 )     (307,278 )     (228,821 )
Income (loss) before taxes
     21,859       (289,555 )     43,001       (627,617 )
Provision for taxes
     —       —       —       —  
Net income (loss)
   $ 21,859     $ (289,555 )   $ 43,001     $ (627,617 )
Net income (loss) per share - basic
   $ 0.00     $ (0.03 )   $ 0.00     $ (0.06 )
Net income (loss) per share - diluted
   $ 0.00     $ (0.03 )   $ 0.00     $ (0.06 )
Weighted average shares outstanding - basic
     10,922,136       10,449,147       10,770,783       10,343,383  
Weighted average shares outstanding - diluted
     11,237,224       10,449,147       11,011,619       10,343,383  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
4
 

 

ALPHA INNOTECH CORP.
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Nine Months Ended
September 30,
  
   
2008
    
2007
  
             
Cash flows from operating activities
            
Net income (loss)
   $ 43,001     $ (627,617 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                
Depreciation and amortization of property and equipment
     386,674       406,784  
Allowance for sales returns and doubtful accounts
     (81,919 )     (237 )
Provision for inventory
     19,191       2,862  
Provision for demo equipment
     (45,000 )     (8,175 )
Amortization of loan fees
     37,478       —  
Accretion of debt discount to interest expense
     117,751       —  
Share-based compensation
     404,033       252,814  
Stock and warrants issued in lieu of payment
     8,988       —  
Change in operating assets and liabilities:
                
Accounts receivables
     (1,031,577 )     390,346  
Inventory
     (434,823 )     (586,195 )
Prepaid expenses and other current assets
     40,853       38,112  
Accounts payable
     (30,331 )     485,350  
Accrued liabilities
     (115,720 )     182,372  
Deferred revenue
     4,230       176,132  
Other liabilities
     (72,452 )     (19,878 )
Net cash provided by (used in) operating activities
     (749,623 )     692,670  
                 
Cash flows from investing activities:
                
Restricted cash
     113       —  
Purchase of property and equipment
     (327,977 )     (258,567 )
Net cash used in investing activities
     (327,864 )     (258,567 )
                 
Cash flows from financing activities:
                
Proceeds from exercise of options
     142,500       —  
Proceeds from debt obligations
     3,200,000       481  
Repayment of debt obligations
     (1,786,968 )     (450,000 )
Payment of loan fees
     (142,600 )      —   
Proceeds from exercise of warrants
     —       3,604  
Net cash provided by (used in) financing activities
     1,412,932       (445,915 )
Net increase (decrease) in cash and cash equivalents
     335,445       (11,812 )
Cash and cash equivalents at the beginning of the period
     167,738       445,656  
Cash and cash equivalents at the end of the period
   $ 503,183     $ 433,844  

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

 
5
 

ALPHA INNOTECH CORP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1.    Summary of Significant Accounting Policies
 
Nature of Operations - Alpha Innotech Corporation was incorporated and began operations in June 1992, in the state of California, with facilities in San Leandro, California. Xtrana, Inc. was incorporated in January 1987 in the state of Delaware. On October 3, 2005, Alpha Innotech Corporation was acquired by Xtrana, Inc. In the transactions, Alpha Innotech Corporation merged with a subsidiary of Xtrana, Inc. and became a wholly-owned subsidiary of Xtrana, Inc. Xtrana, Inc. changed its corporate name to Alpha Innotech Corp. and obtained a new trading symbol APNO.OB.
 
Alpha Innotech Corp. and subsidiary (the “Company”) develop and market both macro imaging and micro imaging systems. The macro imaging systems are used for image documentation, quantitative analysis, and image archiving. These systems are used with electrophoresis samples (gel, blots, autoradiographs, etc.), microscopy applications, and general imaging from insects to culture plates. The micro imaging systems address the micro array, multiplex array and cell based markets. Researchers use the microimaging products to analyze slides or multi-well microplates printed with genomic, proteomic or cellular samples and in some cases, fixed cell cultures.
 
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and new Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The condensed consolidated financial statements include the accounts of Alpha Innotech Corp. and its wholly owned subsidiary (“Alpha Innotech Corp and subsidiary” or the “Company”).  In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.
 
Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on March 31, 2008.
 
Management’s Plan - Through 2007, the Company incurred substantial losses and has a working capital deficiency and a shareholders’ deficit as of September 30, 2008. However, the Company had net income of $43,001 for the nine month period ended September 30, 2008. Furthermore, on May 9, 2008 the Company received cash through new loans from Agility Capital, LLC and Montage Capital, LLC in the aggregate amount of $1,500,000. Moreover, on September 3, 2008, the Company established a new line of credit from Bridge Bank, National Association (“Bridge Bank”) in the aggregate amount of $2,500,000 ($1,250,000 under the domestic accounts receivable facility and $1,250,000 under the foreign accounts receivable facility.) As the primary purpose of these new loans was to fund inventory and accounts receivables requirements driven by the Company’s overall growth and expansion of sales channels in Asia, as well as to pay off certain corporate debts, the Company used $749,623 cash in operating activities for the nine month period ended September 30, 2008. Following these planned expenditures, the Company still had $503,183 in cash and cash equivalents as of September 30, 2008, and as a result, management believes the Company has sufficient cash to fund operations in the near term.
 
While management believes the Company has sufficient cash to fund its operating, investing, and financing activities in the near term, additional working capital may be needed if the Company experiences growth above that currently foreseen by management. For example, the Company’s existing line of credit may prove to be insufficient should higher inventory levels be required. Additional working capital would likely be needed to expand our operations in Asia. If our capital resources are unable to meet our capital requirements, we will have to raise additional funds. We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. The sale of equity or convertible debt securities in the future may be dilutive to our shareholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to us or our shareholders. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms. Failure to generate sufficient revenues, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives.
 
