body10q12009.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 March 31, 2009
 
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) (ZipCode)
(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 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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨                      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.
 
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 May 13, 2009, there were 10,939,508 shares of the issuer’s Common Stock, $.01 par value per share, outstanding.

 
 

 
 
 

Alpha Innotech Corp.
Quarter Ended March 31, 2009
Table of Contents
 
PART I.  FINANCIAL INFORMATION
       2
   
Item 1. Financial Statements
       2
Condensed Consolidated Balance Sheets (Unaudited)
       2
Condensed Consolidated Statements of Operations (Unaudited)
       3
Condensed Consolidated Statements of Cash Flows (Unaudited)
       4
Notes to Condensed Consolidated Financial Statements (Unaudited)
       5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
       14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
       18
Item 4. Controls and Procedures
       18
     
PART II.  OTHER INFORMATION
   19
   
Item 1. Legal Proceedings
       19
Item 1A. Risk Factors
       19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
       19
Item 3. Defaults Upon Senior Securities
       19
Item 4. Submission of Matters to a Vote of Security Holders
       19
Item 5. Other Information
       20
Item 6. Exhibits
       20
 


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 of 1933, as amended (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-K filed with the Securities and Exchange Commission on March 27, 2009, 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.

 
1
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
ALPHA INNOTECH CORP.
 
Condensed Consolidated Balance Sheets (Unaudited)
 
 
   
March 31, 2009
    
December 31, 2008
  
Assets
            
Current assets:
            
Cash and cash equivalents
    $ 381,711      $ 648,757  
Restricted cash
     100,000       50,000  
Accounts receivable, net
     2,061,806       3,032,980  
Inventory, net
     1,763,682       1,464,566  
Prepaid expenses and other current assets
     155,419       154,891  
Total current assets
     4,462,618       5,351,194  
Property and equipment, net
     795,042       789,876  
Loan costs, net
     81,176       119,432  
Other assets
     104,828       90,232  
Total assets
    $ 5,443,664      $ 6,350,734  
Liabilities and Shareholders’ Deficit
                
Current liabilities:
                
Accounts payable
    $ 1,086,309      $ 879,648  
Accrued liabilities
     1,004,941       1,110,010  
Current portion of debt
     2,063,764       2,935,565  
Deferred revenue
     1,173,075       1,217,322  
Other liabilities
     127,327       152,391  
Total current liabilities
     5,455,416       6,294,936  
                 
Debt, net of current portion
     154,474       152,275  
                 
Commitments and contingencies
     —       —  
                 
Shareholders’ deficit:
                
Common stock, $0.01 par value per share: 50,000,000 shares authorized, 10,939,508 and 10,922,136  shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively
     109,395       109,222  
Additional paid-in capital
     18,919,232       18,770,191  
Accumulated deficit
     (19,186,785 )     (18,967,822 )
Treasury stock
     (8,068 )     (8,068 )
Total shareholders’ deficit
     (166,226 )     (96,477 )
Total liabilities and shareholders’ deficit
    $ 5,443,664      $ 6,350,734  

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

 
2
 

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

 
Three Months Ended
March 31,
  
 
2009
    
2008
  
Revenue
$
3,690,605
    
$
3,668,143
  
Cost of goods sold
  
1,688,102
      
1,556,793
  
Gross profit
  
2,002,503
      
2,111,350
  
Operating costs and expenses:
              
Sales and marketing
  
1,184,468
      
1,184,721
  
Research and development
  
                 313,054
      
                 375,275
  
General and administrative
  
                 584,259
      
                 566,842
  
Total operating costs and expenses
  
2,081,781
      
2,126,838
  
Loss  from operations
  
                 (79,278
)
    
                 (15,488
)
Other income (expense):
              
Interest expense
  
                 (131,474
)
    
                 (83,290
)
Sale of patents
  
—
      
100,000
  
Other income (expense), net
  
                 (8,211
)
    
                 (3,279
)
Total other income (expense)
  
                 (139,685
)
    
                 13,431
  
Net loss
$
                 (218,963
)
  
$
                 (2,057
)
Net loss per share - basic and diluted
$
                 (0.02
)
  
$
                 (0.00
)
Weighted average shares outstanding - basic and diluted
  
10,925,224
      
10,536,390
  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3
 

 