Going Concern - The accompanying condensed consolidated financial statements have been prepared on a going concern basis that contemplates the realization of assets and discharge of liabilities in the normal course of business. The Company has incurred recurring losses through 2007 and has a working capital deficiency and a shareholders’ deficit as of September 30, 2008. These conditions raise substantial doubts about the Company’s ability to continue as a going concern. Management plans to manage expenses and operate using new borrowings from Agility Capital, LLC and Montage Capital, LLC and the new line of credit from Bridge Bank. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
 
 
6
 
 
Income (Loss) Per Share - Basic net income (loss) per share to common shareholders is calculated based on the weighted-average number of shares of common stock outstanding during the period excluding those shares that are subject to repurchase by the Company. Diluted net income (loss) per share attributable to common shareholders would give effect to the dilutive effect of potential common stock consisting of stock options, warrants, and preferred stock. Dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company’s net loss.
 
The following outstanding stock options, warrants, common stock subject to repurchase by the Company, and preferred stock (on an as-converted into common stock basis) were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had an antidilutive effects of September 30, 2008 and 2007:

   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Shares issuable upon exercise of stock options
     1,815,293       111,916       1,815,293       111,916  
Shares issuable upon exercise of warrants
     536,097       358,356       536,097       358,356  
Denominator for basic calculations
     2,351,390       470,272       2,351,390       470,272  

 
Recent Accounting Pronouncements – In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.

In September 2006, the FASB finalized SFAS No. 157 which became effective January 1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described above. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 were applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. The adoption of SFAS No. 157 did not have a material effect on the condensed consolidated financial statements for fair value measurements made during the first quarter of 2008. While the Company does not expect the adoption of SFAS No. 157 to have a material impact on its consolidated financial statements in subsequent reporting periods, the Company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets and nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the consolidated financial statements on at least an annual basis.

In May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that presented in conformity with generally accepted accounting principles in the United States of America. SFAS No. 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The Company does not believe SFAS No. 162 will have a significant impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”). The FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including and amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in the FSP. Early application of the FSP is prohibited. The adoption of FSP No. EITF 03-6-1 is not anticipated to have a material effect on the Company's consolidated financial statements.

In October 2008, the FASB issued FSP 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” which became effective upon issue.  FSP 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.

 
7
 
 
2.    Fair Value

The Company adopted the provisions of SFAS No. 157 as amended by FSP FAS 157-1 and FSP FAS 157-2 on January 1, 2008. Pursuant to the provisions of FSP FAS 157-2, the Company will not apply the provisions of SFAS No. 157 until January 1, 2009 for the following major categories of nonfinancial assets and liabilities from the consolidated balance sheet: property and equipment. The Company recorded no change to its opening balance of accumulated deficit as of January 1, 2008 as it did not have any financial instruments requiring retrospective application per the provisions of SFAS No. 157.

Fair Value Hierarchy - SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company’s own assumptions of market participant valuation (unobservable inputs). In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy:

Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

SFAS No. 157 requires the use of observable market data if such data is available without undue cost and effort.

Measurement of Fair Value - The Company measures fair value as an exit price using the procedures described below for all assets and liabilities measured at fair value. When available, the company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued.

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.


The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2008:
 
   
Level 1
    
Level 2
    
Level 3
    
Total
  
                         
Cash and cash equivalents
   $ 503,183     $ —     $ —     $ 503,183  
Restricted cash
     50,000       —       —       50,000  
Total assets
   $ 553,183     $ —     $ —     $ 553,183  


8

3.    Balance Sheet Components
 
Accounts receivable consisted of the following at September 30, 2008 and December 31, 2007:

   
2008
    
2007
  
Accounts receivable
   $ 3,399,566     $ 2,367,989  
Less allowance for sales returns
     (51,372 )     (133,291 )
Less allowance for doubtful accounts
     (5,000 )     (5,000 )
Accounts receivable, net
   $ 3,343,194     $ 2,229,698  

Inventory consisted of the following at September 30, 2008 and December 31, 2007:

   
2008
    
2007
  
Raw materials
   $ 1,472,816     $ 896,935  
Inventory in transit
     14,623       155,681  
Less allowance for excess and obsolete inventory
     (65,722 )     (46,531 )
Inventory, net
   $ 1,421,717     $ 1,006,085  


Property and equipment consisted of the following at September 30, 2008 and December 31, 2007:
 
   
2008
    
2007
  
Machinery and equipment
   $ 541,033     $ 435,617  
Furniture and fixtures
     211,317       208,201  
Leasehold improvements
     1,507,500       1,507,500  
Loaner and demonstration units
     1,321,672       1,160,053  
Computers
     354,814       358,443  
Software
     103,796       103,796  
Total property and equipment
     4,040,132       3,773,610  
Less accumulated depreciation and amortization
     (3,139,446 )     (2,859,227 )
Property and equipment, net
   $ 900,686     $ 914,383  

        Loan fees consisted of the following at September 30, 2008 and December 31, 2007:

   
2008
    
2007
  
Loan fees
   $ 185,760     $ —  
Less accumulated amortization
     (37,478 )     —  
Loan fees, net
   $ 148,282     $ —  

        Accrued liabilities consisted of the following at September 30, 2008 and December 31, 2007:

   
2008
    
2007
  
Payroll and related costs
   $ 516,773     $ 455,641  
Warranty
     102,636       153,251  
Audit and tax accrual
     94,764       62,250  
Finder’s fee
     175,000       175,000  
Consultant
     1,600       1,792  
Founders bonus
     —       398,162  
Other
     85,719       83,764  
Accrued liabilities
   $ 976,492     $ 1,329,860  

9
 
4.    Debt
 
        Debt consisted of the following at September 30, 2008 and December 31, 2007:
 
   
2008
    
2007
  
Agility Capital LLC and Montage Capital LLC term loan
   $ 1,179,813     $ —  
Alexandria Finance, LLC Term Loan
     —       200,000  
BFI Business Finance Line of Credit
     —       1,206,968  
Bridge Bank Line of Credit
     1,700,000       —  
ETP Venture Capital II LLC Convertible Note, net of debt discount
     150,076       307,938  
       Total debt
     3,029,889       1,714,906  
Less current portion
     (2,099,813 )     (1,406,968 )
        Debt, net of current portion
   $ 930,076     $ 307,938  
 
BFI Business Finance Line of Credit - In March 2004, the Company established a line of credit with BFI Business Finance (“BFI”), in which the Company used its accounts receivable as collateral and obtained advances from BFI up to 80% of the Company’s accounts receivable balance at the time of the borrowing, but with principal advances not to exceed $1 million. Effective October 26, 2007, BFI and the Company entered into a First Modification to Loan and Security Agreement raising the maximum amount of the line of credit to $1.5 million. The line of credit was repaid in full in September 2008 and cancelled.
 
Alexandria Finance, LLC Term Loan - In April 2005, the Company executed a term note in the amount of $1,500,000 payable to Alexandria Finance, LLC. The loan was repaid in full in May 2008 and the note was cancelled.
 
ETP/FBR Venture Capital II, LLC Convertible Note - On July 21, 2006, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) between the Company and ETP/FBR Venture Capital II, LLC (the “Purchaser”), the Company completed a private placement offering of a subordinated Senior Convertible Note in the principal amount of $375,000 (the “Note”) and a warrant to purchase 125,000 shares of the Company’s common stock (the “Warrant”). The Note bears interest at a rate of 3% per year and is due on July 20, 2011. During the occurrence of an "Event of Default" under the Note, the Note will bear interest at a rate of 10% per year. The Note is convertible into shares of common stock of the Company at an initial conversion price of $1.60 per share of common stock. The Note is subordinate in right of payment to the Company's  "Senior Debt", specifically (1) the Business Financing Agreement and Borrower Agreement dated as of September 3, 2008 in favor of Bridge Bank, National Association; and (2) the Loan Agreement dated as of May 9, 2008 and related loan documents in favor of Agility Capital LLC and Montage Capital LLC. The Warrant is exercisable at the price of $1.20 per share. On May 9, 2008 the Company repaid $200,000 of the principal leaving $175,000 in principal outstanding. William Snider, a director of the Company, is a general partner of the Purchaser. William Snider is also a general partner of ETP/FBR Venture Capital LLC, which currently owns approximately 13.5% of common stock of the Company.
 
Montage Capital LLC/Agility Capital LLC Term Loan - On May 9, 2008,  the Company entered into a loan agreement (“Montage/Agility Loan Agreement”)  with Montage Capital, LLC (“Montage”) and Agility Capital, LLC (“Agility”, and together with Montage, the “Lenders”). Under the Montage/Agility Loan Agreement, the Company requested one advance of $1,500,000 from the Lenders which will bear interest at a rate of 13% per year and is due on October 31, 2009 (the “Maturity Date”). The Company will use the proceeds from the loan for general corporate purposes. The loan is secured by all of the assets of the Company and is subordinate in right of payment to the Bridge Bank line of credit. The Montage/Agility Loan Agreement contains customary representations, warranties, affirmative covenants and events of default, as well as various negative covenants.
 
In connection with the Montage/Agility Loan Agreement, the Company also issued the Lenders warrants to purchase an aggregate of 281,250 shares of the Company’s common stock (the “Lenders Warrants”). The warrants are immediately exercisable at a per share price of $.80 and expire in October 2014. The Company determined the fair market value of the warrants to be $215,800 using the Black-Scholes valuation model and the following assumptions: a risk-free interest rate of 3.33%; no dividend yield; expected volatility of 157%; and an expected life of six and one-half years (which is the contractual life). This amount was recorded as a loan discount and is being amortized into interest expense over the life of the loan and amounted to $46,960 for the three months and $75,613 for the nine months ended September 30, 2008.
 
The number of shares of the Company’s common stock issuable upon exercise of the Lenders Warrants will be increased by a number that is equal to 7.5% of the balance outstanding on December 31, 2008 divided by the exercise price of the Lenders Warrants, and again by 7.5% of the outstanding balance on April 30, 2009 divided by the exercise price of the Lenders Warrants.
 
 
10
 
 
If any amount is outstanding under the Montage/Agility Loan Agreement on December 31, 2008, the Company will pay the Lenders a fee of $7,500. If any amount is outstanding on May 7, 2009, the Company will pay an additional fee of $7,500. The Company may prepay the loan under the Montage/Agility Loan Agreement in whole or in part at any time without penalty. During the occurrence of an “Event of Default” under the Montage/Agility Loan Agreement, the interest will increase to a rate of 18% per year, the Company will have to pay an additional fee of $2,500 for every 15 days after the occurrence of the Event of Default, and the Lenders will be entitled to additional warrants to purchase shares of the Company’s common stock, as specified in the Lenders Warrants. The Lenders Warrants are immediately exercisable until October 31, 2014 at the exercise price of $0.80 per share, as might be adjusted per the terms of the Lenders Warrants.
 