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

 
Three Months Ended March 31,
  
 
2009
    
2008
  
Cash flow from operating activities
              
Net loss
$
                (218,963
)
  
$
 (2,057
)
    Adjustments to reconcile net loss to net cash provided by operating activities:
              
Depreciation and amortization
  
             143,493
      
             137,325
  
   Allowance for sales returns and doubtful accounts
  
               165
      
               (38,261
)
Demo Equipment previously acquired, depreciated, and then transferred to inventory and sold
   10,399      
— 
  
Non-cash gain on disposal of property and equipment
    (27,547 )     
— 
  
Provision for inventory
  
                54,177
      
                 (2,166
)
Amortization of loan fees
  
38,256
      
—
  
Amortization of debt issuance cost
  
                     69,860
      
                      —
  
Share-based compensation
  
147,694
      
119,752
  
Change in operating assets and liabilities:
              
Accounts receivables
  
             971,009
      
             196,629
  
Inventory
  
             (353,293
)
    
             (239,209
)
Prepaid expenses and other current assets
  
               (15,125
)
    
               74,747
  
Accounts payable
  
                   206,661
      
                   51,872
  
Accrued liabilities
  
             (105,069
)
    
             (51,331
)
Deferred revenue
  
               (44,247
)
    
               (14,110
)
Other liabilities
  
                  (25,064
)
    
                  21,139
  
Net cash provided by operating activities
  
852,406
      
254,330
  
               
Cash flows from investing activities:
              
Restricted cash
  
(50,000
)
    
113
  
Purchase of property and equipment
  
             (131,510
)
    
             (76,587
)
Net cash used in investing activities
  
             (181,510
)
    
             (76,474
)
               
Cash flows from financing activities:
              
Proceed from exercise of warrants
  
1,520
      
—
  
Lines of credit, net
  
(849,462
)
    
(128,756
)
Proceeds from exercise of options
  
—
      
142,500
  
Proceeds from debt obligations
  
—
      
500,000
  
Repayment of debt obligations
  
           (90,000
)
    
           (645,281
)
Net cash used in financing activities
  
         (937,942
)
    
           (131,537
)
Net increase (decrease) in cash and cash equivalents
  
          (267,046
)
    
           46,319
  
Cash and cash equivalents at the beginning of the period
  
           648,757
      
             167,738
  
Cash and cash equivalents at the end of the period
$
           381,711
    
$
 214,057  

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

 
4
 

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 Hong Kong Limited was incorporated under the laws of Hong Kong on November 13, 2008. On December 12, 2008, 100% of the ownership of Alpha Innotech Hong Kong Limited was transferred to Alpha Innotech Corp. from its incorporator and it is now a wholly-owned subsidiary of Alpha Innotech Corp. The assets, liabilities, equity and operations of Alpha Innotech Hong Kong Limited are not material.
 
Alpha Innotech Corp. and subsidiaries (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 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 subsidiaries. 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-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2009.

Management’s Plan - The Company has incurred substantial losses. For the three month period ended March 31, 2009, the Company incurred a loss from operations in the amount of $79,278 and a net loss in the amount of $218,963, and has a working capital deficiency and a stockholders’ deficit as of March 31, 2009. On May 9, 2008, the Company received cash through new loans from Agility Capital, LLC and Montage Capital, LLC (collectively, “Montage/Agility”) in the aggregate amount of $1,500,000, and 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.) Management plans to continue to grow revenues, manage expenses, and extend, renew or replace the Bridge Bank line of credit prior to its termination date of September 3, 2009, and to extend, renew or replace the Montage/Agility loan prior to its maturity date of October 31, 2009.
 
Failure to generate sufficient revenues, raise additional capital or reduce 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. These conditions raise substantial doubts about the Company’s ability to continue as a going concern. 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. 
  

 
5
 

Loss Per Share - Basic net loss per share to common stockholders 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 loss per share attributable to common stockholders 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 March 31, 2009 and 2008:

   
Three Months Ended
March 31,
  
   
2009
  
2008
  
Shares issuable upon exercise of stock options
    
—
    
—
  
Shares issuable upon exercise of warrants
    
300,114
    
324,338
  
Denominator for basic and diluted calculations
    
300,114
    
324,338
  
 
Recent Accounting Pronouncements - In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”). FSP FAS 115-2/124-2 requires entities to separate any other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings, and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 115-2/124-2 will not have a material impact on our consolidated financial condition or results of operations.
 