BroadOak Partners, LLC (“BroadOak”) acted as a placement agent in connection with the Montage/Agility Loan Agreement. In May 2008, per the terms of the BroadOak engagement, the Company issued to BroadOak a warrant to purchase 56,250 shares of the Company’s common stock. The warrant is immediately exercisable at a per share price of $.80 and expires in October 2014. The Company determined the fair market value of the warrant to be $43,160 using the Black-Scholes valuation model and the following assumptions: a risk-free interest rate of 3.33%; no dividend yield; expected volatility of 157%; and an expected life of six and one-half years (which is the contractual life). This amount of $43,160 was recorded as loan fees along with $80,000 that the Company paid in cash to BroadOak for a total of $123,160 in loan fees. The loan fees are being amortized over the life of loan and amounted to $20,527 for the three months ended and $34,210 for the nine  months ended September 30, 2008 and are included in general and administrative expenses. William Snider, a director of the Company, is a managing partner of BroadOak.
 
Bridge Bank Line of Credit - On September 3, 2008, the Company entered into a Business Financing Agreement (the “Business Financing Agreement”) and a Borrower Agreement (the “Borrower Agreement”, and together with the Business Financing Agreement, the “Bridge Bank Loan Agreements”) with Bridge Bank, National Association (“Bridge Bank”). The Company will use the proceeds from the loan for general corporate purposes and to retire certain of its other outstanding debt obligations.
 
Under the Bridge Bank Loan Agreements, the Company may receive a maximum of $2,500,000 ($1,250,000 under the domestic accounts receivable facility and $1,250,000 under the foreign accounts receivable facility.)  The loan will have a term of twelve months, starting September 3, 2008.  The loan will have a finance charge equal to the prime rate listed in the Wall Street Journal plus 1.25% (the “Prime Rate”) annualized on the average daily financed amount outstanding.  The Prime Rate will float and will have a floor of 4.75%.  The Company may prepay the loan under the Bridge Bank Loan Agreements in whole or in part at any time without penalty. The Company paid total loan fees of $62,600 consisting of $50,000 to BroadOak and $12,600 to Bridge Bank. The loan fees are being amortized over the life of the loan and amounted to $3,268 for the three months and nine months ended September 30, 2008 and are included in general and administrative expenses.
 
This loan is secured by all of the assets of the Company and is senior to all present and future debt and/or lien holders. As a condition to funding under the Bridge Bank Loan Agreements, the outstanding balance under the Loan and Security Agreement with BFI Business Finance dated March 9, 2004, as amended, was repaid in full.  The Bridge Bank Loan Agreements contain customary representations, warranties, affirmative covenants and events of default, as well as various negative covenants.
 
BroadOak  acted as a placement agent in connection with the Loan Agreement.  As described above, the Company paid BroadOak $50,000 in cash, which is being amortized over the life of the loan.  William Snider, a director of the Company, is a managing partner of BroadOak.
 
11
 
5.    Share-based compensation
 
The following table presents share-based compensation expense included in the Consolidated Statements of Operations related to employee and non-employee stock options and restricted shares as follows:
 
   
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
  
   
2008
    
2007
    
2008
    
2007
  
Cost of Goods Sold
   $ 6,571     $ 567     $ 14,784     $ 5,668  
Sales and marketing
     41,435       33,909       118,490       75,351  
Research and development
     18,848       735       52,921       20,619  
General and administrative
     80,353       67,796       217,838       151,176  
     Total share-based compensation
   $ 147,207     $ 103,007     $ 404,033     $ 252,814  
 
As of September 30, 2008, $813,644 of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through August 2012. The weighted average term of the unrecognized share-based compensation is 2.96 years. As of September 30, 2008, $225,244 of total unrecognized share-based compensation expense related to non-vested restricted shares is expected to be recognized over the remaining life of the grant through February 14, 2010.
 
In the nine months ended September 30, 2008, no share-based compensation expense was capitalized and there were no recognized tax benefits associated with the share-based compensation charge. The share-based compensation charge did not significantly impact basic and diluted net loss per share in the nine months ended September 30, 2008. During the nine months ended September 30, 2008, no significant compensation cost related to the share-based awards to employees was recognized in the Consolidated Statements of Operations.
 
The following table summarizes the Company’s non-vested stock option activity for the nine months ended September 30, 2008:
 
   
Number of Shares
    
Weighted Average Grant Date Fair Value
  
Non-vested stock outstanding at January 1, 2008
     790,306     $ 1.10  
Granted
     491,000     $ 0.93  
Vested
     (352,727 )   $ 1.06  
Cancelled
     (4,292 )   $ 0.95  
     Non-vested stock outstanding at September 30, 2008
     924,287     $ 1.03  
 
Total fair value of non-vested shares is $951,897 as of September 30, 2008.
 
The Company estimates the fair value of stock options using the Black-Scholes Option Pricing Model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate for calculation of the fair values of the stock options granted in the nine months ended September 30, 2008.
 
For these options, the Company calculated the fair value of each option on the date of grant using the Black-Scholes Option Pricing Model using the following assumptions:
 
   
Nine Months Ended
September 30,
  
   
2008
    
2007
  
Risk-free interest
     4.07 %     4.76 %
Expected life
  
6.25 Years
    
10 Years
  
Expected volatility
     151.63 %     157.91 %
Expected dividend yield
     — %     — %
 
The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life. The expected life was determined based on the options vesting period and exercise behavior of the employees. Expected volatility is based on historical volatility. The Company has not historically issued any dividends and does not expect to in the future.
 