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for period ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 157-4 will not have a material impact on our consolidated financial condition or results of operations.
 
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments in interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We expect the adoption of FSP FAS 107-1 and APB 28-1 will not have a material impact on our consolidated financial condition or results of operations.
 
We adopted SFAS No. 141(R) on January 1, 2009, the first day of our 2009 fiscal year. SFAS No. 141(R) significantly changed the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity is required to recognize all the assets acquired and all the liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Transaction costs are no longer included in the measurement of the business acquired. Instead, these costs are expensed as they are incurred. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us was the beginning of our 2009 fiscal year. The adoption of SFAS No. 141(R) did not have a material impact on our financial statements.
 



 
6
 
 
We adopted SFAS No. 157 on January 1, 2008, the first day of our 2008 fiscal year. FSP FAS No. 157-2, “Effective Date of Financial Accounting Standards Board (“FASB”) Statement No. 157” (“FSP FAS No. 157-2”), amended SFAS No. 157 by delaying its effective date, by one year, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. In accordance with FSP FAS No. 157-2, we adopted the provisions of SFAS No. 157 to non-financial assets and non-financial liabilities in the first quarter of 2009. The adoption did not have a material impact on our financial statements.

We adopted SFAS No. 160 on January 1, 2009, the first day of our 2009 fiscal year. SFAS No. 160 establishes new accounting and reporting standards for noncontrolling interests, previously known as minority interest, in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of noncontrolling interests as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income or loss attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS No. 160 is applied prospectively for fiscal years and interim periods within those fiscal years, beginning with the current fiscal year, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. The adoption of SFAS No. 160 did not have a material impact on our financial statements.

We adopted SFAS No. 161 on January 1, 2009, the first day of our 2009 fiscal year. SFAS No. 161 requires enhanced disclosure of derivatives and hedging activities in order to improve the transparency of financial reporting. Under SFAS No. 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning with our current fiscal year. The adoption of SFAS No. 161 did not have a material impact on our financial statements.
 
2.        Fair Value

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.


 
7
 

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 March 31, 2009:

   
Level 1
    
Level 2
    
Level 3
    
Total
  
Cash and cash equivalents
    $ 381,711      $ —      $ —      $ 381,711  
Restricted cash
     100,000       —       —       100,000  
Total assets
    $ 481,711      $ —      $ —      $ 481,711  
 

 
3.         Balance Sheet Components
 
Accounts receivable, net consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
    
2008
  
Accounts receivable
$
2,119,407
    
$
 3,090,416  
Less allowance for sales returns
  
(52,601
)
    
(52,436
)
Less allowance for doubtful accounts
  
     (5,000
)
    
     (5,000
)
Accounts receivable, net
$
2,061,806
    
$
 3,032,980  
 
Inventory, net consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
    
2008
  
Raw materials
$
1,864,471
    
$
1,496,555
  
Inventory in transit
  
—
      
14,623
  
Less allowance for excess and obsolete inventory
  
(100,789
)
    
(46,612
)
Inventory, net
$
1,763,682
    
$
1,464,566
  
 

 
8
 

Property and equipment, net consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
    
2008
  
Machinery and equipment
$
592,175
    
$
564,191
  
Furniture and fixtures
  
211,317
      
211,317
  
Leasehold improvements
  
1,507,500
      
1,507,500
  
Loaner and demonstration units
  
498,146
      
541,485
  
Computers
  
360,518
      
357,374
  
Software
  
105,890
      
105,890
  
Total property and equipment
  
3,275,546
      
3,287,757
  
Less accumulated depreciation and amortization
  
(2,480,504
)
    
(2,497,881
)
Property and equipment, net
$
795,042
    
$
789,876
  
  
Loan costs, net consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
    
2008
  
Loan costs
$
193,260
    
$
193,260
  
Less accumulated amortization
  
(112,084
)
    
(73,828
)
Loan costs, net
$
81,176
    
$
119,432
  
 
Accrued liabilities consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
  
2008
Payroll and related costs
$
527,550
  
$
642,629
Warranty
  
105,023
    
104,767
Audit and tax service fees
  
68,374
    
88,250
Finder’s fee
  
175,000
    
175,000
Consultant and board member fees
  
—
    
4,080
Other
  
128,994
    
95,284
Total accrued liabilities
$
1,004,941
  
$
1,110,010

4.
Debt
 
Debt consisted of the following at March 31, 2009 and December 31, 2008:

 
2009
    
2008
  
Bridge Bank Line of Credit
$
1,179,538
    
$
2,029,000
  
Agility Capital LLC and Montage Capital LLC, net of debt discount
  
884,226
      
906,565
  
ETP Venture Capital II LLC Convertible Note, net of debt discount
  
154,474
      
152,275
  
Total debt
  
2,218,238
      
3,087,840
  
Less current portion
  
(2,063,764
)
    
(2,935,565
)
Debt, net of current portion
$
154,474
    
$
152,275
  
 

 
9
 

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 used 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, subject to certain limitations).  The loan has a term of twelve months, starting September 3, 2008.  The loan has 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 floats and has a floor of 4.75%. The Company paid Bridge Bank $12,600 and BroadOak Partners, LLC $50,000 for a total of $62,600 in loan fees. Interest expense for the three months ended March 31, 2009 and 2008 was $24,509 and $0, respectively. The loan is secured by a first position lien against all corporate assets. At March 31, 2009, the amount of unused line of credit was $496,801.

Loan from Agility Capital LLC and Montage Capital LLC - On May 9, 2008,  the Company entered into a loan agreement (the “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 bears interest at a rate of 13% per year and is due on October 31, 2009 (the “Maturity Date”). The Company paid Montage/Agility $37,500 in loan fees. As of March 31, 2009, a total of $505,000 of the principal amount of the advance had been repaid. Interest expense for the three months ended March 31, 2009 and, 2008 was $34,011 and $0, respectively, excluding debt discount. The loan is secured by a second position lien against all corporate assets.

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 Warrant is exercisable at the price of $1.20 per share. William Snider, a director of the Company, is a general partner of the Purchaser. William Snider was a general partner of ETP/FBR Venture Capital LLC, which currently owns approximately 13.6% of common stock of the Company. Interest expense for the three months ended March 31, 2009 and 2008 was $1,534 and $2,979, respectively, excluding debt discount. The Note is unsecured.
 
5.
Share-based Compensation

The following table presents share-based compensation expense included in the Condensed Consolidated Statements of Operations related to employee and non-employee stock options and restricted shares as follows:
 
 
Three Months Ended
March 31,
 
2009
    
2008
  
Cost of goods sold
$
6,523
    
$
4,058
  
Sales and marketing
  
40,359
      
38,456
  
Research and development
  
18,443
      
17,038
  
General and administrative
  
82,369
      
60,200
  
Total share-based compensation
$
147,694
    
$
119,752
  
 
 
As of March 31, 2009, $581,764 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 2.51 years.  As of March 31, 2009, $145,746 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.
 

 
10
 

In the three months ended March 31, 2009 and 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 three months ended March 31, 2009 and 2008.

The following table summarizes the Company’s non-vested stock option activity for the three months ended March 31, 2009:
 
   
Number of Shares
    
Weighted Average Grant Date Fair Value
  
Non-vested stock outstanding at January 1, 2009
    
823,539
    
$
1.03
  
Cancelled
    
(35,426
)
  
$ 
1.03
  
Vested
    
 (126,299
)
  
$
1.04
  
     Non-vested stock outstanding at March 31, 2009
    
661,814
    
$ 
1.03
  

 
Total fair value of non-vested shares is $679,880 for the three months ended March 31, 2009.

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 fair values of the stock options granted. There were no options granted during the three months ended March 31, 2009.
  
For these options, the Company calculated the fair value of each option on the date of grant using the Black-Scholes Option Pricing Model as prescribed in SFAS No. 123 using the following assumptions:


     
Three Months Ended
March 31, 2008
  
Risk-free interest
    
3.88
%
Expected life
    
10 Years
  
Expected volatility
    
167.54
%
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 the exercise behavior of the Company’s employees. Expected volatility is based on historical volatility. The Company has not historically issued any dividends and does not expect to in the future.