12
 
Activity under the Company’s stock plans for the nine months ended September 30, 2008 is as follows:

 
Shares
  
Weighted -Average Exercise Price per Share
  
Weighted-Average Remaining Contractual Terms in Years
  
Aggregate Intrinsic Value
  
Outstanding at January 1, 2008
1,333,714
  
$
1.68
            
Grants
491,000
  
$
0.93
            
Cancelled
(4,292)
  
$
0.95
            
Expired
(5,129)
  
$
10.32
            
Outstanding at September 30, 2008
1,815,293
  
$
1.45
  
7.9
  
$
—
  
Exercisable at September 30, 2008
891,006
  
$
1.89
  
6.7
  
$
—
  
Vested and expected to vest at September 30, 2008
1,815,293
  
$
1.45
  
7.9
  
$
—
  
 
The aggregate intrinsic value is the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of its third quarter of 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of that date. The Company’s closing stock price on September 30, 2008 was $0.77.

6.    Stock option plans
 
At September 30, 2008, the Company had five stock option plans (the “Plans”) for the benefit of employees, officers, directors, and consultants of the Company.
 
As of September 30, 2008, a total of 2,335,102 shares of Alpha Innotech Corp.’s common stock were reserved for issuance under the plans. Options granted under the Plans generally vest over a one- to five-year period from the date of the grant.
 

 
13
 

 
       The combined activity for 2008 and 2007 under the above plans was as follows:

       
Outstanding Options
   
Shares Available for Grant
  
Number of Shares
  
Weighted Average Exercise Price
  
Aggregate Price
         Balance at January 1, 2007
  
1,052,339
    
880,821
    
$
2.30
    
$
2,028,639
  
     Authorized under the evergreen provision of the 2006 Plan
  
494,570
    
—
    
$
—
      
—
  
     Restricted shares issued
  
      (530,000
)
  
—
    
$
—
      
—
  
     Granted
  
      (700,800
)
  
700,800
    
$
0.99
      
696,086
  
     Cancelled
  
98,586
    
    (98,586
)
  
$
1.03
      
  (101,994
)
     Expired
  
86,693
    
(149,321
)
  
$
2.60
      
(387,894
)
          Balance at December 31, 2007
  
501,388
    
1,333,714
    
$
1.68
      
2,234,837
  
     Authorized under the evergreen provisions of the 2006 Plan
  
500,000
    
—
    
$
—
      
—
  
     Granted
  
(491,000
)
  
491,000
    
$
0.93
      
455,200
  
     Cancelled
  
4,292
    
(4,292
)
  
$
0.95
      
(4,083
)
     Expired
  
5,129
    
(5,129
)
  
$
10.32
 
    
(52,929
)
          Balance at September 30, 2008
  
519,809
    
1,815,293
    
$
1.45
    
$
2,633,025
  



 
14
 


The following information summarizes stock options outstanding at September 30, 2008:

     
Options Outstanding
  
Options Exercisable
Range of Exercise Prices
  
Number of Outstanding  Shares
  
Weighted Average Remaining Contractual Life (in years)
  
Weighted Average Exercise Price
  
Number of Outstanding  Shares
  
Weighted Average Remaining Contractual Life (in years)
  
Weighted Average Exercise Price
$
0.80 – 0.90
  
520,042
  
8.7
  
$
0.88
  
193,356
  
8.6
  
$
0.87
$
0.95 – 0.98
  
370,000
  
9.5
  
$
0.98
  
50,000
  
8.4
  
$
0.96
$
1.12 – 1.35
  
393,060
  
8.5
  
$
1.23
  
183,473
  
8.4
  
$
1.23
$
1.40 – 1.53
  
246,288
  
7.1
  
$
1.50
  
196,288
  
7
  
$
1.51
$
1.66 - 16.87
  
285,903
  
3.8
  
$
3.11
  
267,889
  
3.6
  
$
3.51
 
Totals
  
1,815,293   
 
 
  
 
 
  
891,006
  
 
  
 
 

The weighted average remaining contractual life of outstanding options at September 30, 2008 was 7.9 years. At September 30, 2008, there were 891,006 options exercisable with a weighted average exercise price of $1.89.

As of September 30, 2008, the Company had 891,580 warrants to purchase common stock outstanding and exercisable for prices ranging from $0.09 to $14.69 with a weighted average exercise price of $0.95 per share.  The weighted average remaining contractual life of these warrants at September 30, 2008 was 5.11 years. These warrants have expiration dates ranging from March 2009 to July 2016.

 
15
 

 
7.        Cash flow information
 
   
Nine Months Ended
September 30,
  
   
2008
    
2007
  
Supplemental disclosures:
            
     Cash paid for interest
  
$
268,529
    
$
220,956
  
Supplemental schedule of noncash financing activities:
                
     Issuance of common stock
  
$
237,648
    
$
—
  
     Issuance of restricted shares
  
$
—
    
$
5,300 
  
 Issuance of warrants
  
$
258,960
    
$
—
  

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-KSB. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-Q.
 
Except for the historical information contained herein, this report contains forward-looking statements (identified by the words “estimate,” “anticipate,” “expect,” “believe,” and similar expressions), which are based upon management’s current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements and include the factors discussed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, estimates and assumptions about future events and their effects cannot be determined with certainty. These estimates and assumptions may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. Actual results may differ from these estimates under different assumptions or conditions. In addition, we are periodically faced with uncertainties, the outcomes of which are not within our control and may not be known for extended periods of time.
 
Our critical accounting policies are set forth below.
 
Revenue Recognition - Our revenue is derived from the sale of digital imaging systems and other products, net of returns and allowances, and is recognized when a contract is executed, all delivery obligations have been met, the fee is fixed and determinable, and collection is probable. All products are sold with a one year standard warranty agreement and we record an associated reserve for estimated warranty costs.
 
For products sold where software is deemed to be more than incidental, we follow Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended. Revenue earned on software arrangements involving multiple elements is allocated to each element based on vendor-specific objective evidence, which is based on the price charged when the same element is sold separately. When a digital imaging system is sold, the multiple elements are software and maintenance and support. Revenue allocated to software is recognized when a contract is executed, all delivery obligations have been met, the fee is fixed and determinable, and collection is probable. Revenue allocated to maintenance and support is recognized ratably over the maintenance term, typically for a period of one year, beginning when a digital imaging system is considered sold or an extended maintenance and support contract is signed.

 
16
 

 
Revenue is recorded net of estimated returns. Our management makes estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns and other allowances, such as allowance for bad debts, in any accounting period. As of September 30, 2008, our allowance for sales returns was $51,372 and our allowance for doubtful accounts was $5,000.
 
Inventory - We record inventories at the lower of cost or market value, with cost generally determined on a first-in, first-out basis. We perform periodic valuation assessments based on projected sales forecasts and analyzing upcoming changes in future configurations of our products and record inventory write-downs for excess and obsolete inventory. As of September 30, 2008, our allowance for excess and obsolete inventory was $65,722.
 
Deferred Taxes Valuation Allowance - We believe sufficient uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required. In subsequent periods if and when we generate pre-tax income, a tax expense will not be recorded to the extent that the remaining valuation allowance can be used to offset that expense. Once a consistent pattern of pre-tax income is established or other events occur that indicate that the deferred tax assets will be realized, additional portions or all of the remaining valuation allowance will be reversed back to income. Should we generate pre-tax losses in subsequent periods, a tax benefit will not be recorded and the valuation allowance will be increased. Despite the valuation allowance, we retain the ability to utilize the benefits of net operating loss carryforwards and research and development credits.
 
Results of Operations
 
Revenues
 
Our revenues are primarily derived from sales of instruments, software, consumables, and service contracts. Total revenues were $4,870,150 and $3,680,160 for the three-month periods ended September 30, 2008 and 2007, respectively, representing an increase of $1,189,990 or 32%. Total revenues were $12,781,960 and $10,838,916 for the nine-month periods ended September 30, 2008 and 2007, respectively, an increase of $1,943,044 or 18%. These increases were primarily due to increased sales of our branded products, including the FluorChem® imaging system and the red™ personal imager. The increases were offset in part by lower sales under our OEM agreement with GE Healthcare.
 
For the three- and nine- month periods ended September 30, 2008, revenues outside of the United States represented 40% and 48%, respectively, of our total revenues compared to 51% and 50% of our total revenues for the three- and nine- month periods ended September 30, 2007. The decreases were primarily due to increased sales of our branded products in North America and decreased sales of OEM products to GE Healthcare in Sweden.

Sales to GE Healthcare accounted for 17% of revenues for the three months ended September 30, 2008 compared to 21% of revenues for the three months ended September 30, 2007. For the nine months ended September 30, 2008 sales to GE Healthcare accounted for 18% of revenues compared to 21% of revenues for the nine months ended September 30, 2007. The decreases were primarily due to increased sales of our branded products and decreased sales of OEM products to GE Healthcare. GE Healthcare also instituted a program to build inventory of OEM products in 2007 which did not continue in 2008.
 
Cost of Goods Sold
 
Cost of goods sold includes direct material, labor and manufacturing overhead. Cost of goods sold was $2,369,521 and $1,690,139 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $679,382 or 40%. Cost of goods sold was $5,783,749 and $4,885,226 for the nine month periods ended September 30, 2008 and 2007, respectively, representing an increase of $898,523 or 18%. Cost of goods sold increased in both the three month and nine month periods ended September 30, 2008 primarily due to increased shipments; however, we also incurred additional costs in the three months ending September 30, 2008 in connection with rework fees to upgrade certain components in inventory and restocking fees associated with adjustments to inventory for other components deemed not needed.
    
Gross Profit
 
Gross profit was $2,500,629 and $1,990,021 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $510,608 or 26%. The gross profit was $6,998,211 and $5,953,690 for the nine month periods ended September 30, 2008 and 2007, respectively, representing an increase of $1,044,521 or 18%. The gross profit as a percentage of revenues decreased to 51% from 54% for the three month periods ended September 30, 2008 and 2007, respectively. The gross profit as a percentage of revenues held steady at 55% for the nine month periods ended September 30, 2008 and 2007, respectively. These increases in gross profit in both the three and nine month periods ended September 30, 2008 are attributable primarily to higher sales offset in part by costs to upgrade existing inventory to meet new performance specifications and restocking fees associated with adjustments to inventory for components deemed not needed. These upgrade costs and restocking fees occurred during the three month period ending September 30, 2008, and were primarily responsible for the decline in gross profit as a percentage of revenues in that period.

 
17
 
 
 
Sales and Marketing Expenses
 
Sales and marketing expenses were $1,305,807 and $1,299,011 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $6,796 or 1%. Sales and marketing expenses were $3,803,299 and $3,516,406 for the nine month periods ended September 30, 2008 and 2007, respectively, representing an increase of $286,893 or 8%. These increases were due primarily to commissions paid in support of higher sales by the direct salesforce. Sales and marketing expenses as a percentage of revenues decreased from 35% for the three month period ended September 30, 2007 to 27% for the three month period ended September 30, 2008. Sales and marketing expenses as a percentage of revenues decreased from 32% for the nine month period ended September 30, 2007 to 30% for the nine month period ended September 30, 2008. We anticipate sales and marketing expenses to increase as sales increase but to remain constant or decrease as a percent of revenue.