 
11
 

Activity under the Company’s stock plans for the three months ended March 31, 2009 is as follows:

   
Shares
  
Weighted -Average Exercise Price per Share
  
Weighted-Average Remaining Contractual Terms in Years
  
Aggregate Intrinsic Value
  
Outstanding at January 1, 2009
    
1,807,585
  
$
1.45
    
7.9
  
$
—
  
Expired
    
(34,550
)
 $
1.03
              
Cancelled
    
(35,426
)
 $ 
1.12
              
Outstanding at March 31, 2009
    
1,737,609
  
$
1.47
    
7.3
  
$
—
  
Exercisable at March 31, 2009
    
1,075,795
  
$
1.74
    
6.6
  
$
—
  
Vested and expected to vest at March 31, 2009
    
1,737,609
  
$
1.47
    
7.3
  
$
—
  
 
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 first quarter of 2009 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 March 31, 2009 was $0.65.
 
6.
Stock option plans

At March 31, 2009, the Company had five stock option plans (the “Plans”) for the benefit of employees, officers, directors, and consultants of the Company.

As of March 31, 2009, a total of 1,092,993 shares of the Company's common stock were reserved for issuance under the Plans. Options granted under the Plans generally vest over a one-year to five-year period from the date of the grant.
 

 
12
 


The combined activity for 2009 and 2008 under the Plans was as follows:
 
         
Outstanding Options
  
   
Shares
Available
For
Grant
    
Number of Shares 
    
Weighted
Average
Exercise
Price
  
Aggregate
Price
  
Balance at January 1, 2008
  
501,388
    
1,333,714
    
$
1.68
  
$
2,234,837
  
Authorized under the evergreen provisions of the 2006 Plan
  
500,000
    
—
     $
—
   $ 
—
  
Granted
  
(131,000
)
  
131,000
     $
0.80
   $
104,800
  
     Balance at March 31, 2008
  
 870,388
    
1,464,714
    
$
1.60
  
$
 2,339,637
  
Granted
  
(360,000
)
  
360,000
     $ 
—
   $
350,400
  
Cancelled
  
10,125
    
(10,125
)
   $
0.86
   $
(8,750
)
Expired
  
    2,504
    
     (7,004
)
   $
7.80
   $
(54,616
)
Balance at December 31, 2008
  
523,017
    
1,807,585
     $
1.45
   $
2,626,671
  
Authorized under the evergreen provisions of the 2006 Plan
  
500,000
    
—
     $
—
   $
—
  
Cancelled
  
35,426
    
(35,426
)
   $
1.03
   $
(36,542
)
Expired
  
     34,550
    
    (34,550
)
   $
1.09
   $
    (37,723
)
     Balance at March 31, 2009
  
1,092,993
    
1,737,609
     $
1.47
   $
2,552,406
  


The following information summarizes stock options outstanding at March 31, 2009:

   
Options
Outstanding at
March 31, 2009
  
Options
Exercisable at
March 31, 2009
Exercise Price
  
Number
Outstanding
  
Weighted
Average
Remaining
Contractual
Life
In Years
  
Weighted Average Exercise
Price
  
Number
Exercisable
  
Weighted Average Exercise
Price
$      0.80-0.90
  
470,167
  
8.2
  
$
0.87
  
273,688
  
$
0.86
$      0.95-0.98
  
 370,000
  
9.0
  
$
0.98
  
 95,000
  
$
0.97
$      1.12-1.35
  
366,394
  
8.1
  
$
1.20
  
210,488
  
$
1.22
$      1.40-1.53
  
246,288
  
6.6
  
$
1.52
  
221,288
  
$
1.52
$    1.66-16.87
  
284,760
  
3.3
  
$
3.40
  
 275,331
  
$
3.46
   
1,737,609
            
1,075,795
      

 
The weighted average remaining contractual life of outstanding options at March 31, 2009 was 7.3 years. At March 31, 2009, there were 1,075,795 options exercisable with a weighted average exercise price of $1.74.


 
13
 

As of March 31, 2009, the Company had 975,928 warrants to purchase common stock outstanding and exercisable for prices ranging from $0.08 to $14.69 with a weighted average exercise price of $0.95 per share.  The weighted average remaining contractual life of these warrants at March 31, 2009 was 4.5 years. These warrants have expiration dates ranging from December 2009 to July 2016.
 