Research and Development Expenses
 
Research and development expenses were $348,602 and $298,820 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $49,782 or 17%. Research and development expenses were $996,679 and $946,310 for the nine month periods ended September 30, 2008 and 2007, respectively, representing an increase of $50,369 or 5%. These increases resulted primarily from increased payments to outside developers and increased wages and stock based compensation, offset in part by a decrease in bonus accruals. Research and development expenses as a percentage of revenues decreased from 8% for the three month period ended September 30, 2007 to 7% for the three month period ended September 30, 2008. Research and development expenses as a percentage of revenues decreased from 9% for the nine month period ended September 30, 2007 to 8% for the nine month period ended September 30, 2008. 

General and Administrative Expenses
 
General and administrative expenses were $677,529 and $604,475 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $73,054 or 12%. This increase resulted primarily from an increase in stock based compensation. General and administrative expenses were $1,847,954 and $1,889,770 for the nine month period ended September 30, 2008 and 2007, respectively, representing a decrease of $41,816 or 2%. The decrease resulted primarily from a decrease in the Founders Bonus, a one-time charge which was accrued last year, offset in part by recruiting fees to place our corporate controller, and increased stock based compensation. The general and administrative expenses as a percentage of revenues decreased from 16% for the three month period ended September 30, 2007 to 14% for the three month period ended September 30, 2008. The general and administrative expenses as a percentage of revenues decreased from 17% for the nine month period ended September 30, 2007 to 14% for the nine month period ended September 30, 2008.
 
Other Income (Expense)
 
Interest expenses were $137,870 and $71,811 for the three month periods ended September 30, 2008 and 2007, respectively, representing an increase of $66,059 or 92%. Interest expenses were $395,956 and  $220,956 for the nine month periods ended September 30, 2008 and 2007, respectively, representing an increase of $175,000 or 79%. The increased expenses were attributable primarily to interest paid and warrant amortization in connection with new debt facilities from Agility Capital LLC, Montage Capital LLC and Bridge Bank.
 
During the three months ended March 31, 2008 the Company sold two patents for a total of $100,000.
 
The company has no Off-Balance Sheet arrangements.
 
Liquidity and Capital Resources
 
From inception through September 30, 2008, Alpha Innotech Corporation has raised a total of $1,956,076, net of offering costs, in convertible notes that were converted into redeemable convertible preferred stock in 2004, a total of $7,615,319, net of offering costs, from the sale of redeemable convertible preferred stock, and $107,137, net of offering costs, from the issuance of common stock. As a result of the closing of the merger with Xtrana, on October 3, 2005 Alpha Innotech Corporation received an additional $2,033,000 in cash. As described below, the Company also raised a total of $375,000 from the sale of convertible notes and $142,500 in proceeds from the sale of restricted stock. As of September 30, 2008, we had $503,183 in cash and a working capital deficit.
 

 
18
 
 
    At September 30, 2008, we had the following capital resources available:
 
ETP/FBR Venture Capital II, L.L.C. Convertible Note - On July 21, 2006, pursuant to a Securities Purchase Agreement  between the Company and ETP/FBR Venture Capital II, LLC, the Company completed a private placement offering of subordinated Senior Convertible Note with the principal amount of $375,000 due in 2011 (the "Note"). The Note bears interest at a rate of 3% per year and is due on July 20, 2011. During the occurrence of an "Event of Default" under the Note, the Note will bear interest at a rate of 10% per year. The Note is convertible into shares of common stock of the Company at an initial conversion price of $1.60 per share. As of September 30, 2008, $200,000 of the principal amount of the note had been repaid.
 
Loans from Agility Capital LLC and Montage Capital LLC - On May 9, 2008,  the Company entered into a loan agreement (“Loan Agreement”)  with Montage Capital, LLC (“Montage”) and Agility Capital, LLC (“Agility”, and together with Montage, “Montage/Agility”). Under the Loan Agreement, the Company requested one advance of $1,500,000 from Montage/Agility which will bear interest at a rate of 13% per year and is due on October 31, 2009 (the “Maturity Date”). As of September 30, 2008, a total of $180,000 of the principal amount of the note had been repaid.
 
Loans from Bridge Bank - On September 3, 2008, the Company entered into a Business Financing Agreement (the “Business Financing Agreement”) and a Borrower Agreement (the “Borrower Agreement”, and together with the Business Financing Agreement, the “Bridge Bank Loan Agreements”) with Bridge Bank, National Association (“Bridge Bank”). The Company will use the proceeds from the loan for general corporate purposes and to retire certain of its other outstanding debt obligations. Under the Bridge Bank Loan Agreements, the Company may receive a maximum of $2,500,000 ($1,250,000 under the domestic accounts receivable facility and $1,250,000 under the foreign accounts receivable facility.)  The loan will have a term of twelve months, starting August 22, 2008.  The loan will have a finance charge equal to the prime rate listed in the Wall Street Journal plus 1.25% (the “Prime Rate”) annualized on the average daily financed amount outstanding.  The Prime Rate will float and will have a floor of 4.75%.
 
    Operating activities used $749,623 cash in the nine month period ending September 30, 2008 compared to $692,670 cash provided in the nine month period ending September 30, 2007.  During the nine months ended September 30, 2008, accounts payable, accrued liabilities, deferred revenue and other liabilities used $214,273.  Additionally, inventory, accounts receivable, prepaid expenses and other current assets used $1,425,547.   Net income for the nine months ended September 30, 2008 and non-cash adjustments provided $890,197.  During the nine month period ending September 30, 2007, accounts payable, accrued liabilities, deferred revenue and other liabilities provided $823,976, inventory, accounts receivable and other current assets used $157,737, and net loss net of non-cash adjustments provided $26,431.
 
    Cash used in investing activities was $327,864 and $258,567 for the nine month periods ending September 30, 2008 and 2007, respectively, to purchase property and equipment needed to support our operations. These amounts include costs of demonstration systems used by our sales teams and which, in some cases, are ultimately sold to customers.
 
    Net cash provided by (used in) financing activities was $1,412,932 and $(445,915) for the nine month periods ending September 30, 2008 and 2007, respectively. In the nine month period ending September 30, 2008, we borrowed a total of $1,500,000 from Montage/Agility and borrowed $1,700,000 from Bridge Bank. Loan principal repayments totaled $1,786,968 on outstanding loans, including $200,000 paid ending our term loan with Alexandria, $1,206,968 paid to BFI, $200,000 paid to ETP/FBR Venture Capital II, L.L.C. and $180,000 paid to Montage/Agility. We also paid loan fees totaling $142,600 to Montage/Agility and Bridge Bank. We received $142,500 from the exercise of options. In the nine month period ending September 30, 2007, we repaid $450,000 on the term loan from Alexandria, and borrowed an additional $481 under the BFI line of credit. Also, $3,604 was provided from the exercise of warrants.
 
    While management believes the Company has sufficient cash to fund its operating, investing, and financing activities in the near term, additional working capital may be needed if the Company experiences growth above that currently foreseen by management. For example, the Company’s existing line of credit may prove to be insufficient should higher inventory levels be required. Additional working capital would likely be needed to expand our operations in Asia. If our capital resources are unable to meet our capital requirements, we will have to raise additional funds. We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. The sale of equity or convertible debt securities in the future may be dilutive to our shareholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to us or our shareholders. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Not required for smaller reporting companies.
 
 
19
 
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
 
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-15(b) and 15d-15(b). Based upon, and as of the date of this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective, because the material weaknesses discussed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, have not yet been fully remediated. In light of these material weaknesses, the Company performed additional analysis and other post-closing procedures to ensure that the consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
 
Changes in Internal Control Over Financial Reporting. The material weaknesses identified and discussed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, have resulted in changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Although not yet complete, during the quarter ended September 30, 2008, we continued the following actions to remediate the material weaknesses we identified to be present as of December 31, 2007:
 
 
 
·
We posted the whistleblower policy on our website.
 
 
·
We continue to work with our external auditors and attorneys regarding new accounting principles and changes to SEC disclosure requirements.
 
 
·
We conducted a review of existing signoff and review procedures as well as document control protocols for critical accounting spreadsheets.  We also increased management’s review of key financial documents and records.
 
 
·
We made our information technology group the primary system administrator for our accounting system and restricted access to specific modules of the accounting system on a need-to-use and/or read-only basis.
 

 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
From time to time we may be involved in claims arising in the ordinary course of business. To our knowledge there are no material pending or threatened legal proceedings, government actions, administrative actions, investigations or claims against the Company.
 
Item 1A. Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, item 1A “Risk Factor” in our Annual Report on Form 10-KSB for our fiscal year ended December 31, 2007. The risks discussed in our Annual Report on form 10-KSB could materially affect our business, financial condition and future result. The risks described in our Annual Report on Form 10-KSB are not the only risks facing us. Additional risk and uncertainties not currently known to us that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
 
Changing worldwide economic conditions could materially adversely affect the Company
 
The Company's operations and performance depend significantly on worldwide economic conditions and their impact on levels of spending by our customers and end users, including pharmaceutical companies, academic/medical institutions, biotechnology companies and government institutes around the world. Worldwide economic conditions have deteriorated significantly in many countries and regions, including without limitation the United States, and may remain depressed for the foreseeable future. These changing worldwide economic conditions could have a material adverse effect on demand for the Company's products and services and on the Company's financial condition and operating results.
 
20
 
Current volatility and disruption in the capital and credit markets may continue to exert downward pressure on our stock price
 
The capital and credit markets have been experiencing extreme volatility and disruption for more than twelve months. In recent weeks, the volatility and disruption have reached unprecedented levels. Stock markets in general , and our stock prices in particular, have experienced significant volatility over the past year. Our stock recently traded at historic lows. In the future, there can be no assurance that price volativity in stock markets in general will abate or that our stock price in particular will rise. Additionally, the volatility in the credit markets could impact our ability to access new financing or maintain our current debt.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
None.
 
Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
 
   
Exhibit No.
 
 
Description
 
 
10.151
 Employee offer letter to Michael Henighan*.
   
31.1
Certificate of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2
Certificate of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1
Certificate of our Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certificate of our Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*    Management contract or compensatory plan.
1    Incorporated by reference to our Form 8-K filed August 22, 2008.

 
21
 

SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
Alpha Innotech Corp.
Date: November 14, 2008
/s/ Ronald Bissinger
 
Ronald Bissinger
 
Chief Executive Officer
 
(Principal Executive Officer)
   
Date: November 14, 2008
/s/ Michael Henighan
 
Michael Henighan
 
Chief Financial Officer
 
(Principal Financial Officer and Principal Accounting Officer)
   


 
S-1