7.            Cash flow information
 
   
Three- Months Ended
March 31,
  
   
2009
    
2008
  
Supplemental disclosures:
            
     Cash paid for interest
  
$
48,861
    
$
83,290
  
Supplemental schedule of noncash financing activities:
                
     Issuance of common stock
  
$
—
    
$
70,000
  
     Disposal of fully depreciated property and equipment
  
$
119,064
    
$
—
  
 
8.            Subsequent events

None.
 
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-K for the year ended December 31, 2008 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-K. The following discussion and analysis also should be read together with our condensed consolidated financial statements and the notes to the condensed 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 including the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2008.
 
 
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.

 
14
 
 
       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.
 
       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 March 31, 2009, our allowance for sales returns was $52,601 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 March 31, 2009, our allowance for excess and obsolete inventory was $100,789.
 
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.
 
Recent Accounting Pronouncements
 
        See the "Recent Accounting Pronouncements" in Note 1 to the Condensed Consolidated Financial Statements for information related to the adoption of new accounting standards in the first quarter of 2009, none of which had a material impact on our financial statements, and the future adoption of recently issued accounting pronouncements, which we do not expect to have a material impact on our financial statements.
 
Comparison of the Three Months Ended March 31, 2009 and 2008
 
Revenues
 
Our revenues are primarily derived from sale of instruments, software, consumables, and service contracts. Revenues for the three months ended March 31, 2009 increased $22,462, or 1%, from $3,668,143 for the three months ended March 31, 2008, to $3,690,605 for the three months ended March 31, 2009. This growth in revenues is attributable to increased international revenues offset in part by decreased domestic revenues.  International revenues increased 31% for the three months ended March 31, 2009, compared to the three months ended March 31, 2008. International revenues represented 61% of our total revenues for the three months ended March 31, 2009, compared to 50% of our total revenues for the three months ended March 31, 2008. We believe the decline in domestic revenues for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, was due at least in part to postponement of purchases as academic researchers focused on preparing new funding requests under The American Recovery and Reinvestment Act of 2009 (Pub.L. 111-5) which was signed February 17, 2009. The sales to GE Healthcare accounted for 14% of revenues for the three months ended March 31, 2009 compared to 18% as a percentage of revenues for the three months ended March 31, 2008. Worldwide sales to GE Healthcare decreased in the three months ended March 31, 2009 as GE Healthcare worked to reduce inventory levels.
 
Cost of Goods Sold
 
Cost of goods sold includes direct material, labor and manufacturing overhead. Cost of goods sold for the three months ended March 31, 2009 increased $131,309, or 8%, to $1,688,102 from $1,556,793 for the three months ended March 31, 2008. Cost of goods sold rose faster than revenues due primarily to increased international revenue, which has lower margins than domestic revenues, and sales of new products having margins lower than the average margin in earlier periods.
 
Gross Profit
 
          Gross profit for the three months ended March 31, 2009 decreased $108,847, or 5%, to $2,002,503 from $2,111,350 for the three months ended March 31, 2008. The gross profit as a percentage of revenues decreased from 58% for the three months ended March 31, 2008 to 54% for the three months ended March 31, 2009, due to an increase in international revenues having lower margins than domestic revenues.

 
15
 

 
 
Sales and Marketing Expenses
 
          Sales and marketing expenses for the three months ended March 31, 2009 decreased $253 or less than 1%, to $1,184,468 from $1,184,721 for the three months ended March 31, 2008. Sales and marketing expenses as a percentage of revenues held steady at 32% for the three months ended March 31, 2008 and 2009. Increased spending for international sales, including international travel and wages, was offset by decreased spending for domestic sales, marketing and technical support.
 
Research and Development Expenses
 
           Research and development expenses for the three months ended March 31, 2009 decreased $62,221, or 17%, to $313,054 from $375,275 for the three months ended March 31, 2008. Research and development expenses as a percentage of revenues decreased from 10% for the three months ended March 31, 2008 to 8% for the three months ended March 31, 2009. The decrease in research and development spending resulted primarily from lower outside development cost.
 
General and Administrative Expenses
 
            General and administrative expenses for the three months ended March 31, 2009 increased $17,417, or 3%, to $584,259 from $566,842 for the three months ended March 31, 2008. The increase resulted primarily from increases in wages and related spending, offset in part by decreased outside consultant costs. The general and administrative expenses as a percentage of revenues increased from 15% for the three months ended March 31, 2008 to 16% for the three months ended March 31, 2009.
 
Other Income (Expense)
 
            Interest expense for the three months ended March 31, 2009 increased $48,184, or 58%, to $131,474 from $83,290 for the three months ended March 31, 2008. The increase resulted from higher outstanding loan balance of loan facilities and amortization of warrants to Montage/Agility. In the three months ended March 31, 2008 we received $100,000 from the sale of patents; we had no corresponding transaction in the three months ended March 31, 2009.
 
Liquidity and Capital Resources

We had $381,711 in cash and cash equivalents, and $100,000 in restricted cash as of March 31, 2009, or a total of $217,046 less than the $648,757 in cash and cash equivalents, and $50,000 in restricted cash as of December 31, 2008. The decrease in cash and cash equivalents resulted primarily from the net decrease of the loan facility from Bridge Bank, purchases of fixed assets, and the increase in restricted cash, offset in part by net cash provided by operations. We are investing our cash and cash equivalents in money market funds and various deposit accounts. We have limited capital resources and operations to date have been funded primarily with the proceeds from private equity and debt financings. In addition, we have a working capital deficit of $992,798.
 
Our ability to generate significant revenues and achieve profitability will be dependent in large part on our ability to expand our customer base, increase sales of our current products to existing customers, manage our expense growth, and enter into additional supply, license and collaborative arrangements as well as on our ability to successfully manufacture and commercialize products incorporating our technologies in new applications and in new markets. As a result of these and other factors, our independent registered public accountants, Rowbotham and Company LLP, indicated, in their report on our 2008 financial statements, that there is substantial doubt about our ability to continue as a going concern. 
 

 
16
 

At March 31, 2009, we had the following capital resources available:
 
Loans from Bridge Bank - On September 3, 2008, we 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”). We used the proceeds from the loan for general corporate purposes and to retire certain of our other outstanding debt obligations. Under the Bridge Bank Loan Agreements, we 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, subject to certain limitations.)  The loan has a term of twelve months, starting September 3, 2008.  The loan has 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 floats and has a floor of 4.75%. We paid Bridge Bank $12,600 and $50,000 to BroadOak Partners, LLC for a total of $62,600 in loan fees. Interest expense for the three months ended March 31, 2009 and 2008 was $24,509 and $0, respectively. The loan is secured by a first position lien against all corporate assets. At March 31, 2009, the amount of unused line of credit was $496,801.

Loan from Agility Capital LLC and Montage Capital LLC - On May 9, 2008,  we 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, we requested one advance of $1,500,000 from Montage/Agility which bears interest at a rate of 13% per year and is due on October 31, 2009 (the “Maturity Date”). We paid Montage/Agility $37,500 in loan fees. As of March 31, 2009, a total of $505,000 of the principal amount of the advance had been repaid. Interest expense for the three months ended March 31, 2009 and 2008 was $34,011 and $0, respectively, excluding debt discount. The loan is secured by a second position lien against all corporate assets.

ETP/FBR Venture Capital II, LLC Convertible Note - On July 21, 2006, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) between us and ETP/FBR Venture Capital II, LLC (the “Purchaser”), we 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 our 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 our common stock at an initial conversion price of $1.60 per share of common stock. The Warrant is exercisable at the price of $1.20 per share. William Snider, a director of the Company, is a general partner of the Purchaser. William Snider was a general partner of ETP/FBR Venture Capital LLC, which currently owns approximately 13.6% of our common stock. Interest expense for the three months ended March 31, 2009 and 2008 was $1,534 and $2,979, respectively, excluding debt discount. The Note is unsecured.
 
Net cash provided by operating activities was $852,406 and $254,330 for the three months ending March 31, 2009 and March 31, 2008, respectively.  During the three months ended March 31, 2009, the cash provided by operating activities was primarily due to $634,872 provided by the reduction of working capital other than cash and $217,534 provided by the net loss adjusted for non-cash items. During the three months ended March 31, 2008, the cash provided by operating activities was primarily due to a negative change in working capital of $39,737 offset by a net income of $214,593 net of adjusted non cash expenses.
 
Net cash used in investing activities was $181,510 and $76,474 for the three months ending March 31, 2009 and March 31, 2008, respectively. During the three months ended March 31, 2009 and 2008, cash was used 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 our customers. In addition, an additional $50,000 of cash was set aside and restricted during the three months ended March 31, 2009.
 
Net cash used in financing activities was $937,942 and $131,537, for the three months ending March 31, 2009 and March 31, 2008, respectively. In the three months ending March 31, 2009, we paid down the Bridge Bank line of credit by $849,462 and repaid to Montage/Agility principal in the amount of $90,000; these repayments were offset in part by $1,520 proceeds from the exercise of warrants. In the three months ending March 31, 2008, two short term notes in favor of BFI Business Finance (“BFI”) were issued and repaid in the amount of $500,000, $150,000 was used to repay a term loan obligation to Alexandria Finance, LLC and $124,037 was used to repay a line of credit debt obligation to BFI. In the three months ended March 31, 2008, we sold common stock for a total of $212,500, received proceeds of $142,500 and cancelled $70,000 of accounts payable.
 


 
17
 

The Bridge Bank line of credit allows us to borrow against only a fraction of our shipments to a maximum of $2.5 million.   Certain international shipments in particular are not eligible for inclusion in the borrowing base of the Bridge Bank facility.  As a result of these exclusions, the Bridge Bank loan balance has remained below the $2.5 million loan limit since inception in September 2008. Furthermore, the second significant source of working capital, the loan from Montage Capital LLC and Agility Capital LLC, decreases by a principal payment amount of $45,000 per month.   Should we fail to ship sufficient product in a timely fashion for any reason, or if international sales accelerate significantly, a shortfall in working capital could occur due to an inability to borrow sufficient funds from Bridge Bank.  We may require additional capital resources in order to conduct our operations and develop our products. We estimate that our capital resources will be sufficient to fund our current level of operations over the near term. However, additional funds may be required to implement our business plan over the longer term. We may not be successful in raising such additional capital on favorable terms or at all. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require the Company 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 stockholders. 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.

The Bridge Bank line of credit terminates September 3, 2009. The balance of the loan from Montage/Agility outstanding on October 31, 2009 is due and payable on that day. Worldwide economic conditions and the overall lending environment have deteriorated significantly since these loans were first secured in 2008. We cannot guarantee that we will be able to extend, renew or replace these borrowings on favorable terms or at all.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
Not required for smaller reporting companies.
 
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-K for the year ended December 31, 2008, 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.
 
 

 

 
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Remediation of Material Weaknesses in Internal Control Over Financial Reporting
 
Management is in the process of addressing the material weaknesses in internal control over financial reporting discussed in our Annual Report on Form 10-K for the year ended December 31, 2008, in an effort to improve our system of internal control over financial reporting through the following actions:
 
·  
Our Chief Executive Officer/Chief Financial Officer will prepare a formal documentation of delegation policy that will be reviewed and approved by the Board and distributed to all employees.
 
·  
Future Audit Committee meetings will specifically include reviews over the implementation of accounting principles.
 
As a small company, we do not have the resources to have dedicated staff with deep expertise in all facets of SEC disclosure and GAAP compliance.  As is the case with many small companies, we will continue to work with our external auditors and attorneys as it relates to financial statement and disclosure review.

The foregoing initiatives will enable us to improve our internal controls over financial reporting.  Management is committed to continuing efforts aimed at improving the design adequacy and operational effectiveness of its system of internal controls.  The remediation efforts noted above will be subject to our internal control assessment, testing and evaluation process.
 
Other Changes in Internal Control Over Financial Reporting
 
Other than the control improvements discussed above, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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 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 Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2008. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future result. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On March 16, 2009, the Company issued 17,372 shares of common stock to Biotechnology Development Fund II LP for an aggregate amount of $1,520 pursuant to the terms of warrants granted in 2004. The shares were issued to a single accredited purchaser pursuant to an exemption from registration contained in Section 4(2) of the Securities Act.  The Company will use the funds for general corporate purposes.
 
Item 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
None.
 

 
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Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
   
Exhibit
Description
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.
 

 
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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: May 13, 2009
  
/s/ Ronald Bissinger
   
Ronald Bissinger
   
Chief Executive Officer
   
(Principal Executive Officer)
     
Date: May 13, 2009
  
/s/ Michael Henighan
   
Michael Henighan
   
Chief Financial Officer
   
(Principal Financial Officer and Principal Accounting Officer)
     

 
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